Intermediary liability: examination and archiving of documents

*by Johannes Fiala, Lawyer(Munich), M.B.A. (Univ.Wales), M.M.(Univ.), Certified Financial and Investment Advisor (A.F.A.), EC Expert(C.I.F.E.),Banker (www.fiala.de)
Commentary on the “expert check
The expert check is a formal check. This means that the adviser and/or intermediary is also obliged in any case to check an investment concept at least for plausibility ? for example on economic viability ? (cf. BGH judgment of 13.01.2000, III ZR 62/99). In addition, there is an obligation for the broker/advisor to check the investment object for tax, legal and economic risks. It is never sufficient to make a general reference to the fact that the customer has been generally informed about the risks!
The expert check provides the first important indications, including a lack of transparency. If the expert check is not positive, you can often save yourself the time of further tests.
Annual reports Comment: Annual reports sometimes contain gaps, for example when no distinction is made between incorporation and entry in the commercial register. A look at the (electronic) commercial register then serves to check all the details of the companies involved.
It is not uncommon for the information to be incomplete: For example, it happens that an investment is set up in the legal form of a GmbH & Co. KG; however, the information on the managing GmbH is missing. The case is similar if the GmbH information is available, but the data on the KG has been completely “forgotten” in the annual report. A typical deficiency is also evident when it comes to the question of whether the signatures of the executive board, supervisory board, auditors, etc. are completely available. In the experten archive, the annual reports are stored as PDF files in both the print and online versions. This type of archiving and documentation has the advantage that it is possible to see whether there are any obvious differences. Last but not least, it becomes clear here whether “improvements” have been made or whether this document was created professionally and error-free from the very beginning.
Offering Memorandum Commentary: This document should not be confused with the prospectus and other promotional materials. The issuing prospectus must, among other things, present the key opportunities and risks of the investment in an orderly, comprehensible and complete manner. Issue prospectuses appear non-transparent if they do not show the associated contracts, or do not show the date and signatures of the parties involved. It is in the nature of things that this simply makes a further examination of the adviser/intermediary superfluous. How else should the inclined reader/intermediary be able to check the effectiveness ? Another common deficiency would be the lack of an indication of validity (since ?), the date of issue and a print number. As is well known, legal changes come into force on almost any day ? how should one then be able to identify which legal situation the prospectus is subject to. Such information is also an indication of professional organisation: if, for example, the sales department discovers that a prospectus has been renewed, clear instructions may be given to have the outdated printed material withdrawn from circulation.
The prospectus should also be signed by the persons responsible: Otherwise, the question always remains open whether the name of a responsible person was really printed on this version of the prospectus with his knowledge and intention. The issue prospectuses are stored in the expert archive in both print and online versions as PDF files. Documentation can enable the intermediary to identify differences between these versions. In the case of deviations, the question always arises as to which version has been valid since when? Which version was the prospectus review based on? Were the previous recipients of prospectuses automatically informed by the distributor of any changes or amendments?
Sales prospectus ? BaFin deposit confirmation Comment: Allegedly, the capital market will no longer be ?grey? as of 01.07.2005, because the initiator must henceforth submit his prospectuses to BaFin in the vast majority of cases. The BaFin must then issue an approval for use within approximately three weeks, if the formal examination there was successful. This affects closed-end investments (e.g. ships, real estate, wind power plants, leasing and media funds), but also silent partnerships and profit participation rights.
The liability of the persons responsible for the prospectus was clearly limited: No liability occurs if the prospectus was already more than 6 months old when the subscription was made. The limitation period is only one year from knowledge of the prospectus error ? 3 years at the longest. On the other hand, the intermediary is liable for 10 years, or at the longest 3 years from the date of knowledge of the damage and of the damaging party. Thus, insurance premiums tend to fall more in the area of prospectus auditors.
Product brochures Information flyers Advertising material Commentary: A review of these documents may lead to the conclusion that there are deviations in content from the offering prospectus. This can later be directed against the advisor or intermediary, because the ?simple? investor feels misled or confused later on ? The lack of transparency can be a further liability argument. As an advisor or intermediary, you are often the first point of contact in the event of a claim. of your customer.
Sales information internal sales documents Comment: Basically, numerous products are presented at sales events, which are also gladly called workshops or trainings, as ?without risk, also suitable for the unemployed, with guaranteed tax refund, without costs for the customer, etc.? The customer would have to indicate so to speak only its bank connection for the luxuriant and guaranteed profits to be expected … The reality looks then later differently: Also the sales department, i.e. broker pools, sales companies, district and regional directors in a structure and (e.g.) with their own stationery, unexpectedly get into the responsibility due to incomplete Power-Point presentations, training videos, etc.: This so-called training liability especially affects those involved who ?forget? to point out the risks and dangers during their trainings.
Corporate presentation Comment: The corporate identity (CI) is reflected in presentations and on the Internet. Here it can be determined whether transparency is practiced openly. Are the key people presented with a short vita and a photo? Perhaps you are interested in how much “scorched earth” individual key personnel have already left behind?
Press and publications Comment: Dealing with the public and the press is an indication of the corporate culture. Is there a press kit for the products? Is it complete? Does the initiator deal with this, especially with critical press? As an advisor and intermediary, you are obliged in case of doubt to make the critical press reports available to the investor in particular, so as not to incur liability yourself.
IDW S4 Prospectus Opinion Comment: Numerous prospectus opinions suffer from the fact that the completeness, orderliness and comprehensibility of the prospectus and the opinion have not been maintained: Reference is made to documents that are not attached to the expert opinion ? and instead could not even be concretely assigned with date and page number. Consequently, attachments can be missing and references can be imprecise: A rogue who thinks evil of it ? that these documents could be exchanged at will ?
About half of the investments on the ?grey market? do not develop as expected: You should save yourself the reproach that the investor later claims that you simply omitted the simplest consideration of formal regularity (completeness pp.).
Numerous WP prospectus reports are criticised as incomplete or faulty: This also starts with formalities, for example by not fully naming the actual investment company (commercial register entry where? and when?, VAT ID?, tax number?). A further point is the question, which folder version (date of ?) was examined here at all? Who guarantees you as an advisor or broker that the version of the issue prospectus you are working with has actually been checked? In practice, auditors’ opinions on prospectuses often lead to an unwanted liability of the auditor: For this reason, prospectus auditors have an “information agreement” signed which, in addition to limitations of liability, also contains a prohibition of disclosure to third parties.
It is important to know that numerous liability agreements were formulated too narrowly, however, and can therefore be interpreted as ineffective GTCs in the end result: A typical example is the case that the closed investment requires 150,000 EUR investor funds, but the WP wants to be liable to all (!) investors only with the minimum amount of his ?minimum insurance? in the amount of, for example, 4,000 EUR. Such clauses are mostly non-transparent.
WP statement on distribution requirements Comment: As is well known, there are different forms of authorisation or permission for the distribution of capital investments. Is § 34c GewO still sufficient, or do I need a licence according to § 32 KWG? It should be remembered at this point that some investment models may later turn out to be prohibited by law. By making a WP declaration, you ensure that your defense attorney has a better chance of advocating for you later.
BaFin statement on sales requirements Comment: In case of doubt, an inquiry with BaFin can help to eliminate uncertainty from the outset. An error discovered later can become quite expensive later, because then a) there may be the threat of criminal proceedings at the instigation of BaFin, as well as audit costs, and b) in this case you are not (any longer) insured at all!
Positive-negative confirmation of VSH insurers Comment: As is well known, the conditions of VSH insurers differ from each other. There are coverage concepts ? but above all gaps, uninsured products, but also excluded product combinations. Which insurer likes to buy “credit-financed annuities” or “Badenia cases”, when the probability of claims seems to be particularly high? An enquiry with the ten major insurers on the market brings clarity as to whether even a single insurer would be uneasy about the product presented.
Certificate of good conduct + management curriculum vitae Comment: Three documents may be of interest here: The certificate of good conduct, the trade central register, and the extract from the Vollstrekkungsregister (debtors’ register):
The latter two are available both for the persons involved and for the companies involved. In the case of entrepreneurs, there is also a certificate of no objection, for example from the social security authorities and the tax office. Such documents strengthen the confidence in the ?clean slate? ? occasionally data from a curriculum vitae can also be compared with other registers.
Excerpts from the commercial register of the companies involved Comment: Inspecting the commercial register can reveal interlocking personal relationships: Such documents can thus bring to light ?coincidences? that make one prick up one’s ears. Let us take the renowned initiator S. ? Part of his investment concept is the involvement of a trustee, we call her “Mrs. Brauner”. A look at the commercial register reveals that after the foundation (and not mentioned in the prospectus) another board member has been appointed, a “Mr. Brauner”. The question arises for every critical mediator as to what the independence might be like? Certified commercial register excerpts facilitate the examination whether the contracts were signed legally by the persons, who were appointed and appointed in addition also.
External analyses, expert reports, ratings Commentary: Here, not only the critical reports of the trade press are meant, as far as it is independent. Also included are reports by people who are regarded in the industry as self-proclaimed experts and who are happy to accept a few thousand as sponsorship from the initiator for their cheerful reports. After such contributions and analyses often present themselves as ?bought advertisement?, the selling must be particularly careful: It is important that the content of the critical trade press in particular is disclosed to the customer ? otherwise there is the threat of particularly sensitive liability.
Performance records with / without SB / WP certificate Comment: The review of performance records arises from the “need for objective assessment standards for the soundness of a company”, according to the LG Munich of 26.04.2001 ? the appeal was withdrawn on the advice of the OLG Munich, because the OLG Munich also considers the publication of performance records to be an important indication of the initiator’s reliability. The omission of an examination by mediators and/or advisors can lead ? without reference to the capital investor ? to the reproach of roughly negligent wrong consultation.
Tax expert opinion of a SB / WP Commentary: In the case of closed-end investments, the tax office has not been giving the investor and initiator any binding information for some time now: In the past, it was possible to ask here whether the initiator’s concept would be recognised by the tax authorities as “binding” in the future. Today the tax offices block themselves and follow thereby one in the effect obviously selling and investor-hostile instruction of the BMF: To change this would be task of federations and politics. This circumstance is however alone reason enough for the fact that initiators have an interest in it to let examine the load-carrying capacity of the fiscal assumptions and effects by an honorary profession. If such an expert opinion is available, it can relieve the sales department considerably during the examination ? but it is then advisable in any case to pay attention to the wording: Sometimes one can find there also such central sticking points again, which represent a reversal as a risk for the investor.
Signed partnership agreement Comment: The intermediary must also check the legal “viability” of the investment offer: He can only assess this if signed contracts are available – and not just sample contracts or only excerpts from contracts in the form of text modules. Company contracts arise sometimes by the fact that an initiator with itself creates a GbR ? a legal unding, because two partners are necessary here legally. Such uncertainties, which can then result in a ?de facto company?, must be recognised by the consultant and intermediary. From a formal point of view: If there is already a hitch here, what does the rest look like?
Signed funds application control agreement Comment: If there is no signed trust agreement, the question arises as to the tasks and duties ? for the investment advisor or intermediary, therefore, a point that can be of central importance, since it secures the assets of its client as well. How important fiduciaries can be is shown by the case of C. media funds: Under the eyes of two fiduciaries, two auditors, insurance cover was taken out with a company in the Bahamas. The BAV had warned against the bogus company, already several years in the past. When the claim occurred, the investors had to sue.
Trust agreement Comment: The trustee is, as it were, a “money logistician” who is responsible for the organisational processing of the investor’s payments on behalf of the initiator. Duties towards the investor only regularly arise for the trustee if he is also commissioned as the controller of the application of funds.
Credit ratings, guarantees, sureties Commentary: The examination of credit ratings is a central part of the WP prospectus opinion. Occasionally there are incompletenesses to complain about here. For the sales department, this question is crucial, because the economic viability and plausibility of the investment concept must also be checked by the intermediary himself. Of central importance is the creditworthiness of insurers (letterbox company in the Bahamas?), rent guarantors (25,000 Euro GmbH guarantees for millions?), placement guarantors (initiator guarantees a multiple of its own balance sheet liable equity capital?), guarantors (letter of comfort by developer who had already brought over 100 companies into insolvency?), etc.
Insurance cover Comment: Numerous entrepreneurial risks can be insured. Whether and to what extent these things are covered is decisive for the question of the ?worst-case scenario? Especially if the total loss risk is presented as harmless in the prospectus material, insurance confirmations on the type and amount of coverage should be available, because this is first of all existential for the investor ? in case of loss also for the broker. Typical examples are ?the sunk ship?, ?the insolvency default of a building subcontractor?, ?the fire of a real estate? and many other large losses.
Advice protocol Comment: From the “sample” advice protocol it is easy to deduce what the initiator has thought about the product and significant risks: A comparison with the risks according to the prospectus and/or auditor’s opinion provides information as to whether the intermediary is to be seriously safeguarded here. But that’s not all: the investor side should also be sufficiently taken into account. For this purpose, forms must contain sufficient space for individual and very personal remarks by the salesperson. Few initiators design their sample minutes in such a way that the course of the conversation can be seen later.
Another knock-out criterion is whether the intermediary really finds everything there is to tick off in terms of conceivable sales documents that an investor might receive. However, it is of little help to the intermediary if he later claims that the customer was able to read about the risks in the documents handed over as receipts: The intermediary must be able to explain why he was sure that the customer understood him correctly.
Purchase of the share/ unit trust fund/ participation certificates/ enterprise participation comment: The statement of experten.de: “The moreover one we will draw in the future each form of participation representatively for the members of the experten network and thereby also the rights as investors with notice. This would be too beautiful around true. Thus a complete documentation from investor view is present. Such an ?investor test purchase? lands for the first time in an ?investor supermarket depot? and makes a product observation possible of the extra class. Because from it a complete comprehensibility of the informatory behavior follows on sides of the initiator. For the (potential) mediator this means an additionally archived investor file of the first advertising folder up to the final account. This transparency might be of greatest importance for initiators and investors ? because experts observe the development and reveal indirectly the presumably bought advertisement over so-called specialists. The archiving result will be important for investors, mediators, experts and justice. Salopp formulated: There some market participant will be allowed to dress particularly warmly.
Summary The expert-formal-check creates a basis for decision-making on a purely factual / formal level. The colour coding of the documents ?placed? in the archive (yellow=requested, orange=reminded, red=overdue, green=placed) (yellow=requested, orange=reminded, red=overdue, green=installed) an overview is available at a glance. If the issue prospectus is set to ?red?, there is no need for further reading, let alone for the communication of this document. If then also still the annual reports are in the ?delivery backlog ? Archive check lamps should light up also with you as advisors/agents.
Documents requested Documents reminded
Documents overdue
documents discontinued
At the push of a button, the expert-formal-check is created as a PDF document and can be printed out and used as part of the consulting protocol. The production of 1 : 1 copies of the two folders with the archived print documents from investor and/or mediator view is given for the tax counsels, chartered accoutants and attorneys a substantial facilitation of their vocational consulting work and means a new dimension at clarity and facts. The annual DVD of the experten-network takes away a not inconsiderable “residual risk” from the consultants / intermediaries. What if the archive atwww.experten.de is no longer available for whatever reason? Then one simply reaches into the shelf, if the Bafin comes to the examination or the annual report to the § 34c GewO is pending.

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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