On June 9, 2016 the CSSF issued the latest update of its Frequently Asked Questions document on the Luxembourg law of July 12, 2013 implementing the AIFMD and the European Commission's Level 2 regulation on implementation of the directive, last revised on August 10, 2015.
The new version provides clarity about the ability of Luxembourg-domiciled alternative funds to conduct loan origination, participation and acquisition, an important issue given the role of Luxembourg as a leading centre for funds conducting or investing in loans.
The FAQ document, which has now run to 10 versions over the past two-and-a-half years, is intended to highlight aspects of the AIFMD rules from a Luxembourg perspective, for the benefit primarily of alternative investment funds and AIFMD-authorised managers established in Luxembourg. It complements Q&A documents on the AIFMD and its subsidiary legislation published by ESMA and by the European Commission.
The FAQs cover issues including the scope of the AIFM 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, marketing and reverse solicitation, notification of investment in non-listed companies, and co-operation agreements signed by the CSSF with non-EU regulators.
Loan business permitted in principle
The new version clarifies that loan origination, participation and acquisition are in principle permissible activities for Luxembourg-domiciled alternative investment funds under the AIFM Law as well as specific product laws and regulations governing the various fund vehicles designated for AIFs. The granting of loans is also explicitly permitted under certain conditions in the EU regulations governing European Long Term Investment Funds (ELTIF), European Social Entrepreneurship Funds and European Venture Capital Funds.
However, the CSSF says various factors should be considered by an alternative investment fund or its AIFM, before and during any loan origination transactions, and the regulator will consider these aspects on a case-by-case basis as part of its process of authorisation and ongoing supervision of the AIFM and where appropriate the fund.
All general requirements for AIFMs with regard to the AIFs they manage according to the AIFM Law apply in the case of loan origination, participation or acquisition, as well as any particular requirements on the fund arising from relevant product laws or regulations.
Organisation and governance
The CSSF says the AIFM or where relevant the fund should ensure to address all aspects and risks of lending activity. In addition, they should have in place proper organisational and governance structures, processes and procedures; expertise and experience in origination, participation or acquisition activity plus the necessary technical and human resources, with a focus on credit and liquidity risk management within an overall risk management process; concentration and risk limitation mechanisms; clear policies regarding assets and investors such as loan and investor categories and avoidance of conflicts of interest; proper disclosure and transparency.
It is the responsibility of the AIFM or AIF itself to ensure the implementation of an appropriate approach for lending activity, to be evaluated by the regulator as part of its authorisation and ongoing supervision process.
ESMA prefers closed-ended loan funds
The CSSF's guidance follows the issue by the European Securities and Markets Authority on April 11, 2016 of its opinion on key principles for a European framework on loan origination by funds for the European Parliament, Council and Commission, taking into account the existing approach of various member states. ESMA says a common EU framework would help create a level playing field in the sector and curb opportunities for regulatory arbitrage, and in turn encourage increased loan origination by investment funds.
ESMA notably says that because of the illiquid nature of loans, it believes loan-originating funds should be set up as closed-ended vehicles that do not offer investors the right to redemption of units on a regular basis. However, the authority says that provided certain conditions are fulfilled, the opportunity for repayment by the fund at the recommendation of its manager could be offered to investors on a non-preferred and equal basis during the life of the AIF. This could take place at fixed intervals, on the same lines at the procedures set out in the ELTIF Regulation.
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