On 27 March 2023, Luxembourg's Parliament introduced a new bill of law with the purpose of providing a modernize Luxembourg investment funds toolbox and enhance the attractiveness and competitiveness of the Luxembourg financial center to suit the needs of investment fund investors and managers (the "Bill of Law").
The Bill of Law suggests amendments to the 5 sectoral laws regulating investment funds (i.e., SICARs, SIFs, RAIFs, UCI Part II Funds) as well as to their investment managers in Luxembourg, (i.e., AIFMs).
These adjustments aim also to ensure that Luxembourg remains at the forefront of progress in the constantly implementing pragmatic legal and supervisory framework providing a unique and innovative toolkit of investment products as well as consolidating its role as forward-looking and innovative global player. The Bill of Law is welcomed by the Luxembourg financial market participants.
The modernisation includes key changes including to (i) the amendments to the threshold of "well-informed investor" definition, (ii) marketing to retail investors, (iii) extension of the period during which the minimum capital must be reached, (iv) additional prohibitions on the issuance and redemption of units, (v) allowing AIFMs to use tied agents and (vi) amendments to the rules applicable in case of voluntary liquidation.
The proposed changes cover the SIF Law, RAIF Law, and SICAR Law, as well as the AIFM Law and the UCI Law.
ANALYSIS OF THE KEY COMMON AMENDMENTS APPLICABLE TO SIF, RAIF, SICAR
Amendment to the threshold of "well-informed investor" definition
The SIF, SICAR and RAIF laws use the notion of "well-informed investors" for the eligibility requirements for investors. The Luxembourg lawmakers in order to align with the European requirements, have proposed to reduce the minimum investment capital threshold from EUR 125,000 to EUR 100,000 to qualify as well-informed investor.
Clarifications on marketing to retail investors
The Bill of Law removes any uncertainty regarding the possibility of marketing SIF, SICAR and RAIF to well-informed investors established or residing in Luxembourg, who qualify as retail investors within the meaning of the AIFM law.
In a process of harmonisation of the different Luxembourg laws, the lawmakers confirm that SICARs and SIFs should be distributed in Luxembourg to retail investors providing that they qualify as well-informed investors. The Bill of Law also eliminates ambiguity and open this possibility for RAIF to be now distributed to retail investors qualifying as well-informed investors, in Luxembourg.
Extension of the deadline (to 24 months) to reach the minimum subscribed capital
Currently the subscribed capital of a RAIF and a SIF should reach the minimum threshold of EUR 1,250,000 within a period of 12 months following the CSSF authorisation or incorporation of the investment fund. While the minimum threshold for the SICAR is EUR 1,000,000 within a period of 12 months following the CSSF authorisation.
However, it is market practice for a SIF, SICAR or RAIF with an illiquid strategy to receive only capital commitments up to the minimum required threshold within the 12 months period without the need to call for contribution in the same period.
Therefore, the Bill of Law extends the 12 months period to 24 months period allowing investment fund managers to identify investment opportunities or to negotiate terms with the possibility to use subscription facility before calling for capital to optimize financial resources.
Prohibitions on the issuance and the redemption of units upon liquidation of depositary
The Bill of Law prohibits the issuance and redemption of securities or interests when the investment fund does not have a depositary, or when the depositary is in liquidation or a similar measure.
The CSSF is also empowered to suspend redemptions when legislative, regulatory, or statutory provisions concerning the SICAR's activities and functioning are no longer met to protect investors. The aim is to protect investors, for example in cases where the net asset value (NAV) of the investment fund is not calculated according to the regulatory rules.
NEW INDIVIDUALLY APPLICABLE CHANGES TO SIF, RAIF, SICAR, AIFM or UCI PArt II
SICAR/SIF: removal of the two-month notice period to replace the depositary
The Bill of Law deletes to the SICAR and SIF laws, the reference to the 2 months' notice period applicable to the replacement of the depositary (which has been removed or has voluntary terminate the agreement) and would require now a freely determinable period notice by the parties to be implemented into the depositary agreement.
The Bill of Law introduces a new sanction that in the absence of the appointment of a new depository at the end of the contractual notice period, the CSSF will proceed to remove the SICAR, or SIF from the CSSF official list. In this case the outgoing depositary shall take all necessary measures for the proper preservation of the interests of the holders of securities or interests, including the obligation to maintain or open all necessary accounts for the safekeeping of the various assets of the funds until the completion of the liquidation.
The amendment aims to ensure the protection of investors and to align the investment fund laws with the CSSF administrative practice.
SICAR/SIF: new rules applicable to the liquidation
The Bill of Law complements the rules appliable to the liquidation by tweaking the conditions for the appointment of the supervisory commissioner (commissaire de surveillance) and its duties.
RAIF: New rules for the recording of the RAIF constitution by the notary
RAIF's constitution must be recorded by a notarized affidavit (acte de constat) within 5 working days from its incorporation date, regardless the legal form the investment vehicle. However, the Bill of Law changes this requirement for certain RAIFs. If the RAIF has a corporate form and was incorporated using a notarial instrument such as SARL, SA, or SCA, it would no longer need to record its incorporation before a notary. Only RAIFs established with a private deed would still need to comply with the current recording rules.
In addition, the RAIFs are required to inform the RCS (Registre de Commerce et des Sociétés) within 20 working days of any changes that occur after the implementation of such changes, to keep the disclosed information on the RCS website up to date (e.g., change of AIFM or registered office).
SIF/RAIF: New subscription tax (taxe d'abonnement) exemption criteria
The Bill of Law also clarifies the conditions to benefit from the exemptions on the subscription tax (taxe d'abonnement). It is intended that the RAIF and the SIF qualifying as European Long-Term Investment Fund (ELTIFs) or as short-term money market fund would also benefit from the subscription tax (taxe d'abonnement) exemption.
SICAR: changes to the withdrawal authorisation for a compartment
Similar to SIFs, the CSSF will be authorized to withdraw authorization for one or more compartments of a SICAR if the organization and operation no longer comply with applicable legislative, regulatory, or statutory provisions. In this respect the CSSF would only withdraw the authorisation of the problematic compartment from the CSSF official list and not of the SICAR, due to the segregation of the compartment's assets and liabilities and the interest of investors investing into other compartments of the same vehicle.
SICAR: new requirement to report substantial changes to CSSF
Similar to SIFs, SICARs will be required to promptly inform the CSSF of any substantial changes made to the information submitted during the CSSF authorization request examination.
SICAR: delegation of management to third parties
The Bill of Law suggests that Luxembourg manager of the SICAR subject to AIFM Law will be authorised to delegate all or part of its functions to third parties in accordance with requirements of Article 18 of the AIFM Law, meaning they shall notify the CSSF thereof the delegation arrangements to become effective.
AIFM: possibility to appoint tied agents
The Bill of Law introduces the opportunity for AIFM to appoint an entity or natural person known as a "tied agent", which acts on behalf of the AIFM within the context of that AIFM's authorization and under its full responsibility within the meaning of Article 1(1) of the Luxembourg law of 5 April 1993 on the financial sector, as amended (the "1993 Law").
The role of a tied agent under the 1993 Law is inter alia the promotion of investment and ancillary services of the investment firm or credit institution to the clients and prospectives clients (in this case the services of the AIFM when promoting the investment funds).
It means that if an AIFM appoints a tied agent for pre-marketing and marketing purposes, the AIFM must comply with the same obligations as credit institutions and investment firms under the 1993 Law. This includes conducting due diligence before appointing the tied agent, monitoring their activities, and taking necessary measures to prevent any negative impact their non-financial sector activities within the meaning of the 1993 Law could have on the activities carried out by tied agent on behalf of the AIFM.
AIFM: new rules applicable in case of liquidation
The Bill of Law introduces new provisions relating to the non-judicial liquidation regime of the AIFM by giving more control to the CSSF. Hence the CSSF should approve the nomination of the appointed liquidator and will continue to monitor the AIFM until the closing of the voluntary liquidation process.
UCI part II: new corporate forms available (SCA, SCS, SCSp, Sàrl)
Currently the SICAVs subject to Part II of the UCI Law should only adopt the legal form of a public limited liability company (société anonyme - SA). The Bill of Law introduces the possibility to opt for new legal form such as limited partnership by shares (Société en Commandite par Actions - SCA) or common limited partnership (Société en Commandite Simple - SCS) or special limited partnership (Société en Commandite Spéciale - SCSp) or a private limited liability company (Société à Responsabilité Limitée - Sàrl), or a cooperative organized as a public limited liability company.
The SICAVs marketed to well-informed investor investors with a partnership legal form such as SCA, SCS and SCSp should be managed by an authorised AIFM.
What's next?
The Bill of Law will now be discussed by the members of the Chamber of Deputies and hence it remains subject to change. The final vote on the Bill of Law is subject to the Council of State's opinion to which the Bill of Law. Four days after its publication in the Official Journal of the Grand Duchy of Luxembourg, the act comes into force and becomes mandatory.
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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.