Amendments to the SICAR law
On 15 October 2008, the Luxembourg Parliament amended the existing SICAR law of 15 June 2004 with the aim to make the SICAR regime more attractive to private equity and venture capital investors.
The main amendments that have been voted are briefly set out hereunder:
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Umbrella structure
The new SICAR law has introduced the possibility to create multiple compartments. The principle of compartment segregation already well known for SIFs, securitization vehicles and UCITS funds is now also applicable to the SICAR. Compartment segregration means that the liabilities of the SICAR can be split into different compartments each of which are treated as separate entities making distinct transactions. The rights of investors and creditors are limited to the risks of a given compartments's assets. Each of the compartments can be liquidated separately without triggering the liquidation of other compartments of the SICAR. The main advantage of the umbrella SICAR is that it can issue several tranches of securities corresponding to different collateral and providing different values, yields and redemption terms. It is important that the constitutional documents of the SICAR expressly provide for the possibility to have multiple compartments and expressly outline the rules that are applicable to them. The issue document must outline the investment policy of each compartment. The shares of the umbrella SICAR may be of different value.
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Minimum capital
The share premium (if any) will be taken into account for the computation of the minimum capital. The share capital increased by the share premium must be at least 1,000,000 Euro to be reached within a period of 12 months from its authorisation by the CSSF.
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No requirement to publish the NAV
Under the initial SICAR law it was required to provide the net asset value to the investors every 6 months. This provision has been abolished.
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Valuation of assets
The valuation of the assets of the SICAR must be based on the fair market value (rather than the foreseeable sales price estimated in good faith).
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Reduction of the duties of the custodian
The SICAR law has reduced substantially the duties of the custodian. More in particular, the following duties do not need to be fulfilled by the custodian under the new SICAR law:
- control that the subscription price for the securities of the SICAR has been received within the time limits set forth in the constitutive documents;
- control that in transactions involving the assets of the SICAR, a consideration is paid or delivered to it within the customary time limits;
- control that the income of the SICAR is applied in accordance with its constitutive documents.
The abolition of the above control duties previously imposed on the SICAR will certainly reduce the annual costs charged by the custodian of a SICAR.
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Annual report
The annual report must be provided to investors within a period of 6 months after the end of the financial year rather than be "published" as was required under the initial SICAR law.
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Limited partnership (société en commandite simple)
The SICAR can now be set up as a société en commandite simple (limited partnership) with a variable share capital.
CSSF - precisions on the prohibition of uncovered short selling
On 29 September 2008 the CSSF issued a press release providing precisions on the prohibition of naked short selling in publicly quoted banks and insurance companies. As can be seen from the precisions below, the CSSF prohibition does not cover market transactions that follow a clear hedging intent or market transactions which are necessary for the orderly functioning of the markets.
The following precisions or exemptions apply in light of the general rules and principles set out in the press release dated 19 September 2008:
- Uncovered (naked) short selling, in this context, means a transaction which results in creating a net short position or increasing any net short position that was held prior to 19 September 2008. Only net short positions (and not gross short positions) are prohibited (provided there is no duration mismatch between the netted positions). The prohibition also covers OTC transactions.
- The prohibition applies to all uncovered short selling where the underlying assets are shares of credit institutions or insurance undertakings admitted to trading on the regulated market of the Luxembourg Stock Exchange (excluding securities admitted to trading on the EuroMTF).
- The short selling rules cover not only the shares themselves but all instruments (for instance contracts for differences, options, futures or depository receipts) that give rise to an exposure to the issued share capital of a company.
- Market makers are generally exempt from the new short selling rules. This exemption covers market makers only when, in the particular circumstances of each transaction, they are acting in that capacity and with the intent of providing liquidity and of exercising genuine market making activities.
As regards Luxembourg market participants, in case they are entering into transactions in respect of securities admitted to trading on any other regulated market, they shall apply the rules as set out by the competent regulator of that regulated market.
CSSF - ban on naked short sales
In a press release of 19 September 2008, the Luxembourg regulator (CSSF) considers that in light of the current market situation, naked short sales are incompatible with the regulatory requirements governing market conduct, in particular where such sales distort or manipulate the market.
The CSSF therefore prohibits market participants from performing this type of short sales where the underlying assets are stocks of a credit institution or insurance undertaking traded on a regulated market, whether on own account or on behalf of clients. When performing such transactions on behalf of their clients, market participants must ensure that the clients are able to deliver the stocks on the settlement date.
The ban comes into force with immediate effect.
In addition, it should be borne in mind that the spreading of false rumours or information constitutes market abuse and is subject to the sanctions provided for in Chapter V of the Law of 9 May 2006 on market abuse.
Investment Funds - UCITS risk management process - clarification on the information to be provided to the CSSF
Two particularly relevant pieces of legislation in the context of eligible assets for investments by UCITS have recently been implemented in Luxembourg. The first one is the Grand-Ducal Regulation dated 8 February 2008, which amends certain definitions specified in the 2002 Law, and which replicates closely the EC Directive 2007/16/EC.
The other piece of legislation is the groundbreaking CSSF Circular 08/339 (released on 19 February 2008) which points out, inter alia, that the provisions of the above Grand-Ducal Regulation must be read in conjunction with the CESR guidelines.
Investors should first note that UCITS already set up at the time of the implementation of the guidelines will benefit from an extension until 23 July 2008 at the latest to comply with the guidelines.
However, more fundamentally, what should be raised is the somewhat more flexible attitude adopted by the CSSF, particularly in circumstances where there is further need of interpretation of the provisions of the Grand-Ducal Regulation and the CESR guidelines. The impact of this Circular should however not be overestimated since the CSSF already fully applied the provisions of the Directive and the related CESR advices, and hence no significant changes are to be expected in practice. However, this evolution of the CSSF’s practice is especially remarkable throughout the appreciation of the circumstances in which a security embeds a derivative or permitted investment within the 10% trash ratio (e.g possibility to include regulated open-ended hedge funds, funds of hedge funds, real estate funds and commodity funds). This more flexible attitude of the CSSF is also to be noted in its administrative practice.
Investment Funds - Update on the eligible assets for investments for UCITS
Two particularly relevant pieces of legislation in the context of eligible assets for investments by UCITS have recently been implemented in Luxembourg. The first one is the Grand-Ducal Regulation dated 8 February 2008, which amends certain definitions specified in the 2002 Law, and which replicates closely the EC Directive 2007/16/EC.
The other piece of legislation is the groundbreaking CSSF Circular 08/339 (released on 19 February 2008) which points out, inter alia, that the provisions of the above Grand-Ducal Regulation must be read in conjunction with the CESR guidelines.
Investors should first note that UCITS already set up at the time of the implementation of the guidelines will benefit from an extension until 23 July 2008 at the latest to comply with the guidelines.
However, more fundamentally, what should be raised is the somewhat more flexible attitude adopted by the CSSF, particularly in circumstances where there is further need of interpretation of the provisions of the Grand-Ducal Regulation and the CESR guidelines. The impact of this Circular should however not be overestimated since the CSSF already fully applied the provisions of the Directive and the related CESR advices, and hence no significant changes are to be expected in practice. However, this evolution of the CSSF’s practice is especially remarkable throughout the appreciation of the circumstances in which a security embeds a derivative or permitted investment within the 10% trash ratio (e.g possibility to include regulated open-ended hedge funds, funds of hedge funds, real estate funds and commodity funds). This more flexible attitude of the CSSF is also to be noted in its administrative practice.
Investment Funds - securities lending in relation to UCITS
A new regime applicable to securities lending operations performed by UCITS – and, in principle, by other UCIs subject to the 2002 Law – was introduced by CSSF Circular 08/356 released on 4 June 2008. The main point of this new regime is, by reforming the previous one (referred to in the Commission Directive 2007/16/EC, and the corresponding CESR guidelines) set out in 1991 (by CSSF Circular 91/75) to take into account the fast growing number of securities lending transactions Luxembourg UCITS and UCIs have recently been engaged in.
This Circular lays down the techniques and instruments which may be used by UCITS, comprising in particular securities lending transactions. The criteria to be fulfilled by the techniques and instruments subject to the Circular are threefold, namely that:
- They are economically appropriate (= realised in a cost-effective way);
- They are entered into for one or more of the following specific aims
- reduction of risk
- reduction of cost
- generation of additional capital or income for the UCITS with a level of risk which is consistent with its risk profile and the risk diversification rules applicable to it; and
- The risks they entail are adequately captured by the risk management process of the UCITS.
The Circular provides broad guidelines on, inter alia, how the fund may lend its securities, which assets are eligible as collateral, and on the content of the prospectus of the fund addressed to investors, which overall reveals a more flexible administrative attitude adopted by the CSSF.
Crucial points to be noted may be summarized as follows:
- A Fund may lend its securities
- Directly;
- Via a standardized lending system organized by a recognized securities lending institution; or
- Via a lending system organized by a financial institution subject to prudential supervision rules considered by the CSSF as equivalent to those laid down by Community law and specialized in that type of transactions.
- The assets eligible as collateral include:
- Liquid assets (cash and short-term banking deposits, money market instruments, and letters of credit or guarantees on first demand issued by a first class credit institution non affiliated to the counterparty);
- Bonds issued or guaranteed by an OECD Member State or a first class issuer offering adequate liquidity; and
- Shares or units issued by daily valued money market UCIs (assigned a rating of
AAA or its equivalent) or a UCITS investing in bond / shares referred to in the Circular.
- The prospectus of the fund must indicate:
- That the Fund intends to enter in securities lending operations;
- The purpose of such securities lending transactions;
- The conditions and limits of such securities lending transactions;
- The conditions and limits of collateral cash re-investment if the Fund intends to do so; and
- As the case may be, a description of the risks inherent to such securities lending operations.
Amendment to the SICAR regime – possibility to have multiple compartments
On 21 February 2008, the Luxembourg government has introduced a draft law aimed to make more attractive the SICAR vehicle to private equity and venture capital investors.
Brief overview of the main changes proposed in the draft law:
- introduction of possibility to create multiple compartments (as is already the case for the Luxembourg specialized investment fund (SIF) vehicle;
- share premiums will be taken into account for the computation of the minimum capital (share capital + share premium must be at least 1,000,000 Euro)
- no requirement to publish NAV of its assets;
- obligation to publish annual report within 6 months following the end of the accounting year;
- lighter requirements imposed upon custodian (the SICAR regime will be aligned on the SIF regime as to that). Consequently, the annual running costs of the SICAR will be reduced;
- the assets of the SICAR will have to be valued at fair market value;
Please contact Olivier Sciales or Rémi Chevalier should you have any further questions.
130/30 funds in Luxembourg
Alfi (Luxembourg Association of Investment Funds) has announced that the fund industry has been facing a strong demand for so called 130/30 funds which allocate 100% of their NAV to long positions and short sell securities to the value of 30% of their NAV. The proceeds from the short sale are usually used to acquire additional long positions. Alfi’s Legal and Regulatory Committee is currently analyzing the opportunity for the development of such products in Luxembourg. The results of the analysis will be discussed with the CSSF at a second stage.
We will keep you updated on the forthcoming changes.
CSSF circular - financial information to be provided by specialized investment funds
The CSSF has issued circular 07/310 of 3 August 2007 which specifies the drawing-up and communication of financial information that specialized investment funds are requested to submit to the CSSF. This information which be drawn up on a monthly and yearly basis respectively, will be used by the CSSF for statistical purposes and for the purposes of supervising the specialized investment funds concerned. The financial information required under circular CSSF 07/310 concerns the same data as that required from undertakings for collective investment under circular IML 97/136.
CSSF Risk spreading guidelines for SIFs
On 3 August 2007, the CSSF (Luxembourg regulator) issued a circular letter 07/309 (the “Circular”) containing guidelines on the principle of risk spreading as laid out in article 1 of the Law of 13th February 2007 on specialized investment funds (the “SIF Law”).
Article 1 of the SIF law provides that:
“For the purpose of this Law, specialized investment funds shall be any undertakings for collective investment situated in Luxembourg: – the exclusive object of which is the collective investment of their funds in assets in order to spread the investment and to ensure for the investors the benefit of the results of the management of their assets….”.
In general the CSSF has upheld a flexible interpretation to the principle of risk spreading with some minor restrictions. The CSSF leaves it up to the investors of the fund to evaluate the principle of risk spreading by gathering themselves all the information they deem necessary. As a general matter, the CSSF considers that the principle of risk spreading is fulfilled if the investment policy of the fund is in accordance with the following guidelines:
- An SIF can in principle not invest more than 30% of its assets in securities of the same type issued by the same issuer. These restrictions are not applicable for:
- Investments in securities issued or guaranteed by a member state of the OECD or by its public collectivities or by a supranational organization with a global or regional character;
- Investments in target UCIs whose risk spreading criteria are at least equivalent with those required for the SIF.
- Uncovered sales can in principle not have as consequence that the SIF holds a covered position on securities of the same type issued by the same issuer which represents more than 30% of its assets;
- When derivative instruments are used, the SIF has to ensure an equivalent risk spreading policy by an appropriate diversification policy of its underlying assets. In over the counter operations, the risk of consideration has to be limited in function of the quality and qualification of the consideration.
These guidelines apply in principle to each SIF. However, the CSSF can provide for derogations based on an appropriate justification.
