Answer ... There are no restrictions as to the legal form to be adopted by an alternative investment fund manager (AIFM) or investment adviser in Luxembourg.

Any legal person whose regular business is managing one or more AIFs can apply to act as an AIFM (authorised or registered).

An AIFM may either be an ‘external AIFM’ or an ‘internal AIFM’, depending on the legal form of the AIF. Where the legal form of the AIF permits an internal management and the AIF’s governing body has chosen not to appoint an external AIFM, the AIF will be ‘internally managed’. The ‘external AIFM’ is the legal person appointed by the AIF which will be responsible for managing the AIF. AIFs structured as a common fund (fonds commun de placement) or société en commandite spéciale cannot act as an internal AIFM and must appoint an external AIFM.

The following structures may be used by Luxembourg AIFMs:

• Chapter 16 management companies under the Undertakings for Collective Investment (UCI) Law;
• internally managed UCIs under Part II of the UCI Law;
• internally managed specialised investment funds (SIFs) under the SIF Law;
• internally managed sociétés d’investissement en capital à risque (SICARs) under the SICAR Law;
• any internally managed Luxembourg AIF which is not regulated under any of the product laws; and
• any Luxembourg entity adopting the status of AIFM and appointed in such capacity by an AIF.

In practice, most Luxembourg AIFMs are external AIFMs and are generally set up in the form of a Luxembourg private limited liability company (société à responsabilité limitée (S.àr.l.)) or a public limited liability company (société anonyme (SA)).

Answer ... In case of an internal AIFM, the AIF itself will be directly subject to the provisions and requirements of the AIFM Law. The AIF itself will then have to seek authorisation as an AIFM, unless the assets under management do not exceed the threshold set out in Article 3(2) of the AIFM Law.

Internally managed AIFs cannot engage in any activities other than the activities of internal management of the AIF as referred to in Annex I of the AIFM Law.

External AIFMs may engage in the activities listed in Annex I of the AIFM Law (ie, portfolio and risk management, administration and marketing of AIFs and activities relating to the assets of the AIF). They may also, by derogation and under certain conditions, provide the following additional services:

• management of portfolio of investments, including those owned by pension funds and institutions for provision of occupational retirement in accordance with mandates given by investors on a discretionary, client-by-client basis; and
• non-core services (ie, investment advice, safekeeping and administration regarding shares of UCIs, receipt and transmission of orders in relation to financial instruments, only if the investment management functions are provided).

An AIFM which is an internally managed AIF must have an initial capital of at least €300,000; whereas an external AIFM must have an initial capital of at least €125,000, subject to such additional own funds requirements as may be applicable pursuant to the AIFM Law.

Answer ... An AIFM must either be authorised or registered, based on the following criteria.

An AIFM must be ‘registered’ if it manages, directly or indirectly, portfolios of AIFs whose aggregate assets under management do not exceed the following thresholds:

• €100 million, including assets acquired through the use of leverage; or
• €500 million, if the AIFs are not leveraged and have no redemption rights during a period of five years from the date of initial investment in each AIF.

Registered AIFMs are required only to comply with the ‘de minimis’ obligations as set out in paragraphs 3 and 4 of Article 3 of the AIFM Law, as follows:

• Register with the Commission de Surveillance du Secteur Financier (CSSF) and identify the AIFs that they manage to the CSSF;
• Comply with minimum reporting obligations (ie, provide the CSSF with regular information on the main trading instruments, the principal exposures and concentrations of the AIFs); and
• If they no longer satisfy the first two conditions set out above, inform the CSSF and apply for authorisation within 30 calendar days.

Registered AIFMs may not benefit from the marketing passport or any other rights granted under the AIFM Law, unless they opt in.

Should any of the above thresholds be exceeded or should the AIFM intend to benefit from all rights under the AIFM Law, it shall apply to the CSSF for an authorisation to act as an ‘authorised AIFM’.

Answer ... Conducting the activities of an AIFM in Luxembourg is subject to the prior authorisation of the CSSF.

The requirements for authorisation as an AIFM include the following:

• shareholding structure (source of financing, qualified holdings): the holder of a qualifying holding shall be of good repute and suitable to exercise its powers;
• governing bodies and senior management:
• • the persons who effectively conduct the business of the AIFM shall be of sufficiently good repute and experienced in relation to the investment strategies of the AIF managed by the AIFM;
  • their names (and successors) shall be communicated beforehand to the CSSF; and
  • other requirements regarding the minimum number, location, qualification, task allocation and incompatibilities must be fulfilled;
• capital requirements (initial share capital, own funds and additional own funds requirements);
• internal governance and internal control (operational functions, risk management, compliance functions and internal audit function);
• location of the head office and registered office in Luxembourg;
• infrastructure (own premises, IT systems, cloud computing, outsourcing and delegation);
• financial and business forecast;
• performance of core functions by the AIFM (portfolio and risk management);
• adequate systems, procedures and policies for conflict of interest management risk management and liquidity management;
• valuation of assets: a proper and independent valuation must be conducted at least once a year by an independent external valuer or the AIFM itself; and
• remuneration policies which are in line with the risk profile of the AIFs that the AIFM manages.

Answer ... An AIFM seeking authorisation from the CSSF must submit an application to the CSSF that includes the following information:

• the persons effectively conducting the business of the AIFM;
• the identities of the shareholders/members of the AIFM - whether direct or indirect, and whether natural or legal persons - that have qualifying holdings, and the amounts of those holdings;
• a programme of activity setting out the organisational structure of the AIFM, including information on how it intends to comply with its obligations regarding authorisation, operating conditions, organisational requirements, transparency requirements and, where applicable, requirements regarding the use of leverage, acquisition of control of non-listed companies and issuers, marketing conditions, third-country rules and requirements for marketing to retail investors;
• remuneration policies and practices;
• arrangements made for the delegation and sub-delegation of functions to third parties;
• investment strategies;
• location of the master AIF, if the AIF is a feeder AIF;
• management regulation or incorporation documents of each AIF that the AIFM intends to manage; and
• additional information regarding disclosure to investors, as per Article 21 of AIFM Law.

The authorisation process may vary on a case-by-case basis, but it generally takes between 12 and 18 months to obtain authorisation.

Authorisation granted to an AIFM by the CSSF is valid for all EU member states.

Authorised AIFMs are entered on a list by the CSSF. This entry is tantamount to authorisation and the AIFM concerned is notified by the CSSF.

Answer ... An authorised AIFM cannot act as depositary and cannot be a credit institution or an investment firm under the Luxembourg Law of 5 April 1993 on the financial sector. However, a registered AIFM can combine the status of credit institution or investment firm under the 1993 law.

An AIFM must, at least, perform portfolio management and risk management functions when managing an AIF.

An AIFM may additionally perform certain ancillary functions set out in Annex I (2) of the AIFM Law (eg, administration, marketing and other activities), but cannot provide solely ancillary services.

Moreover, an external AIFM may additionally provide:

• discretionary portfolio management services on a client-by-client basis; and
• non-core services (eg, investment advice) as set out in Article 5(4) of the AIFM Law.

However, it cannot exclusively provide such additional services; and it cannot provide the non-core services under the second bullet above without providing the services under the first bullet above.

Although AIFMs do not fall within the scope of Directive 2014/65/EU on Markets in Financial Instruments (MiFID II), they may be subject to certain requirements under MiFID II (eg, inducement rules) when they render such additional services.

Investment advisers may also be subject to the MiFID II provisions in addition to Article 24 of the 1993 law (eg, capital base requirements), and must be authorised as professionals of the financial sector in order to provide personal recommendations to clients.

Answer ... The right to impose any restrictions on the issue, redemption or transfer of interests in AIFs is generally vested in the managing general partner of the AIF or the board of managers/directors of the AIF (in case of an SA or S.à r.l.), and not the AIFM itself.

However, if the AIFM is also the managing general partner or the statutory manager, it can impose restrictions on the issue, redemption or transfer of interests in the AIFs for which it acts in its capacity as managing general partner or statutory manager.

Answer ... The CSSF will grant authorisation to an AIFM if it has received sufficient information in the application for authorisation on the identities of the AIFM’s shareholders or members - whether direct or indirect, and whether natural or legal persons - that have qualifying holdings, and on the amounts of those holdings. The final beneficial owner and the possible holdings, subsidiaries and branches of the AIFM, and generally all entities forming part of the group, must also be clearly identified.

The CSSF must be satisfied that the holder of a qualifying holding is of good repute and suitable to exercise its powers in order to ensure the sound and prudent management of the AIFM, assessed in light of the good repute, financial soundness and absence of suspicion of money laundering or terrorist financing of the proposed acquirer, the reputation and professional experience of those who will direct the business of the AIFM and compliance with prudential requirements by the AIFM.

The shareholders must finance the incorporation of the AIFM with their own funds and on their own behalf. Direct shareholders which are legal persons must have own funds at least equivalent to the amount they intend to invest in the AIFM (at cost after deduction of their other holdings). The financing arrangement of the holdings in the AIFM (eg, cash transfer mechanisms at group level) must be described.

The structure chosen for the establishment of a Luxembourg AIFM must be adequately justified and cannot bypass the legal and regulatory anti-money laundering/counter-terrorist financing requirements.

Answer ... An AIFM may, subject to the prior authorisation of the CSSF, delegate the exercise of one or more functions to third parties on its own behalf. The delegation must not result in the AIFM becoming a letterbox entity, and the AIFM must justify the entire delegation structure with objective reasons and effectively monitor the delegated activities on an ongoing basis. The delegate must be qualified and have sufficient resources to perform the tasks, and the persons effectively conducting the business of the delegate must be of good repute and sufficiently experienced.

The two core functions - that is, portfolio management and risk management - can be delegated only to undertakings which are authorised or registered for the purpose of asset management and subject to supervision by or the prior approval of the CSSF. Both functions cannot be delegated in full at the same time. In case of delegation to a third-country undertaking, cooperation between the CSSF and the supervisory authority of this third-country undertaking must be ensured, in addition to the above requirements. No delegation (or sub-delegation) can be made to the depositary or a delegate of the depositary, or to any entity which may give rise to conflict of interest, unless:

• the entity has functionally and hierarchically separated the performance of its portfolio or risk management tasks from other potentially conflicting tasks; and
• the potential conflicts of interest are identified, managed, monitored and disclosed to investors of the AIF.

Answer ... As a general rule, an external AIFM shall not engage in activities other than:

• investment management functions; and
• other additional functions performed with respect to AIFs as set out in Annex 1 of the AIFM Law.

However, an external AIFM can perform additional management of undertakings for collective investments in transferable securities, subject to authorisation under Directive 2009/65/EC.

By derogation, an external AIFM may additionally provide management services of investment portfolios, including those owned by pension funds and institutions for occupational retirement provision pursuant to Article 19(1) of Directive 2003/41/EC, in accordance with mandates given by investors on a discretionary, client-by-client basis in compliance with applicable provisions of the law of 30 May 2018 on markets in financial instruments and EU Regulation 600/2014 on markets in financial instruments.