Luxembourg update

Market figures in Luxembourg [1]

As of 31 July 2021, the total net assets of undertakings for collective investment (UCI), comprising UCIs subject to the 2010 Law, specialised investment funds and investment company in risk capital (SICAR), amounted to EUR 5,541.371 billion compared to EUR 5,487.526 billion as at 30 June 2021, i.e. an increase of 0.98% over one month. Over the last twelve months, the volume of net assets rose by 20.01%. In figures, there is an increase in amount of EUR 1,137.688 since 30 April 2020.

The Luxembourg UCI industry thus registered a positive variation amounting to EUR 53.845 billion in July. This increase represents the sum of positive net capital investments of EUR 39.083 billion (+0.71%) and of the positive development of financial markets amounting to EUR 14.762 billion (+0.27%).

The number of UCIs taken into consideration totalled 3,541, against 3,554 the previous month. A total of 2,331 entities adopted an umbrella structure representing 13,249 sub-funds. Adding the 1,210 entities with a traditional UCI structure to that figure, a total of 14,459 fund units were active in the financial centre.

It is worth noting that in the foregoing figures unregulated alternative investment funds (AIFs) established as reserved alternative investment funds (RAIFs) or in the form of a common limited partnership (SCS) / special limited partnership (SCSp) (without the RAIF regime) are not included. Such AIFs are, however, the structures primarily chosen for AIFs investing in illiquid asset classes such as private equity, venture capital, real estate, infrastructure, clean energy etc.

PRIIPs Regulation update

The European Commission has published on 7 September 2021 in all languages the Commission Delegated Regulation in the sector of packaged retail and insurance-based investment products (PRIIPs)². This Delegated Regulation specifies obligations with respect to both AIFs and UCITS and amends the regulatory technical standards (RTS) laid down in Commission Delegated Regulation (EU) 2017/653.

The main areas covered by the draft Delegated Regulation are:

i. performance scenarios - new calculation methodologies and revised presentation;

ii. summary cost indicators - revisions, including amended presentation;

iii. transaction costs - modification of the calculation methodology;

iv. MOPs (multi-option products) - refinement of the rules relating to PRIIPs offering a range of options for investment;

v. incorporation of existing provisions regarding investment funds into the PRIIPs framework (i.e. incorporating UCITS); and

vi. past performance - requirement for certain types of investment funds and insurance-based investment products to publish information (in a separate document) and refer to it within the key information document (KID).

The Commission also intends for amendments to be made to the UCITS Directive and the PRIIPs Regulation to avoid investors receiving two pre-contractual disclosure documents:

• Article 32 of the PRIIPs Regulation provides for a temporary exemption so that UCITS managers do not need to provide a PRIIPs KID as well as a key investor information document (KIID) at the same time under the UCITS Directive. The exemption is to be further extended to 1 July 2022 for UCITS management companies to produce PRIIPs KIDs replacing UCITS KIIDs.
• On 15 July 2021, the Commission also published a proposed Directive³ which would amend the UCITS Directive by requiring Member States to accept the PRIIPs KID as being compliant with the need for a KIID. This change would come into force on 1 July 2022.

CSSF communiqué on IFR and IFD

On 2 September 2021, the Commission de Surveillance du Secteur Financier (CSSF) published a communiqué regarding the entry into force of the following new regulatory provisions applicable to investment firms⁴:

• The publication of the Law of 21 July 2021 amending the Law of 5 April 1993 on the financial sector (the LFS) which entered into force on 31 July 2021 in order to transpose, among other things, the Investment Firm Directive (IFD).
• The entry into force of the Investment Firm Regulation (IFR) which applies from 26 June 2021.

The IFD and the IFR together constitute the ‘IFD package’ which is intended to subject EU investment firms to a prudential framework which is better suited to their needs. The core aim of the IFR/IFD is to introduce more proportionate rules for all EU investment firms in relation to capital, liquidity and other risk management requirements, while ensuring a level-playing field between large and systemic financial institutions.

Three classes of investment firms

The IFD package categorises investment firms into three different classes. So-called ‘class 1’ investment firms which, due to their size or their activities, are considered as systemic and/or are assimilated to credit institutions will be regulated from a prudential perspective under the existing Capital Requirements Regulation (CRR2) / Capital Requirements Directive (CRDV) regime.

Consequently, the IFD package applies to the so-called ‘class 2’ and ‘class 3’ investment firms. While ‘class 2’ investment firms are entirely subject to the new regime, the small and non-interconnected investment firms defined in Article 12 of the IFR, the so-called ‘class 3’ investment firms, benefit from a simplified supervisory framework in accordance with the principle of proportionality.

Following a mapping exercise performed by the CSSF, about one third of investment firms incorporated under Luxembourg law fall within ‘class 2’ with the remainder being ‘class 3’. No investment firm has so far been identified as ‘class 1’.

New requirements regarding own funds

As regards prudential requirements, which apply in principle at the individual and consolidated level, the IFD package introduces new permanent minimum capital requirements, determined according to the investment service or activity provided and which range between EUR 75,000 and EUR 750,000.

In order to phase-in the new own funds requirements for existing investment firms, the IFD package sets out certain transitional provisions designed to mitigate the effects of an increase in own funds requirements for a period of five-years from 26 June 2021.

A new approach to the authorisation of investment firms
In addition, the Law of 21 July 2021 amends the provisions regarding the authorisation of investment firms and repeals investment firm status - this amendment reflects the increasing harmonisation of European rules applicable to investment firms.

It should be noted that such amendment does not nullify the authorisation of those investment firms already authorised. However, with a view to complying with the new legal provisions, an updated version of the articles of incorporation, reflecting the corporate objects that have to be amended to be in line with the new provisions of the LFS, must be filed with the Registre de Commerce et des Sociétés.

A new approach to the authorisation of investment firms
In addition, the Law of 21 July 2021 amends the provisions regarding the authorisation of investment firms and repeals investment firm status - this amendment reflects the increasing harmonisation of European rules applicable to investment firms.

It should be noted that such amendment does not nullify the authorisation of those investment firms already authorised. However, with a view to complying with the new legal provisions, an updated version of the articles of incorporation, reflecting the corporate objects that have to be amended to be in line with the new provisions of the LFS, must be filed with the Registre de Commerce et des Sociétés.

A new approach to the authorisation of investment firms

In addition, the Law of 21 July 2021 amends the provisions regarding the authorisation of investment firms and repeals investment firm status - this amendment reflects the increasing harmonisation of European rules applicable to investment firms.

It should be noted that such amendment does not nullify the authorisation of those investment firms already authorised. However, with a view to complying with the new legal provisions, an updated version of the articles of incorporation, reflecting the corporate objects that have to be amended to be in line with the new provisions of the LFS, must be filed with the Registre de Commerce et des Sociétés.

CSSF communiqué dated 31 August 2021 - Update in relation to the requirement to submit liquidation period extension requests for funds in non-judicial liquidation

Liquidation period extension requests for funds in non-judicial liquidation will no longer be required. The CSSF will monitor the status of the liquidation using semi-annual progress reports on the progress of the liquidation. These reports are submitted by the liquidator using the form available on the CSSF website⁵.

The deadlines for submission of the half-yearly progress reports are as follows:

• Report covering the period from 1 January to 30 June – to be submitted no later than 30 September of the same calendar year.
• Report covering the period from 1 July to 31 December – to be submitted no later than 31 March of the following year.

Notwithstanding the above, it is worth noting that the liquidator must report to the CSSF any significant issue without delay and should not wait until issuing the semi-annual report.

Liquidation period extension requests for sub-funds of funds that are on the official list and consequently not in non-judicial liquidation are still required when the nine-month deadline is reached.

Law of 21 July 2021 transposing Directive (EU) 2019/1160 on cross-border distribution of collective investment undertakings[7]

The EU Directive and Regulation on the cross-border distribution of collective investment funds (the CBDF Directive and CBDF Regulation) were published in the Official Journal of the EU (OJ) on 12 July 2019. The CBDF Directive and the CBDF Regulation entered into force on 1 August 2019. The CBDF Regulation has applied since 1 August 2019 with the exception of Articles 4(1) to (5), Articles 5(1) and (2), Article 15 and Article 16, which came into effect from 2 August 2021. Member States were required to apply measures implementing the CBDF Directive from 2 August 2021.

Among other things, the new rules in the CBDF Directive amend the existing EU Alternative Investment Fund Managers Directive (AIFMD) with the objective of harmonising the ability for EU alternative investment fund managers (AIFMs) to distribute AIFs across the EU, including by introducing a new regime for “pre-marketing” (see below).

The CBDF Regulation is also intended to facilitate the cross-border distribution of collective investment funds and amends the European Venture Capital Funds Regulation (EuVECA)⁷, the European Social Entrepreneurship Funds Regulation (EuSEF)⁸ and the Regulation key information documents for packaged retail and insurance-based investment products (PRIIPs Regulation).

In Luxembourg, the law of 21 July 2021 implementing the CBDF Directive (the Law) was published in the Official Gazette on 26 July 2021.

Pre-marketing

Previously, there has been no concept of pre-marketing in the AIFMD. Differing views by Member State regulators about draft documentation and the meaning of an offer or placement had made fund promotional activity inconsistent in Europe.

Pre-marketing is defined in the CBDF Directive as:

"provision of information or communication, direct or indirect, on investment strategies or investment ideas by an EU AIFM or on its behalf, to potential professional investors… in order to test their interest in an AIF or a compartment which is not yet established, or which is established, but not yet notified for marketing… and which in each case does not amount to an offer or placement to the potential investor to invest in the units or shares of that AIF or compartment".

The pre-marketing regime applies to all AIFs - for AIFs not yet established and AIFs that are established in the home Member State but not yet notified for marketing in the host Member State.

However, pre-marketing activity may not amount to an offer or placement to potential investors to invest in units or shares of an AIF or its compartment. For this reason, a draft prospectus or offering document shall not contain sufficient information to allow investors to take an investment decision and shall clearly include that:

• The documents do not constitute an offer or an invitation to subscribe in units or shares of the AIF or a compartment thereof.
• The information presented therein should not be relied upon because it is incomplete and may be subject to change.

Any subscription by professional investors within eighteen (18) months as of the start of pre-marketing activities, to units or shares of an AIF referred to in the information provided in the context of pre-marketing, or of an AIF established as a result of marketing, is considered to be the result of the pre-marketing.

Mandatory placement agents

Under the new regime only investment firms (including tied agents), credit institutions, UCITS management companies or AIFMs will be authorised to conduct pre-marketing and marketing activities.

To ensure a uniform implementation of these arrangements, the CBDF Directive states that host Member States may not require UCITS or AIFMs to have a physical presence nor to appoint a local third party in the targeted host Member State for any of these tasks. Such clarification is welcome as the implementation of the UCITS Directive by different Member States with regard to the requirement for the above facilities proved to be burdensome.

Reverse solicitation

The pre-marketing regime will also have an impact on reverse solicitation. EU AIFMs having pre-marketed will no longer be able to rely on reverse solicitation during 18 months from the beginning of the pre-marketing activity. Equally, none of the investors contacted during the pre-marketing phase may avail themselves of reverse solicitation. These investors may only acquire units or shares once the AIF is authorised for marketing in the relevant Member State.

De-notification

There is a new de-notification procedure to allow authorised EU AIFMs to discontinue the marketing of some or all of their EU AIFs in one or several host Member States in respect of which these EU AIFMs had made a previous notification for marketing under the AIFMD passport. A number of conditions must be fulfilled by an authorised EU AIFM to discontinue the marketing of an EU AIF in a host Member State. Such conditions include that no pre-marketing of the de-notified AIF can be undertaken by the EU AIFM in the relevant host Member State for a period of 36 months after the date of de-notification.

CSSF Guidance on Pre-Marketing⁹

The CSSF has published helpful guidance with respect to Lux/EU/non-EU AIFMs that engage in pre-marketing in Luxembourg under the CBFD Directive.

In particular, it confirms its view that the EU/Lux AIFM pre-marketing regime is extended to non-EU AIFMs (not clarified in the law, so far) on the basis of Article 42 of the AIFMD. The guidance also includes a Pre-Marketing Notification Letter¹⁰.

Taxonomy Regulation (EU) 2020/852

The Taxonomy Regulation¹¹ was published in the OJ on 22 June 2020.

The Taxonomy Regulation establishes a classification system (or taxonomy) which provides businesses with a common language to identify whether or not a given economic activity should be considered ‘environmentally sustainable’.

The environmental objectives defined therein and the application dates for these are as follows:

1 January 2022 for provisions in respect of:

• climate change mitigation; and
• climate change adaptation.

1 January 2023 for provisions in respect of:

• sustainable use and protection of water and marine resources;
• transition to a circular economy;
• pollution prevention and control; and
• protection and restoration of biodiversity and ecosystems.

As mentioned above, the Level 1 text of the Taxonomy Regulation was published in the OJ on 22 June 2020¹². Following its publication, work started on the underlying Level 2 measures. These concern:

• How requirements in the Taxonomy Regulation apply in relation to the transparency of undertakings in non-financial statements.
• Establishing technical screening criteria to determine the conditions under which a given economic activity should be considered to be contributing substantially to an environmental objective.

Work on Key Performance Indicators (KPIs)

On 5 November 2020, the European Securities and Markets Authority (ESMA) published a consultation paper¹³ setting out proposals under Article 8 of the Taxonomy Regulation to specify the content, methodology and presentation of the KPIs that (a) non-financial undertakings and (b) asset managers are required to disclose. The consultation period ended on 4 December 2020. ESMA's final report¹⁴, setting out its advice to the European Commission (Commission) was published on 26 February 2021.

On 7 May 2021, the Commission published for consultation a draft Delegated Regulation¹⁵ containing its proposed measures, together with a FAQ document¹⁶. The Commission published the adopted Delegated Regulation¹⁷ on 6 July 2021, together with eleven annexes. When the text has been agreed by the European Parliament and the Council of the EU, the final text will be published in the OJ. The Delegated Regulation is expected to apply from 1 January 2022.

Work on technical screening criteria

On 20 November 2020, in light of the technical expert group’s advice, the Commission published the draft text of a Delegated Regulation¹⁸ specifying the technical screening criteria under which specific economic activities qualify as contributing substantially to i) climate change mitigation; ii) climate change adaptation; and for determining whether those economic activities cause significant harm to any of the other relevant environmental objectives. The delegated act will apply as of 1 January 2022 for those two objectives as abovementioned.

CSSF Press Release 21/13 dated 10 June 2021 – FAQ on the application of MiFID to Luxembourg Investment Fund Managers (IFMs)[19]

On 10 June 2021, the CSSF published a FAQ on the application of the revised Directive on markets in financial instruments (MiFID) to Luxembourg management companies (section 10) and AIFMs (section 26) (IFM). This FAQ clarifies under what circumstances and to what extent MiFID applies to IFMs, their third-party delegates and their investment advisers.

IFMs are expected to comply with the CSSF FAQ as soon as possible and by 31 December 2021 at the latest, considering the best interests of investors.

From a practical perspective, IFMs should as soon as possible analyse their organisational model in order to assess:

• The need for an authorisation to provide services under Article 101 (3) of the UCI Law or under Article 5(4) of the AIFM Law of 12 July 2013. Indeed’ IFMs (i.e. chapter 15 management companies for UCITS and AIFMs), which provide services such as portfolio management or marketing in relation to funds for which they are not the appointed IFM (typically by way of delegation by the appointed AIFM/UCITS management company) are no longer exempt from the scope of MiFID when performing the functions included in collective portfolio management. These IFMs are now required to obtain a MiFID top up licence bearing in mind that they may, however, benefit from certain exemptions (more particularly intragroup service exemption).
• Appropriate compliance, by any third country entity acting as their delegate or undertaking services on their behalf with the third country regime as foreseen under CSSF Circular 19/716²⁰ on the provision in Luxembourg of investment services or performance of investment activities and ancillary services in accordance with Article 32-1 of the LFS, as amended.

SFDR

The key Level 1 provisions of the Regulation on sustainability related disclosures in the financial services sector (SFDR) became effective as of 10 March 2021.

The European Supervisory Authorities (ESAs²¹) requested clarification of the scope of the SFDR by raising priority questions in a joint letter²² to the Commission on 7 January 2021.

On 26 July 2021, the Commission published a Q&A²³ in response to the questions raised by the ESAs  on, inter alia, the applicability of the SFDR to (i) sub-threshold AIFMs and (ii) non-EU AIFMs, and further guidance on the concept of promotion within the meaning of Article 8 SFDR. The Commission clarifies in its Q&A that both entity and financial product related requirements of the SFDR are applicable to all sub-threshold AIFMs.

The Commission stipulates that for the purposes of the SFDR, a 'financial market participant" includes an AIFM, irrespective of whether the AIFM has its registered office in an EU Member State or in a third country (non-EU AIFM). When a non-EU AIFM gains market access to (one or more) EU Member States using a national private placement regime, the non-EU AIFM must ensure compliance with the SFDR, including the financial product related provisions.

Furthermore, guidance is given regarding the application of the 500-employee threshold for principle adverse impact (PASI) reporting. The Commission clarifies that the 500-employee criteria is based on the entire group including non-EU subsidiaries. PASI disclosure for large groups should cover the activities of the parent undertaking only, and not of the entire group (unless group entities qualify as financial market participants or advisers themselves).

Level 2 measures on the content and format of what financial market participants must disclose

On 23 April 2020, the Joint Committee of ESAs published a consultation paper²⁴ setting out draft RTS to specify the content and format of what financial market participants must disclose. The consultation period closed on 1 September 2020 and on 21 September 2020 the ESAs published a survey²⁵. The survey closed on 16 October 2020. After this the ESAs were originally expected to submit a final report containing their advice to the Commission by 20 December 2020 so that the measures could be finalised and become effective from 10 March 2021 like SFDR Level 1 measures. However, the Commission put back the date of application of the Level 2 measures to 1 July 2022.

Reminder

It is worth remembering that the delay in the SFDR Level 2 measures does not impact the timeline of the Taxonomy Regulation (as defined and explained above). In particular, a number of the disclosure obligations set out in the Level 1 measures of the Taxonomy Regulation will still start to apply from 1 January 2022. Therefore, asset managers and financial advisers with products within scope of the Taxonomy Regulation will still need to review and potentially update their investor disclosures in order to comply at the end of the year.

CSSF Regulation No. 20-10 – The implementing measures of Article 100(1) of the amended UCI Law relating to UCIs[26]

On 23 December 2020, the CSSF published Regulation no. 20-10 laying down the implementing measures of Article 100(1) of the Law of 17 December 2010 relating to UCI as regards the marketing of foreign UCIs other than the closed-ended type to retail investors in Luxembourg (the Regulation).

Purpose and scope

With effect from 1 January 2021, the CSSF defines the procedure and the conditions applicable to the marketing of foreign UCIs other than the closed-ended type to retail investors in Luxembourg (the Foreign UCIs). For the purpose of the Regulation, ‘Foreign UCIs’ means UCIs other than undertakings for collective investment in transferable securities, which are established in a Member State of the EU other than Luxembourg or in a third country, and ‘UCIs other than the closed-ended type’ is defined as UCIs other than UCIs for which there are no redemption rights in relation to their units or shares in favour of investors. The Regulation applies to the marketing of Foreign UCIs which are not covered by CSSF Regulation no. 15-03²⁷ on the marketing of foreign alternative investment funds to retail investors in Luxembourg.

Marketing authorisation

Prior to the marketing of their units or shares to retail investors in Luxembourg, Foreign UCIs (or the compartment(s) thereof) must, request authorisation from the CSSF for marketing, in accordance with the provisions of Article 129 (1) of the UCI Law and the Regulation. Upon granting authorisation, the CSSF will register the Foreign UCI on a list which is published on the CSSF website.

The main condition for the CSSF to grant marketing authorisation is that the Foreign UCI can be managed by a manager which is subject in its home state to regulation and prudential supervision by competent authorities. When the Foreign UCI is a feeder UCI, the master UCI it invests in must be subject in its home state to permanent supervision and there must be cooperation between the CSSF and the supervisory authority of the master UCI.

Foreign UCIs which comply with the following rules are eligible for marketing to retail investors in Luxembourg:

• Issue/Redemption prices must be determined regularly and at least once a month.
• Sufficient risk allocation²⁸.

Termination of marketing

A Foreign UCI must inform the CSSF without delay when it decides to no longer market its units or shares to retail investors in Luxembourg. The CSSF will then remove the Foreign UCI from the list of Foreign UCIs admitted for marketing to retail investors in Luxembourg. Furthermore, the Foreign UCI must also publish a notice to investors concerning the termination of its marketing activities in Luxembourg. Such notice must be published in a Luxembourg newspaper or by means of a website.

Foreign UCIs which were already authorised prior to 1 January 2021 to market their units or shares to retail investors in Luxembourg according to Article 100(1) of the UCI Law are automatically considered to be authorised under the Regulation.

CSSF Circular 20/764 - Guidelines on performance fees in UCITS and certain types of AIFs[29]

On 18 December 2020, the CSSF published CSSF Circular 20/764 - Guidelines on performance fees in UCITS and certain types of AIFs²⁹, i.e. only those AIFs in Member States allowing for the marketing of AIFs to retail investors in accordance with Article 43 of AIFMD and with the exception of (i) closed-ended AIFs and (ii) open-ended AIFs.

The Circular applies ESMA’s final guidelines on performance fees³⁰ which were published on 5 November 2020. The purpose is to inform all investment fund managers of UCITS and AIFs marketed to retail investors in Luxembourg that the CSSF, in its capacity as competent authority, will apply the ESMA guidelines and integrate them in its administrative and regulatory practices as of the date of application of the guidelines.

The ESMA guidelines were published with a view to establishing harmonised common standards in relation to the manner in which investment fund managers charge performance fees to retail investors in UCITS/AIFs and the circumstances in which performance fees can be paid, in such a way as to prevent undue costs being charged to the relevant UCITS/AIF and its investors. In particular, ESMA set out common standards and criteria in relation to the following:

• Performance fee calculation method.
• Consistency between the performance fee model chosen and the fund’s investment objectives, strategy and policy.
• Frequency for crystallisation (and for the subsequent payment of the performance fee).
• Circumstances where a performance fee should be payable.
• Duration of the performance reference period.
• Disclosure of the performance fee model.
• As a reminder, the types of funds subject to the guidelines are not only UCITS funds, but also AIFs with classes open to retail investors within the meaning of MiFID II.

The guidelines came into effect as from 6 January 2021. In addition thereto:

• Managers of any new funds created after the date of application of the guidelines with a performance fee, or any funds existing before the date of application that introduce a performance fee for the first time after that date, should immediately comply with the guidelines, in respect of those funds.
• Managers of funds with a performance fee existing before 6 January 2021 should apply the guidelines in respect of those funds by the beginning of the financial year following 6 months from 6 January 2021.
• The first funds to apply the guidelines will be those with a fiscal year ending on 31 July 2021. The compliance date will be as from 1 August 2021.
• The guidelines will also be applicable as of 6 January 2021 for any newly created sub-funds of an existing umbrella, i.e. in relation to any new sub-fund setting up a performance fee at sub-fund or share classes.