As previously reported in Dechert's Fourth Quarter 2013 Financial Services Quarterly Report and DechertOnPoint, Luxembourg Law Transposing the AIFMD Passed by Luxembourg Parliament, Luxembourg’s transposition of the AIFMD into Luxembourg law by the law of 12 July 2013 on alternative investment fund managers (AIFM Law) also amended not less than 15 other laws and regulations. As of 11 March 2014, the Luxembourg supervisory authority (Commission de Surveillance du Secteur Financier – CSSF) had approved 24 AIFMs, positioning Luxembourg among the top three jurisdictions in terms of number of approvals of AIFMs.
The CSSF released Frequently Asked Questions (FAQs) on its website1 for the very first time on 18 June 2013, while we were still living in a pre-AIFMD world. The FAQs have regularly been revised since then, with the most recent update on 17 March 2014. This article summarizes the guidelines provided so far by the CSSF on Luxembourg’s transposition of the AIFMD.
Moving to the End of the Transitional Period
The AIFM Law requires any entity that provided services as an AIFM before 22 July 2013 and which exceeds the lighter regime threshold2 to submit a duly completed application for authorization as an AIFM by 22 July 2014. Notwithstanding this deadline, the CSSF has invited AIFMs to submit an application file to the CSSF by 1 April 2014. The FAQs also contain a timely reminder that during the transitional period, AIFMs should take all necessary measures on a best efforts basis to comply with the obligations set out under the AIFM Law, including as regards operating conditions, organizational requirements, conflicts of interest, remuneration and the rules relating to risk management, liquidity management, securitization, valuation and delegation.
Any regulated Luxembourg alternative investment fund (AIF)3 – including one managed by an external AIFM benefitting from the transitional period – is also invited by the CSSF to submit – again by 1 April 2014 – a file containing information as regards its compliance with the SIF Law,4 the SICAR Law5 or the UCI Law6 as amended by the AIFM Law. In addition, internally managed AIFs must submit an application for authorization as an AIFM, provided that they have not opted out, and do not intend to opt out, under the lighter regime. The CSSF is expected to release on its website during March 2014 the information required to be submitted by AIFMs and internally managed AIFs that can make use of the lighter regime.
Unregulated Luxembourg AIFs (i.e., AIFs that are not SIFs, SICARs or UCIs under part II of the UCI Law) – which generally are internally managed – are not exempted from having to consider whether they need to make a CSSF filing. The FAQs note that the governing body of an entity that potentially could fall into the scope of the AIFM Law should carry out a self-assessment and, if appropriate, submit an application to the CSSF – either confirming compliance with the requirements under the AIFM Law (both under the full and lighter regimes) or, where the AIF is a SIF or a SICAR, indicating that it is out of scope of the AIFM Law. If the conclusion of the self-assessment is that the unregulated entity is a holding company7 or is otherwise outside the scope of the AIFM Law, no filing need be made.
One of the key questions that AIFMs have had to deal with concerns the engagement of depositaries. The FAQs distinguish between externally managed AIFs and internally managed AIFs – in relation to the former, the depositary must provide its services in accordance with the AIFM Law by 22 July 2014, provided that the external AIFM benefited from the transitional period. A depositary must provide its services to an internally managed AIF in accordance with the AIFM Law as of the date that the internally managed AIF was authorized as an AIFM.
Determining the AIFM when the AIF is a Luxembourg Limited Partnership or Common Fund
A Luxembourg AIF can adopt the form of, inter alia, a corporate partnership limited by shares (société en commandite par actions – SCA), a common limited partnership (société en commandite simple – SCS) or a special limited partnership (société en commandite spéciale – SCSp). Please refer to DechertOnPoint, New Luxembourg Limited Partnership Regime for a summary of the reform of Luxembourg limited partnerships that was implemented together with the transposition of the AIFMD into Luxembourg law. These AIFs can either be ordinary, unregulated companies or regulated companies (i.e., SIFs, SICARs or UCIs under part II of the UCI Law, as noted above).
With respect to an AIF formed as an SCA or an SCS (each of which has a separate legal personality), the AIFM can be:
the AIF itself, where the general partner’s corporate object is restricted to the management of the AIF in question;
the AIF’s general partner, where the general partner’s corporate object goes beyond the management of that AIF; or
a third party duly authorized as an AIFM.
An internally managed AIF cannot adopt the form of an SCSp (which has no separate legal personality) – its general partner will either need to be authorized as an AIFM, or appoint a third-party authorized or registered AIFM.
A Luxembourg common fund (fonds commun de placement – FCP), which can either be regulated under part II of the UCI Law or under the SIF Law, does not have a separate legal personality. It is managed by a management company either under chapter 15 or chapter 16 of the UCI Law. Each of these management companies has the choice either to seek authorization as an AIFM, or to appoint a third party duly authorized as an AIFM if managing an FCP. It should be noted that a Luxembourg AIF formed as an FCP must have a Luxembourg management company. The Luxembourg management company, however, can appoint a non-Luxembourg AIFM as the AIFM of the FCP.
ESMA published final guidelines on reporting obligations for AIFMs on 1 October 2013,8 which the CSSF has effectively adopted through the FAQs.
Reporting frequency is determined in accordance with the level of assets under management, use of leverage and investment strategy:
An AIFM with assets under management above €1 billion (leveraged or unleveraged) or an AIFM with assets under management above €500 million (if leveraged) must report on a quarterly basis;
An AIFM with assets under management of €1 billion or less and with assets under management either above €100 million (if leveraged) or above €500 million (if unleveraged) must report on a semi-annual basis; and
An AIFM registered under the lighter regime, or being unleveraged and invested in non-listed assets (e.g., private equity or real estate), must report on a quarterly basis.
The reporting obligation is triggered with effect from the first day of the following quarter after the AIFM has information to report until the end of the AIFM’s first reporting period.9 For instance, an AIFM authorized on 15 February 2014 that is subject to a half-yearly reporting cycle must submit by 31 July 2014 its first report covering the period from 1 April 2014 to 30 June 2014. The period from 1 July to 31 December 2014 must be reported by 31 January 2015.
The CSSF distinguishes between authorized AIFMs and AIFMs registered under the lighter regime.
An AIFM authorized between 22 July 2013 and 30 June 2014 will be required to submit its first report by 31 October 2014 (in the case of quarterly reporting frequency) or by 31 January 2015 (in the case of semi-annual or annual reporting frequency). An AIFM authorized between 1 July 2014 and 22 July 2014 will be required to submit its first report – covering the period from 1 October 2014 to 31 December 2014 – by 31 January 2015 (whatever its reporting frequency).
An AIFM that received confirmation of its registration under the lighter regime in 2013 will be required to report for the first time by 31 January 2015 – covering the period from 1 January 2014 through 31 December 2014. An AIFM that receives confirmation of its registration under the lighter regime in 2014 will be required to report for the first time by 31 January 2015, except if its registration is confirmed in the fourth quarter of 2014 (in which case it will be required to report for the first time by 31 January 2016).
These reporting deadlines assume that the AIFM is not reporting on a fund of funds, in which case the reporting deadline is extended by an additional 15 days.
Further to the final guidelines on reporting obligations, ESMA released an opinion on additional information that national competent authorities may require on a periodic and ad-hoc basis for effective monitoring of systemic risk. This additional information, which goes beyond standard reporting obligations, can cover:
details of the number of transactions carried out when using a high-frequency algorithmic trading technique together with the corresponding market value of buys and sells in the base currency of the AIF in question;
information on geographical focus, to be expressed as a percentage of the total value of assets under management to better take into account the impact of financial derivative instruments;
information on short positions, to include an indication of whether the position is used to hedge a position with a similar economic exposure and to express information on the extent of the hedging;
VaR reporting, to compute the VaR as of the last business day of the reporting period with an interval of confidence of 99% over a period of 250 days and with a 20-day holding period using the Monte Carlo simulation, historical simulation or parametric VaR;
information on the portfolio’s sensitivity to FX rates or commodity prices; and
information on non-EU master AIFs not marketed in the EU, if one of the feeder funds is an EU AIF or is an AIF marketed in the EU.
On 13 January 2014, the CSSF released circular 14/581 providing technical details on reporting obligations under the AIFM Law. Reporting files (which must be in English) have to be submitted electronically using either e-file or SOFIE.
Appointment of Administrators and Depositaries as External Valuers
The AIFM Law requires the AIFM either to perform its own valuation of the assets of the AIFs it manages or to appoint one or more independent valuers to do so. The external valuer must be independent from the AIFM, the AIF and any other person with a close link to the AIFM or the AIF.10
The CSSF has confirmed in the FAQs that an administrator can be considered as an external valuer, so long as the administrator provides tailor-made valuations for individual assets (and specifically for those assets requiring subjective judgment on the value of assets), and the administrator was appointed under the terms of a written contract.
The appointment of a depositary as an external valuer is subject to two conditions – first, that it has functionally and hierarchically separated the performance of its depositary function from its tasks as external valuer, and second, that potential conflicts of interest are properly identified, managed, monitored and disclosed to investors.
It is a long established requirement that Luxembourg-regulated AIFs must disclose the identity of external valuers in their annual reports.
Disclosure of Transaction Costs
An AIF under part II of the UCI Law is required to disclose transaction costs in its financial report. These transaction costs are any costs in connection with transactions, including those charged by the AIF’s custodian bank. Transaction costs can either be disclosed under a specific header of the profit and loss account or in the notes to the accounts.
Marketing in Luxembourg
Marketing under the Passport Regime
An EU AIFM can market any EU AIF – irrespective of whether or not the AIF is regulated – to professional investors in Luxembourg so long as notice of the marketing has been provided to the CSSF under the passport regime.11
No notification to the CSSF is necessary when marketing a Luxembourg-regulated AIF (i.e., a SIF, SICAR or UCI under part II of the UCI Law) in Luxembourg. Moreover, SIFs and SICARs can be marketed in Luxembourg to well-informed investors (which term is broader than the professional investor definition), and UCIs under part II of the UCI Law can be marketed to any type of investor, including retail investors.
However, the FAQs point out that the marketing of an unregulated Luxembourg AIF in Luxembourg requires notification to the CSSF under the passport regime, irrespective of whether the AIFM is authorized in Luxembourg or in another EU Member State.12 Marketing is then limited, in Luxembourg, to professional investors.
Marketing to Retail Investors
It is possible to market an EU or non-EU AIF – including when managed by an AIFM exempted under the lighter regime – to retail investors in Luxembourg,13 provided the AIF:
is subject to permanent supervision in its home jurisdiction to ensure the protection of investors;
offers a level of protection considered by the CSSF as equivalent to an AIF under part II of the UCI Law;
appoints a Luxembourg credit institution as a paying agent;
makes all necessary information available to investors in Luxembourg; and
is authorized by the CSSF to be marketed to retail investors.
Insufficient Guidance when Marketing under the Lighter Regime
Effective 22 July 2014, the CSSF will abandon its long-standing approach that private placements to a restricted circle of investors do not fall within the scope of its supervision.
The FAQs are unfortunately silent on the question of whether and how an AIF managed by an AIFM exempted under the lighter regime (or an internally managed unregulated AIF exempted under the lighter regime) can be marketed in Luxembourg after 22 July 2014. In particular, no guidance is currently provided by the FAQs on the marketing in Luxembourg of: an unregulated Luxembourg AIF by a management company under article 125(1) of the UCI Law; or an internally managed unregulated Luxembourg AIF that contemplates registration under the lighter regime.
Until 22 July 2014, such AIFs can continue to be privately placed in accordance with the current Luxembourg private placement regime. After such date, the prudent approach for marketing an open-ended AIF managed by an AIFM under the lighter regime could be to seek authorization with the CSSF for marketing to retail investors (and this implicitly covers marketing to professional investors). As to marketing a closed-ended unregulated Luxembourg AIF in Luxembourg, the prudent approach could be to have this AIF managed and marketed by a duly authorized AIFM or to make the AIF a regulated entity (e.g., a SIF).
Marketing from Luxembourg
Passporting under the AIFMD has been available for Luxembourg-authorized AIFMs since 22 July 2013.
The FAQs detail the documents to be provided in the notification file to the CSSF when an AIFM wishes to market an EU AIF in another EU Member State. The FAQs confirm that the CSSF will, no later than 20 days after the date of receipt of the complete notification file, transmit such file to the competent supervisory authority of the relevant EU Member State where the AIF is intended to be marketed.
Notification of all material changes to the information included in the notification file must be provided to the CSSF at least one month before implementing the change (or immediately after the occurrence of an unplanned change). The CSSF will, without delay, inform the competent supervisory authorities in the relevant Member States in which marketing is being conducted.