Newsletter April-June 2013

CAPITAL MARKETS

CSSF CIRCULAR 13/565 DATED APRIL 17TH 2013 (THE "CIRCULAR") AMENDING CSSF CIRCULAR 12/548 ("CIRCULAR 12/548") TRANSPOSING THE GUIDELINES OF THE EUROPEAN SECURITIES AND MARKETS AUTHORITY ("ESMA") ON THE EXEMPTION FOR MARKET MAKING ACTIVITIES AND PRIMARY MARKET OPERATIONS (THE "GUIDELINES")

Further to the publication of the Guidelines on April 2nd 2013 by ESMA, the Commission de Surveillance du Secteur Financier (CSSF) has by way of the Circular amended Circular 12/548 concerning the practical aspects of implementing Regulation (EU) No 236/2012 of March 14th 2012 on short selling and certain aspects of credit default swaps (the "Regulation").

The purpose of the Guidelines is to assist market participants and national supervisory authorities with the assessment and operation of notifications to the competent authorities in respect of the exemptions for market making activities and primary market operations under Article 17 of the Regulation and thereby develop a common and consistent approach in dealing with exemptions throughout the European Union.

In particular, the Guidelines provide advice on the following:

definition and scope of the exemption for market makers and authorised primary dealers; determination of the competent authority to which the notification for exemption should be addressed; general principles and qualifying criteria of eligibility for the exemptions; exemption process (including templates for notifications). The Guidelines are incorporated into Circular 12/548 (by being annexed as Annex VI) with immediate effect and the amended Circular 12/548 is available on the website of the Commission de Surveillance du Secteur Financier (CSSF) at:

www.cssf.lu/fileadmin/files/Lois_reglements/Circulaires/Hors_blanchiment_terrorisme/cssf12_548_upd_170413.pdf

NEW LUXEMBOURG LAW CONCERNING DEMATERIALISED SECURITIES

A big step in the modernisation of Luxembourg securities law has been taken with the adoption of the law concerning dematerialised securities and amending a number of existing Luxembourg laws, which was published in the Luxembourg Official Gazette (Mémorial A N°71) on April 15th 2013 (the "New Law").

Luxembourg companies (societé anonyme, société en commandite par actions) and investment funds now have the option to issue dematerialised equity securities and foreign and Luxembourg issuers have the option to issue dematerialised debt securities governed by Luxembourg law. There remains the option to issue debt and equity securities in bearer and registered form.

The New Law sets out certain requirements for the issuance/conversion of equity securities in/into dematerialised form, including but not limited to, the amendment of the articles of the issuer. The New Law also provides for forced conversion and sets down the consequences of non-presentation of securities in case of forced conversion.

Listed securities must be issued through clearing houses (les organismes de liquidation), which at present in Luxembourg would be one of Clearstream Banking S.A., LuxCSD S.A. and VP Lux S.à r.l. Non-listed securities are settled by either one of the above mentioned clearing houses or by central securities depositaries (les teneurs de compte central). The New Law also amended the law of April 5th 1993 on the financial sector, as amended, to provide for a central securities depositary (le teneur de compte central) as a new professional of the financial sector, which requires approval of the Luxembourg financial regulatory authority (Commission de Surveillance du Secteur) Financier (CSSF) to exercise its activities.

INVESTMENT FUNDS

PRINCIPLES FOR THE VALUATION OF COLLECTIVE INVESTMENT SCHEMES

On May 3rd 2013, the International Organisation of Securities Commissions ("IOSCO") issued a final report on "Principles for the Valuation of Collective Investment Schemes ("CIS")" (the "Final Report"). The Final Report amends and updates the Principles for CIS Valuation, originally developed in 1999 by the IOSCO, in order to take into account subsequent regulatory, industry and market developments.

Considering that during the last decade the fund industry developed a wide range of new assets whose valuation cannot be determined by using quoted prices, it has become inevitable for a CIS to rely on internal techniques which means management's judgment. As such internal techniques are more subjective, new international guidelines are required.

The Final Report therefore aims to promote internationally recognised standards for the valuation of assets of a CIS. In the opinion of the IOSCO, the proper valuation of assets is crucial for the protection of investor's interests.

The Final Report sets forth eleven principles as described below:

Documented and comprehensive policies and procedures should be drafted by the entity responsible for the valuation of CIS' assets; The methodologies for the valuation of assets should be identified by such policies and procedures; The valuation policies and procedures should establish procedures handling with potential conflicts of interest; Valuation policies and procedures should be applied consistently to all assets of the same nature; Procedures solving problems relating to pricing errors should be established in order to fully compensate investors for material harm; The valuation policies and procedures should be periodically reviewed to ensure their appropriateness and effective implementation; they should also be reviewed by a neutral third party at least annually; Initial and periodic due diligence should be performed on third parties before entrusting them with the performance of valuation services; The valuation methodologies should be disclosed to investors in the CIS' offering documents (or otherwise); Redemptions and subscriptions of investors' units and shares shall be performed on the basis of forward pricing and not on the basis of historic net asset value; Asset valuation should be performed on any day open for subscriptions and redemptions; and The net asset value should be available to investors at no fee. The above mentioned principles have been drafted in consideration of the comments received by the IOSCO during the consultation process. Such principles reflect a certain common approach and are a practical guide for regulators and industry practitioners.

EU FINANCIAL TRANSACTION TAX

During negotiations in relation to the European financial transaction tax ("FTT"), it became clear that it would be difficult to reach consensus across the 27 Member States. At the request of 11 Member States, namely France, Germany, Belgium, Portugal, Slovenia, Austria, Greece, Italy, Spain, Slovakia and Estonia, the European Commission has adopted a proposal to implement the FTT under the "enhanced cooperation" procedure.

The FTT shall be implemented by January 2014 only by those Member States opting into the "enhanced cooperation" procedure.

Nonetheless, the FTT will have an impact on investors all over the world. Indeed, in its current form, the FTT would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in a participating country (i.e. when at least one party is located in a country participating in the enhanced cooperation).

The United Kingdom has officially launched a challenge against the European Commission in the European Court of Justice in respect of the proposed implementation of the FTT under the "enhanced cooperation" procedure. Following this, Luxembourg announced on May 8th 2013, through the publication of a Q&A on the matter, that it would not opt for such enhanced cooperation.

In this Q&A, Luc Frieden, the Luxembourg Finance Minister has indicated that "Luxembourg is not opposed philosophically to the FTT" but, due to the growing interdependence of the financial world, it must be looked on a global level and not just at a regional level by 11 countries. He warns that implementation of the FTT through the "enhanced cooperation" procedure could lead to fragmentation of the single market and capital flight from the non-participating Member States.

UPDATE ON REGULATIONS OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL ON EUROPEAN VENTURE CAPITAL FUNDS ("EuVECA") AND ON EUROPEAN SOCIAL ENTREPRENEURSHIP FUNDS ("EuSEF")

Following the endorsement of both proposed regulations by Coreper on December 13th 2012 (see our newsletter of January 2013), the European Parliament adopted on March 12th 2013 at first reading, the amended proposals on EuVECA and EuSEF. They were subsequently adopted by the Council on March 21st 2013.

Both regulations were signed on April 17th 2013 and published in the European Official Journal on April 25th 2013. They will apply from July 22nd 2013, coinciding with the effective date of the Alternative Investment Fund Managers Directive ("AIFMD"). These regulations aim to make it easier for venture and social entrepreneurs that are exempt from the requirement to seek authorisation under AIFMD, to raise funds across the European Union without the requirement to comply with the full AIFMD regime. The key elements of the regulations provide for an EU brand for "EuVECA" and "EuSEF" and the introduction of a European marketing passport. The regulations are complementary although the range of eligible financing investments under the EuSEF regulation is wider than those available for venture capital funds under the EuVECA regulation.

We hereafter discuss only the amendments with respect to the EuSEF. Those with respect to the EuVECA will be developed in a separate publication.

The adopted amendments are the result of a compromise reached between the European Parliament and the Council. One significant amendment relates to the definition of a qualifying portfolio undertaking. It is extended to mean an undertaking that is established within the territory of a Member State, or in a third country provided that the third country is not listed as a...