Luxembourg update

Introduction

As at October 31, 2019, the total net assets of collective investment undertakings (UCIs), including UCIs subject to the Law of December 17, 2010 relating to undertakings for collective investment, specialised investment funds and SICARs, amounted to EUR 4,577.890 billion which shows a total increase of 8.81 per cent over the past 12 months¹ .

The number of UCIs taken into consideration is 3,785 compared to 3,807 the previous month² . 2,482 entities have adopted a multiple compartment structure, representing 13,545 compartments. Adding the 1,303 entities with a traditional structure, a total of 14,848 units are active in the financial centre.

Flexibility in the wake of a potential hard Brexit: CSSF press releases 19/48 and 19/54

On October 11, 2019, the Commission de Surveillance du Secteur Financier (CSSF) issued Press Release 19/48 (PR19/48) in relation to the UK leaving the EU without an agreement on 31 October 2019 (hard Brexit). PR19/48 related to both: (i) UK managers of alternative investment funds established in Luxembourg (AIFs), whether regulated or not (UK Managers), which did not submit a Brexit notification (a Required Brexit Notification) to the CSSF by September 15, 2019; and (ii) UK Managers that had submitted the Required Brexit Notification by September 15, 2019.

CSSF Press Release 19/54 of 6 November 2019 (PR19/54) was issued following the extension of the Article 50 period to 31 January 2020 and revises the deadlines as follows:

“Following the decision of the European Council of October 30, 2019 extending the period under Article 50(3) relating to the United Kingdom withdrawal from the European Union, the reference date for a potential hard Brexit in all of CSSF’s previously published communications should now be read as January 31, 2020.

The subsequent application for authorisation, or, as the case may be, notification, or other information on any action taken otherwise (notably as per CSSF press release 19/48) shall be submitted by undertakings for collective investment and/or their managers to the CSSF no later than by January 15, 2020.”

UK Managers that don’t submit the Required Brexit Notification will not be entitled to continue their activities under the transitional period provided for under the laws of April 8, 2019 on Brexit (the Brexit Laws) and will be considered “third country managers” from the date of a hard Brexit. Accordingly they will, from the date of a hard Brexit, lose the benefit of their existing passporting rights.

UK Managers that wish to continue their activities from the date of a hard Brexit must now:

• Seek, prior to January 31, 2019 (based on PR19/54), the approval of investors (and, as the case may be, bondholders) in their AIFs that such UK Manager remains a “third country manager” after the date of a hard Brexit;

• Confirm that the direct or indirect investors of these AIFs are professional investors (as defined in PR19/48); and

• Provide the CSSF with:

• a duly signed confirmation that all direct and indirect investors in the relevant AIF qualify as professional investors (as defined PR19/48);
• a copy of the appropriate resolution(s) evidencing the approval of the professional investors (and, as the case may be, of the bondholders), duly signed; or
• when circumstances justify a delay, an explanation of such circumstances together with a copy of the appropriate convening notice (or draft consultation) duly sent to shareholders/limited partners, and, as the case may be, to bondholders.

The CSSF reserves the right to publish, in due course, a list of UK Managers that don’t comply with these requirements.

UK Managers who submitted the Required Brexit Notification, have, instead of remaining subject to the transitional regime as a result of such notification, been granted the possibility of opting to become “third country managers” for each AIF, subject to:

• Recalling their Required Brexit Notification;
• Seeking the approval of investors (and, as the case may be, bondholders) in their AIFs, prior to January 31, 2020 (based on PR19/54);
• Confirming that the direct or indirect investors of these AIFs are professional investors (as defined in PR19/48); and
• Providing the CSSF with:
  • a duly signed confirmation that the notification submitted through the dedicated CSSF Brexit portal should be rescinded
  • a duly signed confirmation that all direct and indirect investors in the relevant AIF qualify as professional investors (as defined in PR19/48);
  • a copy of the appropriate resolution(s) evidencing the approval of professional investors (and, as the case may be, of bondholders), duly signed; or
  • when circumstances justify a delay, an explanation of such circumstances together with a copy of the appropriate convening notice (or draft consultation) duly sent to shareholders/limited partners, and as the case may be, to bondholders.

Whilst the above statements made by the CSSF are based on the assumption of a hard Brexit occurring on January 31, 2020 (based on PR19/54), and the CSSF does not preclude the possibility of future legislative or regulatory modifications of the third country regime, the introduction by the CSSF of an option for those UK Managers having already made the Required Brexit Notification to become, subject to the fulfilment of certain conditions, third country managers, rather than remaining within the transitional regime, is welcome.

Brexit: Temporary permissions regime, deadline extended until 30 January 2020

As reported previously, the temporary permissions regime (TPR) enables relevant firms and funds in the EEA which passport into the UK to continue operating in the UK should the UK exit the EU in a hard Brexit. The FCA is accepting formal notifications from firms and funds that wish to make use of the TPR through a dedicated tool available on its portal.

In light of the further extension to the Article 50 process, the FCA’s notification window for the TPR has been extended and will now close at the end of January 30, 2020. Any fund managers that wish to update their notification before the notification window closes on January 30, 2020, should email recognisedcis@fca.org. uk by the end of January 15, 2020 at the very latest confirming this and including their FRN. Additional information on the TPR can be found on the FCA’s website.

Luxembourg provides Brexit support to citizens and businesses

The Luxembourg government has made available on its citizens portal a section dedicated to Brexit issues (in respect of both a deal and a no-deal scenario), which includes an FAQ feature summarising the rules governing Luxembourg citizens residing in the UK and those governing UK citizens residing in Luxembourg in a number of key areas (right to work, residency requirements, family allowances, etc.). The FAQ feature similarly summarises, for both a deal and a no-deal scenario, the rules which will affect businesses established in Luxembourg and businesses based in the UK after Brexit.

CSSF issues FAQ on swing pricing mechanism

On July 30, 2019, the CSSF published an FAQ on swing pricing. The principles outlined in the FAQ apply to all regulated funds in Luxembourg (UCITS, UCI part II, SIFs³ ) that apply the mechanism of swing pricing. The FAQ outlines certain governance requirements in relation to prospectuses, disclosure in the semiannual report, net asset value calculation errors and other organisational requirements. Where changes are required to a prospectus, articles of association or management regulation, the CSSF has outlined that these should be included at the next update.

CSSF online assessment concerning PRIIPs

On July 1, 2019, the CSSF issued a press release concerning packaged retail and insurance-based investment products (PRIIPs).

The CSSF requires all SIFs, Part II UCIs and SICARs⁴ to complete an online assessment available on the eDesk portal as specified in Circular 19/721 (Dematerialisation of requests to the CSSF). The CSSF explains that, as securities or partnership interests issued by Luxembourg regulated investment funds are likely to qualify as PRIIPs, the regulator would like to obtain an overview of the impact of the PRIIPs Regulation on Luxembourg-related investment funds. The CSSF required completion of an online assessment first by October 31, 2019 and extended the deadline until December 31, 2019 in CSSF press release 19/56.

From paper to e-filing CSSF launches eDesk Portal

On July 1, 2019, the CSSF published Circular 19/721 which informs supervised entities such as UCITS, Part II UCIs, SIFs, SICARs, Luxembourg management companies and alternative investment fund managers, of the establishment of an electronic portal (eDesk Portal).

Going forward, these entities, including in particular investment funds and management companies, will be required to use the eDesk Portal when filing applications, updating existing dossiers or submitting ad-hoc requests. However, not all requests will be made via the eDesk Portal from now on. A list of eDesk requests has been published and will be regularly updated on the CSSF homepage. All entities are responsible for keeping themselves regularly informed of the updated list of requests, thereby ensuring that the available requests that are applicable to them are completed appropriately and in due time.

Additional information and guidelines in the form of a user guide are available online for each dematerialised request. Access to the eDesk Portal requires the creation of a user account by every person or representative authorised by an entity concerned to act on its behalf with the CSSF in relation to the requests available via the eDesk Portal.

Also, in press release 19/45, the CSSF confirms that as from October 1, 2019 applications for new UCI approval (UCITS, UCI Part II, SIF and SICAR not yet registered on the official list) will have to be submitted via the eDesk Portal.

However, in order to allow users to become familiar with the eDesk Portal, the CSSF has decided to put in place a transition period ending on October 31, 2019 during which requests for UCI approval may be submitted via:

• Email or secured e-file channels using the current dedicated Excel form.

• The eDesk/UCI approval dedicated application.

Importantly, as from November 1, 2019, the only possible channel will be the eDesk Portal. Therefore, the CSSF encourages firms to submit their next applications, where appropriate, via the eDesk Portal in order to get familiar with the new communication channel.

Publication of the Prospectus Law

The law of July 16, 2019 on prospectuses for securities, which implements certain provisions of the EU Prospectus Regulation and provides for other requirements covering the national prospectus regime, was published in Memorial A – No 513 of July 18, 2019 and entered fully into force on July 21, 2019.

It should be noted that Article 4 of the said law implements the option offered by Article 3(2) of the EU Prospectus Regulation, by exempting offers to the public of securities with a total amount in the EU of less than EUR 8 million, calculated over a 12-month period, from the obligation to publish a prospectus, while surrounding this exemption with a number of conditions. Thus, in particular, it is required to publish an information notice for public offerings of securities with a total amount in the EU of EUR 5 million or more, this limit being calculated over a 12-month period.

This law repeals the amended law of July 10, 2005 on prospectuses for securities and is available on the CSSF website.

Implementation and longawaited clarification

On July 16, 2019, the Luxembourg law implementing into domestic law certain provisions of the EuVECA⁵, EuSEF⁶, MMF⁷, ELTIF⁸ and Securitization Regulations9 was published in the Official Journal of the Grand Duchy of Luxembourg (the Law of July 16, 2019). This law also amends the Luxembourg Law of July 23, 2016 relating to reserved alternative investment funds (RAIF Law).

The Law of July 16, 2019 explicitly designates the CSSF as the competent authority in respect of the EuVECA, EuSEF, ELTIF and MMF Regulations and sets out the CSSF’s powers and administrative sanctions that it may apply pursuant to such regulations.

The CSSF is also generally designated as the competent authority pursuant to the EU Securitization Regulation provided that the Commissariat aux Assurances is the competent authority for ensuring the adherence of the obligations laid down in Articles 6 (risk retention) to 9 (criteria for creditgranting) of the EU Securitization Regulation by sponsors, originators and securitization special purpose entities established in Luxembourg and subject to its supervision.

The Law of July 16, 2019 also strengthens legal certainty by amending Article 8 of the RAIF Law. Henceforth, the RAIF Law provides expressively that FCP¹⁰ (RAIF) may be managed by Luxembourg management companies authorized pursuant to chapters 15, 16 or 18 of the Law of December 17, 2010. Article 49 of the RAIF Law is further amended to allow for the conversion of FCP RAIFs into SICAV¹¹ RAIFs, giving additional flexibility to both managers and investors.

Increased obligations for market players in the wake

The Luxembourg parliament adopted on July 10, 2019 the Bill of Law 7402 (the Draft Bill) implementing the revised Shareholders Rights Directive¹² (SRD II) EU and amending the Luxembourg law of May 24, 2011 on the exercise of certain rights of shareholders in listed companies, as amended by the Draft Bill (the Law).

Its entry into force is foreseen for the first day of the month following its publication in the Official Journal of the Grand Duchy of Luxembourg (which, at the time of writing, has not yet happened). In addition to the Law, a new Regulation (EU) 2018/1212 will become applicable as from September 3, 2020, aiming to improve the communication between listed companies and their shareholders.

The main objectives are to encourage long-term engagement of shareholders in listed companies, reinforce shareholders’ rights and increase the transparency of issuers, institutional investors, asset managers, intermediaries and proxy advisors.

Directors of the relevant entities will be personally and jointly liable for any damage resulting from the breach of their respective obligations imposed by the Law.

Strongly increasing interest for RAIF

As in the previous quarters, the reserved alternative investment fund (RAIF), the flexible investment vehicle which has existed since July 2016, continues to generate strong interest. Since its implementation, 843 RAIF structures have been created in Luxembourg with a variety of different investment policies and purposes (time-to-market, incubation, private wealth management etc.). This also means that since the last reference period of June 3, 2019, a very strong number of 173 new RAIFs have been created and added onto the official list (meaning on average of more than 1 RAIF per day). The RAIF-product is not only a fit for illiquid asset classes but, mainly due to the availability of variable capital structuring, also for liquid asset classes including strategies involving a high frequency trading.

As in the previous reference period it may be observed that investors, especially institutional investors, in Europe and around the globe, have got used to the product and have included the RAIF as the SIF look alike (and to a lower number SICAR look alike) Luxembourg investment fund/ vehicle meeting the highest standards of structural quality and flexibility, as they were used to in a “real” SIF (or “real” SICAR) but without an add-on regulation on the fund/investment product itself.

Besides this, for illiquid asset classes, AIF’s structured as unregulated partnerships (SCS or SCSp) have seen strong increasing demand. Promoters and investors appreciate the legal framework allowing (to the extent requirements are met) for a choice of setups ranging from AIFs only managed by a registered AIFM (and, for instance, not requiring a depositary) to AIFs managed by an authorised AIFM, both, for instance allowing for investments without the requirement of minimum diversification, to the extent this is intended.

Even though the RAIF and the unregulated AIF as described above are currently dominating the structural demand in alternative asset classes, the SIF as the traditional regulated fund vehicle with its year-long market position and continuous flexibility preserves its role in the range of available fund products. This applies certainly more for strategies involving liquid asset classes and/or markets where certain investors are more comfortable or the legal framework is favouring/requiring regulated fund vehicles and funds not qualifying as an AIF, such as fund vehicles reserved for a pre-existing group of investors, i.e. a family (please refer to the definition provided by the European Securities and Markets Authority).