Luxembourg bill 6471 transposing the EU Alternative Investment Fund Managers Directive (the “AIFMD” into Luxembourg law is now close to being adopted by the Luxembourg parliament. The bill goes beyond the mere implementation of the AIFMD into Luxembourg law, in particular by reforming the regime of Luxembourg limited partnerships. The Luxembourg supervisory authority, the Commission de Surveillance du Secteur Financier (the “CSSF”), has also recently taken steps to ensure the smooth transposition of the AIFMD into Luxembourg law. In another development, Luxembourg enacted a new law on dematerialised securities on 6 April 2013. Henceforth, Luxembourg companies and Luxembourg investment funds (including SICAVs, SICAFs, SICARs and FCPs) will be able to issue equity or debt securities in dematerialised form. These developments are discussed below.
Luxembourg Bill Implementing the AIFMD Close to Adoption; CSSF Releases AIFM Application Forms and Signs AIFMD Cooperation Arrangements
A process that started on 24 August 2012, when the Luxembourg government proposed bill 6471 (the “Bill”) transposing the AIFMD into Luxembourg law, is nearing its conclusion. The Bill is now close to being adopted by the Luxembourg parliament.
On 18 June 2013, the CSSF released on its website various templates to be used when filing the application to be authorised as an AIFM in Luxembourg, as well as Frequently Asked Questions (“FAQs”) to highlight key aspects of AIFMD regulations from a Luxembourg point of view.
Further, on 31 May 2013, the CSSF announced that it had signed 34 AIFMD cooperation arrangements, with jurisdictions including the United States, Hong Kong, Switzerland, BVI, Cayman Islands, Jersey and Guernsey.
This discussion deals first, and in large part, with the Bill.
The Bill goes beyond the mere implementation of the AIFMD into Luxembourg law. It reforms the regime of Luxembourg limited partnerships and it provides some additional changes to the legal framework applicable to Part II UCIs – that is, undertakings for collective investments that can be freely marketed to all types of investors (including retail investors), but which do not fulfil the conditions required to be met to be authorised as UCITS (for instance, restrictions on eligible assets and investment restrictions) – and SICARs (i.e., investment companies investing in so-called risk capital).
The Bill can be split into two parts:
- Chapters 1 to 11 form an entirely new law establishing the legal regime for a Luxembourg alternative investment fund manager or “AIFM” (the “AIFM Law”) and conditions to be fulfilled when managing and marketing alternative investment funds or “AIFs” in Luxembourg.
- Chapter 12 of the Bill amends several existing Luxembourg laws by adjusting and enhancing the different legal regimes to which a Luxembourg AIF may be subject.
Luxembourg AIFMs and Other Luxembourg Management Companies
The AIFM Law establishes rules as regards the authorisation, scope of activities and transparency requirements to which a Luxembourg AIFM is subject. The AIFM Law closely replicates provisions of the AIFMD and does not seek to “gold-plate” the AIFMD.
A Luxembourg corporate AIF (for instance, a corporate SIF or a SICAR) that does not appoint an external AIFM will be required to be authorised as an internally managed AIF and meet in principle the same conditions as an external AIFM.
A Luxembourg AIFM providing portfolio management and risk management before 22 July 2013 has until 22 July 2014 to submit an application to the CSSF to be authorised as an AIFM. During this transitional period, such a Luxembourg AIFM can continue to manage and market AIFs created before or after 22 July 2013 under the current regime – the relevant AIF has to comply with the AIFMD regime when the Luxembourg AIFM is authorised as an AIFM. When authorised as an AIFM, the Luxembourg AIFM will be able to benefit from the pan-European marketing passport that is seen as a key benefit of becoming authorised as an AIFM.
Alongside the creation of the Luxembourg AIFM, several provisions applicable to existing Luxembourg management companies will be amended by the Bill:
- Management companies under Chapter 15 of the UCI Law1 – that are management companies allowed to manage UCITS – can apply to become AIFMs, but as a result of becoming AIFMs they will not need to file duplicate information and documents that are already available to the CSSF.
- Management companies under Chapter 16 of the UCI Law will in the future only manage non-UCITS and structures that are not caught by the AIFMD (unless the management company appoints a duly authorised AIFM to manage such an AIF) so that they can operate without having to comply with the requirements of the AIFMD. It will be open to such management companies to provide, on an ancillary basis, investment management and advisory services, safe-keeping and administration of units of undertakings for collective investment and reception and transmission of orders with respect to financial instruments.
There will be three types of regulated AIFs under Luxembourg law:2 Part II UCIs, SIFs (i.e., specialised investment funds) and SICARs. Any Luxembourg AIF benefiting from the transitional provisions must submit to the CSSF by 1 April 2014 at the latest a file containing information as regards its compliance with the AIFMD by 22 July 2014.
Part II UCIs
A Part II UCI will in principle always be an AIF within the meaning of the AIFM Law. If the AUM of a Part II UCI is below the AUM thresholds set out in AIFMD, the Part II UCI can opt to be outside of the scope of the AIFMD but will need to comply with provisions relating to the appointment of the depositary and the valuation of assets in the same way as a Part II UCI falling within the scope of the AIFMD.
The following additional amendments have been introduced in relation to Part II UCIs:
- The annual report of a Part II UCI must be submitted within six months after the end of the relevant accounting year (instead of four months, as is currently the case) and the semi-annual report must be submitted within three months after the end of the semi-annual period (instead of the current two months); and
- No French or German translation of the notarial deed of the articles of incorporation of a corporate Part II UCI will need to be published – the articles of incorporation can be drafted solely in English.
The SIF Law3 will be split into two parts:
- Part I of the SIF Law will set out common rules applicable to all SIFs, which replicate to a large extent the current regime applicable to SIFs; and
- Part II of the SIF Law will set out additional rules for those SIFs that will fall within the scope of the AIFMD by cross-referring to the AIFM Law.
This will have as a consequence that a SIF covered by an exemption set out in the AIFMD (e.g., a SIF entirely dedicated to the wealth management of a family or an internally managed SIF with AUM below the AUM thresholds set out in the AIFMD) will be governed solely by Part I of the SIF Law. While such a SIF must entrust the safe-keeping of its assets to a depositary, the more stringent provisions under the AIFMD will not need to be applied.
The same approach has been adopted for the SICAR Law,4 which will be split into Part I, setting general rules applicable to all SICARs, including those which are outside of scope of the AIFMD, and Part II, providing additional rules for those SICARs falling within the scope of the AIFMD.
As for Part II UCIs and SIFs, no French or German translation of the articles of incorporation will be required for publication purposes.
Impact on Luxembourg Depositaries
Luxembourg will be abandoning the strict requirement for depositaries of Part II UCIs, SIFs and SICARs to be credit institutions. Besides credit institutions, investment firms under the Financial Sector Law5 can also be appointed as a depositary of any Part II UCI, SIF or SICAR, including those that are outside of the scope of the AIFMD, provided that the investment firm complies with additional conditions mainly related to the level of their own funds.
The Financial Sector Law will also provide a new licensing regime for depositaries servicing AIFs that are mainly invested in assets other than financial instruments that can be held in safe-custody, so long as the AIFs do not allow their investors to request the redemption of their shares/units for at least five years following investment. These depositaries, which need not be authorised as a credit institution or an investment firm, will need to be approved and subject to the prudential supervision of the CSSF. They must have a sound administration and organisational structure and a minimum capital of €500,000. Luxembourg fund administrators, among others, are expected to apply for this authorisation to enable them to be entrusted with the safe-keeping of assets of closed-ended SIFs and SICARs invested in non-financial assets (e.g., private equity and real estate).
Depositaries servicing AIFs within the scope of the AIFMD will need to provide cash monitoring, safe-keeping and oversight duties in accordance with the AIFMD. When providing safe-keeping services for financial instruments held in custody, the depositary is subject to strict liability (that is, the depositary has the burden of proof with respect to the discharge of its liability when assets are lost). Depositaries servicing AIFs outside of the scope of the AIFMD will continue to be subject to the current Luxembourg depositary regime, which is mainly contractually determined in accordance with the regulatory practice of the CSSF. Safe-keeping the assets of an AIF is then an obligation of means of the depositary (that is, the AIFM or internally managed AIF has in principle the burden of proof with respect to the depositary’s liability when assets are lost).
Marketing in Luxembourg
The AIFM Law establishes marketing rules for an AIFM established in an EEA6 member state, or established in a third country if the AIFM contemplates marketing an EEA AIF or a non-EEA AIF in the Grand Duchy of Luxembourg.
Offering of an EEA AIF by an EEA AIFM
Alongside the AIFMD marketing passport (which applies to professional investors only), it will also be possible to market AIFs that fall within the AIFMD to retail investors in Luxembourg outside the AIFMD marketing passport regime, provided that the AIF is subject to:
- regulation offering investors a level of protection at least equivalent to that applicable to a Luxembourg AIF marketed to retail investors; and
- supervision of the AIF considered by the CSSF as at least equivalent to the supervision of a Luxembourg AIF marketed to retail investors.
Additionally, a cooperation arrangement between the CSSF and the supervisory authority of the relevant AIF must be in place. The AIFM Law requires the CSSF to adopt implementing measures on marketing of AIFs to retail investors by way of regulation.
Offering of a Non-EU AIF by an EEA AIFM and Offering of an EEA AIF or Non-EEA AIF by a Non-EEA AIFM
Luxembourg will not impose stricter rules on the marketing of AIFs that will be unable to benefit from the AIFMD marketing passport immediately after 22 July 2013 than the rules imposed on EEA AIFMs wishing to make use of the marketing passport.
An EEA AIFM will be able to use the Luxembourg private placement regime7 to market a non-EEA AIF to professional investors in Luxembourg, provided that:
- The AIFM fulfills all requirements under the AIFMD, excluding the depositary provisions that are replaced by a “depositary lite” regime;
- Appropriate cooperation arrangements are in place between the supervisory authority of the AIFM and that of the non-EEA AIF — the Bill clarifies that the CSSF is considered as the competent authority of the AIFM when the marketing is made in Luxembourg through a Luxembourg AIFM; and
- The non-EEA AIF is not located in a Financial Action Task Force (“FATF”) non-cooperative country.
A non-EEA AIFM will be able to use the Luxembourg private placement regime to market a non-EEA AIF to professional investors in Luxembourg, provided that:
- The non-EEA AIFM complies with the transparency requirements and controlling interest provisions set out in the AIFMD.
- Appropriate cooperation arrangements are in place between the CSSF and the supervisory authority of the non-EEA AIFM and the supervisory authority of the non-EEA AIF; and
- The non-EEA AIF is not located in a FATF non-cooperative country.
Offering of a Non-Luxembourg AIF that Does Not Fall Within the Scope of the AIFMD
Units of an open-ended non-Luxembourg AIF that falls outside the scope of the AIFMD can likely be sold to retail investors8 in Luxembourg subject to the approval of the CSSF which will, among other considerations, assess whether such open-ended AIF is subject in its home jurisdiction to permanent regulatory supervision, with the purpose of establishing whether there is adequate investor protection.
The Bill is silent on the marketing of units of closed-ended non-Luxembourg AIFs exempted from the scope of the AIFMD. Marketing of these AIFs remains subject to the requirements of the EU-level Prospectus Directive and the exemptions set out in that directive.
The Bill does not contain specific rules or guidance that market participants may find helpful in relation to “reverse solicitation”. This concept will be assessed in practice by the CSSF on a case-by-case basis.
Reform of Luxembourg Limited Partnerships
Prior to the adoption of the Bill, two forms of Luxembourg limited partnerships9 were recognised under Luxembourg law, each of these having a separate legal personality:
- the common limited partnership (société en commandite simple or “SCS”), which is an “intuitu personae”10 company issuing partnership interests that are in general not freely transferable; and
- the corporate partnership limited by shares (société en commandite par actions or “SCA”), which is a joint-stock company whose capital is represented by shares in principle freely transferable.
The Bill amends existing Luxembourg companies legislation, among other laws, to introduce a third form of limited partnership, namely the special limited partnership (société en commandite special or “SCSp”), which is an intuitu personae company but, unlike the SCS, does not have a legal personality and consequently is fully transparent from a corporate and tax perspective. The SCSp adopts many of the principles seen in limited partnerships under common law jurisdictions such as England, Cayman Islands and Guernsey. For instance, the SCSp offers the ability for investors to have both capital and loan accounts and can make it easier, through the use of contractual investor excuse provisions, to allow certain investors to be treated as not having invested in certain of the SCSp’s investments.
The SIF Law and the SICAR Law will be amended to permit the organisation of SIFs and SICARs in SCSp form.
From a tax perspective, the concept of carried interest will be clarified in the Income Tax Law,11 by distinguishing between:
- carried interest as an incentive right not attached to a share or unit, and which will be considered as miscellaneous income to be taxed in principle at the marginal income tax rate; and
- carried interest attached to a share or unit, which qualifies as capital gain for tax purposes (and which is exempted from income tax if it is realised after a minimum holding period of six months and if the participation does not exceed 10% of the issuer’s capital).
Additionally, a favourable tax regime will be created for the carried interest paid to Luxembourg tax residents employed by an AIFM subject to certain conditions.
Recent Steps Taken by the CSSF to Ensure Smooth Transposition of the AIFMD into Luxembourg Law
The CSSF did not wait for the enactment of the Bill into law prior to releasing AIFMD application forms and FAQs on its website. The templates and FAQs (which are only available in English) are available at http://www.cssf.lu/fileadmin/files/Publications/Communiques/Communiques_2013/CP_1325_AIFMD_Guidance_180613.pdf.
Further to ESMA’s approval of cooperation arrangements with 34 non-EEA supervisory authorities, the CSSF has signed separate cooperation arrangements with each of these authorities. The list of supervisory authorities with whom the CSSF has entered into cooperation arrangements is available at http://www.cssf.lu/fileadmin/files/Publications/Communiques/Communiques_2013/CP_1323_34_MOUS_EN.pdf.
The execution of these cooperation arrangements enables management companies to engage in the following activities, among others:
- Marketing in Luxembourg of non-EEA AIFs under the Luxembourg private placement regime, as described above; and
- Delegation of portfolio management to an investment manager located outside of the EEA, provided that other conditions for delegation under the AIFMD are fulfilled (e.g., the investment manager must be authorised to manage a portfolio and subject to prudential supervision in its home jurisdiction).
The implementation of the AIFMD into Luxembourg law is almost complete and the deadline of 22 July 2013 will certainly be met. The implementation is built on a pragmatic approach – without going beyond the already detailed requirements set under the AIFMD but enhancing, where possible, the legal framework applicable to managers, funds and service providers in Luxembourg.