The Luxembourg financial regulator, the Commission de Surveillance du Secteur Financier (CSSF) published on 9 June 2016 an updated version of its FAQ concerning the Luxembourg law of 12 July 2013 on alternative investment fund managers, as amended (AIFM Law). The updated FAQ notably includes a new section focusing on loan origination, and follows an opinion from ESMA of 11 April 2016 on a harmonised European framework for loan origination by funds (ESMA Opinon).1 The FAQ is primarily addressed to alternative investment fund managers (AIFMs) and alternative investment funds (AIFs) that are established in Luxembourg – the EU’s leading jurisdiction for debt and loan funds.
The updated FAQ touches on most of the key items identified in the ESMA Opinion. Of importance, the CSSF clarifies that Luxembourg AIFs are in principle permitted to originate loans, as there are no provisions in the AIFM Law, the AIFMD2 and other laws applicable to AIFs depending on the product chosen (collectively, Product Laws3), or applicable regulations that prohibit this activity. The CSSF further indicates that an AIF which qualifies as a European long-term investment fund (ELTIF), European social entrepreneurship fund (EuSEF) or European venture capital fund (EuVECA) is permitted to grant loans under the conditions determined in the relevant EU regulations (collectively, EU Fund Regulations).
In the FAQ, the CSSF sets forth certain factors to be considered by AIFMs – and, as applicable, the AIFs they manage – in connection with the origination of loans. When approving and supervising the relevant AIFM/AIF, the CSSF will assess these factors on a case-by-case basis. In particular, the AIFM/AIF must have in place compliance policies and procedures, as well as appropriate technical and human resources (including persons experienced in credit and liquidity risk management) to address all aspects and risks of loan origination. The policies and procedures must take into account the type of assets and investors, as well as cover the risk of potential conflicts of interest and appropriate disclosure.
The CSSF states that it is the responsibility of the AIFM/AIF to ensure the implementation of a robust and appropriate approach to loan origination. The CSSF will evaluate this on a case-by-case basis.
From a practical perspective, it remains to be seen what impact (if any) the updated FAQ will have on unregulated AIFs and reserved alternative investment funds (RAIFs),4 and, in particular, whether such AIFs and RAIFs can be structured as funds that originate loans. We would expect the FAQ to be updated after the enactment of the law on RAIFs, as this new type of fund should logically also be included within the definition of the Product Laws.
It should be kept in mind that entities engaged in the business of granting loans to the public for their own account must be authorised for such purpose under the Financial Sector Law,5 either as banks/credit institutions6 or as professionals performing lending operations.7 With respect to loan origination by investment funds, the Financial Sector Law expressly provides that it does not apply to those investment funds that are subject to a Product Law (e.g., specialised investment funds). As of the date of this article, only the FAQ on AIFMs has been updated. However, we would expect that the CSSF will also at some point update its Questions and Answers on the status of professionals of the financial sector, as this includes guidance as to the granting of loans by AIFs subject to the Product Laws.
It would be a welcome development – both for consistency and to avoid interpretation issues – if the bill of law on RAIFs currently before Parliament would amend the Financial Sector Law8 to expressly state that the latter does not apply to RAIFs (although it could be argued that, depending on the situation, entities covered by special laws are generally out of scope as it stands).