BaFin Publishes Guidelines for Higher Administrative Fines

by Morgan Lewis

Morgan Lewis

Guidelines indicate that violations of the German Securities Trading Act will be sanctioned more rigorously by the German federal financial supervisory authority in the future.

Since July 2016, the German federal financial supervisory authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)) can impose higher administrative fines for breaches of the German Securities Trading Act (Wertpapierhandelsgesetz (WpHG)). This new sanctioning regime was introduced to the WpHG through the transformation of the transparency amending directive[1] and the market abuse directive.[2]

BaFin has set out the principles it applies in determining administrative fines and exercising its discretionary powers pursuant to section 17 of the Act on Regulatory Offences (Gesetz über Ordnungswidrigkeiten (OwiG)) in the WpHG Administrative Fine Guidelines II (Guidelines) (offered in German language only), which were released in February 2017.

The Guidelines apply to breaches of ad hoc publication obligations, voting rights notification requirements, and rules on financing reporting enforcement committed by natural or legal persons.

Assessment of Administrative Fines

The new sanction rules under the WpHG introduce the possibility of a revenue-based or profit-based calculation of the relevant fines, which exist in parallel to the traditional legal framework that provides for a fixed fine amount and differentiates between frameworks for natural persons and legal persons. Consequently, the new rules provide for various methods to determine a fine, which allows BaFin to fix substantially higher fines than was possible before.

According to the Guidelines, the determination of a fine is carried out in two steps:

First, BaFin sets the framework for the fine. Because the WpHG contains alternative frameworks for determining fines, BaFin applies the framework that allows for imposing the highest fine. For instance, pursuant to Section 39, paragraph 4 of the WpHG (governing breaches of financing reporting obligations), BaFin may impose either sanctions in the amount of €10 million, an amount equal to 5% of the total turnover from the previous year, or an amount equal to two times the profit achieved by the breach. Consequently, in the case of an issuer with a total turnover of €50 billion, the revenue-based framework allows for sanctions of up to €2.5 billion (i.e., 5% of the annual turnover). The previous maximum sanction amount was €200,000.

Second, based on the statutory maximum amount, BaFin determines the specific fine in three further stages:

  1. The base amount is calculated by an evaluation of the circumstances of the offense. If a framework according to amount is applicable pursuant to the first step described above, BaFin applies two criteria to calculate the base amount—the size of the issuer (i.e., its market capitalization) and the evaluation of the individual circumstances of the offense (e.g., type, duration, and effect of breach). The circumstances of the offense are divided in classes from “light” to “extra severe.” BaFin provides a number of examples in the Guidelines as to how it will calculate the base amount. For example, in the case of an issuer with a market capitalization exceeding €20 billion and “medium severe” breach circumstances, BaFin would set the base amount of a fine for a breach of financing reporting obligations at €3.5 million.
  2. The base amount is adjusted by an evaluation of further circumstances of the offense and in particular the offender (e.g., pre- and post-offense conduct such as a confession or repeated offenses).
  3. BaFin considers the financial capacity of the offender.

BaFin will publish all sanctioning decisions on its website.

Conclusion and Forecast

The Guidelines indicate that violations of the WpHG will be sanctioned more rigorously by BaFin in the future, and there already have been examples where BaFin made use of its extended powers. After imposing administrative fines of €3.25 million on a major investment management company in March 2015, BaFin recently announced that it has imposed fines amounting to €247,500 on China Specialty Glass AG for violations against financial reporting obligations.

BaFin Chief Executive Director Elisabeth Roegele said, “In particular, in the case of companies with a high turnover and a strong market capitalization, we will impose significantly higher sanctions for severe breaches in the future.“

[1] (2013/50/EU)

[2] (2014/57/EU)


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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