Alternative Investment Management Association
Jacques Elvinger and FrÃ©dÃ©rique Lifrange
Elvinger, Hoss & Prussen
Luxembourg is about to adopt a new investment vehicle in replacement of the existing institutional fund. This new vehicle will offer greater flexibility in terms of corporate structure and a lighter prudential regime. Besides, the scope of eligible investors will be widened so as to cover not only institutional investors but also other types of well-informed investors, including sophisticated private investors.
On 5 October 2006, the Luxembourg government deposited with Parliament a bill on specialised investment funds (the Bill).
The object of the Bill is to replace the law of 19 July 1991 concerning undertakings for collective investment (UCIs) the securities of which are not intended to be placed with the public (the Law of 1991) by a new law on specialised investment funds.
The Law of 1991 governs UCIs reserved for one or several institutional investors (Institutional UCIs). The Law of 1991 thus differs from the law of 30 March 1988 relating to UCIs (Law of 1988) and the law of 20 December 2002 relating to UCIs (Law of 2002) which govern UCIs, the securities of which are intended to be placed with the public by means of a public or private offer.
In all other respects, notably as regards the rules applicable to the operation and monitoring of Institutional UCIs, the Law of 1991 refers to the provisions of the Law of 1988, which governs UCIs subject to part II of that law (i.e. non-EU harmonised UCIs). Apart from the possibility of having a single investor and the obligation to be reserved for institutional investors, the regime applicable to Institutional UCIs is, therefore, similar to the one applicable to non-EU harmonised UCIs, which may be distributed to retail investors. However, in light of the fact that institutional investors do not need a protection similar to the one that needs to be assured for retail or private investors, the Luxembourg regulator (Commission de Surveillance du Secteur Financier or CSSF) is, in practice, more flexible in certain respects, notably regarding diversification rules.
Due to the cross-reference it contains to the Law of 1988, the Law of 1991 must be amended or redrafted by 13 February 2007, after which the Law of 1988 will be repealed as a result of the transitional provisions included in the Law of 2002 which implements the UCITS Directive 85/611/EC, as amended, (the so-called UCITS III regime), into Luxembourg law.
The purpose of this contribution is to give a brief overview of the main features of the Bill.
1. A self-contained law on SIFs
Rather than modifying the Law of 1991, the approach adopted by the Bill is to replace it by instituting a self-contained law providing for a more flexible corporate framework and a lighter prudential regime than that applicable to UCIs which may be distributed to retail investors. To further distinguish the vehicles created under this new regime from UCIs governed by the Law of 2002, the Bill refers to them as "Specialised Investment Funds" (SIFs).
2. Flexibility with respect to eligible assets
Like part II of the Law of 2002 and in contrast to the law of 15 June 2004 relating to the investment company in risk capital (SICAR), the Bill allows significant flexibility with respect to the assets in which SIFs may invest. Accordingly, the new regime will be available for vehicles investing in any type of assets and pursuing any type of investment strategies, including alternative strategies. SIFs could, therefore, be used, inter alia, for the creation of transferable securities funds, money market funds, real estate funds, hedge funds, private equity funds and debt funds.
3. Maintaining the principle of risk spreading
Like UCIs governed by the Law of 2002 and UCIs currently governed by the Law of 1991, SIFs will have to invest in accordance with the principle of risk-spreading. The CSSF could, however, allow a lower level of diversification, as SIFs will be restricted to well-informed investors. It is expected that principles based investment restrictions will be applicable rather than quantitative investment restrictions.
4. Extending the concept of eligible investors to other types of well-informed investors
Eligible investors in SIFs will comprise, besides institutional investors, professional investors and other well-informed investors, who invest a minimum of 125,000€ or, have obtained an assessment, made by a credit institution or another financial sector professional, certifying their capability to appraise the contemplated investment and the risk thereof. This third category means that SIFs could be distributed to sophisticated retail or private investors. This should be particularly valuable in the context of the hedge fund industry, given the growing demand from private investors for access to alternative investments funds.
5. No requirement for a promoter
In contrast to UCIs which may be distributed to retail investors, SIFs will not be required to be set up at the initiative of an institutional promoter with significant financial resources approved by the CSSF. The CSSF will no longer check the financial standing of the investment managers of SIFs but focus on the good repute and expertise of the directors of the vehicle, in light of the investment policy.
The waiver of the requirement to have a promoter should boost the growth in Luxembourg of certain products where the expertise is developed by smaller institutions, like hedge funds.
6. Allowing the start of activities prior to regulatory approval
SIFs could be created and start their activities before having received regulatory approval, provided that an application for authorisation is filed with the CSSF within the month following their creation.
7. Flexible share capital structure
Like UCIs governed by the Law of 2002 and those currently governed by the Law of 1991, the minimum capitalisation for a SIF will be 1,250,000€. However, the time period within which this minimum must be reached is extended to 12 months after the authorisation of the vehicle, compared to 6 months for UCIs under the Law of 2002. Except for the fonds commun de placement (FCP), the reference should be the subscribed capital rather than the net assets but the issue premium can be included.
Furthermore, under the new regime, the possibility to issue partly paid shares should be extended to investment companies with variable capital (société d'investissement à capital variable or SICAV).
8. Other lighter requirements
Although SIFs will be subject to the supervision of the Luxembourg regulator, as is the case for UCIs created under the Law of 2002 and those currently governed by the Law of 1991, the Bill provides for a somewhat less strict regulatory regime. For instance, there is no requirement to publish a semi-annual financial report and the Bill does not provide for a specific schedule with respect to the minimum contents of the offering document.
In the same manner as UCIs created under the Law of 2002 and the Law of 1991, SIFs will have to appoint a depository which must be a Luxembourg credit institution or a Luxembourg branch of a foreign credit institution. However, the Bill does not require the depository to perform additional monitoring functions in relation to certain operations of the fund as imposed by the Law of 2002 and the Law of 1991. This lightening of the duties of the depositary should be particularly valuable in the context of hedge funds, notably in the light of the significant involvement of prime brokers.
9. Additional flexibility
Under the Bill, a SICAV will not be required to be a limited liability company (société anonyme) as is the case for SICAVs subject to the Law of 2002 or the Law of 1991. Under the new regime, a SICAV could also be established in the form of a partnership limited by shares (société en commandite par actions), a private limited company (société à responsabilité limitée), or a cooperative set up as a public limited company (société coopérative organisée sous la forme d'une société anonyme).
In addition, the conditions and procedures for the issue and redemption of shares or units are relaxed, compared to the rules applicable to UCIs governed by the Law of 2002 or those currently subject to the rules of the Law of 1991. In this regard, the Bill provides that the conditions and procedures applicable to the issue and, if applicable, the redemption of shares or units, is determined in the constitutive documents. As a result for example, there is no requirement that the issue price be based on the net asset value as it is the case for a SICAV governed by the Law of 2002 or the Law of 1991.
In the same manner as for UCIs governed by the Law of 1991, SIFs will be subject to the subscription tax (taxe d'abonnement) at a rate of 0.01% (compared to 0.05% for most UCIs existing under the Law of 2002). In the same manner as the Law of 2002, the Bill exempts from the subscription tax, the portion of assets invested in other Luxembourg UCIs subject to this tax, certain institutional cash funds and pension pooling funds. In respect of the latter, the Bill innovates by not requiring (contrary to the Law of 2002) that the participating pension schemes be of the same group and, by permitting individual sub-funds and classes reserved to pension schemes, to also benefit from the exemption.
11. Ensuring continuity for UCIs currently existing under the Law of 1991
Given that there are currently 193 UCIs governed by the Law of 1991 (source: CSSF, 5 October 2006), it is important to ensure that these entities may continue their investments with no impact other than formal amendments to their documentation, to bring them into compliance with the new regime. To this end, the Bill includes appropriate transitional provisions, ensuring continuity for UCIs presently existing under the Law of 1991, by providing that these UCIs will be automatically subject to the new law (i.e. will automatically become SIFs) and that all references in the constitutive documents of such UCIs to the Law of 1991, shall be construed as references to the new law.