Introducing The RAIF And Major BEPS Developments Relevant To Funds

The Reserved Alternative Investment Fund

A year ago, the Luxembourg fund industry welcomed the Reserved Alternative Investment Fund (RAIF). The RAIF is governed by the law of 23 July 2016 (the RAIF Law) and more than 100 RAIFs have been set up since the law was passed. Moreover, in July 2017, the Luxembourg stock exchange listed a RAIF for the first time.

The RAIF: A Newcomer to the Luxembourg Alternative Investment Fund Industry

The longstanding approach of the Luxembourg government has been, to create sound regulation around the fund products (so-called 'product laws') on the one hand, while on the other hand imposing somewhat burdensome licensing requirements on financial service firms active in the production and distribution of such fund products (e.g. managers, depositary banks, fund administrators, IT support, distributors and advisors).

This regulated environment has been beneficial to the development of Luxembourg's role as a global fund domicile by creating a brand for its fund products (UCITS and SIFs) and a label of quality. The downside, however, has undoubtedly been costs, entry barriers and slowness in the regulatory process.

The entry into law in July 2013 of the Alternative Investment Fund Managers (AIFM) Law, implementing in the Grand-Duchy of Luxembourg the Alternative Investment Fund Managers Directive (AIFMD) has had an unforeseen and undesirable effect on the funds industry by introducing an additional layer of supervision - at the level of the alternative investment fund (AIF) itself under the products law, and at the level of its alternative investment fund manager (AIFM), which may be based in a different country from where the AIF is established.

This dual layer of supervision has created a competitive disadvantage for Luxembourg compared to its traditional competitors (both onshore and offshore) and has accelerated the modernisation and emergence of unregulated vehicles such as a common limited partnership or a special limited partnership appointing an authorized AIFM, giving them access to the European marketing passport.

The international fund promoters' strong appetite for these unregulated vehicles, attested since their implementation in Luxembourg simultaneously with the AIFM Law, is evidence that the funds industry no longer perceived the product laws as a key and essential factor. Instead, reducing administrative burdens and costs, and above all, cutting time-to-market are key motivations for initiators.

The enactment of the RAIF Law demonstrates the willingness and continuing commitment...