Luxembourg added an extra layer of regulation when it adopted the Alternative Investment Fund Managers Directive. This can be frustrating, time consuming and costly for alternative investment funds being sold only to well informed investors. The government has acted.
The AIFMD is a manager regulation. The text states that only the alternative fund management company needs to be regulated to enable the funds they administer to benefit from borderless “passported” distribution around the EU. However, to add an extra level of security, the Luxembourg government decided that the fund also needed the OK from the national regulator, the CSSF. As well, certain substantial changes in the way the fund operates thereafter needs approval too.
No AIF regulation
“There is no provision in the directive for the fund to be supervised,” noted Jacques Elvinger, partner at the law firm Elvinger Hoss Prussen, “that is why there was need for change.” The proposed reserved alternative investment fund will, if certain criteria are met, not need this regulatory approved. It must be proven that the fund is only destined for sophisticated investors such as financial institutions and very wealthy individuals or families. Also, the fund will need to be run by an approved, regulated management company.
Thus the RAIF will be supervised by proxy. “It is the manager who must be authorised and has to ensure that the fund complies with specified rules,” explained Susanne Weismüller, senior legal adviser at the Association of the Luxembourg Fund Industry. This will include regular reporting to the regulator on the RAIF.
She agrees that cutting time-to-market is the key motivation for this new fund vehicle. “The RAIF will not have to be approved by the regulator before taking up business,” she said, “this is in contrast to existing alternative investment funds such as UCI part II funds, specialised investment funds and investment companies in risk capital [SICARs].” With all this in place, the RAIF will be eligible for the prized European Union single market “passport” which facilitates borderless distribution.
At the moment, if an alternative investment manager wants to launch an unregulated fund with an EU passport they have to use a company structure in Luxembourg. This might be a limited company or a limited partnership. These forms work well for real estate and private equity investments, but it can be ill suited to hedge fund strategies.
Also, the RAIF is in line with regulation seen elsewhere, making it relatively easy to replicate existing funds from other jurisdictions. The rules and structure draw on Luxembourg’s SIF and SICAR regimes. This includes how “well-informed investors” are defined, the rules on eligible assets or investment policies, and risk diversification principles. A 0.01% subscription tax will be levied on total net assets in most cases.
Ready for summer
“We expect significant demand for this new vehicle, comparable to the demand for the special limited partnership,” Weismüller said. “We illustrate the main features of the new vehicle during our conferences or roadshows abroad, and the audience always seems to be very interested,” she added. The bill of law was submitted to the Chamber of Deputies on 14 December 2015, and Elvinger says that his best guess for parliamentary approval is “the end of May or the beginning of June.”