On August 10, the CSSF issued the latest update of its Frequently Asked Questions document on the grand duchy’s law of July 12, 2013 implementing the AIFMD and the European Commission’s Level 2 regulation on implementation of the directive, last revised on December 29, 2014.

The FAQ document has now run to nine versions over the past year and a half. Its aim is to highlight aspects of the AIFMD rules from a Luxembourg perspective, for the benefit primarily of alternative funds and managers established in the grand duchy. It complements Q&A documents on the AIFMD published by ESMA, itself most recently updated last month, and by the European Commission.

The FAQs cover issues including the scope of the law, the authorisation and registration regimes applicable to alternative managers, delegation requirements, entry into force of the law and duration of transitional provisions, the scope of authorised managers’ activities, depositary requirements, the application of the AIFMD passport to Luxembourg managers and funds as well as to foreign managers marketing in Luxembourg, reporting, valuation, transaction costs, managers’ capital requirements, and co-operation agreements signed by the CSSF with non-EU regulators.

The new version most notably aims to provide clarity on how marketing and reverse solicitation are understood by the CSSF. The regulator says that since there is no guidance on European level regarding exactly what marketing consists of, the views of different EU regulators may vary, and the same applies to “reverse solicitation” or “passive marketing”, activities to which the AIFMD marketing rules do not apply.

Luxembourg’s 2013 legislation defines marketing as a direct or indirect offering or placement at the initiative of the manager or on its behalf of units or shares of an alternative investment fund it manages to or with investors domiciled or with a registered office within the EU. Marketing takes place when the fund, the manager or an intermediary seeks to raise capital by actively making fund shares or units available for purchase by a potential investor.

The CSSF says merely presenting draft documentation on a fund to prospective investors does not in itself constitute marketing, provided that the documents cannot be used to make a formal subscription or investment commitment. The manager may present documents to potential investors even before the regulator has received notification, although no subscriptions can be validly made until it has been duly informed. However, once such documentation has been provided to investors the manager can no longer claim that an investment is the product of reverse solicitation.

Marketing consists of any offering or placement manifested by means such as advertising, distribution of documentation to prospective investors, roadshows or distance marketing, the CSSF says, provided that investors receive material allowing them to make a formal subscription or commitment.

Marketing in Luxembourg does not require a physical presence by the manager on the territory of the grand duchy; it can be carried out by Luxembourg-based intermediaries such as management companies, banks or financial sector professional entities that are authorised to do so. The activity must take place on national territory in order to qualify as marketing in Luxembourg.

Distance marketing means such as telephone or web site, qualifies as marketing in Luxembourg when the investors are domiciled or have their registered office in Luxembourg, without requiring the simultaneous presence in the grand duchy of the fund, the manager or an intermediary, and the investor, if the materials in question can be used by the investor to make a formal subscription or commitment.

The regulator says reverse solicitation occurs where the manager provides information regarding a fund and/or makes its units or shares available for purchase at the initiative of an investor or their agent, without any solicitation by the fund, manager or any intermediary acting on their behalf. The manager has the burden of proving reverse solicitation, for example through a written declaration by the investor that they have sought information on or decided to invest in the fund in question at their own initiative.

The CSSF says three cases that do not constitute marketing are investments in alternative funds under discretionary individual investment mandates; proposals to invest in funds at the initiative of an adviser under an investment advisory agreement; and investments by alternative or other funds in AIFs at the initiative of the fund, its management company, AIFM or portfolio manager. Nor does marketing include secondary trading of fund units or shares, except in the case of an indirect offering or placement via intermediaries at the initiative or on behalf of the manager or fund.

Other issues dealt with by the latest update to the CSSF Q&A include:

• Credit institutions and investment firms cannot combine that status under Luxembourg’s 1993 legislation with that of authorised AIFM under the 2013 law, although they may manage alternative fund assets under a delegation arrangement. Banks may become registered AIFMs, as may investment firms provided that their authorisation under the 1993 law covers management of third-party assets.

• A professional depositary of assets other than financial instruments (PDAOFI) may be appointed as a depositary for alternative funds with a five-year lock-up, and whose main investment policy does not involve investment in assets subject to custody requirements or that makes private equity-style investments.

• Under the single depositary rule of the 2013 legislation, a PDAOFI that has been appointed as depositary for an alternative fund is also responsible for the safekeeping of financial instruments that can be held in custody. Although it will have to delegate custody of those assets to an eligible provider, the duty of restitution in the event of loss of financial instruments remains with the PDAOFI, unless the loss is due to unavoidable external events beyond its control.

• There are no restrictions on the type of alternative fund for which a PDAOFI may provide safekeeping of assets other than financial instruments.

• A non-EU AIFM will have to report to the CSSF only if it is marketing funds to professional investors in Luxembourg, and as long as the passport regime is not available to such managers. A non-EU AIFM managing or marketing in Luxembourg a feeder fund, whether EU-domiciled or not, must report to the CSSF on the non-EU master fund, even if this is not marketed in the EU, if it manages both funds.

• Where a non-EU AIFM is marketing alternative funds to professional investors in Luxembourg as well as in other EU member states, reporting to the CSSF only covers data for funds marketed in Luxembourg and in applicable cases their non-EU master funds.

• The amount of assets under management and other positions of a non-EU master fund that must be reported to the CSSF in a separate AIF reporting file should not be included in the aggregate reporting to the CSSF for the manager.

• The 2013 law and the European Commission’s AIFMD level 2 regulation should be taken into account when assessing the initial capital and own funds requirements applicable to external AIFMs that are not licenced as Chapter 15 ManCos (that is, Chapter 16 ManCos or other Luxembourg-based AIFMs).

• The professional liability risks to be covered relating to AIFMD comprise the risk of loss or damage caused by a relevant person through negligent performance of activities for which the AIFM has legal responsibility, as set out in the Commission regulation.

• A Chapter 15 or Chapter 16 ManCo authorised as the appointed AIFM of a fund in a master-feeder alternative fund structure and carrying out activities regulated by the AIFMD for the other fund must have professional liability risk cover at both master and feeder level, applicable to activities for which the AIFM has legal responsibility.

The FAQs dealt with by the CSSF can be consulted at http://www.cssf.lu/fileadmin/files/AIFM/FAQ_AIFMD.pdf, those posted by ESMA at http://www.esma.europa.eu/system/files/2015-11_qa_aifmd_january_update.pdf, and those published by the European Commission at http://ec.europa.eu/yqol/index.cfm?fuseaction=legislation.show&lid=9.

The European Securities and Markets Authority has published – with a slight delay of six days beyond the July 22 deadline – its advice on extending access to the EU market under the Alternative Investment Fund Managers Directive to non-EU alternative investment fund managers and funds, recommending that the AIFMD passport be granted to Guernsey, Jersey and Switzerland.

ESMA has not yet reached a conclusion on whether managers and funds in Hong Kong, Singapore and the United States should also gain access to the EU market. However, it suggests holding off on any AIFMD passport extension until more jurisdictions have been assessed.

ESMA has also published its opinion on the functioning of the passport for EU alternative managers and of national private placement regimes, as stipulated by the directive. The two documents will now be considered by the European Commission, Parliament and Council, which will decide whether to activate the provision in the AIFMD allowing the passport to be extended to non-EU entities, which can currently access individual European markets under local private placement rules, via a delegated act.

ESMA says it has conducted a country-by-country assessment in order to have the flexibility to take into account the different circumstances of different non-EU jurisdictions regarding the regulatory issues to be considered, namely investor protection, competition, potential market disruption and the monitoring of systemic risk.

The authority selected six jurisdictions for assessment – Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the US – based on various of factors including the amount of private placement distribution activity already being carried out by entities from these countries and territories, the knowledge and experience of EU national regulators in dealing with their counterparts in the jurisdictions considered, and the efforts by stakeholders from these countries and territories to engage with ESMA’s process.

In its advice, ESMA concludes that no obstacles exist to the extension of the passport to Guernsey and Jersey, while Switzerland will remove any remaining obstacles with the enactment of a pending amendment to the Federal Stock Exchanges and Securities Trading Act. However, it has not reached a definitive view on the other three jurisdictions due to concerns related to competition, regulatory issues and lack of sufficient evidence to assess the relevant criteria properly.

ESMA aims to finalise the assessment of Hong Kong, Singapore and the US as soon as practicable and to assess further groups of jurisdictions until it has provided advice on all the non-EU countries and territories that it considers should be included in the extension of the passport. The jurisdictions still to be assessed are Australia, the Bahamas, Bermuda, Brazil, British Virgin Islands, Canada, Cayman Islands, Curaçao, Isle of Man, Japan, Mexico, Mauritius, South Africa, South Korea, Thailand and US Virgin Islands.

The authority says the European institutions may consider waiting to take a decision on extending the passport to non-EU jurisdictions until it has delivered positive advice on a sufficient number of non-EU countries and territories, to avoid any adverse market impact that might result from a decision to extend the passport to only a few non-EU countries.

In its opinion on the functioning so far of the AIFMD passport and of national private placement regimes, ESMA’s preliminary view is that, given the short time period since the implementation of the AIFMD as a result of the delay in implementation of the directive followed by further delays in its transposition into national law in several member states, a definitive assessment is difficult. It “sees merit” in the preparation of a further opinion on the functioning of the passport after a longer period of implementation.

However, even at this early stage, ESMA has identified a number of issues. These include divergent approaches to marketing rules, including wide differences in the fees charged by national regulators in the countries where the alternative funds are marketed, and in the definition of what constitutes a professional investor.

The authority says there are also differences in interpretation of what activities constitute ‘marketing’ and of ‘material changes’ under the AIFMD passport between different member states, and it advocates greater convergence in the definition of these terms. However, ESMA has not so far uncovered evidence to suggest that the passport has raised major issues in terms of the functioning and implementation of the AIFMD framework.

The various delays in full implementation of the directive also make a definitive assessment of the functioning of national private placement regimes difficult, and again ESMA suggests preparing a second opinion later, although this issue to lined to the decision to be taken in the meantime by the European institutions on whether to extend the passport to one or more non-EU countries or territories. In this area too it sees no evidence that the regimes raise major issues regarding the operation of the AIFMD framework.

The full text of ESMA’s opinion on the functioning of the passport and private placement regimes is available at http://www.esma.europa.eu/system/files/2015-1236_advice_to_ep-council-com_on_aifmd_passport.pdf, and its advice on extending the passport is at http://www.esma.europa.eu/system/files/2015-1235_opinion_to_ep-council-com_on_aifmd_passport_for_publication.pdf.

The European Securities and Markets Authority has issued a fresh update on May 12 to its Questions and Answers document containing guidance and interpretation of the EU’s Alternative Investment Fund Managers Directive as well as the European Commission’s delegated regulation on implementation of the directive issued in December 2012 and May 2013.

ESMA says the Q&A document, first issued in February 2014 and since updated seven times, is designed to promote common supervisory approaches and practices in the practical application of the AIFMD and its implementing measures through responses to questions posed by the general public and regulators themselves. It complements a Q&A document on the AIFMD published by the European Commission.

The ESMA Q&A covers remuneration, notification of alternative investment funds and their managers, reporting to national regulators, services covered by MiFID, depositaries, calculation of leverage, delegation, calculation of assets under management, additional own funds, and scope of the authorisation requirement.

The latest version principally updates information regarding regulatory reporting requirements, as well as calculation of leverage. The previous update, issued on March 26, covered reporting, notification of managers, calculation of leverage, calculation of additional own funds, and the scope of the authorisation requirement.

• ESMA says the reporting requirements apply to all alternative investment managers for the fund they manage and or market within the EU, regardless off whether they are sister companies or owned by another AIFM, according to the reporting frequency set out in Article 110 of the implementing regulation.

• Managers of private equity funds should consider actual capital drawdowns rather than commitments when they report information on fund subscriptions.

• Once a registered AIFM has opted in under the directive it must comply fully with its requirements, including reporting to its national regulator, but opting in does not impact its reporting frequency, which should remain on an annual basis unless total assets under management exceed the Article 110 thresholds. In member states where all AIFMs must be authorised, sub-threshold managers must report the information required under in Article 24 of the directive.

• Non-EU AIFMs whose total assets under management do not exceed the thresholds set out in Article 3(2)(a) and (b) and that market their funds in the EU through a national private placement regime should report at least the information listed in Article 3(3)(d) of the directive to the regulators of the jurisdictions where the funds are marketed. National private placement regimes may require non-EU AIFMs to report additional information.

• Where a fund invests exclusively in assets denominated in its base currency, the manager should report long and short positions in that currency.

• AIFMs should not consider the distribution of dividends as redemptions for the purposes of the consolidated reporting template.

• Managers should not apply the same reporting frequency to sub-funds of the same umbrella fund structure; each must be considered separately in respect of reporting requirements.

• AIFMs should take into account cash and cash equivalents in reporting the main instruments in which the fund trades and the five most important portfolio concentrations.

• The procedure for the first reporting of funds should be the same as for that of AIFMs, as set out in ESMA’s guidelines on reporting obligations under Articles 3(3)(d) and 24(1), (2) and (4) of the directive.

• When calculating their exposure under the commitment approach under Article 8 of the implementing regulation, AIFMs should take into account the absolute value of all positions of their funds in accordance to the criteria set out in the AIFMD and the regulation. For derivative instruments, managers should convert each position into an equivalent position in the underlying asset using the methodologies set out in the directive and regulation.

• Information on the long and short value of exposures should be provided in the base currency of the fund.

• Non-EU managers marketing their funds in the EU under Article 42 should report the results of stress tests where this is required by the private placement regime of the member states where the funds are marketed, or if the managers have carried out such stress tests.

• An AIFM that is already managing funds in a host member state under Article 33 of the directive does not have to undertake a new notification under Article 33(2) of the AIFMD every time it wishes to manage a new fund in that member state. The original notification is valid for all funds, but an update under Article 33(6) should be sent to identify each new fund, clarifying if necessary that the new fund is of a different type from those specified in the original notification.

• When calculating the exposure of a fund using the gross method under Article 7(a) of the implementing regulation, AIFMs should exclude the value of all cash held in the base currency as well as cash equivalents.

• In calculating own funds under Article 9(3), AIFMs should exclude investments by their funds in other AIFs they manage. However, they should not exclude investments in other funds they manage for the calculation of additional own funds to cover potential liability risks arising from professional negligence, because investment in other AIFs run by the same manager increases the operational risk.

• Under Article 36(1) of the AIFMD, member states may allow an authorised EU AIFM to market to professional investors on their territory the units or shares of EU-domiciled feeder AIFs with a non-EU master fund managed by a non-EU AIFM. Whether the non-EU manager must be authorised depends on how the member state has transposed Article 36 into national law.

ESMA’s Q&A document can be consulted at http://www.esma.europa.eu/system/files/2015-850_qa_aifmd_may_2015_update.pdf, while the European Commission has published its own list of issues and responses at http://ec.europa.eu/yqol/index.cfm?fuseaction=legislation.show&lid=9.

On May 5 the Luxembourg Financial Supervisory Authority issued CSSF Circular 15/612, addressed to all managers of alternative funds subject to the 2013 legislation implementing the Alternative Investment Fund Managers Directive, regarding reporting on unregulated alternative funds, whether established in Luxembourg, another EU member state or in a non-EU jurisdiction, as well as alternative funds regulated outside the EU.

The circular applies to registered alternative fund managers under Article 3 of the 2013 law, those with less than €100m in fund assets or €500m where there is a minimum lock-up of five years, as well as to managers that are fully authorised under the legislation, when they begin to manage any additional alternative fund or sub-fund – one that has not been previously reported to the regulator – that is unregulated, or regulated outside the EU. It does not concern funds run by Luxembourg managers in other member states, which are already covered by reporting requirements set out in Article 32 of the law.

The CSSF notes that the reporting requirements set out in Article 22 of the law for authorised managers, and in Article 5 of the Commission’s AIFMD Level II regulation of December 2012 for registered managers, do not necessarily guarantee the regulator a full and up to date picture of all the funds that they manage, especially in the case of unregulated funds that are not subject to prior authorisation and/or ongoing prudential supervision, as well as funds that are subject to the authority of a regulator in a country outside the EU.

This also matters because the CSSF is required to report at least quarterly to the European Securities and Markets Authority on all alternative funds run by Luxembourg managers as well as further information on the management and distribution of such funds to enable ESMA to keep its European fund registry updated.

In such cases the manager must complete for each such fund a form that can be downloaded from the regulator at http://www.cssf.lu/surveillance/vgi/gfia-aifm/formulaires/, form Ia for single-portfolio funds and Ib for umbrella funds, and send it to aifm@cssf.lu. In addition, managers must inform the CSSF by e-mail via the same address as and when they cease to manage any unregulated or non-EU regulated fund.

The required information should be submitted to the regulator within 10 working days of the manager beginning to manage the additional fund, which is signalled by the date of signature or of entry into force of the contract designation it as the manager of the fund, which may be before the fund has been launched. Likewise notification of the termination of a manager’s mandate for such a fund must be made within 10 working days.
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The CSSF is continuing to update its Frequently Asked Questions document on the grand duchy’s law of July 12, 2013 implementing the AIFMD and the European Commission’s Level 2 regulation on implementation of the directive, most recently on December 29, 2014.

The FAQ document has now run to eight versions over the past year and a half. The CSSF’s aim is to highlight aspects of the AIFMD rules from a Luxembourg perspective, for the benefit primarily of alternative funds and managers established in the grand duchy. It complements Q&A documents on the AIFMD published by ESMA, most recently updated earlier in January 2015, and by the European Commission.

The FAQs cover issues including the scope of the law, the authorisation and registration regimes applicable to alternative managers, delegation requirements, entry into force of the law and duration of transitional provisions, the scope of authorised managers’ activities, depositary requirements, the application of the AIFMD passport to Luxembourg managers and funds and for foreign managers marketing in Luxembourg, reporting, valuation, transaction costs, managers’ capital requirements, and co-operation agreements signed by the CSSF with non-EU regulators.
The new version primarily updates information regarding reporting requirements for managers authorised in the final quarter of 2014, requirements governing the marketing without a passport in the grand duchy of non-EU funds by Luxembourg or other EU managers, and notification to the CSSF of the acquisition of major holdings and control of non-listed companies by both Luxembourg-authorised managers and non-EU firms carrying out marketing in the grand duchy.

The CSSF says that managers established before July 22, 2014 and authorised between October 1 and December 31 of last year are required to submit their first report to the regulator, covering the final quarter of 2014, for January 31, 2015, of February 15 in the case of a fund of funds), even if they are normally subject to half-yearly or annual reporting. The standard deadline for transmission of information is one month following the end of the reporting period for ordinary funds, and the 15th of the following month for funds of funds.

The update Q&A also sets out the rules for the marketing of funds domiciled outside the EU to professional investors in Luxembourg without a passport by Luxembourg or other EU-based managers, as set out in Article 37 of the legislation. The rules apply to all authorised EU managers seeking to market in Luxembourg the shares or units of one or more non-EU funds, or of EU feeder funds where the master fund is not EU-domiciled or not managed by an authorised EU manager.

Managers in question must inform the CSSF when they start (or stop) carrying out marketing activity for such funds in the grand duchy, providing the information required on a form downloadable from the regulator’s web site. They must ensure the appointment of one or more entities to carry out the so-called Depositary Lite services of cash monitoring, safekeeping of assets and oversight of certain operational functions described in Article 21 of the AIFMD, and indicate the identity of the providers to the CSSF.

The regulator says the safekeeping of assets for non-EU fund may be carried out by a single depositary or several entities, such as multiple different prime brokers, but a single provider must be appointed for cash monitoring and for oversight of operational functions. There are no requirements regarding geographical location for Depositary Lite service providers.

The only general rule applicable to EU managers marketing non-EU funds to professional investors is that they should not contravene to the Luxembourg Consumer Code. Managers that were marketing non-EU funds to professional investors under Luxembourg’s existing private placement regime before July 22, 2013, must submit the required information to the CSSF in order to continue to market the funds under Article 37 of the Luxembourg legislation.

The Q&A also covers details of how authorised Luxembourg alternative managers authorised under Chapter 2 of the 2013 legislation as well as non-EU managers conducting marketing activities in the grand duchy without a passport under Article 45 are required to notify the CSSF whenever the proportion of voting rights held by their funds in unlisted companies reaches, exceeds or falls below the thresholds of 10%, 20%, 30%, 50% and 75%.

Managers must also notify the CSSF when one or more of the funds they manage, either individually or jointly, or under an agreement with other managers, acquires control of an unlisted company, defined as holding more than 50% of the voting rights. This applies to companies whose registered office is in the EU and whose shares are not traded on a recognised market.

Notification to the CSSF is not required for unlisted companies that are defined as small and medium-sized enterprises: employing fewer than 250 people, with an annual turnover no larger than €50m, and/or an annual balance sheet total not exceeding €43m. Nor does it apply to SPVs created to purchase, hold or manage real estate.

The form for notification of major holdings in or control of unlisted companies can be downloaded from the CSSF website. This must be completed and submitted as soon as possible, and not later than 10 working days after the date on which the fund reached or passed a stipulated ownership threshold or took control of the unlisted company. Compliance with these rules is required from the date of authorisation for Luxembourg managers, and from the date of starting marketing activities for non-EU managers.

The January 9 update to the ESMA AIFMD Q&A also deals with reporting requirements. The authority says alternative managers should report the value of subscription and redemption orders rather than their number, reporting should be for the month when cash flows in or out rather than when the orders are placed, unless they are the same.
Reports on changes in NAV from month to month should reflect the net impact of subscriptions, redemptions and investment performance. If no official NAV is available, managers should provide estimates for the NAV.

In some cases, such as where funds are investing in illiquid assets, the best estimate may be the previous NAV, ESMA says. The same applies to information on gross and net investment returns per month.
The authority has also clarified that managers of both single-manager funds and funds of funds should provide information on the single-manager funds within a month of the end of the reporting period, and on the funds of funds as well as manager-level reporting within 45 days.

The FAQs deal with by the CSSF can be consulted at http://www.cssf.lu/fileadmin/files/AIFM/FAQ_AIFMD.pdf, those posted by ESMA at http://www.esma.europa.eu/system/files/2015-11_qa_aifmd_january_update.pdf, and those published by the European Commission at http://ec.europa.eu/yqol/index.cfm?fuseaction=legislation.show&lid=9.

The European Securities and Markets Authority has published on July 21 the latest update to Question and Answers document on the Alternative Investment Fund Managers Directive, which seeks to ensure the application of common supervisory approaches and practices in the application of the AIFMD and its implementing measures.
The Q&A document, which was last updated in June, offers responses to questions from the general public and national regulators regarding the practical application of the directive. Although primarily designed to ensure that regulators’ supervisory actions are in line with ESMA’s guidance, the answers also aim to provide alternative fund managers with clarity about the AIFMD rules, and do not constitute fresh requirements.
The Q&A now deals with seven topics: remuneration, notification of alternative investment funds, reporting to national regulators, notification of alternative fund managers, MiFID services under the AIFMD, depositaries, and calculation of leverage.
As regards reporting to national regulators, ESMA’s new answers deal with issues including reporting of derivative trade volumes, repo trades, FX spot trades, cross-currency interest rate swaps, the assessment of “substantial” leverage, rehypothecation of collateral, and the currency denomination for reporting on principal markets and financial instruments in which they trade.
In the area of depositary requirements, the clarifications cover cash monitoring and reconciliation obligations, verification of compliance by the fund and manager with AML, employment law and non-management related contractual obligations, verification of ownership of derivatives, custody requirements regard interests in other funds, and the definition of the close of the business day.
Regarding calculation of leverage, ESMA has clarified that debt raised by financial structures controlled by private equity funds for the acquisition of assets should be included in the calculation of leverage where the structure is specifically set up for that purpose, but not where the fund does not have to bear losses beyond its investment in the structure, nor does it have to include debt raised by unlisted companies or issuers subject to the same proviso, even where the debt is raised to pay a dividend enabling the financial structure to repay its acquisition debt.
The ESMA Q&A can be consulted at http://www.esma.europa.eu/system/files/2014-esma-868__qa_on_aifmd_july_update.pdf.