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Proposed Luxembourg legislation introduces changes affecting SIFs, SICARs and Part II Funds

April 2016 - Finance. Legal Developments by Chevalier & Sciales .

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The Luxembourg government has placed before parliament on January 18 draft legislation amending provisions relating to specialised investments funds (SIFs), risk capital investment companies (SICARs) and non-UCITS funds issued under Part II of the grand duchy’s collective investment fund legislation. The proposals would notably restrict SIF funds and sub-funds that invest in so-called exotic assets to professional investors, a tighter definition than that for eligibility for SIF investments in general.

Under the SIF law of February 13, 2007, specialised investment funds may invest in virtually any type of asset class, including illiquid and other assets that are hard to value. Investment is restricted to three categories of ‘well-informed investor’, including professional investors as defined by appendix II to the EU’s MiFID II directive and institutional investors. Under existing administrative practice of Luxembourg’s Financial Sector Supervisory Authority, the latter may include professionals who manage significant volumes of assets but are not subject to specific financial services legislation.

In addition, other investors are eligible to invest that qualify neither as institutions nor professional investors, but that declare in writing their well-informed status, invest a minimum of €125,000 in the SIF, or are certified by a bank or fund management company as possessing the expertise, experience and knowledge to be able to appraise investment in the SIF adequately.

The proposed changes to the eligible investment rules for SIFs would restrict to professional investors alone the ability to invest in SIFs or compartments that hold non-traditional assets, including wine, diamonds, insurance contracts, economic rights to sports professionals, art and animals.

As a standard rule, such SIFs must ensure that their investors all qualify as professional investors and any existing vehicles must of need be redeem the shares, units or interests of other types of investor. The legislation would authorise the CSSF to grant derogations to SIFs that invest in exotic assets and whose constitutional documents allow investment by non-professional investors, but there are no transitional arrangements foreseen for Funds that do not benefit from such an exemption.

The legislation also includes amendments to the SICAR law of June 15, 2004 to bring it into line with the SIF legislation as well as with changes to company law, especially the introduction of special limited partnerships and changes to the provisions applicable to common limited partnerships as part of the AIFMD implementation law of July 12, 2013.

The changes mostly correspond to existing practice, and include prohibiting the issuance of interests when a SICAR is in the process of liquidation; enabling the CSSF to remove the authorisation of an individual SICAR compartment, but not the structure as a whole; requiring a SICAR to be authorised before launching activities and requiring its management body as well as portfolio managers to meet suitability tests; requiring notification of substantive changes, including to key personnel; confirming the CSSF’s ability to order the suspension of a SICAR’s redemptions in the interests of investors; enabling the regulation to impose financial penalties on the management board, managers and officers of a SICAR, as well as on service providers; and confirming that non-cash investments in a SICAR are subject to a report from a statutory auditor.

Requirements on a SICAR to establish a risk management system and other stipulations with regard to delegation will be subject to a transition period up to the end of this year.

The draft bill also removes a requirement that undertakings for collective investment subject to part II of Luxembourg’s investment fund law of December 17, 2010, which implemented the UCITS IV directive into national legislation, must issue units at net asset value, plus commission and expenses.

The legislation would allow constitutional documents of a Part II fund to set different rules determining the issuance price per unit. For instance, alternative funds investing in private equity or real estate could issue units at a fixed price, with an equalisation mechanism established on a contractual basis applicable to the issue of units to subsequent investors.