Law of 21 July 2023: Modernizing Luxembourg's Investment Fund toolbox and its impact on RAIF, SIF, SICAR, AIFM & UCI
Luxembourg has taken a significant stride towards modernizing its investment fund laws with the entry into force of the law of 21 July 2023 on 28 July 2023. It adopted Bill 8183 by the Luxembourg Parliament. This law introduces amendments to several pivotal fund laws, including the Law of 2010 on Undertakings for Collective Investment (UCI Law), the Law of 2007 on Specialized Investment Funds (SIF Law), the Law of 2004 on Investment Companies in Risk Capital (SICAR Law), the Law of 2013 on Alternative Investment Fund Managers (AIFM Law), and the Law of 2016 on Reserved Alternative Investment Funds (RAIF Law). These amendments are designed to update and strengthen the country’s fund-related regulations, bolstering the competitiveness and attractiveness of Luxembourg’s financial centre.
The adopted amendments encompass several significant changes, including inter alia:
1. Undertakings for Collective Investment (UCITS and UCI Part II)
New regime introduced by the law of 21 July 2023 | Previous regime under UCI Law | |
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Timeframe for reaching the minimum capital | The period for achieving subscribed capital has been extended to 12 months for UCIs Part II. | The period for achieving subscribed capital was 6 months for UCIs Part II. |
Replacement of depositary | The depositary agreement must include prior notice provisions, and a replacement depositary must be appointed before the expiry of this notice period. During this transition period, outgoing depositaries are still required to safeguard the interests of investors. This change mitigates the risk of automatic de-listing, considering the necessary time for conducting due diligence and onboarding a new depositary. | A 2-month maximum period was previously foreseen to replace a depositary. |
Suspension of subscription and/or redemption | Subscriptions and/or redemptions of a SICAV are prohibited: - for the period during which there is no depositary; or - when the depositary is in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision. | The prohibition of subscription and/or redemption of a SICAV for the period during which there was no depositary or when the depositary was in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision was not foreseen under the previous regime. |
Formation | UCIs Part II opting for a corporate form as SICAV may take the form of a public limited liability company (SA), corporate partnerships limited by shares (SCA), common and special limited partnerships (SCS/SCSp), private limited liability companies (SARL), as well as cooperatives organized as public companies limited by shares (SCoSA). | UCIs Part II opting for a corporate form as SICAV may take the form of a public limited liability company (SA). |
Issuance share/interests | Closed-ended UCIs Part II may issue shares/interests at a price other than the NAV, provided it is stated in the constitutive documents. | Closed-ended UCIs Part II may issue shares/interests at a NAV price. |
Tax | i. UCIs Part II authorized as ELTIF are exempted from subscription tax ii. UCIs Part II reserved to PEPPs are exempted from subscription tax iii. UCIs Part II may benefit from the reduced subscription tax of 0.01% provided that certain conditions are met. |
2. Specialized Investment Funds (SIFs)
New regime introduced by the law of 21 July 2023 | Previous regime under SIF Law | |
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Eligibility of well-informed investor | The investment threshold has been lowered to EUR 100,000, and the list of entities authorized to certify the experience of other well-informed investors has been aligned. | The investment threshold was set at EUR 125,000. |
Timeframe for reaching the minimum capital | The period for achieving subscribed capital has been extended to 24 months for SIFs. | The period for achieving subscribed capital was 12 months for SIFs. |
Replacement of depositary | The depositary agreement must include prior notice provisions, and a replacement depositary must be appointed before the expiry of this notice period. During this transition period, outgoing depositaries are still required to safeguard the interests of investors. This change mitigates the risk of automatic de-listing, considering the necessary time for conducting due diligence and onboarding a new depositary. | A 2-month maximum period was previously foreseen to replace a depositary. |
Suspension of subscription and/or redemption | Subscriptions and/or redemptions of a SICAV are prohibited: - for the period there is no depositary; - the depositary is in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision | The prohibition of subscription and/or redemption of a SICAV for the period during which there was no depositary or when the depositary was in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision was not foreseen under the previous regime. |
Marketing | Marketing of AIFs in the form of a SIF to well-informed investors in Luxembourg is permissible (see further point E below). | Marketing of AIFs in the form of a SIF was permissible only to professional investors. |
Tax | SIFs authorized as ELTIF are exempted from subscription tax as well when they are authorized as MMFs considering some certain conditions apply. |
3. Investment Companies in Risk Capital (SICARs)
New regime introduced by the law of 21 July 2023 | Previous regime under SICAR Law | |
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Eligibility of well-informed investor | The investment threshold has been lowered to EUR 100,000, and the list of entities authorized to certify the experience of other well-informed investors has been aligned. | The investment threshold was set at EUR 125,000. |
Timeframe for reaching the minimum capital | The period for achieving subscribed capital has been extended to 24 months for SICARs. | The period for achieving subscribed capital was 12 months for SICARs. |
Replacement of depositary | The depositary agreement must include prior notice provisions, and a replacement depositary must be appointed before the expiry of this notice period. During this transition period, outgoing depositaries are still required to safeguard the interests of investors. This change mitigates the risk of automatic de-listing, considering the necessary time for conducting due diligence and onboarding a new depositary. | A 2-month maximum period was previously foreseen to replace a depositary. |
Suspension of subscription and/or redemption | Subscriptions and/or redemptions of a SICAV are prohibited: - for the period there is no depositary; - the depositary is in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision. | The prohibition of subscription and/or redemption of a SICAV for the period during which there was no depositary or when the depositary was in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision was not foreseen under the previous regime. |
Marketing | Marketing of AIFs in the form of a SICAR to well-informed investors in Luxembourg is permissible (see further point E below). | Marketing of AIFs in the form of a SICAR was permissible only to professional investors. |
Tax | All in-kind contributions in a SICAR should be backed up by a valuation report drawn by an auditor. | Under the previous regime, there was no explicit obligation for the contributions in kind to be backed up by a valuation report drawn by an auditor. |
4. Reserved Alternative Investment Funds (RAIFs)
New regime introduced by the law of 21 July 2023 | Previous regime under RAIF Law | |
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Eligibility of well-informed investor | The investment threshold has been lowered to EUR 100,000, and the list of entities authorized to certify the experience of other well-informed investors has been aligned. | The investment threshold was set at EUR 125,000. |
Timeframe for reaching the minimum capital | The period for achieving subscribed capital has been extended to 24 months for RAIFs. | The period for achieving subscribed capital was 12 months for RAIFs. |
Formation formalities | The formation formalities for RAIFs have been streamlined. The requirement for a Luxembourg notary to acknowledge the establishment and appointment of an external Alternative Investment Fund Manager (AIFM) within five business days has been eliminated for RAIFs established through a notarial deed, though it still applies to RAIFs established through a private deed. | Luxembourg notary shall acknowledge the establishment and appointment of an external Alternative Investment Fund Manager (AIFM) within five business days for RAIFs established through a notarial deed or a private deed. |
Marketing | Marketing RAIFs to well-informed investors in Luxembourg is permissible (see further point E below). | Marketing of RAIFs was permissible only to professional investors. |
Replacement of depositary | The depositary agreement must include prior notice provisions, and a replacement depositary must be appointed before the expiry of this notice period. During this transition period, outgoing depositaries are still required to safeguard the interests of investors. This change mitigates the risk of automatic de-listing, considering the necessary time for conducting due diligence and onboarding a new depositary. | A 2-month maximum period to replace a depositary was previously foreseen. |
Suspension of subscription and/or redemption | Subscriptions and/or redemptions of a SICAV are prohibited: - for the period there is no depositary; - the depositary is in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision | The prohibition of subscription and/or redemption of a SICAV for the period during which there was no depositary or when the depositary was in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision was not foreseen under the previous regime. |
Tax | RAIFs authorized as ELTIF are exempted from subscription tax. |
5. Alternative Investment Fund Managers (AIFMs)
New regime introduced by the law of 21 July 2023 | Previous regime under AIFM Law | |
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Tied Agents | Authorized alternative investment fund managers are permitted to utilize tied agents as defined by article 1, point 1 of the law of 5 April 1993 on the financial sector. Where an AIFM decides to use tied agents, the AIFM shall, within the limits of the activities permitted under this law, comply with the same rules as those applicable to investment firms under Article 37-8 of the amended law of 5 April 1993 on the financial sector. | The appointment of tied agents was foreseen under the previous regime for pre-marketing purposes. |
Marketing | AIFMs may market shares/units of AIF SIFs, RAIFs and AIF SICARs to well-informed investors established or residing in Luxembourg even if they do not fall in the scope of the definition of a professional investor. | AIFMs may market shares/units of AIF SIFs, RAIFs and AIF SICARs only to professional investors. |
Should you have any inquiries or require expert guidance pertaining to the information provided, our investment management team is available to assist you.
CSSF circular 18/698 on authorisation and organisation of Luxembourg investment fund managers
On 23 August 2018, the CSSF issued a Circular 18/698 relating to the authorisation and organisation of investment fund managers incorporated under Luxembourg law, repealing and replacing CSSF Circular 12/456.
The circular applies to UCITS management companies authorised under Chapter 15 of Luxembourg’s investment fund legislation of 2010, management companies authorised under Chapter 16 or branches of management companies authorised under Chapter 17 of the 2010 law, self-managed UCITS, alternative investment fund managers authorised under chapter 2 of the AIFMD implementation legislation of July 12, 2013, and self-managed alternative investment funds under Article 4(1)(b) of the AIFMD law. However, it does not apply to sub-threshold registered alternative investment fund managers using the exemption under Article 3(2) of the 2013 law.
The circular seeks to standardise and codify the practical approach adopted by the CSSF up to now in its supervision process as well as to reflect the new legislation introduced in the years since the regulator’s previous circular in this regard.
The repealed Circular 12/456 was not been directly applicable, for instance, to alternative investment fund managers, even though the CSSF required AIFMs to comply with its provisions. Publication of the new circular has clarified this situation and established a unified and comprehensive set of rules for all market participants within the scope of the circular.
Circular 18/698 sets out the conditions necessary to obtain and maintain the authorisation of the investment fund manager relating to aspects including its ownership, own funds, governance, central administration, internal organisation, external audit and exchange of the information between relevant parties.
It additionally sets out specific conditions applicable to investment fund managers providing accessory services such as discretionary portfolio management or providing services via EU passporting arrangements.
The provisions of the new circular became applicable from the date of publication of the circular and all investment fund managers in scope should adapt their operating models accordingly without delay. We are available to discuss any questions you might have in this regard.
CSSF Circular 18/698 can be accessed here.
ESMA issues additional updates to AIFM Directive Q&A
The European Securities and Markets Authority has issued a fresh update on October 1 to its Questions and Answers document providing guidance and interpretation of the EU’s Alternative Investment Fund Managers Directive as well as the European Commission’s level II delegated regulations on implementation of the directive issued in December 2012 and May 2013.
The Q&A document, first issued in February 2014 and since updated nine times, aims 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 contains just a single new question, regarding depositaries. ESMA says that when fund assets held in custody by the fund’s depositary are provided to an EU or third-country central securities depositary as defined under Regulation (EU) No 909/2014 (CSDR) to be held in custody in accordance with AIFMD Article 21(8), the CSD must comply with the provisions on delegation set out under the directive’s Article 21(11).
The previous update, issued on July 21, covered reporting to national regulators and calculation of the total value of assets under management:
• When a non-EU AIFM reports information to the regulator of an EU member state under Article 42, only funds marketed in that member state need to be taken into account. Where EU members apply ESMA’s opinion on collection of additional information under Article 24(5), managers should also report on non-EU master funds, even if not not marketed in the EU, if they have either EU feeder funds or non-EU feeders marketed in the EU under Article 42.
• To convert the total value of assets under management into euros, AIFMs should take the rounded values of the funds in their base currency and divide them by the corresponding value of one euro into the base currency of the funds. For example, if the base currency of a fund reporting for the March 31, 2015 period is the US dollar, using the ECB rate AIFMs should divide the rounded US dollar value of the fund by 1.0759, the spot rate on that date. ESMA says AIFMs should report the rounded values in the base currency as well as in euros in questions 33 and 34 of the consolidated reporting template for AIFM-specific information and in question 48 for AIF-specific information. They should also report the value of the exchange rate used for the conversion in question 37 of the template for AIFM-specific information and in question 50 for AIF-specific information.
• Since the procedure for first reporting of funds should be the same as for first reporting of managers, according to ESMA’s guidelines on reporting obligations, AIFMs should not report any information on AIFs for the reporting period during which they were created. However, ESMA has clarified that AIFMs should include AIFs created during the reporting period in their total value of assets under management for the period. In this case, the total value of assets for the manager at the reporting date will not match the sum of assets for its funds.
• ESMA says AIFMs should include short non-derivative positions for the calculation of the total value of assets under management, under Article 2(1)(b) of the implementing regulation, which says AIFMs should include assets acquired through leverage.
CSSF clarifies marketing rules in updated AIFMD law Q&A
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.
ESMA says Jersey, Guernsey and Switzerland are ready for AIFMD passport
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.
ESMA issues new updates to AIFMD Q&A
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.
AIFMD CSSF circular 15/612: information to be communicated by Luxembourg-established AIFMs
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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CSSF issues eighth update to AIFMD law Q&A
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.
CSSF issues reminder on AIFMD reporting obligations
The CSSF issued a reminder on January 13 to all Luxembourg-domiciled alternative investment fund managers and non-EU managers that are marketing alternative funds in the grand duchy under article 42 of the Alternative Investment Fund Managers Directive to assess their reporting obligations, set out in Article 3 (3)(d) of the directive of registered AIFMs and in article 24 (1), (2) and (4) for authorised (sub-threshold) and non-EU AIFMs.
The regulator advises managers affected that in addition to the AIFMD, transposed into Luxembourg by the law of July 12, 2013 on alternative investment fund managers, they should also consult the European Commission’s Delegated Regulation 231/2013 (available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:083:0001:0095:en:PDF); ESMA’s reporting guidelines and Q&A on the application of the
AIFMD (available at http://www.esma.europa.eu/page/Investment-management-o)asked questions (available at http://www.cssf.lu/fileadmin/files/AIFM/FAQ_AIFMD.pdf).
Managers are requested to submit reporting files to the regulator according to the technical requirements set out in CSSF Circular 14/581 of January 13, 2014, by a deadline of January 31, except for fund of funds, which enjoyed an additional 15 days.
Before submitting any reporting file the sender – either the manager or any entity to which reporting has been delegated – is required to register a certificate with the CSSF, as detailed in CSSF Circular 08/334. Senders that have already registered a certificate with the CSSF and are now submitting reporting on behalf of an AIFM are requested to inform the regulator of the manager’s identity by e-mail to aifm@cssf.lu.
Updated ESMA AIFMD Q&A deals with reporting details, depositary obligations and PE leverage calculation
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.