Investment Funds in Luxembourg 2012 potx

Luxembourg’s solutions for UCIsA Common fund FCP or B investment company SICAV or SICAF These different entities may create multiple compartments, each with a different investment policy

Investment Funds

in Luxembourg

A technical guide – September 2012

8.2 UCITS 211

8.4 Accounting records, calculation of NAV and supporting documentation 2168.5 Subscriptions and redemptions of shares or units and payment of dividends 217

10.7 Investor information on conlicts of interest and voting rights 267

Appendices 311

Asset lows: a disappointing year

The last 12 months could be described as another year where

nothing much happened, with global assets under management

(“AuM”) remaining at around US$ 54 trillion A deeper analysis

shows that Europe and the US still make up 80% of the AuM

despite the never-ending focus on Asia Investment funds’ share

of the global AuM has fallen by around 5% overall, fueling more

discussion on costs and eficiency of the industry, and added

value of investment fund regulation There were, however, some

marginal bright spots: Hong Kong, China and Singapore saw

deposit products Some segments did comparatively well,

with ETFs reaching around US$ 1.4 trillion and hedge funds

somewhere around US$ 1.8 trillion In the alternative space,

debt funds are currently the hot asset class, relecting the

ongoing lack of credit from the traditional banking sources

Regulation: driving change

In contrast with what happened in the market, much has

happened on the regulatory front − most of which is covered

extensively in this publication Of particular note is the progress

on the Alternative Investment Fund Managers (AIFM) Directive:

the inal Directive was published in June 2011, kicking-off

intensive preparation for implementation; at the time of

writing, the European Commission was expected to adopt the

implementing measures (“Level 2”) after the 2012 summer

vacation – a little less than a year before implementation in

July 2013 The Commission has issued its UCITS V proposal,

which will broadly align the UCITS Directive with some of the

key provisions of the AIFM Directive The Commission has also

recently published a paper providing some insight into the areas

which might be covered by UCITS VI

Business: consolidation ahead

Notwithstanding the stagnation of AuM, the asset management

business remained highly proitable The costs associated with

the implementation of the various regulatory reforms will,

however, squeeze margins, driving product and service provider

consolidation, along with signiicant restructuring of operational

and distribution models This will inevitably lead to the “big”

getting “bigger” They will, however, still be surrounded by

innovative niche players, some of which will eventually be

absorbed by the “big” Others will reinvent themselves as

specialist “sub-service” providers and a savvy few will grow into

“big” players themselves

Future priorities: refocus on the long-term

So where should the regulators and the industry be focusing their energy over the coming years?

I see the following key themes emerging:

• Protecting and enhancing the “UCITS brand” through:

• Taking concrete steps to make UCITS-like products a more attractive building block of European pension fund reform

• Proactive engagement with non-EU regulators

• ฀Building an “AIF brand” in the alternative product space for products from AIFM Directive-compliant managers, similar

to that achieved by UCITS for traditional products, both in Europe and beyond

• Selling the right products to investors – despite MiFID II, UCITS IV, KII and other initiatives, the investment fund distribution model will need to be further reined to ensure investors are truly getting a suitable product at a cost eficient price

• Ensuring regulatory reform focuses on investor protection – following the heavy low of regulation over the last three years, the focus now needs to be on making sure it works

in the interest of investors This may well entail some brave decisions around deleting or adding certain “speciic pieces”, but the overriding objective of protecting the interests of the investors must not be lost along the way

• Managing investors expectations − the industry needs to

be more aware than ever before of investors’ demand for capital preservation and ultimate outcome for their individual situation No regulation will ever achieve this – industry leaders will need to align their irm’s long term interests with those of their investors

The purpose of this technical guide

The purpose of this technical guide is to provide, in a clear and concise format, an introduction to Luxembourg as a center for investment funds, the types of funds available and a summary

of the regulations applicable to the formation and operation of Luxembourg investment funds It also covers the regulations applicable to management companies based in Luxembourg, and provisions applicable to other Luxembourg service providers

I hope you ind this publication useful and would welcome your comments

Michael FergusonErnst & Young Luxembourg EMEIA Regulated Funds Practice Leader

Tel: +352 42 124 8714Email: michael.ferguson@lu.ey.com

1.1.1 What is an investment fund?

An investment fund (also referred to as an undertaking for collective investment or UCI) has the following characteristics:

• ฀ Collective investment of funds

• ฀ The funds used for collective investment are collected from the “public” (which may be restricted to a small circle of investors)

• ฀ The investment which forms the object of the collective investment must be made in accordance with the principles of risk-spreading

The shares or units of some UCIs may be distributed to the general public while others are reserved for certain circles of investors, such

as informed, qualiied or institutional investors Depending on the structure of the UCI, these shares or units may be obtained through private placement, direct distribution, distributors, or through stock exchanges

The portfolio of collective investments may consist of transferable securities and/or other assets Risk spreading is required to prevent excessive concentration of investments

1.1.2 Why set up an investment fund?

An investment fund can offer investors the possibility to:

• ฀ Obtain a yield or a capital gain

• ฀ Access a diversiied portfolio of investments

• ฀ Beneit from professional management of the portfolio

• ฀ Share the associated costs

• ฀ Gain exposure to speciic investments in the case of investors who are not able to access the investment directly, for example due to investor qualiication requirements

Source: Commission for the Supervision of the Financial Sector – CSSF

1.2 Luxembourg’s investment fund industry

Luxembourg is the leading global location for investment funds The irst Luxembourg fund was established in 1959 and there are now over 3,800 fund vehicles, comprising over 13,400 funds (single funds and compartments of umbrella funds1), with net assets of €2.2 trillion (as at

30 June 2012), analyzed as follows:

At the end of 2011, there were 6,440 shares or units of UCIs listed by the Luxembourg Stock Exchange, of which 6,244 were shares or units of Luxembourg UCIs

The success of Luxembourg in attracting investment funds, and becoming a major inancial center, may be attributed to a number of factors such as:

• ฀ Service provider considerations such as their expertise and ability to meet speciic local distribution market requirements from Luxembourg

• ฀ Location, language and cultural alignmentLuxembourg investment funds are authorized and supervised by the Commission for the Supervision

of the Financial Sector (Commission de Surveillance du Secteur Financier – CSSF).

The Luxembourg fund industry has, since 1988, been successfully represented and promoted

by the Association of the Luxembourg Fund Industry (Association Luxembourgeoise des Fonds

d’Investissement - ALFI) Since 2008, LuxembourgforFinance, the agency for the development of the

inancial center, has also been promoting the Luxembourg fund industry

1 Also known as multiple compartment UCIs – see Section 3.3.2.

2 Undertakings for Collective Investment in Transferable Securities

Luxembourg’s solutions for UCIs

A) Common fund (FCP) or B) investment company (SICAV or SICAF)

These different entities may create multiple compartments, each with a different investment policy

Luxembourg(Chapter 15) or

EU UCITS management company***

Luxembourg UCITS management company (Chapter 15)

orLuxembourg non-UCITS management company (Chapter 16)

Part I

UCITS investment funds (qualify for European Distribution Passport – may

be sold to retail and institutional investors with minimum formalities)

Part II

Investment funds (do not qualify for European Distribution Passport – includes hedge, private equity and real estate funds – may be sold to both retail and institutional investors but subject to each country’s local distribution rules)

SIFs (may be sold to informed investors, subject

to each country’s local distribution rules)

2010 Law

1.3 Luxembourg’s investment fund solutions

Luxembourg offers an attractive range of solutions for the creation of UCIs Luxembourg UCIs can be established under either of the following regimes:

The 2010 Law on UCIs (the principal law on UCIs):

The Specialized Investment Fund Law (the SIF Law) SIF

The choice of regime and basic structures are presented in schematic form below:

Luxembourg(Chapter 15) or

EU UCITS management company***

Luxembourg UCITS management company (Chapter 15)

orLuxembourg non-UCITS management company (Chapter 16)

Self-managed**** Have not designated a management company

* Investment funds in contractual form (common funds – FCPs) must have a management company.

** Investment companies with variable capital (SICAV) or ixed capital (SICAF) need to appoint a management company or manage themselves

*** Management companies of UCITS are required to meet signiicant substance and capital requirements.

**** Self-managed UCITS investment companies are required to meet many of the same requirements

The following table outlines the main characteristics of Luxembourg’s three investment fund regimes:

3 Additional restrictions may be included in the constitutional document or prospectus.

4 See Section 3.4.2.

5 Except in the case of a SIF set up as a private limited liability company (S.à r.l.), in which case the maximum number

of investors is 40.

6 Main service providers only listed here; see Section 1.4.2.

7 “Directors” means, in the case of public limited companies and in the case of cooperatives in the form of a public

limited company, the members of the Board of Directors, in the case of partnerships limited by shares, the general

partner, in the case of private limited liability companies, the manager(s) and in the case of common funds, the

members of the Board of Directors or the managers of the management company.

Regimes

Authorization procedure Prior to set-up Prior to set-up Prior to set-up

Structures available Common fund: FCP

Investment company: SICAV

or SICAF

Common fund: FCPInvestment company: SICAV

or SICAF

Common fund: FCPInvestment company: SICAV

certiication

Use of compartments

Investment restrictions Detailed restrictions Some restrictions General risk diversiication

No detailed restrictions, must be disclosed

No detailed restrictions, must be disclosed

Prospectus, inancial statements

Prospectus or offering document, inancial statements

Required service providers 6 UCITS management

company (common fund)Depositary

Administrator, registrar and transfer agent

Auditor

Management company (common fund)DepositaryCentral administration, registrar and transfer agentAuditor

Management company (common fund)DepositaryCentral administration, registrar and transfer agentAuditor

Regulator reputational

checks PromoterInvestment manager and/or

adviserDirectors of UCI, or of management companyDepositary

PromoterInvestment manager and/or adviser

Directors of UCI, or of management companyDepositary

Directors of SIF, or of management company7

Depositary

The decision as to whether to create a UCI in contractual form (common fund - FCP) or in corporate form (an investment company, generally a SICAV)10 is primarily based on tax, operational and marketing considerations The following table details the main differences between FCPs and SICAVs:

Regimes

Net asset value (NAV)

calculation and redemption

frequency

Minimum twice a month Minimum monthly NAV required, at least for

reporting purposes

Subscription and

redemption price NAV

redemption conditions laid down in the constitutional document

Basic structures FCP — common fund SICAV – investment company Oversight of service

providers Board of Directors of management company Board of Directors, general partner or manager(s)11

Taxable status Transparent (with limited exceptions) Not tax transparent (with limited

exceptions)

Tax implications Individual underlying investors may beneit

from certain double taxation treaties (DTTs)

SICAV may directly beneit from certain DTTs

VAT status VATable person (via its management

Shareholders’ or

unitholders’ meetings Unitholders’ meetings are not mandatory for a common fund

At least one meeting of shareholders must

be held annually

Luxembourg’s investment fund regimes and basic structures, and the requirements for each, are described in more detail in Chapter 3

Appendix I describes what UCIs are and explains the various types of funds and asset classes

1.3.1 Traditional investment funds

Traditional funds include:

2010 Law Part II UCIs or SIFs) using any of the basic structures mentioned previously

8 The net asset value per share or unit may be adjusted to incorporate a “swing factor” if swing pricing procedures are in place (see Section 8.5.7.)

9 Idem

10 See also Section 3.3.

11 In the case of public limited companies and in the case of cooperatives in the form of a public limited company, the members of the Board of Directors, in the case of partnerships limited by shares, the general partner and in the case

of private limited liability companies, the manager(s).

12 Idem

13 Except in the case of a partnership

class alternative funds and funds of alternative investment funds, will generally be set up either as

2010 Law Part II UCIs or SIFs; any of the basic structures may be used

Capital14 Such vehicles, however, are not UCIs and are not covered in this Technical Guide

1.3.2.1 Vehicles used in combination with alternative investment funds

Luxembourg vehicles used in combination with alternative investment funds include commercial

companies referred to as SOPARFIs and securitization vehicles This section provides a brief

description; these vehicles are not further covered in this Technical Guide

A SOPARFIs

SOPARFI (Société de Participations Financières) is the name usually given to Luxembourg

companies which have, as their main corporate purpose, the holding of participations in other

companies The SOPARFI is not a speciic vehicle or regime; like other Luxembourg companies it is

subject to the Law of 10 August 1915 on commercial companies, as amended (the 1915 Law)

SOPARFIs are unregulated vehicles which can be set up in any Luxembourg corporate form; the

most common are the public limited company and the private limited liability company

SOPARFIs are fully taxable Luxembourg companies, subject to corporate income tax, municipal

exempt from corporate income tax and municipal business tax (i.e., Participation Exemption

regime may apply)

associated with commitments taken or activities carried out by third parties and, in exchange,

issue securities whose return is directly linked to the risks borne Any tangible or intangible asset

or activity with a reasonable ascertainable value or predictable future stream of revenue can be

securitized

Luxembourg securitization vehicles are also occasionally used in combination with alternative

investment funds The Law of 22 March 2004 on securitization, as amended, (the Securitization

Law) provides a legal framework for securitization providing lexibility to initiators to develop

workable and eficient structures for securitization transactions

14 Law of 15 June 2004 regarding investment in venture capital (Société d’Investissement en capital à risque - SICAR).

SPVs can either be set up as corporate entities (sociétés de titrisation), or funds with no legal personality managed by a management company (fonds de titrisation) These can be set up as

single or multi-compartment vehicles; each compartment can issue several tranches of securities The assets of each compartment can be segregated (the protected cell concept) A single securitization vehicle can be established to carry out an entire securitization transaction, or separate securitization vehicles can be established, the irst one acquiring the assets or bearing the risks, the second one issuing securities to the investors Multiple layer securitization structures with two or more acquisition or issuing vehicles can be created to optimize the risk spreading

• ฀ Have access to existing DTTs

• ฀ Securitization funds are tax transparent Luxembourg entities which are exempt from any direct taxation in Luxembourg, including the annual subscription tax

• ฀ SPVs beneit from net wealth tax exemption

• ฀ Repatriation of proceeds to investors are free from Luxembourg WHT

• ฀ SPVs themselves are subject to VAT

• ฀ Management services provided to SPVs are VAT exempt in practice

1.3.3 Pension Fund Pooling Vehicles (PFPVs)

Pension Fund Pooling Vehicles (PFPVs) can be set up as Luxembourg common funds, which are tax transparent PFPVs are also exempt from subscription tax (see Chapter 11 for more information

on taxation and VAT issues related to Luxembourg funds) Thus, Luxembourg offers a regime that allows the pooling of pension fund investments in a way that is both tax and cost eficient, in the interest of the beneiciaries (see also Section I.3.12 of Appendix I for a description of PFPVs and Section 3.3.4.2 on co-management and pooling of assets)

1.3.4 Master-feeder structures

In master-feeder structures, the feeder UCI invests most of its assets in a master UCI Therefore, the management of a signiicant portion of the portfolio of the feeder fund is effectively performed by the manager of the master fund

A feeder UCITS is a non-diversiied investment structure investing into a diversiied product (master UCITS), permitting the pooling of assets In a UCITS master-feeder structure, a feeder UCITS invests at least 85% of its assets in a master UCITS It may invest up to 15% in liquid assets, inancial derivative instruments for hedging purposes or, in the case of investment companies, property essential for the direct pursuit of business An existing UCITS may be converted into a feeder UCITS Alternatively an existing UCITS may become a master UCITS A feeder UCITS may also change its master The master, or one or more of the feeders, can be located in different Member States See also Section 3.3.4.1

Master-feeder structures may be used by asset managers as a distribution mechanism to

facilitate access to certain markets For example, some French investors may prefer to invest

in a local UCITS An asset manager which currently only offers a Luxembourg domiciled UCITS

may take advantage of the UCITS master-feeder provisions and create a French domiciled feeder

UCITS which invests in the Luxembourg master UCITS This structure will enable the manager to

distribute to such French investors while managing only one portfolio of investments

1.3.5 Unit-linked products

Luxembourg life insurers are permitted to offer a range of “unit-linked” life insurance products

“Unit-linked” life insurance products are products which are linked to one or more investment funds, which

may be either:

• ฀ “External” UCIs, which:

• ฀ Can be one of the following:

• A UCITS, another UCI investing in transferable securities

• An open-ended fund of alternative investment funds (i.e., a fund of hedge funds)

• An open-ended real estate UCI

underlying investment fund(s) before they invest

Luxembourg insurance supervisory authority (Commissariat aux Assurances – CaA) Circular 08/1

clariies the rules applicable to unit-linked life insurance products These products are not further

covered in this Technical Guide

Investment adviser

Promoter

Investment company

Board of Directors Depositary

Management company

Administrator, registrar, transfer, domiciliation agent

Investment company with a management company Self-managed investment company

adviser

Self-managed investment company

Administrator, registrar, transfer, domiciliation agent Investment

1.4.1 Typical organization of a UCI

As part of the formation procedures of a UCI, several service providers must be appointed

The following diagramsshow illustrative examples of the organization of UCIs; other models may be possible

1.4.2 UCI service providers

The principal duties of the main service providers are as follows:

its management company

In general, the promoter is represented in the governing bodies of the UCI, or is a shareholder of the

management company of a common fund (see also Sections 1.4.3., 3.4.1.2 and 5.3.2.)

B Management company

A management company is a company that manages undertakings for collective investment (UCIs)

“Management” includes, in general, investment management, administration and distribution Not

all UCIs are required to have a management company (see also Section 1.4.3 and Chapter 6)

C Investment manager

The investment manager manages the UCI (or certain of its compartments) with respect to the

investment, divestment and reinvestment of the assets of the UCI It is a delegate of the UCI or of its

management company The investment manager is further discussed in Chapter 7

D Investment adviser

The investment adviser advises the investment manager, the management company or the UCI itself

with respect to the investment, divestment and reinvestment of the assets of the UCI It does not

make decisions The investment adviser is further discussed in Chapter 7

E Administrator

The administrator is, inter alia, responsible for keeping the accounting records of the UCI, calculating

the NAV, assisting in preparing the inancial statements, and acting as a contact with the CSSF and

the independent auditor Administration is further discussed in Chapter 8

F Registrar and transfer agent

The registrar and transfer agent is responsible for keeping the principal register of shareholders or

unitholders of the UCI, and for arranging for the issue, transfer, allotment, conversion, redemption

and/or purchase of shares or units of the UCI (see also Chapter 8)

G Domiciliation agent

The domiciliation agent provides the registered ofice of the UCI It is responsible for providing ofice

accommodation and other facilities to the UCI, keeping all correspondence of the UCI, and arranging

payment of bills on behalf of the UCI (see also Chapter 8)

H Distributor

Distributors are intermediaries who are part of the distribution system set up by the promoter to

perform one of the following:

Market makers are intermediaries participating on their own account and at their own risk in

subscription and redemption transactions of UCI shares or units (see also Section 12.7.3.)

K Depositary

The depositary is responsible for the supervision of the assets of the UCI, and for the day to day administration of the assets (receipts, sales, dividends, etc.), based on instructions received from the asset managers or management company (unless they conlict with the constitutional document) The depositary must be a Luxembourg credit institution It may delegate the actual holding of the assets (see also Chapter 9)

L Prime broker

A prime broker is, according to the Alternative Investment Fund Managers (AIFM) Directive, an entity subject to prudential regulation and ongoing supervision, which:

• ฀ Offers one or more services to professional investors primarily to inance or execute transactions in inancial instruments as counterparty

• ฀ May also provide other services such as clearing and settlement of trades, custodial services, securities lending, customized technology and operational support facilities15 (see Section 9.6.1.)

M Paying agent

The paying agent arranges for payment of distributions made by the UCI A paying agent may be required in each country where the UCI is distributed Generally, the depositary and its network will provide paying agent services Paying agent is a term used differently in the context of the EU Savings Directive (see Section 11.3.10.3.)

N Auditor

The inancial statements of a UCI must be audited by a Luxembourg independent auditor (réviseur

d’entreprises agréé - see Sections 10.5.5 and 10.6.5.).

1.4.3 Organizational model considerations

The choice of organizational model for the UCI, its management and service providers will depend on

a number of factors, including:

• ฀ The basic structure of the UCI

• ฀ Preference for a group entity or a third party

• ฀ The other fund ranges of the group Where the group has fund ranges in multiple jurisdictions, it may consider cross-border management

• ฀ Service provider considerations

1.4.3.1 Basic structure

A common fund (FCP) has no legal personality and must be managed by an approved management company, regardless of whether it has been created under the 2010 Law or the SIF Law The Board

of Directors of the management company, in conjunction with the depositary, has ultimate control

of the common fund The management company is responsible for the common fund, including the appointment and oversight of service providers

An investment company must appoint an approved management company or designate itself as managed” (for self-managed UCITS, see Section 3.4.1.5.) The Board of Directors of the investment company, and ultimately the shareholders, control the investment company The Board is responsible for the investment company, including the appointment and oversight of service providers It may appoint a management company to manage the investment company, in which case the oversight of some of the service providers is delegated The promoter is usually represented on the Board of the investment company

“self-Both common funds and investment companies can be single or multiple compartment (sub-fund), and each compartment can have one or more share-classes

15 Based on the AIFM Directive deinition of a “prime broker”

It is also possible to create master-feeder structures In master-feeder structures, the feeder UCI

invests most of its assets in a master UCI

The key differences between basic structures of UCIs are summarized in Section 1.3 The basic

structures, multiple compartment and share classes, are described in more detail in Section 3.3

Master-feeder structures are covered in Section 3.3.4.1

1.4.3.2 Group or third party

Promoters generally set up their own UCIs However, some investment managers and investment

advisers choose to “rent” a UCI created by a third party In this case, a new compartment will be

created in a multiple compartment UCI (see Section 3.3.2.) promoted by the third party The

manager or adviser will be appointed as the investment manager of, or investment adviser to, the

compartment “Rent a UCI” is generally a market entry strategy

Promoters who wish to use the services of a management company have the following options:

UCITS IV introduced the management company passport which permits UCITS management

companies to manage UCITS cross-border in the EU, both intra-group and as a third party

Cross-border management may be provided either directly (free provision of services) or via a branch (see

also Section 6.3.)

The Alternative Investment Fund Managers (AIFM) Directive introduces a passport permitting the

cross-border management of alterative investment funds (AIF) (see Section 2.3.2.)

1.4.3.4 Management models

Asset management groups, particularly those operating in multiple jurisdictions, have a number of

options for the management of their UCIs The optimal model will probably be based on one or a

combination of the following:

• ฀ The “super ManCo” model: creating a single management company and/or AIFM for an ensemble

of UCIs, or converting an existing management company, to a “super ManCo” Typically “super

ManCos” will manage UCIs cross-border

• ฀ The “multiple ManCo” model: local management companies in each UCI domicile, or for speciic

fund ranges This is the typical legacy structure existing today

• ฀ The “third party ManCo” model: appointing one or more third party management companies

Under this model, one third party “super ManCo” or multiple third party management companies

are appointed rather than setting up group management companies

Self-managed investment companies do not beneit from a passport enabling them to provide their

services cross-border Self-managed UCITS investment companies are required to comply with most

of the requirements applicable to management companies (see also Section 3.4.1.5.)

The Alternative Investment Funds Managers (AIFM) Directive will facilitate the development of

similar models for the management of alternative investment funds (AIF) – for example, a “super

AIFM” will be able to manage AIF cross-border Furthermore, a single entity may be authorized to

manage UCITS and AIF facilitating, inter alia, the development of a “super ManCo & AIFM” (see

also Section 2.3.2.)

1.4.3.5 Service provider models

Management companies have, in general, the choice between local and cross-border service providers, including administrators; the management company is subject to its home Member State delegation requirements

In general, asset management groups may choose service providers in:

• ฀ Decentralized: service providers from the same inancial services group are selected - generally one in each host Member State

• ฀ Multiple service providers: service providers from different inancial services groups are selected to serve different UCITS

1.4.4 Restructuring a UCI

Asset management groups may decide to restructure UCIs for a variety of reasons including, inter

alia, optimization of operating models, cost reduction, economies of scale, and focusing on certain

target investor markets

Typical types of restructuring of UCIs include:

• ฀ Restructuring UCIs:

• Conversion of Luxembourg UCIs: 2010 Law UCIs into SIFs and vice versa (see Section 5.6.1.)

• Conversion of an existing UCITS to a feeder UCITS (see Section 5.6.2.)

• A feeder UCITS changing master UCITS (see Section 5.6.2.)

2 Current and future

developments

2.1 Introduction

This chapter outlines:

• Current and future developments with respect to:

• ฀ ALFI best practice for UCITS risk management function and other clariications on risk management

The UCITS V proposal follows the Commission’s Consultation on the UCITS depositary function and on

the UCITS managers’ remuneration issued in December 2010

The proposed amendments to the UCITS Directive require the European Commission to adopt measures clarifying certain elements of the text and setting down detailed requirements on speciic topics (called “Level 2 measures”)

The proposed amendments on the depositary and managers’ remuneration are broadly in line with the provisions of the Alternative Investment Fund Managers (AIFM) Directive (see Section 2.3.2.)

2.2.1.2 Depositary regime

The proposal clariies that a single depositary must be appointed for each UCITS

The appointment of the depositary must take the form of a written contract The depositary contract

must, inter alia, comprise rules establishing the low of information necessary for the depositary to

perform its functions

The Level 2 measures are expected to deine the minimum content of the contract by which the depositary is appointed

Eligible entities

The Directive requires that the depositary be:

• ฀ An authorized credit institution with its registered ofice in the EU

• ฀ An EU MiFID-authorized16 investment irm subject to capital adequacy requirements which also provides the ancillary service of safekeeping and administration of inancial instruments for the account of clients

16 The Markets in Financial Instruments Directive (MiFID) – Directive 2004/39/EC, as amended

Duties of the depositary

The obligations of the depositary are:

• ฀ To carry out a number of monitoring and oversight tasks

• ฀ To ensure proper monitoring of cash lows

• ฀ To perform the safekeeping of inancial instruments and other assets belonging to the UCITSThe depositary is permitted to delegate safekeeping duties, but not any other duty

The depositary must act honestly, fairly, professionally, independently and in the interest of the UCITS and its investors

The Level 2 measures are expected to clarify the depositary’s duties

Monitoring and oversight

The depositary has a number of oversight roles in ensuring that:

• ฀ The applicable law and the UCITS constitutional document are respected in the following operations:

• ฀ Transactions on shares or units of the UCITS (sale, issue, repurchase, redemption or cancellation)

• ฀ The calculation of the NAV of the UCITS’ shares or units

• ฀ The application of the UCITS’ income

• ฀ Any consideration in transactions involving the UCITS’ assets is remitted to the UCITS within the usual time limits

• ฀ The instructions it receives from the management company or investment company do not conlict with applicable law and the UCITS rules or instruments of incorporation

Cash low monitoring

The depositary must ensure that cash lows are properly monitored This includes ensuring that:

• ฀ Payments made by investors (or on their behalf) for subscription of shares or units of the UCITS are received

• ฀ All cash of the UCITS has been booked in one or more cash accounts

• ฀ Where the cash account is opened in the name of the depositary acting on behalf of the UCITS, no cash of the entity with which the cash account is opened, or the depositary’s own cash, is booked

on the same account

Safekeeping

A distinction is made between the depositary’s safekeeping duties relating to inancial instruments which can be held in custody and those relating to other assets

The depositary must hold in custody:

• ฀ All inancial instruments belonging to the UCITS which may be registered in a inancial instruments account, in accounts which are segregated (i.e., separately from the depositary’s own assets) and opened in the name of the UCITS (or of the management company acting on behalf of the UCITS),

so that they can at any time be clearly identiied as belonging to the UCITS

• ฀ All inancial instruments that can be physically delivered to the depositaryFor all other assets of the UCITS, the safekeeping duty of the depositary is limited to verifying ownership and maintaining a record of the assets for which it is satisied that they belong to the UCITS (or to the management company acting on behalf of the UCITS) The assessment of ownership is determined on the basis of all information and documentation regularly provided by the UCITS or the management company, or any external evidence the depositary can rely on

Provision of information to competent authority

The depositary is required, upon request from its competent authority, the competent authority of the management company’s home Member State, and the competent authority of the UCITS home Member State, to make available to them all information which it has obtained while undertaking its duties and which may be necessary for the competent authority of the UCITS or of the management company to carry out their duties under the Directive

Liability

Loss of inancial instruments held in custody

As a general rule, the depositary is liable to a UCITS and its investors for the loss of inancial instruments held in custody by the depositary itself, or by a third party to whom custody had been

held in custody is considered to be “lost”.

However, the depositary is not liable if it can prove that the loss has arisen as a result of an external

event beyond its reasonable control, the consequences of which would have been unavoidable

despite all reasonable efforts to the contrary

The Level 2 measures are expected to clarify this exception

Other losses

The depositary is also liable to the UCITS and its investors for all other losses incurred as a result of

negligent or intentional failure to properly perform its obligations pursuant to the Directive

Delegation of safekeeping

Conditions for delegation

The depositary may delegate safekeeping duties to a third party if it can demonstrate that:

to such local entity, and investors of the relevant UCITS must be duly informed of this delegation

(including the legal constraints and circumstances of the third country and the circumstances

justifying the delegation) prior to their investment

Delegation and liability

The depositary’s liability is not affected by delegation

2.2.1.3 Remuneration of UCITS managers

Management companies will be required to establish and apply remuneration policies and practices that:

• ฀ Are consistent with and promote sound and effective risk management

• ฀ Do not encourage risk-taking which is inconsistent with the risk proiles, or constitutional documents of the UCITS it manages

• ฀ Are in line with the business strategy, objectives, values and interests of the management company and the UCITS it manages or the investors of such UCITS, and includes measures to avoid conlicts

of interest

• ฀ Cover salaries and discretionary pension beneitsThe policies and practices must cover those categories of staff whose professional activities have a material impact on the risk proiles of the management company or the UCITS it manages including:

• ฀ Senior management

• ฀ Risk takers, including those taking investment decisions

• ฀ Control functions

• ฀ Any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers

The management body of the management company must adopt and periodically review the general principles of the remuneration policy, and is responsible for its implementation There must be at least annual, central and independent internal reviews of compliance with remuneration policies and procedures

Staff engaged in control functions must be compensated in accordance with the achievement of the objectives linked to their functions, independent of the performance of the business areas they control

Management companies that are signiicant in terms of their size or the size of the UCITS they manage, their internal organization and the nature, the scope and the complexity of their activities are required to establish a remuneration committee The remuneration committee is responsible for the preparation of decisions regarding remuneration It is required to directly oversee the remuneration of the senior oficers in the risk management and compliance functions The remuneration committee must exercise independent judgment It must be chaired by, and composed

of, non-executive Directors17

Management companies are required to comply with a series of principles in a way that is appropriate

to their size, internal organization and the nature, scope and complexity of their activities The

principles include, inter alia:

• ฀ Where remuneration is performance related, the total amount of remuneration must be based on

a combination of the assessment of the performance of the individual and of the business unit or UCITS concerned and of the overall results of the management company; when assessing individual performance, inancial as well as non-inancial criteria must be taken into account

• ฀ The assessment of performance must be set in a multi-year framework appropriate to the life-cycle

of the UCITS managed by the management company

• ฀ Fixed and variable components of total remuneration must be appropriately balanced and the ixed component must represent a suficiently high proportion of the total remuneration

• ฀ In general, at least 50% of any variable remuneration must consist of shares or units of the UCITS concerned, or equivalent non-cash instruments

• ฀ At least 40% of the variable remuneration component must be deferred over a period which is appropriate in view of the life-cycle and redemption policy of the UCITS concerned and is correctly aligned with the nature of the risks of the UCITS in question (generally three to ive years)The European Securities and Markets Authority (ESMA) is expected to adopt Level 3 guidelines

on sound remuneration policies

17 Members of the management body

In July 2012, ESMA issued its inal Guidelines on ETFs and other UCITS issues as well as a

Consultation on recallability of repo and reverse repo arrangements The guidelines will signiicantly

impact a wide range of UCITS:

The inal guidelines, comprising both the Guidelines on ETFs and other UCITS issues and the inal

rules on repo and reverse repo agreements, will become effective two months after publication on

the ESMA website of the translations into the oficial languages of the EU This date was not known at

the time of writing UCITS existing at that time beneit from transitional provisions giving them up to

12 additional months to comply

2.2.2.2 Guidelines on ETFs and other UCITS issues

The overall objective of the paper is to increase investor protection by strengthening the applicable

The following is an overview:

Eficient Portfolio Management (EPM) techniques

EPM, the identity of entities to which such costs and fees are paid and any relationship with the

management company or depositary

• ฀ All revenues arising from EPM techniques, net of direct and indirect operational costs, should be

returned to the UCITS

• Ability, at any time, to recall securities lent out or to terminate any securities lending agreement

entered into

• ฀ UCITS entering into EPM techniques must include these operations in their liquidity risk

management process in order to ensure that they are able to comply, at any time, with their

redemption obligations

or index, information on counterparties, their risk of default and the potential effect on investor returns, the extent to which the counterparties assume any discretion over the UCITS’ portfolio or over the underlying of the FDIs

• ฀ Compliance with UCITS requirements on investment management delegation where the counterparties have discretion over the UCITS’ portfolio or over the underlying of the FDIs

• ฀ Annual report disclosure on the underlying exposure through FDIs, identity of counterparties and type and amount of collateral

Management of collateral

The guidelines require:

• ฀ That UCITS combine the risk exposures to a counterparty arising from EPM techniques and OTC FDI transactions when calculating counterparty risk limits

• ฀ That collateral used to reduce counterparty risk, be it from EPM and OTC FDI transactions, meet

amended requirements regarding, inter alia, liquidity, credit quality and collateral diversiication

• ฀ UCITS receiving collateral for 30% or more of its assets have an appropriate stress testing policy to assess the liquidity risk

• ฀ UCITS have a clear and documented haircut policy adapted to each class of assets received as collateral

• ฀ Prospectus disclosure on the UCITS’ collateral policy covering permitted types of collateral, level of collateral required and haircut policy and, in the case of cash collateral, reinvestment policy

UCITS ETFs

The guidelines require:

• ฀ Use of the “UCITS ETF” identiier in the name, constitutional document, prospectus, Key Investor Information (KII), and marketing communications; this English identiier should be used independently of the language of the document; the identiiers “UCITS ETF”, “ETF” or “exchange-traded fund” cannot be used by other UCITS18

• ฀ Prospectus, KII and marketing communication disclosure on the policy on portfolio transparency and where information on the portfolio can be obtained, including the indicative net asset value (iNAV)

18 A UCITS ETF is a UCITS at least one share or unit class of which is traded throughout the day on at least one regulated market or Multilateral Trading Facility with at least one market maker which takes action to ensure that the stock exchange value of its shares or units does not signiicantly vary from its net asset value and where applicable its indicative Net Asset Value (iNAV).

components, how the index will be tracked and implications in terms of exposure to the underlying

index and counterparty risk, anticipated tracking error (in normal market conditions), and factors

impacting the ability of the UCITS to track the performance of the index

the sub-categories of one commodity are not highly correlated; highly correlated sub-categories

of one commodity should be considered as being the same commodity

• ฀ Adequacy of the index as a benchmark of a market (e.g., index objective, universe of the index

components, any inclusion of cash management as part of the index strategy not to affect the

objective nature of the calculation methodology)

• ฀ Financial indices will only be eligible investments for UCITS where:

• The full calculation methodology is disclosed by the index provider, enabling investors to

replicate the index

• The constituents and weightings of each component of the index are freely and easily

accessible by investors

• ฀ That the UCITS carries out appropriate and documented due diligence on the index

• ฀ That the index is subject to independent valuation

2.2.2.3 Treatment of repurchase and reverse repurchase agreements

The proposed guidelines in the Consultation on recallability of repo and reverse repo arrangements

suggest that when UCITS enter into repo and reverse repo arrangements:

In March 2012, Association of the Luxembourg Fund Industry (ALFI) issued its Best Practice

Proposals for the Organisation of the Risk Function of a UCITS Management Company or UCITS

Investment Company It covers, inter alia:

In December 2011, ALFI issued a FAQ on CSSF Circular 11/512 CSSF Circular 11/512 clariies

the risk management requirements applicable to Luxembourg UCITS management companies and Luxembourg domiciled UCITS (including self-managed UCITS)

The FAQ covers, inter alia:

• ฀ Risk disclosures:

• ฀ Estimation of the level of leverage for a new UCITS, disclosure in the prospectus, and updates thereto

• ฀ The scope of the leverage calculation, and disclosure format

• ฀ Provision to the CSSF of examples of risk management reporting

• ฀ Portfolio risk calculation methods:

• ฀ Maximum potential loss linked to a inancial derivative instrument (FDI) in concentration risk calculations

• ฀ Categories of risk to be considered in stress testing

• ฀ Utilization of stress test results

• ฀ Content of risk management reporting to conducting oficers and the Board of Directors

In July 2012, ESMA published its Questions and Answers on Risk Measurement and Calculation of

Global Exposure and Counterparty Risk for UCITS This paper provides clariication on:

on risk measurement and the calculation of global exposure and counterparty risk for UCITS, the

leverage to be included in the prospectus (see also Section 10.2.) and the annual report (see also Section 10.5.1.) for those UCITS determining the global exposure using a value-at-risk (VaR) approach, is to be calculated on the basis of the sum of the notionals of derivative instruments used while allowing these UCITS to supplement this information using (a) leverage igure (s) calculated through the commitment approach

2.2.4 New CSSF KII FAQ and updated ALFI KII Q&A

In May 2012, the CSSF issued a Key Investor Information Document – Frequently Asked Questions document covering, inter alia:

• ฀ Responsibility for the content of the KII

• ฀ Formal CSSF approval (or visa stamping) – none is provided for KII

• ฀ Requirements to be met before issuing a share or unit class (including iling the KII with the CSSF)

• to-date

฀ Impact of temporary suspension of subscriptions and redemptions on requirement to keep KII up-• ฀ Provision of translations of the KII to the CSSF

• ฀ Requirements to be met in relation to the publication of KII on a website

In April 2012, ALFI issued an updated version of its Key Investor Information Document Q&A The

Q&A, which represents the view of the ALFI working group on KII, covers questions relating to:

• ฀ Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC as

regards key investor information and conditions to be met when providing key investor information

or the prospectus in a durable medium other than paper or by means of a website

• CESR’s guidelines on the methodology for the calculation of the synthetic risk and reward indicator

in the Key Investor Information Document

• CESR’s guidelines on the methodology for calculation of the ongoing charges igure in the Key Investor Information Document

• Practical implications of the KII for distribution networks

In January 2012, ALFI issued a position paper on the Treatment of subscription and redemption

orders under UCITS IV under CSSF Regulation 10-04 transposing Commission Directive 2010/43/

EU of 1 July 2010 implementing Directive 2009/65/EC as regards organisational requirements, conlicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company.

ALFI’s paper provides a guide to best market practice in relation to speciic recording and reporting requirements for subscription and redemption orders which were previously not standard market practice:

• ฀ Management company identiication

• ฀ Date and time of receipt of the order, and method of payment

• ฀ Breakdown of commissions and expenses charged

2.3 Alternative investment funds

This section focuses on developments related to non-UCITS (other UCIs or alternative investment funds – AIF) These include:

interest, and delegation of speciic tasks and functions to third parties They also inter alia permit

cross investment between compartments of SIFs and simplify certain reporting and general meeting requirements

2.3.1.2 Prior authorization

The SIF Law, as amended, requires SIFs to obtain the authorization of the CSSF before commencing operations The CSSF must also approve the appointment of the Directors19 of the SIF (or its management company in the case of a common fund (FCP)) as well as the choice of depositary bank

2.3.1.3 Risk management

SIFs are required to implement risk management systems to identify, measure, manage and monitor appropriately the risks associated to the investment positions and their contribution to the overall risk proile of the portfolio

A CSSF Regulation is expected to clarify the implementation of the measures on risk management

In April 2012, the CSSF issued a Communiqué on information to be provided to the CSSF in relation

to risk management

19 “Directors” means, in the case of public limited companies and in the case of cooperatives in the form of a public limited company, the members of the Board of Directors, in the case of partnerships limited by shares, the general partner, in the case of private limited liability companies, the manager(s) and in the case of common funds, the members of the Board of Directors or the managers of the management company.

SIFs are required to communicate to the CSSF a concise description of the risk management systems implemented according to the proportionality principle in order to appropriately identify, measure, manage and control all the material risks to which the fund or its compartments are or might be exposed.

This description must cover, inter alia:

• ฀ The risk management function (including the allocation of responsibilities), its independence or the speciic protection measures implemented to avoid conlicts of interest and ultimately allowing

an independent execution of the risk management activities or procedures

• ฀ Processes and methods to appropriately measure and manage the risks arising from the investment strategies and the risk proile of the fund (or compartments)

ALFI issued Recommendations on the Risk Management System for Specialised Investment Funds in

The CSSF Regulation will also clarify the implementation of the measures on conlicts of interest

The CSSF Communiqué clariies that SIFs are required to communicate to the CSSF a concise

description of the conlicts of interest policy as well as the measures taken to comply with the requirements of the amended SIF Law relating to conlicts of interest

• ฀ The CSSF must be adequately informed of the delegation

• ฀ The mandate cannot prevent the effectiveness of supervision of the SIF, and in particular it must not prevent the SIF from acting, nor the SIF from being managed, in the best interests of the investors

• ฀ When the delegation concerns portfolio management, the mandate may only be given to persons

or entities which are authorized or registered for the purpose of asset management and subject

to prudential supervision; in cases of delegation to a third country undertaking, there must

be cooperation between the CSSF and the supervisory authority of the third country Where these conditions are not met, the delegate must be of suficiently good repute and suficiently experienced, and prior approval from the CSSF must be obtained

that it was selected with all due care and that the SIF is in a position to monitor effectively at any

time the delegated activity, to give at any time further instructions to the delegate or to withdraw

the mandate with immediate effect in order to protect the interests of the investors

• ฀ Investment management functions cannot be delegated to the depositary

• ฀ The prospectus or offering document of the SIF must list the delegated functions

SIFs existing in March 2012 have until 30 June 2013 to comply with these provisions

2.3.1.6 Cross investment

Multiple compartment SIFs may invest in other compartments of the same SIF (cross investment), if

permitted by the offering document and provided that certain conditions are met, inter alia:

observations of the supervisory board (if applicable) to shareholders at the same time as the

convocation to the annual general meeting; the convocation must indicate how to obtain these

systemic risk The Commission is of the view that coordinated EU regulatory oversight is a better

mechanism to deal with the potential danger of systemic risk that may arise from the activities of AIF

than current fragmented national approaches

The objectives of the proposed AIFM Directive are to:

2.3.2.2 Implementation

Member States are required to adopt, publish and apply the laws, regulations and administrative provisions necessary to comply with the Directive by 22 July 2013

Member State legislation transposing the Directive, including Luxembourg law, should be applicable from 22 July 2013 AIFM existing on 22 July 2013 have one additional year to submit their application for authorization

The AIFM Directive requires the European Commission to adopt various types of measures clarifying certain elements of the text and setting down detailed requirements on speciic topics (called “Level

2 measures”21) In this context, and to prepare the future regulatory framework, the Commission requested technical advice from ESMA ESMA, in turn, requested evidence and views from relevant parties

In December 2010, ESMA22 published its call for evidence on Implementing measures on the

Alternative Investment Fund Managers Directive The call for evidence covers general provisions

of the AIFM Directive, the authorization of and the operating conditions for AIFM, depositary requirements, transparency requirements and leverage, and provisions relating to the supervision

of AIFM (including third country AIFM) In November 2011, ESMA submitted its Technical advice

to the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive to the European Commission.

At the time of writing, the European Commission was expected to adopt the inal Level 2 measures before the end of 2012 in the form of a Regulation which would be directly applicable in all Member States

AIFM Directive entry into force

position period ends

Trans-EU AIFM

to get authoriz- ation

EU passport for third countries

End of

EU national PPRs*

July 2011 AIFM Directive entry into force Summer 2012: Adoption of Level 2 measures

Nov 11: ESMA advice to the European Commission

July 2013

July 2014

July 2015

July 2018

EU passport required

EU passport or national PPRs*, subject to conditions

EU passport required Non-EU AIFM and/or

non-EU AIF

* PPRs = Private Placement Regimes

AIFM Directive timeline

21 The Level 2 measures consist of a combination of “implementing measures”, “delegated acts” and “regulatory technical standards”.

22 The Committee of European Securities Regulators (CESR) became the ESMA on 1 January 2011.

In February 2012, ESMA published a discussion paper on Key concepts of the Alternative Investment

Fund Managers Directive and types of AIFM The paper covers deinitions of AIFM and AIF,

appointment of AIFM and treatment of UCITS management companies, investment irms and credit

institutions

ESMA is also expected to adopt guidelines (also known as Level 3 measures) in respect of certain

elements of the AIFM Directive In June 2012, ESMA published a consultation paper entitled

Guidelines on sound remuneration policies under the AIFMD.

The Commission will review the application and scope of the Directive two years after

implementation

2.3.2.3 Key provisions

The key provisions of the AIFM Directive are summarized in the following diagram:

AIFM key provisions at a glance

• Valuation requirements

II.

Marketing and cross-border managementI.

Authorization

VI.

Speciic provisions

V.

Transparency

IV.

Functions and service providers

III.

Conduct of business

• Risk and liquidity management

I Authorization

I.1 Scope

I.1.1 AIFM and their activities

An AIFM is any legal person whose regular business is managing one or more AIF The AIFM may be an external manager or the AIF itself where the AIF’s governing body chooses not to appoint an external AIFM (internally managed AIF) and where permitted by the corporate structure of the AIF

Managing AIF means performing, for one or more AIF, the investment management services of:

• ฀ Portfolio management

• ฀ Risk management

In its Key concepts paper, ESMA suggests, inter alia, that the AIFM must be capable of

providing, and take responsibility for, both portfolio management and risk management functions in order to obtain an AIFM authorization in accordance with the AIFM Directive An AIFM may, nevertheless, choose to delegate the portfolio management and/or the risk management function ESMA considers that an AIFM may delegate the two functions either in whole or in part, but may not delegate both functions in whole

at the same time (see also IV.4 Delegation of AIFM functions)

AIFM may additionally provide:

• ฀ Administration

• ฀ Marketing

• ฀ Activities related to the assets of AIF23Member States may authorize external AIFM to provide additional services of:

• ฀ Management of portfolios of investments, including those of pension funds and institutions for occupational retirement provision, on a discretionary, client-by-client basis

• ฀ As non-core services:

• ฀ Investment advice

• ฀ Safekeeping and administration in relation to shares or units of UCIs

• ฀ Reception and transmission of orders in relation to one or more inancial instrumentsThe provision of such additional services is also subject to MiFID24 conduct of business obligations and organizational requirements

External AIFM may also be UCITS management companies, if they are authorized under both the UCITS and the AIFM Directives

In its Key concepts paper, in relation to UCITS management companies, ESMA suggests

• As a delegate: a UCITS management company may also provide services to AIF, such

as investment management or administration services, as a delegate (i.e., without being appointed as AIFM) In this case, all of the UCITS management company’s activities will continue to be covered by its authorization under the UCITS Directive and it will not need to seek authorization under the AIFM Directive

23 Such activities include:

• Services necessary to meet the iduciary duties of the AIFM

• Facilities management

• Real estate administration activities

• Advice to undertakings on capital structure, industrial strategy and related matters

• Advice and services relating to mergers and the purchase of undertakings

• Other services connected to the management of the AIF and the companies and other assets it has invested in

24 The Markets in Financial Instruments Directive (MiFID) – Directive 2004/39/EC, as amended

I.1.3 Requirement for AIF to have an AIFM

Each AIF is required to have a single AIFM, which is responsible for ensuring compliance with the requirements of the Directive

I.1.4 Scope of application of the Directive

The AIFM Directive applies to all:

I.1.5 Exemptions, “opt-in” and grandfathering

The Directive provides for several exemptions from the Directive’s provisions Full exemptions apply to holding companies as deined in the Directive26, securitization special purpose entities, institutions for occupational retirement provision (IORP) and their managers insofar as they do not manage AIF and to certain group AIFM entities27

Providing certain registration and regulatory reporting requirements are met, the provisions of the Directive do not apply to:

• ฀ AIFM which manage portfolios of AIF whose assets under management, including any assets acquired through use of leverage, in total do not exceed a threshold of €100 million

• ฀ AIFM which manage portfolios of AIF whose assets under management, in total, do not exceed a threshold of €500 million when the portfolio of AIF consists of AIF that are not leveraged and have no redemption rights exercisable during a period of ive years following the date of initial investment in each AIF

However, such AIFM may choose to “opt-in” under the Directive in order to beneit from the rights granted to AIFM (in particular passports); in this case, they must comply with all the provisions of the Directive

The AIFM Directive Level 2 measures are expected to clarify, inter alia:

• Calculation and monitoring of total assets of portfolios of AIF under management (AuM)

• Calculation of leverage

• In the case of AIFM which are not subject to the Directive, information to be provided

to their national competent authority as part of registration

25 The Directive refers to “collective investment undertakings” (CIUs)

26 Under the Directive, a “holding company” is a company with shareholdings in one or more other companies, the commercial purpose of which is to carry out a business strategy or strategies through its subsidiaries, associated companies or participations in order to contribute to their long-term value, and which is either:

• A company operating on its own account and whose shares are admitted to trading on a regulated market in the Union

• A company not established for the main purpose of generating returns for its investors by means of divestment of its subsidiaries or associated companies, as evidenced in its annual report or other oficial documents

27 AIFM insofar as they manage one or more AIF whose only investors are the AIFM or the parent undertakings or the subsidiaries of the AIFM or other subsidiaries of those parent undertakings, provided that none of those investors itself

is an AIF.

Managers of some closed-ended AIF existing at the inal date of transposition may beneit from grandfathering clauses, namely:

• ฀ Managers of closed-ended AIF “which do not make any additional investments” after

22 July 2013 may continue to manage such AIF without authorization under the AIFM Directive

•

฀ Managers of fully subscribed closed-ended AIF which had their inal close prior to mid-2011 and are constituted with a maximum life that requires them to be liquidated by mid-2016 at the latest, may continue to manage such AIF without complying with most

of the requirements of the AIFM DirectiveI.2 Authorization requirements

AIFM in scope of the Directive must be authorized and supervised in accordance with the provisions of the Directive, in order to provide management services in respect of AIF

The application for authorization must include:

• ฀ Information on the persons effectively conducting the business of the AIFM

• ฀ Information on the identities of the AIFM shareholders that have qualifying holdings and the amounts of those holdings

• ฀ A program of activity setting out the organizational structure of the AIFM, including information

on how the AIFM intends to comply with its obligations under the Directive

• ฀ Information on the remuneration policies and practices

• ฀ Information on arrangements made for the delegation and sub-delegation to third parties of functions

• ฀ Information about the investment strategies including the types of underlying funds if the AIF

is a fund of funds and the AIFM’s policy as regards the use of leverage, and the risk proiles and other characteristics of the AIF it manages or intends to manage, including information about the Member States or third countries in which they are established or are expected to be established

• ฀ Information on where the master AIF is established if the AIF is a feeder AIF

• ฀ The fund rules or instruments of incorporation of each AIF the AIFM intends to manage

• ฀ Information on the arrangements made for the appointment of the depositary for each AIF the AIFM intends to manage

• ฀ Additional information which the AIFM must disclose to the investors in the AIFThe Directive lays down the conditions which must be met in order for the competent authority

of the home Member State of the AIFM to grant authorization In general, authorization must be granted within three months of the submission of the complete application

AIFM existing on 22 July 2013 have one additional year to submit their application for authorization (see also II.2.1.1 in relation to marketing by such AIFM) Speciic exemptions apply in the case of AIFM managing closed-ended AIF (see I.1.5 Exemptions, “opt-in” and grandfathering)

The competent authority of the home Member State of the AIFM may restrict the scope of the authorization, in particular as regards the investment strategies of AIF which the AIFM is allowed

Internally managed AIF will be required to hold an initial capital of €300,000

AIFM which are appointed as external managers of one or more AIF will be required to hold:

• ฀ The initial regulatory capital +

• ฀ Additional own funds (if relevant)

supervision “Portfolios of the AIFM” means AIF managed by the AIFM, including portfolios of AIF

for which the AIFM has delegated functions, but excluding portfolios which the AIFM is managing

The Level 2 measures are expected to clarify, inter alia:

• Professional liability risks, which may include, inter alia:

• Loss of documents evidencing title of assets of the AIF

• Misrepresentations and misleading statements made to the AIF or its investors

• Negligent acts, errors or omissions resulting in a breach of:

• Legal and regulatory obligations

• Duty of skill and care towards the AIF and its investors

• Fiduciary duties

• Obligations of conidentiality

• AIF constitutional documents

• Terms of appointment of the AIFM by the AIF

• Failure by the senior management to establish, implement and maintain appropriate

procedures to prevent dishonest, fraudulent or malicious acts

• Improper valuation of assets and calculation of share or unit prices

• Losses arising from business disruption, system failures, failure of transaction processing

or process management

• Qualitative requirements for addressing professional liability risks, including:

• Effective internal operational risk management policies and procedures to identify,

measure, manage, and monitor appropriately operational risks including professional

liability risks to which the AIFM is or could be exposed (see also IV.2 Risk and liquidity

management)

• Record any operational failures, loss or damage in a historical loss database

• Additional own funds:

• Whether it is possible to combine additional own funds and indemnity insurance, and, if so,

the applicable rules

Own funds must be invested in liquid assets or assets readily convertible to cash in the short term

II Marketing and cross-border management

II.1 Summary

II.1.1 Marketing

Marketing covers any direct or indirect offering or placement, at the initiative of the AIFM or on behalf of the AIFM, of shares or units in an AIF it manages to or with investors domiciled in the EU

The main principles of the marketing provisions of the Directive can be summarized as follows:

• ฀ Authorized EU AIFM beneit from a “marketing” passport permitting them to market EU AIF to professional investors in their home Member State and in other Member States (“host” Member States) from July 2013

• ฀ For EU AIFM managing and marketing non-EU AIF, and non-EU AIFM marketing EU and non-EU AIF, two regimes will coexist for marketing:

• ฀ All marketing with a passport of EU and non-EU AIF to professional investors by EU and non-EU AIFM in their home Member State (or “Member State of reference”) or another Member State is subject to a notiication procedure

• ฀ Member States may permit marketing of EU or non-EU AIF by AIFM to retail investors in the Member State They may also apply stricter requirements

• ฀ EU professional investors may invest, on their own initiative, in any AIF of their choice, irrespective of the domicile of the AIF or AIFM (also referred to as “reverse solicitation”)

Professional investors include:

• ฀ Entities which are required to be authorized or regulated to operate in the inancial markets:

• ฀ Investors which may be treated as professional clients within the meaning of Annex II to the MiFID Directive

Retail investors are investors which are not professional investors

The regime for marketing of EU and non-EU domiciled AIF by, or on behalf of EU AIFM, to EU and

non-EU investors is summarized in the following table:

Marketing regimes applicable to EU AIFM Domicile Any EU

marketing? Directive Is AIFM

applicable?

AIFM marketing regimes

Requirements applicable

to AIFM and AIF applicable to third Requirements

country domiciles AIFM AIF

(from 2013)

Full Directive None

Full Directive except provisions on depositary, but entity needs to be appointed

to execute depositary functions

Cooperation arrangementsAML requirements

Passport (expected from 2015 onward)

Full Directive Cooperation

arrangementsAML requirementsTax agreements

EU

Non-EU

No Yes None Full Directive except

provisions on depositary and annual report

Cooperation arrangements

The AIFM Directive applies to non-EU AIFM only to the extent that they manage EU AIF or market

AIF (EU or non-EU) to EU investors The regime for marketing EU and non-EU domiciled AIF by, or

on behalf of non-EU AIFM, to EU and non-EU investors is summarized in the following table:

Marketing regimes applicable to non-EU AIFM Domicile Any EU

marketing? Directive Is AIFM

applicable?

AIFM marketing regimes

Requirements applicable

to AIFM and AIF applicable to third Requirements

country domiciles AIFM AIF

Non-EU

to at least 2018)

Provisions on transparency, and major holdings and control provisions (if applicable)

Cooperation arrangementsAML requirements

Passport (expected from 2015 onward)

Full Directive, including “Member State of reference”

authorization

EU legal representative

Cooperation arrangementsAML requirementsTax agreements

Non-EU

including “Member State of reference”

authorization

EU legal representative

Cooperation arrangementsAML requirementsTax agreements

Provisions on transparency, and major holdings and control provisions (if applicable)

Cooperation arrangementsAML requirements

Passport (expected from 2015 onward)

Full Directive, including “Member State of reference”

authorization

EU legal representative

Cooperation arrangementsAML requirementsTax agreements

II.1.2 Cross-border management

Authorized EU AIFM, and non-EU authorized in a “Member State of reference”, beneit from a management “passport” permitting them to manage EU AIF cross-border in the EU either:

• ฀ Directly

• ฀ Via the establishment of a branch

EU AIFM may also manage non-EU AIF

II.2 EU AIFM

II.2.1 Marketing of EU AIF

II.2.1.1 Passport regime

Authorized EU AIFM are entitled to market their EU AIF to professional investors in any EU Member State – they beneit from a “passport.”

Where the EU AIF is a feeder AIF, however, there are two possible scenarios:

• ฀ The master AIF is an EU AIF managed by an authorized EU AIFM: in this case, the feeder beneits from a passport

• ฀ The master AIF is not an EU AIF managed by an authorized EU AIFM: in this case, the provisions applicable to the marketing of non-EU AIF by EU AIFM apply (see II.2.2.2 Private placement regime)

EU AIFM existing on 22 July 2013 have until July 2014 to submit an application for authorization At the time of writing, it was unclear what regime(s) would be applicable to marketing of AIF by AIFM between 22 July 2013 and the date of their authorization under the Directive For example, private placement by EU AIFM of their

EU AIF might be permitted by some Member States, at least during the additional one year period – i.e., until July 2014

Member States may permit the marketing of AIF to retail investors in the Member State The requirements of the Directive must be met, and, in addition, Member States may impose stricter requirements on the AIFM or the AIF than those applicable to marketing to professional investors These requirements must not be stricter for EU AIF marketed cross-border than for AIF marketed domestically

When an EU AIFM intends to market its EU AIF in an EU Member State (its home Member State or a host Member State), it must submit a notiication to its home Member State for each AIF The notiication must include:

• ฀ A notiication letter, identifying the AIF which the AIFM intends to market and information on where it is established

• ฀ The AIF constitutional document

• ฀ The identity of the depositary for each AIF

• ฀ A description of, or information on, the AIF available to investors, as well as information that must be provided to them before they invest

• ฀ Information on the master AIF, if the AIF is a feeder

• ฀ The identiication of the Member State(s) in which it intends to market the AIF

• ฀ Measures to prevent the fund from being marketed to retail investors (if relevant)

• ฀ Information on arrangements made for marketing the AIF in the home, or host, Member State

Providing that the provisions of the Directive are met, in the case of marketing in the AIFM’s home Member State, the competent authority is required to inform the AIFM within 20 days that it may start marketing the AIF In the case of cross-border marketing, the competent authority of the AIFM’s home Member State are required to transmit the complete documentation to the competent authority of the host Member State, together with an attestation that the AIFM is authorized to manage AIF with that particular investment strategy within 20 days; upon transmission, they are required to notify the AIFM of the transmission The AIFM may start marketing the AIF in the host Member State from the date of notiication of transmission