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CMS Luxembourg AIFM in Luxembourg

CMS DeBacker Luxembourg | Scope of the AIFM Law | May 2014

Contents

1. Source of Law – ESMA and CSSF Guidelines

2. Definition of an AIF

3. Applicability to regulated investment vehicles…

4. … and to unregulated vehicles

5. Derogations under the AIFM Law

6. Exemptions under the AIFM Law

7. Practical cases

8. Summary

Scope of the AIFM law


EU AIFM Directive 2011/61 (8 June 2011)

EU Regulation 231/2013 (19 December 2012)

AIFM EU Directive : implementation in the Luxembourg legislation by

the law of 12 July 2013 on alternative investment fund managers

(The « AIFM Law ») - Entry into force of the AIFM Law:15 July 2013

ESMA final reports on guidelines on key concepts

CSSF circular 14/581 on reporting obligations

CSSF Guidelines (FAQ 4 January 2014)

Sources of law – ESMA and CSSF Guidelines


Definition of an AIF

An alternative investment fund (AIF) is constituted by 4 cumulative

elements.

Article 1 (39) (a) of the AIFM Law: « collective investment

undertakings, including investment compartments thereof which

raise capital from a number of investors, with a view to investing it

in accordance with a defined investment policy for the benefit of

those investors ;

and do not qualify as UCITS. »

Point 1.a of the CSSF Guidelines: « It is the responsability of the

management body of any collective investment vehicle to self-

assess if it has to be considered as an AIFM under the AIFM law

or not. »



(i) « collective investment undertakings »

This concept is neither defined in the EU AIFM Directive nor in the AIFM Law.

Its purpose is to pool assets from investors in order to generate a return by

acquiring, holding or selling assets and where the investors do not have

access to the daily discretion or the control over the management of the

assets of the undertaking.

Hence, it does not restrict the definition of an AIF to a regulated collective

investment scheme subject to the prudential supervision of the CSSF.

However it excludes ordinary companies with general commercial or

industrial purpose.



(ii) « raise capital »

Direct or indirect steps to procure the transfer or commitment of capital by

one or more investors to an undertaking for the purpose of investment with a

view to generating a pooled return for the investors;

and/or commercial communication between the undertaking seeking capital

or a person or entity acting on its behalf and the prospective investors, which

results in the transfer of capital.

Raising capital has various forms: a single transfer or multiple transfer

(including contribution in kind).

F.O. exemption: No raising of capital if the exclusive purpose of the

undertaking is the investment of private wealth of a pre-existing group.



(iii) « a number of investors »

An undertaking could not qualify as an AIF if it has a single investor.

However the constitutive documents must clearly mention that the

undertaking has a sole investor/shareholder.

Recommendation: amending the constitutive documents in order to secure

this issue.

If the undertaking has a sole investor who has raised funds from multiple

entities, it will be still regarded as « a number of investors » - applicable to

fund of funds, nominee arrangement, feeder structures etc.



(iv) « a defined investment policy » (1/3)

Means how the pooled capital will be managed in order to generate a pooled

return in favour of the investors.

CSSF Guidelines reflect the ESMA Guidelines (ESMA/2013/611) to define the

concept of « defined investment policy ».

Factors that would solely or cumulatively tend to indicate the existence of

such a policy:

• The investment policy is fixed at the latest by the time that investor’s

commitments to the undertaking become binding on them;




• The investment policy is set out in a document which becomes

part of, or is referenced in, the rules or instruments of

incorporation of the undertaking;

• The undertaking or the legal person managing the undertaking

has an obligation to investors, which is legally enforceable by

them, to follow the investment policy;

• The investment policy specifies investment guidelines with

reference to criteria including any or all of the following:

─ Invest in some categories of assets




• Restriction on asset allocation

• Invest in particular geographical regions

• Restrictions on leverage

• Minimum holding periods

• Provide risk diversification

Articles of incorporation or management regulations might be defined as a

« defined investment policy ».


Applicability to regulated investment vehicles…

Investment Vehicle Status under AIFM Law

UCI Part II Always qualify as AIF

Securitisation Vehicle Excluded upon conditions

SIF AIF test & Derogation / Exemptions

SICAR AIF test & Derogation / Exemptions

UCITS are explicitly excluded from the scope of the AIFM Law.


….and to unregulated vehicles

« Does the concept of AIF cover only regulated entities?

No. The concept of AIF covers AIFs established in Luxembourg, in

another EU Member State or in a third country irrespective of

whether such AIF is a regulated or a non-regulated entity.

[…] any entity not regulated under the law of 2010, the law of 2007

or the law of 2004 that also meets the criteria of article 1(39) of the

law of 2013. » (Point 1.b) CSSF Guidelines v.4).

CSSF has confirmed that unregulated entities could qualify as AIF if

they meet the AIF test. Hence, a SOPARFI, a IP Holding, a SPF,

etc. might qualify as AIF and therefore would fall under the scope of

the AIFM Law. The body vested with management must

therefore conduct a self-assessment.


Derogations under the AIFM Law

Limited number of exemptions to the AIFM Law:

• Holdings

• Securitisation Special Purpose Vehicles

• Central banks

• Pension funds

• Supranational institution

• Etc.


Focus on Holdings (1/2)

• Definition: company with shareholdings in one or more

companies, the commercial purpose of which is to carry out a

business strategy or strategies through its subsidiaries,

asssociated companies or participations to contribute to long-term

values and which is a company that is:

─ operating on its own account and whose shares are admitted to

trading on a regulated market in the EU

or ;

─ not established for the main purpose of generating returns for

its investors by means of divestments of its subsidiairies or

associated companies as evidenced in its annual report

or other official documents.



Focus on Holdings (2/2)

• A holding is a separate legal entity which carries out its business

through the holding of equity shares of other companies without

seeking to dispose of such shares for generating profits but to create

long-term values by conducting commercial or industrial projects

(business strategies). The holding is always acting for its own benefit

and not for third parties.

• The concept of « Holding » is therefore divergent from the concept

already defined under EU or domestic law.

• How to define long-term values? What is the status of Joint Ventures?

(i) Not defined under the AIFM Law

(ii) The AIFM test must therefore be performed



Focus on Securitisation SPV

Law of 22 March 2004 on securitisation

• Ad hoc Securitisation SPVs are out of scope under the

AIFM

due to the Article 2 (2) g provided that they meet the definition

of the ECB 24/2009

• Point 19 of the CSSF Guidelines:

─ Exclusive object to perform securitisation deals

─ True sale transaction(s)

─ Synthetic transactions limited to credit/loans

─ Issuance of CLOs or debt instruments only

─ Uncertainties when:

• The securitisation SPV is the first lender

• Synthetic transaction on non credit related assets

• Securitisation SPV could be therefore unregulated and out of scope of the AIFM law

Securitisation Vehicle

Regulated Unregulated

Exclusion Art. 2(2) G of AIFM

Law

Art. 19



Exemptions under the AIFM Law (1/2)

Exemption in full vs partial exemption

Art 3(1) : Intragroup exemption

When the AIFM manages AIF(s) where the only investors are the AIFM

and/or the subsidiaries and/or parent companies of the AIFM or other

companies of the same group.

AIFM

Parent Company

AIF

SPV Group Company

PM / RM Agreement


Exemptions under the AIFM Law (2/2)

Exemption in full vs partial exemption

Art 3(2) : De minimis exemption (2 categories)

(i) Managers in Luxembourg that manage AUM in excess of EUR 100 Mio

(ii) Managers in Luxembourg that manage AUM in excess of EUR 500 Mio

without leverage and redemption rights during the first 5 years

Complex calculation of thresholds: it include alls AIFs under AIFM

management (directly or not, delegated or not, etc.) with exceptions.

Partial exemption means mandatory registration with the CSSF and

regular reporting obligations.


Legal consequences (1/2)

If the self-assessment is positive:

(i) The governing body of the AIF must determine the AIFM:

- AIFM is in charge of the PM or the RM

- Could be external (delegation)

- Could be internal (BOD, BOM, GP) self-managed

(ii) The governing body must undertake the appropriate regulatory

process:

- Registration with the CSSF (if partial exemption)

or

- Full authorisation process with the CSSF

Deadline: 22 July 2014!


Legal consequences (2/2)

If the self-assessment is negative:

Recommendations:

1. Documenting the self-assessment;

2. Regular review of the structure;

3. Anticipating the potential consequences if the client intends to

change the features of the investement vehicle (timing, associated

costs, etc.).


Practical cases (1)

Sole

shareholder

Participations

SOPARFI (Sàrl)


Practical cases (2)

Shareholder 2

Participations

SOPARFI (SCA)

Shareholder 1 Shareholder 3

EUR 60 Mio

Cash Cash CIK

CIK = Contribution in Kind

G.P.


Practical cases (3)

Group Company

Parent Company

SOPARFI

(SA)

SPV Group Company

EUR 135 Mio


Practical cases (3)

Father

SOPARFI

(SA)

SPV Children

EUR 35 Mio

Sisters of the

father


Summary

Unregulated Regulated

Non-AIF AIF

SOPARFI, SPF &

Securitisation SPV

Part I SIF

Part I SICAR Part II SIF

Part II SICAR

Part II UCI

+ De minimis regime

UCITS

AIF AIF


Vivian Walry Partner

Cédric Buisine Senior Associate

French – English – German French – English

T +352 26 27 53 21 T +352 26 27 53 31

F +352 26 27 53 53 F +352 26 27 53 53

E [email protected] E [email protected]

Contact details

Investment Funds Team

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