Luxembourg: CSSF Clarifies Marketing Rules In Updated AIFMD Law Q&A

Last Updated: 16 September 2015
Article by Olivier Sciales

On August 10, the CSSF issued the latest update of its Frequently Asked Questions document on the grand duchy's law of July 12, 2013 implementing the AIFMD and the European Commission's Level 2 regulation on implementation of the directive, last revised on December 29, 2014.

The FAQ document has now run to nine versions over the past year and a half. Its aim is to highlight aspects of the AIFMD rules from a Luxembourg perspective, for the benefit primarily of alternative funds and managers established in the grand duchy. It complements Q&A documents on the AIFMD published by ESMA, itself most recently updated last month, and by the European Commission.

The FAQs cover issues including the scope of the law, the authorisation and registration regimes applicable to alternative managers, delegation requirements, entry into force of the law and duration of transitional provisions, the scope of authorised managers' activities, depositary requirements, the application of the AIFMD passport to Luxembourg managers and funds as well as to foreign managers marketing in Luxembourg, reporting, valuation, transaction costs, managers' capital requirements, and co-operation agreements signed by the CSSF with non-EU regulators.

The new version most notably aims to provide clarity on how marketing and reverse solicitation are understood by the CSSF. The regulator says that since there is no guidance on European level regarding exactly what marketing consists of, the views of different EU regulators may vary, and the same applies to "reverse solicitation" or "passive marketing", activities to which the AIFMD marketing rules do not apply.

Luxembourg's 2013 legislation defines marketing as a direct or indirect offering or placement at the initiative of the manager or on its behalf of units or shares of an alternative investment fund it manages to or with investors domiciled or with a registered office within the EU. Marketing takes place when the fund, the manager or an intermediary seeks to raise capital by actively making fund shares or units available for purchase by a potential investor.

The CSSF says merely presenting draft documentation on a fund to prospective investors does not in itself constitute marketing, provided that the documents cannot be used to make a formal subscription or investment commitment. The manager may present documents to potential investors even before the regulator has received notification, although no subscriptions can be validly made until it has been duly informed. However, once such documentation has been provided to investors the manager can no longer claim that an investment is the product of reverse solicitation.

Marketing consists of any offering or placement manifested by means such as advertising, distribution of documentation to prospective investors, roadshows or distance marketing, the CSSF says, provided that investors receive material allowing them to make a formal subscription or commitment.

Marketing in Luxembourg does not require a physical presence by the manager on the territory of the grand duchy; it can be carried out by Luxembourg-based intermediaries such as management companies, banks or financial sector professional entities that are authorised to do so. The activity must take place on national territory in order to qualify as marketing in Luxembourg.

Distance marketing means such as telephone or web site, qualifies as marketing in Luxembourg when the investors are domiciled or have their registered office in Luxembourg, without requiring the simultaneous presence in the grand duchy of the fund, the manager or an intermediary, and the investor, if the materials in question can be used by the investor to make a formal subscription or commitment.

The regulator says reverse solicitation occurs where the manager provides information regarding a fund and/or makes its units or shares available for purchase at the initiative of an investor or their agent, without any solicitation by the fund, manager or any intermediary acting on their behalf. The manager has the burden of proving reverse solicitation, for example through a written declaration by the investor that they have sought information on or decided to invest in the fund in question at their own initiative.

The CSSF says three cases that do not constitute marketing are investments in alternative funds under discretionary individual investment mandates; proposals to invest in funds at the initiative of an adviser under an investment advisory agreement; and investments by alternative or other funds in AIFs at the initiative of the fund, its management company, AIFM or portfolio manager. Nor does marketing include secondary trading of fund units or shares, except in the case of an indirect offering or placement via intermediaries at the initiative or on behalf of the manager or fund.

Other issues dealt with by the latest update to the CSSF Q&A include:

  • Credit institutions and investment firms cannot combine that status under Luxembourg's 1993 legislation with that of authorised AIFM under the 2013 law, although they may manage alternative fund assets under a delegation arrangement. Banks may become registered AIFMs, as may investment firms provided that their authorisation under the 1993 law covers management of third-party assets.
  • A professional depositary of assets other than financial instruments (PDAOFI) may be appointed as a depositary for alternative funds with a five-year lock-up, and whose main investment policy does not involve investment in assets subject to custody requirements or that makes private equity-style investments.
  • Under the single depositary rule of the 2013 legislation, a PDAOFI that has been appointed as depositary for an alternative fund is also responsible for the safekeeping of financial instruments that can be held in custody. Although it will have to delegate custody of those assets to an eligible provider, the duty of restitution in the event of loss of financial instruments remains with the PDAOFI, unless the loss is due to unavoidable external events beyond its control.
  • There are no restrictions on the type of alternative fund for which a PDAOFI may provide safekeeping of assets other than financial instruments.
  • A non-EU AIFM will have to report to the CSSF only if it is marketing funds to professional investors in Luxembourg, and as long as the passport regime is not available to such managers. A non-EU AIFM managing or marketing in Luxembourg a feeder fund, whether EU-domiciled or not, must report to the CSSF on the non-EU master fund, even if this is not marketed in the EU, if it manages both funds.
  • Where a non-EU AIFM is marketing alternative funds to professional investors in Luxembourg as well as in other EU member states, reporting to the CSSF only covers data for funds marketed in Luxembourg and in applicable cases their non-EU master funds.
  • The amount of assets under management and other positions of a non-EU master fund that must be reported to the CSSF in a separate AIF reporting file should not be included in the aggregate reporting to the CSSF for the manager.
  • The 2013 law and the European Commission's AIFMD level 2 regulation should be taken into account when assessing the initial capital and own funds requirements applicable to external AIFMs that are not licenced as Chapter 15 ManCos (that is, Chapter 16 ManCos or other Luxembourg-based AIFMs).
  • The professional liability risks to be covered relating to AIFMD comprise the risk of loss or damage caused by a relevant person through negligent performance of activities for which the AIFM has legal responsibility, as set out in the Commission regulation.
  • A Chapter 15 or Chapter 16 ManCo authorised as the appointed AIFM of a fund in a master-feeder alternative fund structure and carrying out activities regulated by the AIFMD for the other fund must have professional liability risk cover at both master and feeder level, applicable to activities for which the AIFM has legal responsibility.

The FAQs dealt with by the CSSF can be consulted here, those posted by ESMA here, and those published by the European Commission here.

Olivier Sciales
Chevalier & Sciales
Route de Thionville 51
2611 Luxembourg
Office: + 352 26 25 90 30
Fax: +352 26 25 83 88
Twitter: @oliviersciales

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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