Answer ... The Alternative Investment Fund Managers (AIFM) Law sets out disclosure requirements towards both investors and the Commission de Surveillance du Secteur Financier (CSSF).
Article 21 of the AIFM Law requires that for each EU AIF managed and for each AIF marketed in the European Union, the AIFM make available certain information to investors before they invest in the AIF. This must include, among other things, information on:
- the investment strategy and policy of the AIF;
- the types of assets in which the AIF may invest;
- the techniques it may employ;
- the use of leverage;
- information on the identity of the service providers and the AIFM;
- investors’ rights;
- a description of the delegation by the AIFM and the depositary;
- the valuation procedure;
- liquidity risk management;
- fees and expenses;
- information on the issue and sale of interests;
- the net asset value of the AIF; and
- its performance.
Any preferential treatment of investors must also be disclosed in the constitutive documents of the AIF. AIFMs having recourse to leverage for investment purposes are subject to additional disclosure requirements.
Disclosure obligations also apply when an AIF acquires or disposes of, individually or jointly, control of a non-listed company, other than a small or medium-sized entity or a real estate special purpose vehicle. The AIFM must notify the acquisition of control by the AIF:
- to the non-listed company;
- to the shareholders; and
- to the CSSF, together with information regarding the consequences on the voting rights, the conditions subject to which the control was acquired and the date on which control was acquired.
Answer ... Registered AIFMs are subject only to the light reporting requirements as set out in Article 3(3) of the AIFM Law. Among other things, the information required includes details of the main trading instruments, the principal exposures and the most important concentrations of the AIFs they manage.
Authorised AIFMs must ensure that for each EU AIF managed and each AIF marketed in the European Union, an annual report is made available for each financial year no later than six months from the end of the financial year. This must be provided to investors upon request and be made available to the CSSF and the home member state of the AIF. It must contain at least the information set out in Article 20(2) of the AIFM Law (ie, balance sheet, income and expenditure account, report on activities, any material changes in the information listed in Article 21 of the AIFM Law, total amount of remuneration paid by the AIF to its staff, carried interest paid by the AIF and remuneration broken down by senior management).
Authorised AIFMs must regularly report to the CSSF on:
- the principal instruments and markets in which they trade;
- the principal exposures and most important concentrations;
- the main categories of assets (including percentages subject to special arrangements due to their illiquid nature); and
- the risk profile and risk management systems employed.
Answer ... Governance requirements apply to internally managed AIFs and AIFMs authorised under Chapter 2 of the AIFM Law.
The governing body of an AIFM or internally managed AIF must be composed of at least three members, who must possess sufficient skills and professional experience, and be of good repute. The number of hours dedicated to professional engagements cannot exceed 1,920 hours per year for each member of the governing body; and the number of mandates in regulated entities and in operating companies cannot exceed 20 mandates. The governing body must meet at least once every quarter and its work must be documented in writing.
Additional requirements apply to the senior management of the AIFM. Each AIFM must have at least two conducting officers, permanently located in Luxembourg, bound by a full-time employment contract. Certain derogations may be granted, depending on the size of the assets under management of the AIFM. The conducting officers must possess sufficient skills and professional experience in light of the type and investment strategies of the AIFs, and demonstrate their good repute. Conducting officers must be members of the executive committee of the AIFM.
There are certain incompatibilities in the exercise of the functions in order to ensure the independence of the management body of the AIFM.
Answer ... Risk management requirements apply to AIFMs. There must be a functional and hierarchical separation of the risk management function from the operating units and from the portfolio management functions.
AIFMs must also implement adequate risk management systems in order to identify, measure, manage and monitor risks. Such risk management systems must be reviewed and least once a year and be adapted when necessary.
AIFMs must comply with the following minimum requirements:
- Conduct due diligence when investing on behalf of the AIF in accordance with the investment strategy, objectives and risk profile of the AIF;
- Ensure identification, measure and monitoring on an ongoing basis (including through use of stress testing procedures) of the risks associated with each investment position of the AIF and the overall effect on the AIF’s portfolio; and
- Ensure that the risk profile of the AIF corresponds to the size, portfolio, structure and investment strategies and objectives of the AIF, as set out in the constitutive documents of the AIF.
Finally, AIFMs must set a maximum level of leverage which they may employ on behalf of the AIF and limit on the reuse collateral or guarantee granted under a leveraging arrangement.