Luxembourg’s financial regulator, the Financial Sector Supervisory Authority, has published practical guidance for alternative fund managers on how they should approach the issue of becoming registered or authorised under the Alternative Investment Fund Managers Directive, which was transposed into Luxembourg law through legislation that came into force on July 15.
The CSSF says any entity established in Luxembourg that could potentially be categorised as an alternative manager under the new law must conduct a self-assessment of whether it qualifies, and if so, whether it will be subject to a requirement for registration or authorisation.
The Luxembourg legislation stipulates that the external manager of an alternative fund, or where relevant a self-managed fund itself, must be registered or authorised. Non-regulated alternative funds, vehicles structured as Part II funds under the grand duchy’s 2010 investment funds law, Specialised Investment Funds and SICARs must all conduct a self-investment process to determine whether they qualify as self-managed funds (internal AIFMs) subject to registration or authorisation.
An entity that requires registration under the directive, falling outside the asset thresholds for full authorisation, must register with the CSSF immediately. Managers subject to authorisation must apply to the CSSF by July 22, 2014. Forms for registration or authorisation can be downloaded from the CSSF website at http://www.cssf.lu/aifm/.
All managers must comply with the reporting requirements set out in Article 3 of the Luxembourg law (for entities subject to registration) or Article 22 (those subject to full authorisation).
The CSSF says practical aspects of reporting and clarification on the information to be reported to the regulator as well as its timing, via the reporting template promised by Annex IV of the European Commission’s Level 2 regulation published last December, are currently being finalised by the European Securities and Markets Authority. They should be made public before the end of the year.
Once Luxembourg-based alternative managers have conducted their self-assessment, they must report back to the CSSF at the latest by August 16 with information comprising the name and address of the manager, whether it is an external fund manager or a self-managed fund, and whether it is required to be registered or authorised by the CSSF, by e-mail to aifm@cssf.lu.

The European Securities and Markets Authority has approved seven further framework agreements for co-operation arrangements between European Union securities regulators and global counterparts with responsibility for oversight of alternative investment funds including hedge funds, private equity and real estate funds.
ESMA’s Board of Supervisors has approved additional memorandums of understanding with regulators from five countries, including the US Commodity Futures Trading Commission, ahead of the introduction of the Alternative Investment Fund Managers Directive, which takes effect on Monday, July 22.
ESMA has now negotiated a total of 38 co-operation agreements on behalf of the 31 EU and European Economic Area national regulators responsible for securities markets supervision, after approving 31 MoUs in May. The agreements provide for the exchange of information, cross-border on-site visits and mutual assistance in the enforcement of each jurisdiction’s supervisory laws.
The agreements cover third-country alternative fund managers that market funds in the EU and EU-based managers that manage or market funds outside the EU. The agreements also cover co-operation in the cross-border supervision of depositaries and other providers of outsources services to alternative managers.
EU national securities regulators are in the process of signing MoUs with outside jurisdictions relevant to their market. The existence of co-operation arrangements between EU and non-EU regulators is a precondition for allowing managers from third countries access to EU markets or to perform fund management tasks delegated by EU managers under the AIFM Directive.
Applicable from July, the agreements will allow the cross-border marketing of alternative funds to professional investors in other jurisdictions jurisdictions. In addition, non-EU jurisdiction must not be classified by the Financial Action Task Force as unco-operative on efforts to combat money laundering and the financing of terrorism, and must have co-operation agreements in place with EU member states enabling the exchange of information on tax matters.
The ESMA MoUs follow the IOSCO Principles on Cross-Border Supervisory Co-operation and complement the terms and conditions of the 2002 IOSCO Multilateral MoU Concerning Consultation and Co-operation and the Exchange of Information.
ESMA originally contacted all the regulators that had signed the IOSCO Multilateral MoU and has now approved MoUs with the 42 bodies that responded. It continues to negotiate with the Chinese securities market regulator authority.
The new agreements approved by ESMA are with the Financial Services Agency, Ministry of Economy, Trade and Industry and Ministry of Agriculture, Forestry and Fisheries in Japan, the Securities Commission (Malaysia), National Banking and Securities Commission (Mexico), Securities Commission of the Bahamas, and the CFTC.

The draft legislation transposing the European Union’s Alternative Investment Fund Managers Directive into Luxembourg law was approved by the grand duchy’s Chamber of Deputies on the morning of Wednesday, July 10.
With the deadline of July 22 for member states to adopt the directive into national law approaching fast, Luxembourg is now set to become one of a minority of EU countries to implement the AIFM Directive on time.
The government has requested a dispensation from proceeding with the optional second vote on the legislation in the Chamber of Deputies. According to the expected timetable, the legislation will receive the assent of Grand Duke Henri and be published in the official gazette, the Mémorial, on July 17, after which it will become law.
Bill of law no. 6471 not only incorporates the directive but introduces into national law a new regime to be known as the société en commandite special, or special limited partnership. It also provides greater clarification on the taxation of carried interest.
It also contains assorted measures revising and updating various elements of Luxembourg’s investment fund regulation in line with the AIFM Directive provisions, notably the 2010 legislation adopting the Ucits IV directive into national law. In total 14 existing laws will be amended, including the legislation governing Specialised Investment Funds (SIFs) and Risk Capital Investment Companies (Sicars).
The timing of the Chamber of Deputies is critical since the governing coalition is expected to resign over an unrelated issue, resulting in the dissolution of parliament and the calling of an early general election probably in October.
The original draft of the law provided that it would come into force on the first day of the month following its publication of the Mémorial, but it was amended on June 28 to change the date of entry into force to the day of publication, to ensure that the July 22 deadline for transposition of the deadline would not be missed.
The approval of the legislation means that Luxembourg will join Ireland, Malta, European Economic Area member Liechtenstein and possibly a few others in meeting the deadline. The UK and France are also close to finalising the legislation; Germany has done so but a critical related tax law has been held up by deadlock between the Berlin government and federal states.

Luxembourg’s financial regulator, the Financial Sector Supervisory Authority (CSSF), has published a series of Frequently Asked Questions (FAQs ) regarding the draft legislation that will implement the European Union’s Alternative Investment Fund Managers Directive into national law and the European Commission’s implementing regulation.
The CSSF has decided to publish the FAQs to provide managers with greater clarity on the impact of the directive, and especially provisions regarding the transitional period of a year up to July 22, 2014, even though Luxembourg’s Chamber of Deputies has not yet voted the draft legislation into law.
The CSSF says the FAQs will be regularly updated and that it may if need be change its approach to some of the issues they deal with. This emphasises that the document is purely designed to provide guidance and does not offer managers legal certainty, especially before the draft bill is enacted into law.
The Commission’s ‘Level 2’ delegated regulation, No 231/2013, was issued on December 19, 2012 and will have effect from July 22 this year, the deadline for transposition of the directive into the national law of EU member states.
Bill of law no. 6471, which transposes the AIFM Directive and also introduces the new Special Limited Partnership into Luxembourg law, was placed before parliament on August 24, 2012. The regulator says it expects the legislation to be adopted “in a near future”, which is understood to mean before July 22, 2013.
When can managers start applying for authorisation under the AIFMD?
The CSSF has announced that it has been open to the submission of applications for authorisation as an alternative investment fund manager under the directive since March 1. It has provided details on its web site of the procedure for submission of an authorisation file at http://www.cssf.lu/en/forms/. Managers in activity before July 22 this year have until July 22, 2014 to submit an application for AIFMD authorisation to the CSSF.
Who qualifies for the CSSF’s transitional provisions?
The regulator says in its FAQs that transitional provisions apply only to managers in existence and carrying out management of alternative funds before July 22, 2013. Managers that have not yet launched management activities must complete authorisation (or registration, if they are below the asset thresholds set out in the directive) before doing so.
Existing managers are required to take “all necessary measures” – that is, “expend their best efforts” – to comply with the provisions of the Luxembourg draft law regarding general principles, operating conditions, organisational requirements, conflicts of interest, remuneration, risk management, liquidity management rules, securitisation rules, valuation and delegation rules by July 22, 2014, or from the moment of authorisation by the CSSF if earlier.
Do the transitional provisions work differently for managers and funds?
The regulator draws a distinction with regard to the transitional provisions between the regime applicable to managers and the impact of this on alternative investment funds set up under one of Luxembourg’s ‘product laws’ – the 2010 (UCITS IV) investment fund legislation for Part II funds, the SIF law of 2007 and the SICAR law of 2004.
From the moment a manager is authorised under the AIFMD implementation law, it must ensure that the funds it manages take all necessary measures to comply with the rules introduced by the respective product law regarding the annual report, valuation rules, disclosure to investors and depositary rules.
Luxembourg’s AIFMD implementation law modifies these product laws to bring them into line with the requirements of the directive. All funds set up under one of these laws before July 22, 2013 and that qualify as alternative investment funds under the directive, and any such funds established over the subsequent 12 months to July 22, 2014, can appoint a manager that benefits from the transitional arrangements – that is, they do not need to seek authorisation before July 22, 2014.
Once a fund has appointed a manager authorised as AIFM by the CSSF, it must take all necessary measures to comply with the product law rules on the annual report, valuation rules, disclosure to investors and depositary rules.
When do funds covered by the transitional arrangements have to comply in full?
All qualifying alternative funds benefiting from the transitional provisions must submit to the CSSF by April 1, 2014 information regarding its compliance with the AIFMD product rules as of July 22, 2014, as opposed to the previously applicable product law rules.
The transitional rules also apply to any new sub-fund created as part of an umbrella fund established under one of the product laws before July 22, 2013.
What is the situation regarding private placement distribution in Luxembourg?
The CSSF also notes that managers established in both EU and non-EU countries will remain able to market their funds in Luxembourg under the country’s existing private placement regime, unaffected by the provisions of the AIFMD implementation law, until July 22, 2014.
After this date, all managers and funds must comply with the directive from the moment of their establishment. The directive excludes EU managers marketing in member states through private placement arrangements from this point on.
What does all this mean for Luxembourg-based managers and funds?
• Alternative managers that already exist and are managing funds as of July 22 this year, including self-managed alternative funds, have a further 12 months to apply for authorisation from the CSSF.
• Any such managers or alternative self-managed funds established or beginning activity after July 22 this year must be authorised and comply with the directive immediately.
• Regulated alternative funds with an external manager – SIFs, SICARs and Part II Funds – in existence and regulated before July 22 are only required to comply with the AIFMD product rules once their manager has obtained authorisation under the AIFM Directive, or by July 22, 2014 at the latest.
• Funds established on or after July 22 but that have external managers in existence and active before that date need to comply with the product rules only once the manager is authorised, or by July 22, 2014 at the latest.
• All other externally managed alternative funds established after July 22 – i.e. those whose managers do not enjoy an extra year’s transitional period to obtain authorisation – must comply with the AIFMD product rules immediately.

The European Securities and Markets Authority published on May 24 its final report on guidelines for key concepts under the Alternative Investment Fund Managers Directive (please see below for a copy under related PDFs). The report reflects feedback received by ESMA following its publication of a discussion paper on key concepts and types of alternative fund managers on February 23 last year, and in particular a consultation paper issued on December 19.
The consultation paper, which received 37 responses from asset managers, banks, law firms, industry associations, a private equity administrator and public authorities, set out formal proposals for guidelines ensuring common, uniform and consistent application of the concepts in the definition of alternative investment funds in Article 4(1)(a) of the directive by providing clarification on each of these concepts. An important factor is avoiding regulatory arbitrage resulting from national regulators interpreting terms used in the directive in different ways.
A cost-benefit analysis conducted by ESMA estimates that the introduction of the guidelines will make relatively little impact on the number of EU-domiciled funds that will fall under the directive according to the definition in the legislative text, estimated at between 25,650 and 28,975. The authority believes there will be “no material impact” on the Luxembourg-domiciled funds affected, which it says number at least 2,000.
ESMA believes 50 additional funds may fall under the directive as a result in Finland, around 1,600 in France on top of up to 12,000, and no more than 33 in Italy. Up to 150 funds could be captured in or excluded from the scope of the directive in the Netherlands, and about 50 could be excluded in Portugal.
The authority says the guidelines should bring clarity to national regulators and to managers, prevent managers falling outside reporting obligations on leverage used to assess systemic risk, enable smoother application of the AIFMD passport for both EU and (after July 2015) non-EU managers, and minimise the risk on entities not targeted by the legislation falling under its scope.
The new report sets out the final form of the guidelines to be issued to national regulators. These will be translated into the official languages of the EU and the final texts be published on the ESMA website. The deadline for reporting requirements will be two months following the publication of the translations and the guidelines will apply from this date.

The European Commission published two implementing regulations forming part of the detailed framework of the Alternative Investment Fund Managers Directive in the EU Official Journal on May 15.
The regulations are automatically binding on member states without any need for transposition into national legislation. They will enter into force on June 5 and apply from July 22, the deadline for adoption of the directive into the national law of member states and the date on which it takes effect.
Commission Implementing Regulation (EU) No 447/2013   sets out the procedure for alternative fund managers that are not required to comply in full with the AIFMD but that nevertheless choose to opt for authorisation from their home regulator. The same process applies as with managers that are required to seek authorisation under the directive.
The regulation also clarifies that a manager granted AIFMD authorisation whose assets under management subsequently fall below the thresholds set out in the directive remains authorised and subject to full application of the legislation unless and until the authorisation is revoked. This will not be triggered automatically by a fall in assets below the threshold, but only at the manager’s request.
Commission Implementing Regulation (EU) No 448/2013 establishes a procedure for determining the member state of reference that will conduct regulatory oversight of a non-EU manager seeking to manage or market fund products within the union.
The regulation says that where there is more than one possible choice of jurisdiction for the non-EU manager’s member state of reference, the manager must submit a request to all of the regulators in question to decide which of them should take responsibility.
The manager must supply relevant information and documents including details of any EU-domiciled funds run by the non-EU manager, their assets under management and the domicile of those assets, and where and how they intend to market funds within EU member states.
The regulators approached are jointly responsible for reaching a decision, within a month at the latest, but the European Securities and Markets Authority should ensure that all possible member states of reference are involved, and ESMA should assist them in reaching a decision.
If the regulators in question fail to reach a decision within the stipulated period, the manager can decide itself in which member state of reference it should be regulated according to the criteria set out in the directive.

The draft legislation transposing the European Union’s Alternative Investment Fund Managers Directive into Luxembourg law was submitted to the grand duchy’s Chamber of Deputies by finance minister Luc Frieden on August 24.
Although the deadline for member states to adopt the directive into their national law is July 22, 2013, Luxembourg plans to become one of the first EU countries to implement the AIFMD, and the government expects the legislation to have been approved by parliament before the end of this year.
The Luxembourg legislation not only incorporates the directive but introduces into national law a new regime to be known as the société en commandite special, or special limited partnership, which we discuss in a separate client note.
Bill of law no. 6471 also contains various ‘housekeeping’ measures revising and updating Luxembourg’s investment fund regulation as a whole, especially the 2010 statute adopting the Ucits IV directive into national law, and entails amendments to a total of 14 other pieces of legislation, including the laws governing Specialised Investment Funds (SIFs) and Risk Capital Investment Companies (Sicars).
In accordance with the directive, which was agreed by the EU Council and Parliament in November 10 and formally adopted the following year, the Luxembourg legislation provides for the registration of all managers of alternative investment funds – comprising hedge funds, private equity and real estate vehicles and any other types of fund that do not fall under the Ucits regime – apart from those excluded by the directive, exempted by the fact that they fall below the directive’s thresholds for assets under management, or that benefit from grandfathering arrangements.
Managers registered under the legislation must comply with its requirements – supplemented by the European Commission’s forthcoming ‘Level 2’ regulation and guidelines drawn up by the European Securities and Markets Authority, Esma – regarding operating conditions, organisational rules and transparency.
Once the directive comes into effect next July, registration is required before any new EU-based manager can begin management of alternative funds; existing managers have a transitional period of one year within which to apply for authorisation.
From July 22, 2013, Luxembourg-based managers of EU-domiciled funds will be free to market them under an AIFMD ‘passport’ to professional investors in any other EU member state, subject to notification requirements. Although this has not yet been explicitly addressed, past practice suggests that authorised managers will be also able to market their funds to EU countries that have failed to transpose the directive into their national law by the deadline.
Luxembourg-based managers of non-EU-domiciled funds, or managers of Luxembourg funds based outside the EU, may be able to benefit from the passport as well, but not before July 2015, and only once the Commission, on advice from Esma, has passed delegated legislation to that effect.
In the meantime, funds that are not domiciled or are not managed within the EU may continue to seek distribution through national private placement arrangements, where these exist, although their managers must still comply with the directive’s requirements regarding transparency.
The Luxembourg legislation offers flexibility regarding marketing of funds to retail investors, regardless of whether the funds are EU-domiciled or not, and of whether the marketing is within Luxembourg or on a cross-border basis. The directive left this question to individual members states to decide for managers falling under their jurisdiction.
Article 46 of the legislation authorises managers based in Luxembourg, other EU countries or third countries to market alternative funds, wherever they are domiciled, to retail investors as long as the funds are subject to appropriate supervision, non-Luxembourg funds are covered by investor protection rules equivalent to those in the grand duchy, and investor eligibility rules are adhered to.
For Luxembourg, the legislation applies indirectly not only to SIFs and Sicars but also to non-UCITS funds set up under Part II of the grand duchy’s fund legislation, which may or may not follow alternative strategies or be aimed at sophisticated investors, and unregulated vehicles such as financial participation companies (Soparfis) if they call under the directive’s definition of alternative investment funds. Under the legislation, all Part II funds qualify as alternative funds, being non-Ucits. The law’s scope includes Luxembourg-based managers of alternative funds domiciled in other jurisdictions.
The legislation therefore provides for amendments to existing legislation, notably regarding rules governing the depositary, delegation of functions, valuation of assets and provision of information to investors. Legislation was passed earlier this year to amend the 2007 SIF regime and bring it into line with some of the requirements of the AIFM Directive.
Part II funds, SIFs and Sicars that qualify as an alternative investment fund under the directive may be self-managed (where their legal form permits) or appoint an external manager, and can access the pan-EU marketing passport. They are subject to the depositary regime, delegation and valuation rules, and must meet the AIFMD transparency requirements.
Where the manager of such funds is below the directive’s minimum assets thresholds, they remain under the current regulatory regime, but the manager must register with the CSSF and meet ongoing reporting requirements. Where SIFs and Sicars do not qualify as alternative investment funds, the existing regime continues to apply.
Under the 2010 Luxembourg fund legislation that brought Ucits IV into national law, there are two options for management companies. A Ucits management company under Chapter 15 of the 2010 law may act as an external manager of an alternative investment fund under a double licencing arrangement, which means there is no obligation to supply the CSSF with information or documents already provided during the Ucits authorisation procedure. A firm in this position also enjoys access to the management company passport under both Ucits and AIFMD regimes.
A non-Ucits management company authorised under Chapter 16 of the 2010 law may, without further authorisation, act as management company to investment vehicles that fall outside the scope of the directive or for alternative funds if it falls below the assets threshold.
It may act as management company for FCPs, Sicavs and Sicafs that are alternative funds if it designates a manager authorised under the directive, or it can seek licensing under the directive, again without the obligation to provide information or documents already supplied under its earlier authorisation procedure. It can also benefit from the AIFMD management company passport.
A Chapter 16 entity may only act as management company for investment vehicles outside the scope of the directive if the vehicles in question have their own specific regulatory framework, such as SIFs or Sicars, or if it also acts as management company for alternative funds that do not reach the directive’s minimum asset threshold or that have an external manager authorised under the directive.
A non-Ucits management company that manages alternative funds in the terms of the directive must seek authorisation as an alternative fund manager if it exceeds the thresholds and if it has not designated a manager authorised under the directive.
The legislation also amends Luxembourg’s 1993 legislation that created the status of financial sector professional (PSF). Article 178 creates a new category of specialist PSF that may act as depositary to alternative funds, for the most part private equity vehicles, that have a lock-up of at least five years from the date of the original investments and that generally do not invest in financial instruments that the directive requires to be held in custody, or that usually takes controlling stakes in issuers or non-listed companies.
The availability of this option under the directive reflects current practice in various EU member states, notably Germany. Luxembourg’s decision to incorporate this into its legislation may give it the opportunity to increase its share of closed-ended alternative fund business.
This new type of PSF status can be combined with others such as fund administrator, transfer agent, client communication agent or domiciliation agent, although not with management of Ucits or alternative funds. However, depositary and administration functions within the same entity should be hierarchically separated in order to identify and manage potential conflicts of interest between the depositary and the fund, its investors and manager.
Article 179 provides for the abolition of the PSF status of managers of non-co-ordinated funds, used by managers of foreign non-Ucits funds, which will become obsolete since the vast majority of such funds will qualify as alternative investment funds under the directive. This means that their managers must in future be authorised under the AIFMD and will be treated as an alternative investment fund manager under Luxembourg law.
It also amends the 2005 legislation on institutions for occupational retirement provision, to allow Asseps and Sepcavs (equivalent in legal form to FCPs and Sicavs respectively) to delegate asset management to Luxembourg or other EU managers that are authorised to carry out portfolio management under the directive.
The various sections of the legislations are as follows:
Articles 1-4: General dispositions of the law, comprising definitions, its purpose and scope, exemptions and exclusions, and the criteria for determining the manager of an alternative investment fund.
Articles 5-9: Authorisation of alternative investment managers, including preliminary conditions, the authorisation request procedure, authorisation conditions, capital requirements, amendments to the authorisation, and withdrawal of authorisation and liquidation.
Articles 11-15: Conditions managers must adhere to, including general principles such as honesty and integrity, remuneration practices, conflicts of interest, risk management and liquidity management.
Articles 16-17: Organisational requirements, including IT capabilities and valuation.
Articles 18-19: Delegation of the manager’s functions to third-party providers, and the role and functions of a fund’s depositary.
Articles 20-22: Transparency, comprising the requirement to publish an annual report and its content, investor information and reporting to the CSSF.
Articles 23-28: Employment of leverage within funds, use of leverage information by regulators, obligations on managers of private equity or other alternative funds that acquire control over companies, notification of transactions conferring control, special reporting requirements of such funds, and ‘asset-stripping’ restrictions.
Articles 29-30: Marketing of shares or units in alternative funds run by Luxembourg-based managers in the grand duchy and in other EU member states, and the marketing of funds run by non-Luxembourg managers in the grand duchy.
Articles 31-32: Management by Luxembourg-based managers of funds domiciled in other member states, and by non-Luxembourg managers of Luxembourg funds.
Articles 34-35: Third country rules, comprising management by Luxembourg-based managers of funds domiciled outside the EU and not marketed within it, and marketing of such funds in Luxembourg or other EU countries under the passporting regime.
Articles 36-37: Marketing in Luxembourg under a passport of a third-country-fund run by a manager from another EU member state, and private placement distribution in Luxembourg of third-country funds run by EU managers.
Articles 38-39: Authorisation of third-country managers in Luxembourg as member state of reference, and marketing in the EU of funds run by a third-country manager where Luxembourg is the manager’s member state of reference.
Articles 40-42: Marketing in Luxembourg of funds run by a third-country manager where Luxembourg is not the member state of reference; marketing in other EU countries of funds run by a third-country manager where Luxembourg is the member state of reference; and marketing in Luxembourg of third-country funds run by a third-country manager where Luxembourg is not the member state of reference.
Articles 43-45: Management of funds domiciled in other member states by non-EU managers whose member state of reference is Luxembourg; management of funds domiciled in Luxembourg by non-EU managers where Luxembourg is not the member state of reference; and private placement marketing of funds in Luxembourg by non-EU managers.
Article 46: Marketing of alternative funds to retail investors.
Articles 47-52: Regulatory powers, the CSSF’s responsibility regarding Luxembourg managers or the marketing and marketing of funds by managers from other EU countries through a branch, oversight and investigative power, administrative penalties, and the right to appeal.
Articles 53-57: Duty of co-operation between regulators, personal information, exchange of information with third-country regulators, exchange of information on systemic risks, and co-operation on regulatory oversight.
Article 58: Transitional arrangements.
Article 59: Penal measures.
Articles 60-125: Amendments to 2010 investment fund legislation.
Articles 126-152: Amendments to 2007 Specialist Investment Fund legislation.
Articles 153-172: Amendments to 2004 Risk Capital Investment Company legislation.
Articles 173-175: Amendments to 2005 pension fund legislation.
Articles 176-208: Amendments to other Luxembourg legislation.
Articles 209-211: Entry into force.
Appendix I: Obligatory and optional functions of an alternative investment fund manager.
Appendix II: Remuneration policy.
Appendix III: Documentation required for marketing authorisation in Luxembourg.
Appendix IV: Documentation required for marketing authorisation in another EU member state.