The CSSF has published a further update of its AIFM Law FAQ (dated 9 June 2016), providing additional guidance to be taken into consideration by Luxembourg-based and duly authorised (i.e., full-scope) alternative investment fund managers (AIFMs) of alternative investment funds (AIFs) engaging in loan origination, loan participation and/or loan acquisition activities in and from Luxembourg.
The updated FAQ provides welcome guidance for Luxembourg-based authorised AIFMs at a time when Luxembourg has become Europe’s main credit fund/loan origination/acquisition investment funds hub providing AIF structuring solutions for international alternative investment managers located within and outside the EU.
Limited scope of application
The guidance only applies to Luxembourg-based and duly authorised (full-scope) AIFMs. Foreign duly authorised as well as, where applicable, duly registered (i.e., below threshold) AIFMs as well as Luxembourg-based registered AIFMs managing Luxembourg-based AIFs do in principle fall outside the scope of application of the new item 22 of the CSSF AIFM Law FAQ when they are managing Luxembourg-based AIFs which are not subject to a specific Luxembourg fund product regulation (i.e., the law of 13 February 2007 on specialised investment funds, Part II of the law of 17 December 2010 on non-UCITS retail funds).
In such a situation, the CSSF will indeed not be the competent authority to authorise or supervise the relevant activities. The same will apply if and when a duly authorised EU-based AIFM elects to manage the soon to be enacted reserved alternative investment fund (the RAIF).
Regulatory clearance for Luxembourg loan origination AIFs
The new guidance provides an official and most welcome confirmation that Luxembourg-based AIFs may engage in loan origination, loan acquisition or loan participation activities. While market participants have always been in a position to obtain swift regulatory confirmation and clearances, this formal guidance is a clear signal that loan origination funds play an increasingly important role. Although this guidance does not apply to non-Luxembourg AIFMs or Luxembourg AIFs not subject to Luxembourg fund product regulation, it still provides comfort to those ready to embrace loan originating RAIFs and loan originating Luxembourg limited partnerships.
The new guidance applies to foreign duly authorised and registered AIFMs as well as Luxembourg-based registered AIFMs electing to submit their Luxembourg-based AIFs to specific product regulation in Luxembourg and the 2007 SIF Law in particular. In such a case, the supervisory authority could be in a position to impose all or part of its new guidelines.
Organisational and operational requirements
The CSSF has highlighted certain aspects applicable to AIFMs and, where applicable, AIFs engaging in loan origination, participation and/or acquisition:
a) The AIFM (or, where applicable, the AIF) should ensure that all aspects and risks of the loan origination/participation/acquisition activity are addressed.
b) The AIFM (or, where applicable, the AIF) should ensure the proper organisation and governance of its structures.
c) The AIFM (or, where applicable, the AIF) should ensure that the necessary expertise and experience in origination activities, combined with the appropriate technical and human resources, are in place ensuring an overall adequate risk and liquidity management process, amongst others.
The CSSF thus also clarifies that it is the responsibility of the AIFM or, where applicable, the AIF to ensure the implementation of a robust and appropriate approach for these activities.
The CSSF confirms that it will evaluate through its approval and supervisory processes the approaches adopted by the relevant AIFMs and/or AIFs.
The Luxembourg supervisory authority has taken a decisive step in formalising its supervisory practice in relation to Luxembourg-based authorised AIFMs and (regulated) AIFs.
With the recent publication of the ESMA opinion on loan origination by investment funds to the European Parliament, Council and Commission, the European Commission has been called upon to consider establishing a common EU approach. A further regulatory convergence may thus not be excluded and today’s regulatory practice may evolve further.
The FAQ is available at the following address: http://www.cssf.lu/en/supervision/ivm/aifm/faq/