Luxembourg law implementing EuVECA and ELTIF regulations and amending RAIF law
The Law of 16 July 2019 implementing the regulations on EuVECA, EuSEF, ELTIF and MMF (the “Regulations”) and amending the RAIF law entered into force on 22 July 2019 (the “Law of 16 July 2019”).
Although these Regulations are directly applicable to the EU member states, they do allow certain provisions to be regulated on a national level. In view of this, the Law of 16 July 2019 introduces inter alia the following:
Implementation of the EuVECA, EuSEF, MMF and ELTIF regulations
- Designation of the CSSF as the competent authority in respect of the proper application of the EuVECA, EuSEF, ELTIF and MMF regulations and describes the administrative sanctions that the CSSF could impose in case of breaches of these regulations;
- Designation of the CSSF as competent authority in respect of securitization regulation and specific power of supervision to the “Commissariat Aux Assurances” (the “CAA”) for ensuring the respect of the obligations laid down in articles 6 to 9 of the regulation 2017/2402/UE. Therefore, the CAA takes care of the correct application of the risk retention (article 6), the transparency requirements (article 7), the ban on resecuritisation (article 8) and the criteria for credit-granting (article 9) concerning the originator, the original lender of a securitisation or the securitisation special purpose entity (“SSPE”) established in Luxembourg.
Amendment of the RAIF law
Finally, the Law of 16 July 2019 amends the RAIF Law by introducing the possibility to modify a common fund (“FCP”) RAIF into a SICAV RAIF. Additionally, FCP-RAIFs may be managed by Luxembourg management companies authorised pursuant to chapters 15, 16 or 18 of the law of 17 December 2010 relating to undertakings for collective investment.
The law of 16 July 2019 can be accessed here.
CSSF confirms AIFs’ ability to grant loans in updated AIFM law FAQ
On June 9, 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 August 10, 2015.
The new version provides clarity about the ability of Luxembourg-domiciled alternative funds to conduct loan origination, participation and acquisition, an important issue given the role of the grand duchy as a leading centre for funds conducting or investing in loans.
The FAQ document, which has now run to 10 versions over the past two-and-a-half years, is intended to highlight aspects of the AIFMD rules from a Luxembourg perspective, for the benefit primarily of alternative funds and fully AIFMD-authorised managers established in the grand duchy. It complements Q&A documents on the AIFMD and its subsidiary legislation published by the European Securities and Markets Authority 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, marketing and reverse solicitation, notification of investment in non-listed companies, and co-operation agreements signed by the CSSF with non-EU regulators.
Loan business permitted in principle
The new version clarifies that loan origination, participation and acquisition are in principle permissible activities for Luxembourg-domiciled alternative investment funds under the 2013 legislation as well as specific product laws and regulations governing the various fund vehicles designated for AIFs. The granting of loans is also explicitly permitted under certain conditions in the EU regulations governing European Long Term Investment Funds, European Social Entrepreneurship Funds and European Venture Capital Funds.
However, the CSSF says various factors should be considered by an alternative fund or its authorised manager, before and during any loan origination transactions, and the regulator will consider these aspects on a case-by-case basis as part of its process of authorisation and ongoing supervision of the AIFM and where appropriate the fund.
All general requirements for AIFMs with regard to the AIFs they manage under the 2013 legislation according to the Law of 2013 apply in the case of loan origination, participation or acquisition, as well as any particular requirements on the fund arising from relevant product laws or regulations.
Organisation and governance
The CSSF says the AIFM or where relevant the fund should ensure to address all aspects and risks of lending activity. In addition, they should have in place proper organisational and governance structures, processes and procedures; expertise and experience in origination, participation or acquisition activity plus the necessary technical and human resources, with a focus on credit and liquidity risk management within an overall risk management process; concentration and risk limitation mechanisms; clear policies regarding assets and investors such as loan and investor categories and avoidance of conflicts of interest; proper disclosure and transparency.
It is the responsibility of the AIFM or AIF itself to ensure the implementation of an appropriate approach for lending activity, to be evaluated by the regulator as part of its authorisation and ongoing supervision process.
ESMA prefers closed-ended loan funds
The CSSF’s guidance follows the issue by the European Securities and Markets Authority on April 11 of its opinion on key principles for a European framework on loan origination by funds for the European Parliament, Council and Commission, taking into account the existing approach of various member states. ESMA says a common EU framework would help create a level playing field in the sector and curb opportunities for regulatory arbitrage, and in turn encourage increased loan origination by investment funds.
ESMA notably says that because of the illiquid nature of loans, it believes loan-originating funds should be set up as closed-ended vehicles that do not offer investors the right to redemption of units on a regular basis. However, the authority says that provided certain conditions are fulfilled, the opportunity for repayment by the fund at the recommendation of its manager could be offered to investors on a non-preferred and equal basis during the life of the AIF. This could take place at fixed intervals, on the same lines at the procedures set out in the ELTIF Regulation.
The latest edition of the CSSF’s AIFMD FAQs can be consulted at http://www.cssf.lu/fileadmin/files/AIFM/FAQ_AIFMD.pdf. ESMA’s opinion on key principles for a European framework on loan origination by funds is available at https://www.esma.europa.eu/sites/default/files/library/2016-596_opinion_on_loan_origination.pdf.
RAIF: unregulated funds coming soon to Luxembourg
At its meeting on November 27 the Luxembourg government formally approved draft legislation creating a new type of fund vehicle, the reserved alternative investment fund (fonds d’investissement alternatif reservé). The most important characteristic of the RAIF (or FIAR, its French acronym) is that it is not subject to regulation by the Financial Sector Supervisory Authority (CSSF), although it must have an authorised manager. Further details of the fund and its requirements will become clear once the parliamentary bill has been published.
In a statement, the government says it is designed to benefit from the structuring flexibility of non-UCITS collective investment vehicles, specialised investment funds (SIFs) and risk capital investment companies (SICARs). However, the system of dual supervision of managers and funds applicable to these vehicles, which adds costs and places restrictions on the management of the funds, may not be necessary or desired by institutional and professional investors.
What kind of investors may place money in RAIFs?
The RAIF is restricted to sophisticated, institutional and professional investors, and are subject to a minimum investment of €125,000.
What advantages does the RAIF offer?
The RAIF is based on the alternative investment fund regime established by the European Union’s Alternative Investment Fund Managers Directive and its application in Luxembourg to specialised investment funds. However, it is designed to speed up time to market through the absence of a requirement for authorisation or ongoing supervision by the CSSF. This means that future changes to the fund’s constitutional, information or other documents, will not require regulatory approval.
Must a RAIF have a manager established and regulated in Luxembourg?
No. There is no requirement for a Luxembourg-based manager, but it must have an alternative investment fund manager authorised under the AIFMD and domiciled in a European Economic Area member state in order to benefit from the AIFM’s marketing passport.
Are there restrictions on the kind of strategy a RAIF may follow?
With the reservation that the terms of the legislation have not yet been published, it appears that the manager of the RAIF may follow any kind of investment strategy, with no restrictions regarding eligible assets. RAIFs whose investment policy is restricted to risk capital investments will not be required to follow risk-spreading rules.
What kind of tax treatment will RAIFs receive in Luxembourg?
RAIFs will enjoy the same tax treatment as SIFs, paying an annual subscription tax amounting to 0.01% of its net assets but enjoying complete exemption from corporate income tax or withholding tax on the distribution of returns, whether in the form of dividends or interest income. RAIFs limited to risk capital investments will be subject to the same tax regime applicable to SICARs.
What kind of structure can a RAIF take?
Like SIFs and SICARs, RAIFS can take any corporate or contractual legal form, including a public limited company, partnership limited by shares, or common or special limited partnership.
Is the RAIF more attractive than Ireland’s new ICAV for targeting US investors?
The ICAV is a regulated fund vehicle, unlike the RAIF, with the attendant costs and time requirements. When structured as a partnership limited by shares (SCA), the RAIF may, like the ICAV, elect treatment as a partnership for US tax purposes. This is important for hedge funds marketed to US taxpayers, since it allows the use of master-feeder structures.
Can a RAIF have multiple compartments?
Yes, it appears that a RAIF can be created as an umbrella structure with multiple sub-funds, as well as multiple share classes.
When is the draft legislation likely to become law?
Now that the law has been approved by the government, it will be introduced to the lower house of Luxembourg’s parliament, the Chamber of Deputies, for debate and approval. Although the bill has not yet been published, current estimates suggest enactment of the legislation could take place by the second quarter of next year.
