Intermediary liability: examination and archiving of documents

Commentary on the expert check by attorney Fiala
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 – e.g. for 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 situation is similar if the data on the limited liability company are available but the data on the limited partnership have been completely “forgotten” in the annual report.
A typical deficiency also becomes apparent when it comes to the question of whether the signatures of the members of the management board, supervisory board, auditors, etc. are complete.
In the expert 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 “subsequent improvements” were made or whether this document was prepared professionally and without errors from the very beginning.
Issue prospectus
Comment: This document should not be confused with the prospectus and other promotional material. 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 absence 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 recognise 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 from now on the initiator has to submit his prospectuses to BaFin in the vast majority of cases. BaFin must then issue an approval for use within approximately three weeks if the formal examination there has been successful.
Closed-end investments (e.g. ships, real estate, wind power plants, leasing and media funds), but also silent partnerships and profit participation rights are affected.
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 – at the longest 3 years. 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
Comment: A review of these documents may lead to the conclusion that there are deviations in content from the offering memorandum. This can later turn against the advisor or intermediary, because the “simple” investor later feels deceived or confused in case of doubt – the lack of transparency can be another liability argument. As an advisor or intermediary, you are often “the first point of contact” for your client in the event of a claim.
Sales information Internal sales documents
Comment: Basically, at sales events, which are also often referred to as workshops or training courses, numerous products are presented as “no risk, also suitable for the unemployed, with guaranteed tax refund, no costs for the customer, etc.”. The customer would, so to speak, only need to provide his bank details for the lavish and guaranteed profits …
The reality then looks different later on: The sales department, i.e. broker pools, sales companies, district and regional directors in a structure and (e.g.) with their own stationery, also unexpectedly become responsible due to incomplete PowerPoint presentations, training videos, etc. This so-called training liability primarily affects those involved who “forget” to point out the risks and dangers during their training courses.
Company presentation
Comment: The corporate identity (CI) is reflected in presentations and on the Internet. Here it can be determined whether an open approach to transparency is practiced. Are the central persons represented with a short vita and a photo? Perhaps you are interested in how much “scorched earth” individual competence bearers 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 expert opinion have not been maintained: Reference is made to documents that are not attached to the expert opinion – and instead could not even be specifically assigned with date and page number. Consequently, annexes may be missing and references may be imprecise: a rogue who thinks evil of it – for instance, that these documents could be exchanged at will ?
About half of the investments on the “grey market” do not develop as expected: you should spare 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?).
Another point is the question, which prospectus version (date of …) was examined here at all? Who guarantees you as an advisor or intermediary that the version of the offering memorandum you are working with has actually been reviewed?
In practice, WP prospectus appraisals often lead to an unwanted WP liability: For this reason, prospectus appraisers have a “disclosure 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” i.e. for example 4,000 EUR. Such clauses are usually non-transparent.
WP declaration on sales 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 declaration 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: It is well known that the terms and conditions of VSH insurers differ. 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 particularly high here?
An enquiry with the ten major insurers in the market brings clarity as to whether even a single insurer would be uneasy about the product presented.
Certificate of good conduct +curriculum vitae of the management
Comment: Three documents may be of interest here: The certificate of good conduct, the central business register, and the extract from the enforcement register (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 confidence in the “clean slate” – occasionally data from a curriculum vitae can be compared with other registers.
Extracts from the commercial register of the companies involved
Comment: Insight into 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’s take the renowned initiator S. – part of his investment concept is the involvement of a trustee, we’ll call her “Frau Brauner”. A look at the commercial register reveals that after the company was founded (and not mentioned in the prospectus) another board member was appointed, a “Mr. Brauner”. Every critical mediator asks himself the question, what about independence?
Certified excerpts from the commercial register make it easier to check whether the contracts were legally signed by the persons who were also appointed and empowered to do so.
External analyses, expert reports, ratings
Comment: Here, not only the critical reports of the trade press are meant, as far as it is independent. Included are reports by people who are considered self-proclaimed experts in the industry and are happy to accept a few thousand as sponsorship from the initiator for their cheerful reports.
After such articles and analyses often present themselves as “bought advertising”, the sales department 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.
Power balances with / without SB / WP-Testat
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 intermediaries or advisors can – without notice to the investor – lead to the accusation of grossly negligent misadvice.
Tax opinion of a SB / WP
Comment: In the case of closed-end investments, the tax office has not been giving investors and initiators any binding information for some time now: in the past, it was possible to ask here whether the initiator’s concept would be “bindingly” recognised by the tax authorities 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.
However, this circumstance alone is reason enough for initiators to have an interest in having an honorary professional examine the viability of the tax assumptions and effects. If such an expert opinion is available, it can considerably relieve the sales department 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 which represent a reversal as a risk for the investor.
Signed articles of association
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. Partnership agreements are sometimes formed by an initiator founding a GbR with himself – a legal absurdity, as two partners are required by law here. Such uncertainties, which can then lead to a “de facto society”, must be recognised by the advisor and intermediary. Formally speaking: If there’s a problem here, how do you think the rest of it looks?
Signed application of funds control contract
Comment: If there is no signed trust agreement, the question arises as to the tasks and duties – for the investment adviser or intermediary, therefore, a point that can be of central importance, since he is also safeguarding the assets of his client. 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.
Trustee contract
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. As a rule, the trustee only has obligations towards the investor if he is also commissioned as the controller of the application of funds.
Credit ratings, guarantees, sureties
Comment: The examination of creditworthiness belongs centrally to the area 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 determines the question of the “worst-case scenario”. Straight if the total loss risk in the folder material represents itself as harmless, insurance confirmations should be present to the kind and height of the protection, because this is first existential for the investor – in the case of loss also for the mediator. Typical examples are “the sunk ship”, the “insolvency default of a construction subcontractor”, the “fire of a property” and many other major losses.
Consultation protocol
Comment: It is easy to deduce from the “sample” of an advisory protocol what thoughts the initiator has had about the product and significant risks: A comparison with the risks according to the prospectus and/or the auditor’s opinion provides information as to whether the intermediary is to be seriously protected 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 distributor. Few initiators design their protocol samples in such a way that the course of the conversation can later be discerned from them.
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 shares / investment funds / profit participation certificates / company participations
Comment: The statement of experten. de: “Furthermore, in the future we will subscribe to any form of participation vicariously for the members of the experten-network itself and thereby also exercise the rights as investors.” 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 informative behavior follows on sides of the initiator. For the (potential) broker this means an additionally archived investor file from the first advertising prospectus to the final settlement.
This transparency should be of utmost importance for initiators and investors – because experts observe the development and indirectly reveal the presumed bought advertising via so-called experts. The archiving result will be important for investors, intermediaries, experts and the judiciary. To put it bluntly: Some market participants will be able to dress particularly warmly.
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) provides an overview at a glance. If the offering memorandum is on “red”, there is no need for further reading, let alone brokering this investment. If then also the annual reports are in the “delivery backlog”, the “red” archive check lamps should light up also with you as advisors / mediators.
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 at 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. The archive idea is as ingenious as it is simple – thank PDF!
(expert report 1 2005, 3)

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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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