On 6 March 2012, the draft law amending the Luxembourg law of 13 February 2007 on specialised investment funds ("SIF Law"), was approved.
This law is expected to bridge the gaps between Luxembourg's current alternative investment fund regime and certain areas of the directive on Alternative Investment Fund Managers (AIFMD). The law brings further clarifications and a legal framework to certain local regulatory good practice by the supervising authority.
We have summarised the key changes of the new SIF Law below.
Future and existing SIFs are required to take steps to better streamline, clarify or improve the compliance with key organisational requirements:
- Risk management: An adequate risk management process needs to be prepared in order to appropriately detect, measure, manage and monitor the risks associated with the positions of the assets under portfolio to determine the portfolio's overall risk profile. It is so far NOT required for the precisions be disclosed in the issuing document. The CSSF is due to provide further guidance in this respect.
- Conflict of interest: The SIF shall be structured and organised to mitigate any conflict of interest arising from the fund between any persons contributing to the fund activity to advance the best interest of the investors. "Organisation" relates to the representation powers — the segregation of the assignments between the board members for example, —whereas "structuring" relates to the corporate governance rules and bodies within the fund. The CSSF shall detail the requirements on the conflict of interest.
- Well-informed investor: The SIF shall organise itself to put in place adequate measures and processes to identify and better assess the eligibility of the candidate investor to be regarded as a "well-informed investor".
The framework of the delegation of functions to third parties are now codified and, in certain respects, clarified by a dedicated new provision of article 42 ter of the SIF Law which lists all requirements.
In short, any recourse to delegation must be disclosed to the CSSF. However, a distinction appears to be made in the new SIF Law between the investment management functions and other functions delegated. In any case of delegation, the SIF shall provide all appropriate information to the CSSF and ensure that the best due diligence and due care in the selection of the delegate have been carried out. The issuing document must also list all delegated functions.
When the investment management function is entrusted to an investment manager (natural or legal person), as a matter of principle, the new SIF Law requires the delegate to be regulated. This means being (i) authorised to provide investment management services under local applicable law and (ii) being subject to ongoing prudential supervision. Should the investment manager be located in a third country, a cooperation shall exist between the CSSF and the local supervising authority. If the above requirements are not fully satisfied, it is still possible to delegate the investment management function to such person provided that the CSSF approves the delegate upon scrutiny of his good repute and professional experience.
Application file process
The best practice of waiting for informal CSSF approval before launching the fund is now part of the new SIF Law. The SIF is obliged to obtain CSSF approval before launching its activities and submit an application file including all necessary information allowing the CSSF to grant its authorisation. The CSSF will also verify whether the purpose of the SIF is active portfolio management.
The investment manager, i.e. the person in charge of managing the fund portfolio (actively deciding to invest/divest any assets of the fund) now needs to be formally approved by the CSSF, which implies in any case prior scrutiny exercised by the CSSF of both his good repute and suitable experience with regard to the investment policy of the SIF.
Any subsequent material amendments to the application file and to the issuing document will have to be approved by the CSSF.
Improvements towards more flexibility
- Sub-fund cross investment: A sub-fund of an umbrella SIF is now allowed to invest in another sub-fund of the same umbrella SIF.
- Lighter paperwork: (i) It is no longer required to translate the SICAV's articles of association; (ii) it is no longer required to send hard copies of the annual accounts and related documents before the annual general meeting; (iii) to clarify the rules for a fund having frequent redemptions/subscriptions, the new SIF Law sets forth that, for the purpose of the quorum, admission rights and any rights attached to their shares of shareholders calculation, the fifth day preceding the day of the general meeting until elapse of that calendar day (Luxembourg time) shall serve as reference day. This reference day is called the "record date".
Actions you need to consider and timeline
This law amending the current SIF Law will come into effect on the first day of the month following the publication of said amendment law on Luxembourg's official legal gazette called the Memorial. The amended SIF Law provides a grandfathering clause i.e. for "existing" SIFs as of the effective date, a transitional period during which those SIFs will be granted a moratorium to comply with the new requirements. Should an element of a SIF be modified in between, it is however not excluded that the CSSF requires the necessary compliance adjustment in spite of the grandfathering clause.
Timing for complying with the amended SIF Law: click here to see the timeline