A Solution that Redefines Fund Manager & CSSF Roles
On July 14, 2016, Luxembourg’s Parliament approved the law on reserved alternative investment funds (RAIFs), providing a missing link to the Alternative Investment Fund Managers Directive of 2011 (AIFMD).
Until now, all alternative investment funds required initial approval from the CSSF, Luxembourg’s supervisory body, in addition to the integration of an alternative investment fund manager (AIFM) when exceeding specified thresholds for assets under management.
In the alternative fund world, the mandatory integration of an AIFM was unfamiliar and unpopular. Because the two layers of supervision were considered redundant and cumbersome, many players opted for an unregulated investment vehicle, managed by an external AIFM if required.
However, these alternative investment vehicles were not investment funds stricto sensu. To address this hiccup and to enhance security within the alternative fund sector after the financial crises, Parliament looked to the reserved alternative investment fund.
At first glance, RAIFs may seem familiar, sharing substantial characteristics with specialized investment funds (SIFs), but unlike SIFs and risk capital investment companies (SICARs) they are not subject to direct CSSF approval. Under this new law, supervision will be entirely conducted by an authorized AIFM without the involvement of financial regulators.
By expanding the role of AIFMs, their presence becomes a benefit rather than an inconvenience…
Uniquely, state supervision shifts from the product to the manager. Despite the reduced role of the CSSF, this new structure boosts regulatory effectiveness: Instead of infrequent checks by a busy supervisory body, the fund is monitored by a designated manager who is already well positioned to closely oversee each step.
To qualify, AIFMs meet extensive requirements, including the implementation of internal procedures and risk policies. They must also prove that they are actively operating in Luxembourg and able to control the funds under their management.
By expanding the role of AIFMs, their presence becomes a benefit rather than an inconvenience, allowing RAIFs to be set up and monitored more efficiently. With these managers as the sole supervisors, the three to six-month setup period can be reduced to a matter of weeks.
The fund industry is cross-border oriented by nature and demands particularly innovative regulations to meet the needs of international, fast-paced investors.
Luxembourg, home to the world’s second-largest fund industry, has long been a trailblazer in the sector. With the introduction of this semi-regulated structure, the Grand Duchy has once again challenged the limits of traditional investment vehicles.
The fund industry is cross-border oriented by nature and demands particularly innovative regulations to meet the needs of international, fast-paced investors. Because RAIFs benefit from the European ‘passport,’ via their authorized external AIFMs, they can be marketed to and managed for investors throughout Europe.
New investment solutions like this one help to further differentiate and expand the country’s impressive array of investment options. Since the bill was first drafted in 2015, the concept has drawn significant interest due to its short time to market and relative fluidity.
RAIFs, which are limited to well-informed investors, will prove particularly practical for individuals with relatively small to mid-sized investments or those in the development phase who need a sophisticated model. Later on, when their needs shift, they can easily opt for a fully regulated SIF structure.
In principle, RAIFs face the same tax regime as SIFs. Exempt from corporate income and other taxes, they are subject to a .01 percent subscription tax levied on net assets. However, RAIFs investing in risk capital can choose the same tax regime applied to SICARs.
The law came into effect at the end of July and Kaufhold & Réveillaud, Avocats, Avocats has finished preparing the necessary documentation, so that it can hit the ground running now that this exciting new fund is available. The firm will accompany clients through each phase in the process: analysis, setup, drafting of documents and liaising with AIFMs and service providers.