Dodd-Frank: New regulations make it more complicated for Luxembourg investment funds to be distributed in the US, but legal experts say interest is growing.
While a new set of American regulations may add complexity to Luxembourg investment funds taking on the US market, legal experts say the door is far from closed, and interest is perking up, albeit from a low base.
The Grand Duchy is the world’s second largest investment fund centre, according to trade group Alfi, but its funds are not widely available in the US, which is the largest.
In a recent study, PwC found a total of two Grand Duchy-domiciled investment funds (out of a total of five European-domiciled funds) distributed in the US. That contrasts with 45,288 Luxembourg funds distributed in Europe and 4,129 Luxembourg funds distributed in the Asia-Pacific region, according to the consultancy’s Global Fund Distribution 2014 report, which was based on data from research firm Lipper and primarily examined mutual funds.
Earlier this month, law firm Allen & Overy hosted a conference for Luxembourg fund firms looking at entering the US market.
“We are seeing more interest from US investors in accessing the types of strategies run by European managers,” Marc Ponchione, an attorney with Allen & Overy’s Washington office, who presented at the seminar, said in an interview with Delano. “That has created somewhat more demand.”
The goal of the firm’s May 8 conference was to “help them understand the framework in which they should operate to attract US capital and operate in the US”.
New American rules
The 2010 Dodd-Frank reforms introduced changes in commodity trading rules, and “a significant number of Ucits funds might be affected”, Jean-Christian Six, an attorney with Allen & Overy’s Luxembourg office, told Delano following the event.
“Up until now, most private alternative fund managers could remain outside the scope of US regulations based on favourable exemption of licensing. Dodd-Frank eliminated that exception,” Ponchione explained.
Managers who have “some contact with US now have to be more careful how they conduct that operations; a lot of European managers qualify”.
“We expect there to be some additional guidance over the next six to 12 months, and we wanted to brief clients on what we think the SEC might do and how it might impact their business,” the Washington-based attorney stated.
For example, “we’re hearing, informally, that there may be a sort of market friendly recognition of marketing practices, so that a manager might not have to hire a third party to place shares, assuming they have limited activities and a limited number of solicitation events,” Ponchione said.
However, investment firms “should be mindful of state registration requirements” that can come into play if they are not registered with the SEC, which is a federal agency.
“If a non-US adviser registers with the SEC, it is exempt from registration with the states, although they remain subject to anti-fraud state statutes and may need to pay a ‘licensing’ fee,” Baker & McKenzie reported.
Luxembourg funds: “Although it looks complex, it’s feasible”
According to Six, “traditionally many Luxembourg funds avoided US investors to avoid addressing US tax and regulatory issues, which are quite different than what we have to deal with in Europe. But the US is a large market, and you cannot disregard the US as a potential market. We are seeing clients offer Luxembourg funds to US investors, either directly or through feeder funds. Although it looks complex, it’s feasible. You have to address a number of tax and regulatory issues.”
So, will more EU-based fund firms look for clients across the Atlantic? Six said: “Yes, we expect a growing number of European asset managers to offer, to a certain extent, their funds to US investors.”