Following hot on the heels of the introduction of the bill to implement the reserved alternative investment fund (RAIF),1 on 18 January 2016, the Luxembourg government deposited with Parliament a bill of law (Bill) to amend, among other statutes, the law of 13 February 2007 on specialised investment funds, as amended (SIF Law), the law of 15 June 2004 on investment companies in risk capital, as amended (SICAR Law), and part II of the law of 17 December 2010 on undertakings for collective investment, as amended (UCI Law).
SIFs Investing in “Exotic” Asset Classes Reserved to Professional Investors
Specialised investment funds (SIFs) may currently invest in virtually any type of asset class, including illiquid assets and assets that are hard to value.
Only “well-informed investors” as defined under the SIF Law (Well-Informed Investors) may currently invest in SIFs. A Well-Informed Investor is:
- A “professional investor” as defined under annex II of MiFID2 (Professional Investors).
- An institutional investor.
- An investor that is neither an institutional investor nor a Professional Investor, but which (i) confirms in writing that it qualifies as a Well-Informed Investor; and (ii) either invests a minimum of EUR 125,000 in the SIF, or obtains a certificate from a “credit institution” within the meaning of CRD3, an “investment firm” within the meaning of MiFID, or a “management company” within the meaning of the UCITS Directive4, certifying the expertise, experience and knowledge of such investor to adequately appraise its investment in the SIF.
The Bill aims to limit investments in SIFs that invest in “exotic” (i.e., non typical) asset classes to Professional Investors, and invites the CSSF to establish by way of regulation a list of such asset classes. A comment in the Bill gives wine, diamonds, insurance contracts, economic rights to football players, art and animals as examples of “exotic” asset classes.
Although a Professional Investor is always a Well-Informed Investor, the converse is not necessarily the case as some Well-Informed Investors do not qualify as Professional Investors. For example, according to the CSSF's administrative practice, professionals who manage significant assets but are not subject to specific legislation on financial services could nevertheless qualify as institutional investors, and hence be eligible to invest in a SIF. However, such institutional investors are not encompassed within the definition of Professional Investor and could therefore not invest in a SIF that invests in “exotic” asset classes.
In practice, this means that existing SIFs which invest in “exotic” asset classes would need to ensure that only Professional Investors hold shares/units/interests in such a SIF. Should that not be the case, the SIF would be required to redeem the shares/units/interests held by non-Professional Investors.
The Bill permits the CSSF to grant a derogation to a SIF that invests in "exotic" asset classes and which, according to its constitutive documents, admits Well-Informed Investors that are not Professional Investors. However, the Bill does not contain any specific transitional provisions for SIFs that would not be granted a derogation, and consequently must undertake the steps necessary to comply with this new requirement.
Update of the SICAR Law to Align with the SIF Law and the AIFMD
The Bill introduces several changes to the SICAR Law, aimed primarily at aligning it with the SIF Law and recent changes to the company law (including with respect to partnership forms). The proposed amendments largely correspond to CSSF regulatory practice, and include:
- Prohibiting the issuance of interests when a SICAR is in the process of liquidation.
- Providing the possibility for the CSSF to remove a compartment/sub-fund of a SICAR from the CSSF’s official list, without the remainder of the SICAR being subject to a similar loss of status.
- Requiring a SICAR to be authorised by the CSSF prior to commencing activities. Reiterating the requirement that a SICAR’s management body, as well as those persons responsible for its portfolio management (and their successors), be approved by the CSSF based on suitability tests.
- Requiring a SICAR to notify the CSSF of any change in the substantial information on which the CSSF based its decision to authorise the SICAR (including any change in the SICAR’s management board or portfolio managers) – such notice must be given in writing, prior to the change.
- Requiring a SICAR to implement appropriate risk management systems.
- Introducing various requirements in relation to delegations.
- Requiring a SICAR to ensure that appropriate organisational arrangements are put in place (subject to proportionality considerations).
- Confirming the right of the CSSF to suspend redemptions (in the interests of investors) in cases where a SICAR no longer meets applicable requirements in relation to its operation.
- Granting the CSSF certain supervisory and investigative powers necessary to ensure that the CSSF can carry out its functions in relation to SICARs.
- Introducing monetary penalties that the CSSF may impose on the management board, managers and officers of a SICAR, as well as on management companies, depositaries and others in relation to breaches of applicable requirements, and authorising the CSSF to publish such fines in most circumstances.
- Allowing the District Court to order the dissolution and order the liquidation of a SICAR (or a compartment thereof) whose entry on the official list has been refused or withdrawn.
- Confirming the requirement that non-cash contributions to the capital of a SICAR are subject to a report issued by a statutory auditor.
A transition period will be provided with respect to the requirement for a SICAR to establish a risk management system and the requirements in relation to delegations, enabling SICARs to comply with such requirements by 31 December 2016.
Abandonment of the Requirement that Units of Part II UCIs be Issued at Net Asset Value
Undertakings for collective investment under part II of the UCI Law (Part II UCIs) are alternative investment funds that can be marketed to any type of investors in Luxembourg and, where permitted by applicable laws, in other jurisdictions. Part II of the UCI Law currently requires units of a Part II UCI to be issued at net asset value per unit, increased (to the extent relevant) by expenses and commissions. The Bill contemplates allowing the constitutional documents of a Part II UCI to set different rules to determine the issuance price per unit (for example, issuance at a fixed price). Part II UCIs investing in private equity or following an opportunistic real estate strategy would therefore be permitted to issue units at a fixed price, and to contractually determine the equalisation mechanism when issuing units to subsequent investors.
1) The RAIF is an alternative investment fund that is not required to be authorised by the Luxembourg supervisory authority, the Commission de Surveillance du Secteur Financier (CSSF). For further information, please refer to Dechert update: Luxembourg Publishes Bill of Law on Reserved Alternative Investment Funds
2) Directive 2014/65/EU on markets in financial instruments, as amended.
3) Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms.
4) Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities.