Financial Services Quarterly Report - Second Quarter 2019: Developments in the Luxembourg Financial Sector

Dechert LLP

Dechert LLP

The Luxembourg supervisory authority, the Commission de Surveillance du Secteur Financier (CSSF), has published guidance regarding procedures to be followed by non-EEA firms when providing certain investment services in Luxembourg on a cross-border basis. The CSSF also has enhanced its anti-money laundering (AML) supervisory activities. In another development, a bill of law has been introduced that would amend the RAIF Law in a manner beneficial for reserved alternative investment funds that are organised as common funds. These developments are discussed below.

CSSF Clarifies MiFID II Third Country Access to Luxembourg

In the absence of an equivalence decision by the European Commission regarding MiFID II third country access, EEA Member States are free to set their own national rules for non-EEA firms providing investment services in their jurisdictions.

In April 2019, the CSSF released a circular that offers guidance as to the procedures to be followed by non-EEA firms when providing certain investment services in Luxembourg on a cross-border basis (Circular).1Investment services covered under the Circular include: provision of private portfolio management and investment advice regarding financial instruments; receipt and transmission of orders involving financial instruments; and safekeeping of financial instruments in connection with investment services (but not lending activities and cash deposits). The access to the Luxembourg market does not grant any passporting rights to other EEA Member States.

Under the Circular, a distinction is made among the types of clients to whom the investment service is offered:

  • For retail clients and opt-up professional clients.2 it is necessary to establish a branch of the investment firm in Luxembourg that is authorised by the Ministry of Finance. This authorisation is based upon the opinion of the CSSF after its review of the application to set up the branch.
  • For per se professional clients3 and eligible counterparties, the non-EEA firm may offer its investment services in Luxembourg either: through the establishment of a branch authorised by the Ministry of Finance (though with less stringent requirements than for retail and opt-up professional clients); or, if approved by the CSSF, on a cross-border basis without the establishment of a branch.4

The following conditions must be fulfilled for per se professional clients and eligible counterparties:

  • The non-EEA firm must be authorised to provide the relevant services in its home jurisdiction, and subject to the supervision of a competent regulator considered by the CSSF to be “equivalent.”5
  • Cooperation between the CSSF and the competent regulator of the third country must be ensured (generally, in the form of an agreement such as a memorandum of understanding).
  • The non-EEA firm must file an application with the CSSF, in which the firm sets forth information regarding the services to be provided. The application must include: an up-to-date copy of the firm’s constitutive documents; its three latest audited financial statements; a copy of its license or any equivalent document evidencing that the firm is allowed to carry out the relevant services in its home jurisdiction; and a written confirmation that no services will be provided to clients other than per se professional clients and eligible counterparties. The Circular includes an application form to be used for this purpose. The activity can be started once the CSSF has made a favorable decision.

Where a client in the EEA (whether retail, opt-up professional or per se professional) requests on its own initiative that the relevant investment service be provided by a non-EEA firm in Luxembourg, the CSSF deems this to be a reverse solicitation of the service. In this case, the above is not applicable – generally, where a Luxembourg UCITS management company or an alternative investment fund manager (AIFM) is delegating portfolio management or receiving investment advice in connection with financial instruments upon its own request, the services are likely provided cross-border on a reverse-solicitation basis, and no decision by the CSSF is required.6

In the case of a no-deal Brexit, UK firms that provide investment services to Luxembourg clients will benefit from a law granting a 21-month grandfathering period,7 during which the Circular will not apply. For further information regarding this grandfathering period, please refer to Dechert OnPoint, Developments in the Luxembourg Financial Sector (Brexit Mitigation Measures).

CSSF Enhances AML Supervisory Activities

The CSSF has issued new questionnaires in which it requests that certain regulated funds submit a complete AML report covering their sponsors, portfolio managers and advisers. This follows questionnaires regarding the AML activities and compliance of authorised AIFMs, and regarding registered AIFMs, issued by the CSSF in 2017 and 2018, respectively. Further, these questionnaires have been issued in the context of global AML initiatives, as well as the AML inspection to be conducted by the intergovernmental Financial Action Task Force in Luxembourg in 2020.

Bill of Law Fine Tunes the RAIF Law

An amendment to Bill of law n°73498 proposes to make two amendments to the RAIF Law:9 permitting a RAIF organised as an FCP to be converted to a SICAV; and dealing with the management of such a RAIF. The amendments are beneficial for RAIFs organised as common funds (fonds commun de placement, or FCP).

Conversion to SICAV

In a manner comparable to specialised investment funds, a RAIF organised as an FCP may be converted into an investment company with variable capital (société d'investissement à capital variable, or SICAV), provided the unitholders approve the conversion by two-thirds of the votes (irrespective of the net asset value represented by these unitholders).10 As an FCP is a contractual co-ownership scheme without a legal personality, in the absence of this amendment, a RAIF could not be converted into a SICAV (which has a legal person unless it adopts the form of a special limited partnership (société en commandite spéciale, or SCSp)).

Management Structure

A RAIF organised as an FCP must be managed by a Luxembourg-based management company (société de gestion), which is either itself authorised as an AIFM or appoints an AIFM. While the management company and the AIFM are generally the same legal entity, this amendment allows a UCITS management company that is not authorised as an AIFM to act only as a management company for the FCP, and in that event, requires the function of an AIFM to be assumed by another entity appointed for this purpose by the UCITS management company.11


1) CSSF Circular 19/716 (Apr. 10, 2019). The Circular clarifies the application of article 32-1 of the law of 5 April 1993 on the financial sector, as amended, which sets the rules for non-EEA firms providing investment services or performing investment activities in Luxembourg.

2) Opt-up professional clients are non-professional clients who request to be treated as professional clients in accordance with Annex II, item II of MiFID (Directive 2014/65/EU on markets in financial instruments). The client must fulfill certain criteria to be treated as a professional client, and its request is subject to an assessment by an EEA bank or investment firm.

3) Per se professional clients are those listed under Annex II, item I of MiFID. This term includes (among others): banks; investment firms; insurance companies; collective investment schemes and their management companies; and pension funds.

4) When the European Commission makes an equivalence decision for a third country and the non-EEA firm is recorded in ESMA’s register of third country firms, the Luxembourg national regime will continue to apply for a transitional period of up to three years before being replaced by the European regime.

5) The CSSF takes the position that a third country is not equivalent if it has not entered into an IOSCO multilateral memorandum of understanding, or if it does not have adequate legislation and supervision in place for the prevention of money laundering and terrorist financing.

6) The Luxembourg UCITS management company or AIFM will need to notify the CSSF regarding its delegation of portfolio management, in accordance with article 110 of the Luxembourg law of 17 December 2010 on undertakings for collective investment, as amended, or article 18 of the law of 12 July 2013 on alternative investment fund managers, as amended, respectively.

7) Luxembourg law of 8 April 2019 on the measures to be taken in relation to the financial sector in the event of the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union.

8) The original purpose of the Bill was to implement certain EU Regulations, including those pertaining to European venture capital funds (Regulation (EU) n°345/2013) and money market funds (Regulation (EU) 2017/1131), and creating common and standardised EU rules on securitisation (Regulation (EU) 2017/2402). In particular, the Bill designates the CSSF and the Commissariat aux Assurances, the Luxembourg supervisory authority of the insurance sector, respectively, as competent supervisory authorities under the relevant EU Regulation and determines their administrative sanction rights.

9) Luxembourg law of 23 July 2016 on reserved alternative investment funds (RAIFs).

10) This conversion must be approved at a general meeting of unitholders, convened in accordance with the rules applicable to public limited liability companies (société anonyme) under the Luxembourg law of 10 August 1915 on commercial companies, as amended.

11) It seems that a few such cases already exist in practice, contrary to the RAIF Law, and the Luxembourg Parliament has indicated an intent to create legal certainty in this regard. To date, the RAIF Law has allowed a non-UCITS management company that is not authorised as an AIFM (a management company under article 125-1 of the law of 17 December 2010 on undertakings for collective investment, as amended) to be the management company of a RAIF, if the management company appoints an authorised AIFM. The same approach also should now be available for a UCITS management company that is not authorised as an AIFM.

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