Luxembourg: Bill Introducing Investment Restrictions For SIFs And UCIs And Amending SICAR And AIFM laws

Last Updated: 13 December 2018
Article by Jeremie Schaeffer and Suzana Guzu Mercea
Most Read Contributor in Luxembourg, December 2018

On 18 January 2016 the Luxembourg government filed bill n°6936 with the Parliament introducing changes to the investment rules of Luxembourg investment funds governed by the Law of 13 February 2007 on specialised investment funds (SIF Law) and of those governed by part II of the law of 17 December 201O on undertakings for collective investments (UCI Law).

The bill will also amend the law of 15 June 2004 relating to investment companies in risk capital (SICAR Law) in order to align it with the SIF regime and validate administrative practices, as well as "clean-up" the law of 12 July 2013 on alternative investment fund managers (AIFM Law).

Investment restrictions for SIFs

The main objective of the law is to ensure that SIFs investing in atypical asset classes, such as artwork, wine, diamonds or football players' economic rights, representing highly illiquid and risky investments, will enhance investor protection by reserving these investments to professional investors within the meaning of annex II of Directive 2014/65/UE on markets in financial instruments (the MiFID II Directive). Such investors may be credit institutions, investment firms, insurance firms, collective investment schemes and their management companies, pension funds or national governments.

Notable changes to the SIF law to be brought by the bill are as follows:

  • introduction of investment restrictions for SIFs which do not reserve their securities to professional investors, (these restrictions are to be determined by CSSF regulation);
  • SIFs reserving their shares or interests to professional investors within the meaning of the MiFID II will have the right to invest in any type of assets, including atypical, illiquid and highly risky ones;
  • the CSSF regulation can provide for exemptions for existing SIFs or compartments thereof having invested in restricted assets prior to the entry into force of the proposed law;
  • an upgrade to the designation of"gerants" for the companies limited by shares (SCA), in the wake of the changes to the company law enacted in 2013;
  • SIFs managed by registered AIFMs or SIFs not qualifying as alternative investment funds (AIF) within the meaning of the AIFM Law, will need to have a proportionate and good administrative and accounting organisation. They will also need to put in place appropriate control mechanisms allowing them to efficiently supervise their activities.

What about the other, non-professional investors?

Other non-professional investors will be permitted to invest only in SIFs which may invest in asset classes to be determined by virtue of a CSSF regulation.

They will also have the possibility to invest in reserved alternative investment funds (RAIF) as soon as the draft law introducing this vehicle is adopted. In the current form of the draft, the RAIF is allowed to invest in atypical assets and its investors must be well informed investors. The RAIF will not be subject to regulatory authorisation or on-going supervision by the CSSF.

Other changes brought by the bill to the UCI Law, the SICAR Law and the AIFM Law

The bill may bring the following changes to the rules applicable to UCIs under part II of the UCI Law:

  • the type of assets a UCI can invest in will be determined by a CSSF regulation;
  • the CSSF regulation can provide for exemptions for existing UCIs or compartments thereof having invested in restricted assets prior to the entry into force of the proposed law;
  • a closed-ended UCI will be entitled to issue units in the fund at a value to be determined according to its bylaws and it will no longer have to issue the units at a price based on the net asset value.

The bill also aims at aligning the legal framework applicable to SICARs with the regime applicable to SIFs and sanctions regulatory practice. Lastly, it removes the reference to the CSSF as being the "competent authority for the supervision of AIFs established in Luxembourg" in order to remove the uncertainties relating to the vehicles subject to its control. As a result, only regulated AIFs (UCIs, SIFs, SICARs) remain subject to its supervision, by virtue of the special laws applying to them, while unregulated AIFs are exempt from such supervision.

What are the next steps?

Existing SIFs investing in atypical asset classes should perform a review of their asset portfolio and of their investor base and prepare, if required, to make the changes and restructurings required by the future law.

Depending on the type of assets they will invest in, SIFs to be established in the future will need to put in place appropriate measures to verify the qualification of their investors as professional or non­ professional.

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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