The 'Professional Depositary Of Assets Other Than Financial Instruments' A New Breed Of Specialised PFS

The AIFMD2 gives the option3 to Member States to allow the depositary of certain AIFs4 to be a professional entity which does not necessarily qualify as a bank5 or an investment firm6. According to a recently published Bill7, Luxembourg intends to exercise this option by introducing in the Financial Sector Act8 a new category of specialised PSF named "professional depositary of assets other than financial instruments". This memorandum purports to describe the main features of this new depositary.

1. Introduction – As far back as one may go, any piece of Luxembourg legislation dealing with investment schemes9 has always reserved the function of depositary to banks (section 2). In the advent of the AIFMD's transposition, it is likely that Luxembourg will extend the list of authorised depositaries to certain investment firms and to a new category of specialised PFS (section 3). This latter extension results from an option granted by the AIFMD to Member States (section 4) which is exercised in the Bill via the introduction of a new Article 26-1 in the Financial Sector Act (section 5). This new specialised PSF may only act as depositary for limited types of investment schemes (section 6). It will be subject to restrictions whilst also benefiting from certain flexibilities (sections 7, 8 and 9) and will require prior authorisation before commencing its activities (section 10). This new status should create additional opportunities and hence be of interest to the industry (section 11).

2. Currently eligible depositaries – Pursuant to current Luxembourg laws and as illustrated in Table I below, any Luxembourg investment scheme qualifying under the UCI Act10, the SIF Act11 or the SICAR Act12 must appoint a depositary which must be a bank established in Luxembourg. In relation to SIFs13 the depositary must have its registered office in the EU, whereas in relation to UCI IIs14 or SICARs15 the depositary may have its registered office in a non-EU Member State.

3. Eligible depositaries post-AIFMD transposition – Table II below illustrates the new eligibility regime resulting from the Bill and which should apply to non-UCITS16 investment schemes. The Bill should convey two main changes to the regime described in the foregoing section.

   On one hand, the list of entities which may be appointed as depositary will, in addition to banks17, include (i) investment firms complying with the conditions set forth in Article 19 (3)i) of the AIFM Act18 and (ii) under certain conditions the new specialised PSF, which is more fully described in the following sections.

   On the other hand, any non-UCITS Luxembourg investment scheme which is not a Full Scope AIF19 may appoint as depositary the Luxembourg branch of a non-EU Member State bank20.

4. Option offered by AIFMD – According to the last paragraph of Article 21.3 of the AIFMD, for AIFs which fulfil the following conditions (the "Eligibility Conditions") :

   they have no redemption rights exercisable during the period of 5 years from the date of the initial investments21; and in accordance with their core investment policy, they generally: do not invest in assets that must be held in custody in accordance with Article 21.8(a) of the AIFMD; or invest in issuers or non-listed companies in order to potentially acquire control over such companies in accordance with Article 26 of the AIFMD; Member States may allow the depositary to be an entity (a "Qualified Entity"): which carries out depositary functions as part of its professional or business activities in respect of which such an entity is subject to: mandatory professional registration recognised by law; or to legal or regulatory provisions or rules of professional conduct; and which can provide sufficient financial and professional guarantees to enable it to perform effectively the relevant depositary functions and meet the commitments inherent in those functions. A key component of the Eligibility Conditions which requires further precision is the term "generally". Recital (34) of the AIFMD simply lists private equity funds, venture capital funds and real estate funds among the investment schemes potentially fulfilling the Eligibility Conditions. In the absence of further explanations in the EU texts, the determination of whether the "generally" criteria is met or not should rest with the Member States and their regulators' administrative practice. See below, in section 6, for a first hint in this regard.

5. Article 26-1 – According to the Bill, Luxembourg should count among the Member States who have elected to exercise the option described in the foregoing section. Luxembourg should not, however, go as...