Luxembourg Publishes Bill of Law Aimed at Modernization of Product Laws Including Part II AIFs

The Luxembourg government published bill of law n°8183 (the “Bill”) on 24 March 2023 that amends five existing laws on alternative investment funds (“AIFs”) and alternative investment fund managers (“AIFMs”), namely the UCI Act¹, the SICAR Act², the SIF Act³, the RAIF Act⁴ (the “Product Laws”) and the AIFM Act⁵.

The objective of the Bill is to improve and modernise the Luxembourg toolbox relating to Luxembourg AIFs in light of recent and upcoming changes in European Union law, amongst others, the adoption of Regulation (EU) 2023/606 that amends Regulation (EU) 2015/760 on European long term investment funds (“ELTIF”) on 15 March 2023⁶.

This OnPoint summarises the key changes that are contemplated by the Bill.

1. Reform of AIFs under part II of the UCI Act

Contrary to AIFs governed by the RAIF Act, the SIF Act and the SICAR Act, units in AIFs under part II of the UCI Act (“Part II AIFs”) are destined to be made available to the public and are consequently not reserved to a specific group of investors, namely the ‘well-informed investors’. This means that any type of investor, including retail investors, may invest in a Part II AIF. Part II AIFs have received heightened attention since the reform of the ELTIF because it is generally expected that many Luxembourg ELTIFs will take the form of Part II AIFs.

Historically, a Part II AIF is a fund that is very similar to a UCITS but does not fulfil at least one of the conditions required for the UCITS⁷. The legal framework of Part II AIFs is closer to that of the UCITS than the framework applicable to other Luxembourg AIFs. The changes introduced by the Bill bring Part II AIFs closer to AIFs that are subject to other Product Laws, such as the reserved alternative investment fund under the RAIF Act (“RAIF”). The requirement for a Part II AIF to be authorized by the CSSF will however remain.

Set out below are the main changes the Bill makes to Part II AIFs:

• Additional legal forms: Currently, a Part II AIF with variable capital can only take the form of a limited liability company (société anonyme; “SA”). As is the case for specialized investment funds under the SIF Act (“SIFs”) and RAIFs, the Bill allows a Part II AIF to take the form of a corporate partnership limited by shares (société en commandite par actions; “SCA”), a common limited partnership (société en commandite simple; “SCS”), a special limited partnership (société en commandite spéciale; “SCSp”), a private limited liability company (société à responsabilité limitée; “SARL”), or a cooperative company taking the form of an SA (société cooperative sous forme d’une société anonyme; “SCoSA”). Where a Part II AIF takes the form of an SCA, SCS or SCSp, it must appoint an external AIFM authorized in the EEA – as is currently the case with RAIFs. The Bill will not introduce changes that would enable a Part II AIF taking the form of SCA, SCS or SCSp to be managed by a sub-threshold AIFM or for an SCA or SCS to be internally managed⁸.
• Determination of issuance price of units: For a closed-ended Part II AIF, the constitutive documents can freely determine the issuance price. The requirement to refer to the net asset value (by reference to UCITS) only remains applicable for open-ended Part II AIFs.
• General meeting of shareholders: For Part II AIFs taking a corporate form (e.g., SA or SCA), the Bill states that the convening notice for the annual general meeting may indicate where the annual report (including the management report and the audit report) is made available and the annual report may be sent to relevant shareholders if they request it. This differs from the Companies Act⁹ which requires corporates to provide the actual annual report with the convening notice. Furthermore, to determine the quorum, the convening notice may reference the number of shares which are outstanding on the fifth day preceding the general meeting at midnight Luxembourg time, as opposed to determining the number of the shares on the day of the general meeting, as is usually required under the Companies Act.
  
• Required designation for SICAVs: The The name of the Part II AIF with variable capital is to be followed by the designation of the adopted legal form and “SICAV-OPC partie II¹⁰”. The Bill follows the approach previously required by the SIF Act for SIFs and by the RAIF Act for RAIFs¹¹. Interestingly, no similar requirement has been inserted by the Bill for the designation of common funds (fonds commun de placement; FCP).

2. Other changes for AIFs under the Product Laws

In addition to the changes affecting Part II AIFs, the Bill will insert a number of other changes across the various Product Laws. The most important are summarized below.

• Adjusted definition of “Well-informed investors” for RAIFs, SIFs and SICARs: Access to RAIFs, SIFs and SICARs¹² is limited to ‘well-informed investors’, as such term is defined in the RAIF Act, the SIF Act and the SICAR Act, respectively. Professional investors in the meaning of MiFID¹³ are always well-informed investors and the Bill does not change this. To date, investors who are not professional investors could only be treated as well-informed investors if they confirmed in writing that they were well-informed investors and invested, or committed to invest, at least €125,000 (or the equivalent amount in a freely convertible currency). The Bill reduces this threshold to €100,000, thereby aligning with the threshold in the EuVECA Regulation¹⁴ and the EuSEF Regulation¹⁵. Contrary to AIFs managed under the EuVECA Regulation and the EuSEF Regulation, marketing an RAIF, SIF or SICAR to well-informed investors who are not professional investors is not covered by the AIFMD passport.
  
  
• Extension of the duration to meet €1,250,000: Currently, the minimum threshold of €1,250,000 must be met within the following timeframes – for a Part II AIF, within six months of its authorization by the CSSF; for a SIF, within 12 months of its authorization by the CSSF; and for a RAIF, within 12 months of its establishment. The Bill extends this period to 12 months for Part II AIFs and to 24 months for SIFs and RAIFs. For SICARs, this minimum threshold is currently €1,000,000 and must be met within 12 months from the date of the SICAR’s authorization – the Bill extends this to 24 months.
  
  
• Withdrawal of the depositary: The Bill amends the UCI Act (where this change also concerns UCITS), SIF Act and SICAR Act to bring into law the CSSF’s administrative practice of withdrawing a Part II AIF, SIF or SICAR from its official list when the depositary resigns. Enacting this practice into law aims to avoid the AIF contesting the CSSF’s decision to withdraw the AIF from its official list. The Bill clarifies that any depositary agreement must provide for a notice period that would allow time for the depositary to be replaced. Whilst this is widely the case in practice, we note that notice periods (generally three months or 90 days) are generally too short to properly organise the replacement of the depositary. The Bill does not insert a minimum notice period. Finally, the Bill requires that the depositary who resigned shall continue after its effective resignation to safeguard the interests of the investors, including at least to keep the AIF’s bank accounts open.
  
  
• No article 34 formalities for RAIF established by notarial deed: Article 34 of the RAIF Act requires a Luxembourg notary to acknowledge that the RAIF has been established and that an external AIFM has been appointed within five Luxembourg business days of the establishment of the RAIF. The Bill removes this requirement where the RAIF is established by notarial deed. Establishment under a notarial deed is mandatory for RAIFs adopting one of the corporate forms such as the SA or the SCA. However, RAIFs taking the form of an SCS or SCSp are generally established by private deed, meaning that the formalities of article 34 of the RAIF Act continue to apply to these RAIFs.
  
  
• Marketing of RAIFs in Luxembourg: The Bill clarifies that RAIFs can also be marketed to non-professional investors in Luxembourg, provided they qualify as well-informed investors.

3. Changes affecting management companies and AIFMs

Assessment of ownership to ensure sound and prudent management of an AIFM: Persons holding a qualified majority¹⁶ in a Luxembourg AIFM are subject to approval by the CSSF to ensure sound and prudent management of the AIFM¹⁷. The Bill inserts provisions into chapter 16 of the UCI Act and the AIFM Act to bring into legislation the CSSF’s criteria to assess ‘sound and prudent management’, which is currently just based on the CSSF’s administrative practice. The good repute and the financial strength of the persons holding a qualified majority must then be assessed and monitored by law to determine sound and prudent management. More precisely, the Bill introduces into legislation a requirement that the CSSF assesses (i) the structure of the ownership to ensure transparency and effective supervision in the exchange of information between competent authorities and (ii) whether any change in the qualified majority will increase the risk of money laundering and terrorist financing.

Liquidation of AIFMs: The Bill clarifies the rules to be followed in case of a voluntary liquidation of the AIFM. The liquidator must be approved by the CSSF and the AIFM will continue to be under the supervision of the CSSF until the closing of the liquidation process. The liquidation report must be subject to review of the statutory auditor of the AIFM. The Bill also introduces rules for a judicial liquidation of the AIFM that are based on rules for the judicial liquidation of regulated AIFs.

Appointment of tied agents by AIFMs: As is the case for UCITS management companies¹⁸, the Bill enables AIFMs to appoint tied agents. Tied agents are non-regulated persons or companies appointed by credit institutions or investment firms under MiFID for the purposes of promoting their services, soliciting business, or receiving orders from clients or potential clients and transmitting them, placing financial instruments, and providing advice in respect of such financial instruments and services offered. Where an AIFM appoints a tied agent, the AIFM will be subject to the same obligations as credit institutions and investment firms. Pre-marketing and marketing of AIFs through tied agents will no longer require the appointment of an investment firm by the AIFM.

4. Tax changes

No subscription tax for ELTIFs: Luxembourg ELTIF will not be subject to subscription tax irrespective whether of they adopt the form of a Part II AIF, SIF or RAIF.

No subscription tax for investments through PEPP: The Bill also exempts from the subscription tax Part II AIFs, SIFs or RAIFs (or any compartment thereof) if they are reserved to individual investors acting through a pan-European Personal Pension Product (“PEPP”) in line with regulation (EU) 2019/1238.

Modernization of subscription tax process: The Bill provides for certain additional updates of the subscription tax rules, notably by updating the definition of money market funds to benefit from the exemption of the subscription tax and by organizing the exchange of information between the CSSF and the Luxembourg indirect tax authority¹⁹ for the application of the exemption or the reduced subscription tax of certain Part II AIFs, SIFs and RAIFs.

5. Next steps

The Bill will go through the Luxembourg legislative process and is expected to be adopted soon. No specific grand-fathering provision is contemplated in the current version of the Bill.