On 14 July 2016, Luxembourg Parliament voted on a new law ("RAIF Law"), introducing a new type of Luxembourg investment vehicle named the Reserved Alternative Investment Fund ("RAIF").
The RAIF will be regulated under Directive 2011/61/UE of 8 June 2011 on Alternative Investment Fund Managers ("AIFMD") and will benefit from the corresponding European Union ("EU") passport but will not be supervised by the Commission de Surveillance du Secteur Financier (CSSF), making it an attractive vehicle from a time-to-market perspective.
The introduction of the RAIF regime seeks to widen the range of investment vehicles available in Luxembourg, offering a new option to the initiators of Luxembourg AIF projects.
In order to be eligible for this new regime, the RAIF will have to be an Alternative Investment Fund ("AIF") managed by an external authorised Alternative Investment Fund Manager ("AIFM"), both within the meaning of the AIFMD. The AIFM may be established in Luxembourg or in another Member State of the EU.
The other features of this new Luxembourg investment vehicle are substantially identical to those of the specialised investment fund (SIF) and the RAIF Law has therefore been drafted drawing heavily from the text of the Law of 13 February 2007 on specialised investment funds, notably, in respect of the various legal forms (corporate (such as the public company) and contractual (such as the special limited partnership)) which are available, the absence of limitations as regards eligible assets or investment policies save for the requirement to invest in accordance with the principle of risk spreading, the possibility to have multiple compartments and multiple classes as well as flexible subscription, redemption and distribution features and, in principle, the tax regime of a taxe d’abonnement at a 0.01 per cent rate (or nil rate in certain circumstances). A different tax regime (similar to the one currently applicable to Luxembourg SICARs) applies if the RAIF invests exclusively in risk capital investments, in which case it will not have to invest in accordance with the principle of risk spreading.
The RAIF should become a vehicle of choice for managers and investors looking to combine contractual freedom and short time-to-market together with both the protection of the AIFMD framework and the RAIF Law, and the marketability of an investment vehicle benefiting from an EU passport.
The RAIF Law will come into force three days after its publication in the Luxembourg Gazette which is expected to occur before the end of July 2016.
2. Luxembourg loan-originating funds
On 9 June 2016, the CSSF updated its FAQ concerning the amended Law of 12 July 2013 (“AIFM Law”) on alternative investment fund managers ("AIFMs") by adding a new Section 22 to the FAQ composed of 4 questions. The purpose of this update is to clarify the CSSF’s position as to loan-originating alternative investment funds (“AIFs”).
The CSSF clearly states in question 22.a) of the FAQ that loan origination is a permitted activity for Luxembourg AIFs. This was merely a clarification, awaited by the industry, of the CSSF’s regulatory practice over the last few years.
Indeed in recent years the CSSF has consistently approved loan-originating funds on the basis that lending funds to third parties is no longer deemed to be an activity reserved to credit institutions if it is not financed by repayable deposits gathered from the public, and may therefore qualify as an acceptable investment activity for investment funds.
The development of loan-originating funds has been the subject of a positive assessment by the European Commission(1) in its Action Plan on Building a Capital Markets Union and ESMA(2), endorsing this view, has just rolled out a list of points that could be part of a possible European framework on loan-originating funds.
The CSSF indicates in the FAQ that an AIFM/AIF engaging in loan-origination activities should follow a number of key principles, including:
- properly assessing and monitoring the particular risks of engaging in loan origination, in particular credit and liquidity risks;
- having a proper organisational and governance structure (including appropriate processes and procedures regarding inter alia assets and investors – loan and investor categories – conflicts of interest, transparency, valuation, etc.);
- having the necessary expertise/experience in origination activities and appropriate technical and human resources.
The AIFM/AIF shall thus be responsible for implementing a robust and appropriate approach for its loan origination or investment activities. The CSSF has indicated that it will evaluate, in the context of its approval and on-going supervisory process, if applicable, on a case-by-case basis, the approaches implemented by the AIFMs/AIFs.
The FAQ further clarifies that loan participation and/or acquisition is also a permitted activity for AIFs, subject to the AIFM/AIF following the same key principles mentioned above.
It is worth noting that, although not covered by the FAQ, Luxembourg loan-originating funds may engage in a broad variety of sectors including infrastructure, real estate, SMEs etc. Moreover the FAQ is not prescriptive in the way in which loan-originating funds are structured provided that all relevant risks resulting from the structure (such as liquidity risk in case of an open-ended fund) are duly assessed and managed.
Moreover loan origination or loan participation/acquisition is currently not limited to AIFs and could be undertaken inter alia by specialised investment funds or investment companies in risk capital that may not qualify as AIFs.
3. Remuneration: ESMA Guidelines
On 31 March 2016, ESMA published the UCITS V Remuneration Guidelines which also include a proposal to amend the existing remuneration guidelines for AIFMs.
The amendment relates to AIFMs which are part of a group: the UCITS V Remuneration Guidelines clarify that in a group context, non-AIFM sectoral prudential supervisors of group entities may deem certain staff of the AIFM which is part of that group to be identified staff for the purpose of their sectoral remuneration rules.
4. ESMA Q&A on AIFMD: Updates
Over the past few months, ESMA has updated its Q&A on AIFMD several times.
The most recent update is dated 19 July 2016 (ESMA/2016/1136). The newly added question relates to the impact of the EMIR Regulation on AIFMD(3) and in particular, as regards the valuation of OTC financial derivative transactions that are centrally cleared and subject to the reporting obligation of EMIR.
Essentially, AIFMs must have in place a process for proper and independent verification of the value of the OTC financial derivative transactions and the valuation provided by the CCP (central counterparty) can therefore only serve as a point of reference for the verification performed by the AIFM.
New questions were also added in the ESMA Q&A on the AIFMD in April and June 2016.
The June 2016 update contains new questions on the notion of "committed capital" whereby ESMA clarifies that the "committed capital” must not be taken into account when (i) calculating the additional own funds requirement and (ii) calculating the total value of assets under management(4).
New questions and answers on requirements regarding (i) the domicile of EU AIFs which are marketed in the home Member State of the AIFM, and (ii) the marketing of EU feeder AIFs which have a non-EU master AIF are also addressed by ESMA.
In the April 2016 update, ESMA specifies in the AIFs notification section of the Q&A that if an EU AIF decides to offer additional fund units to investors, and the offer is limited to the investors already invested in the AIF, the AIFM does not have to submit a new notification to the national competent authority(5).
(1) Action Plan on Building a Capital Markets Union, 30 September 2015, COM(2015) 468 final.
(2) ESMA Opinion on key principles for a European framework on loan origination by funds, 11 April 2016, ESMA/2016/596.
(3) At the same time as this update of the AIFMD Q&A, ESMA updated its UCITS Q&A on the same topic by taking the same approach for UCITS management companies as the one taken for AIFMs.
(4) Unless national rules require the inclusion of the committed capital in the assets under management.
(5) In accordance with Article 31(2) of AIFMD.