The Luxembourg government has brought to Parliament a bill of law transposing UCITS V into Luxembourg’s UCI Law and AIFM Law. Further, the Luxembourg CSSF published a new version of its AIFMD Frequently Asked Questions, among other matters clarifying the definitions of “marketing” and “reverse solicitation” from a Luxembourg perspective. In another development, the Luxembourg “FATCA Law” recently came into effect, with an impact on covered institutions pursuant to the provisions of the law itself as well as the relevant guidance. These developments are discussed below.
Introduction of Bill to Transpose UCITS V into Luxembourg Law
The Luxembourg government brought to Parliament, on 5 August 2015, bill of law number 6845 (Bill) – transposing UCITS V1 into Luxembourg law. The Bill will introduce the new provisions required under UCITS V into the law of 17 December 2010 on undertakings for collective investment (UCI Law), as well as amendments to the law of 12 July 2013 on alternative investment fund managers (AIFM Law).
UCITS V – Recap and Next Steps
UCITS V harmonizes eligibility rules for depositaries of UCITS, strengthens the liability regime of depositaries across the EU and sets common rules on segregation and safeguarding of assets under custody. In addition, UCITS V requires the implementation of remuneration policies for those persons managing UCITS or having an impact on the UCITS’ risk profile, in order to promote sound and effective risk management and to avoid excessive risk-taking. Further, UCITS V harmonizes administrative sanctions that may be undertaken by national supervisory authorities.
UCITS V was published in the Official Journal on 28 August 2014 and came into force on 17 September 2014. It must be transposed into the laws of the EU Member States by 18 March 2016 and will be applied from that date.
Many of the detailed measures under UCITS V will be implemented through delegated acts to be adopted by the European Commission, referred to as level II measures. For this purpose, the European Securities and Markets Authority (ESMA) provided technical advice to the European Commission on 28 November 2014 as to the content of two of the delegated acts required in respect of the depositary regime under UCITS V. And, on 23 July 2015, ESMA launched a consultation on guidelines on sound remuneration policies; this consultation will close on 23 October 2015.
New Depositary Regime for UCITS … and Certain AIFs
Before the Bill was introduced by the government, the CSSF had previously released a circular2 setting forth rules applicable to depositaries of UCITS and had invited Luxembourg depositaries to start an internal assessment to prepare for compliance with the new depositary requirements. For further information as to this circular, please refer to CSSF Sets Forth Rules for UCITS Depositaries and Clarifies Luxembourg Depositary Regimes.
The Bill transposes into Luxembourg law the following new requirements for depositaries under UCITS V:
- Eligibility conditions: The Bill will maintain the requirement that the depositary function be limited to Luxembourg credit institutions and to Luxembourg branches of credit institutions located in EU Member States other than Luxembourg.
- Cash monitoring: The Bill clarifies that the depositary must monitor cash flows and must ensure proper collection and booking of subscription funds and income.
- Conditions on delegation of safe-keeping: Delegation of safe-keeping must be justified by objective reasons and be subject to initial and periodic due-diligence of the sub-custodian; the latter must have an adequate infrastructure, and be subject to prudential regulation, with respect to the safe-keeping of financial instruments.
- Segregation of assets throughout the custody chain: The depositary and its sub-custodian must differentiate and segregate assets of UCITS from their proprietary assets as well as those assets that are not collectively managed.
- Liability regime: The depositary has a strict obligation to make restitution with respect to financial instruments under its safe-keeping – the depositary is liable for any loss of assets unless it can prove that the loss arose as a result of an external event beyond the depositary’s reasonable control. Unlike the provisions of the EU AIFM Directive (AIFMD), the depositary is not permitted to contractually discharge its liability.
The Bill goes beyond the mere transposition of UCITS V into Luxembourg law, as the new provisions for depositaries will also be applicable to undertakings for collective investments under part II of the UCI Law (Part II UCIs) – these are alternative investment funds (AIFs) that can be marketed in Luxembourg to retail investors. The Bill aims to introduce a single depositary regime for UCITS and Part II UCIs, irrespective of whether or not the Part II UCI is managed under the lighter regime of the AIFM Law. According to the explanatory notes of the Bill, this approach is justified to ensure a higher level of protection for undertakings that may raise capital from retail investors. The explanatory notes further refer to the regulation on European long-term funds (ELTIFs), which imposes a depositary regime largely replicating that under UCITS V. Comparable to Part II UCIs, ELTIFs are AIFs that may be marketed to retail investors.
When transposing the AIFMD into Luxembourg law, Luxembourg introduced a new type of license offered by the AIFMD for Depositaries of Non-Financial Assets – these are depositaries safe-keeping the assets of AIFs that: (i) have no redemption rights exercisable for a period of five years; and (ii) generally do not invest in (a) financial instruments to be held in custody or (b) issuers or non-listed companies in order to potentially acquire control over such companies. Depositaries of Non-Financial Assets are generally not credit institutions and – as a consequence of the application of the future UCITS depositary regime to Part II UCIs – will not be permitted to serve as depositaries of Part II UCIs.3
The Bill introduces new rules on the remuneration of persons involved in the management of a Luxembourg UCITS. This is in accordance with the commitments of G20 to mitigate risks in the financial services sector, and broadly replicates the requirements on remuneration policy applicable to AIF managers (AIFMs) under the AIFM Law.
With respect to an appropriate balance between fixed and variable components of total remuneration in the management of UCITS, the Bill introduces an obligation to pay at least 50% of variable remuneration in the form of units of the relevant UCITS and to defer at least 40 % of the variable remuneration component over a period of at least three years. The remuneration policy will be subject to central and independent internal review, on at least an annual basis.
The Bill introduces into the UCI Law specific rights of the CSSF to impose administrative sanctions and penalties provided under UCITS V.
Sanctions and penalties may be imposed with respect to UCITS and Part II UCIs, as well as their management companies, depositaries and any other entities providing services to the UCITS or the Part II UCIs and which are under the supervision of the CSSF. This mechanism is different from the sanctions under the AIFM Law, which enable the CSSF to act against the AIFM only. Luxembourg management companies licensed to manage both UCITS and AIFs (commonly referred to as “SuperManCos”) will be required to assess on a case-by-case basis whether their behavior in relation to the management of UCITS or AIFs can be sanctioned under either or both regimes.
Proposed Changes to the AIFM Law
The Bill proposes the following changes to the AIFM Law:
- AIFMs (other than sub-threshold AIFMs) must have their accounts audited by an external auditor. Since Luxembourg AIFMs generally have an external auditor, this new requirement will likely have minimal impact.
- AIFMs can use their AIFMD passport for the “MiFID-like” services under article 5(4) of the AIFM Law (e.g., discretionary portfolio management, investment advice, safe-keeping and administration in relation to units of UCIs, receipt and transmission of orders as to financial instruments). This amendment transposes article 92 of MiFID II.4