Reserved Alternative Investment Funds: Luxembourg Is One Step Ahead Of The Game

This article first appeared in Agefi Luxembourg in June 2016.

Almost six months following the publication on the Luxembourg Parliament's website of the bill of law n°6929 on reserved alternative investment funds (RAIFs), the funds industry is looking forward to the updated version of the bill of law, which was initially planned for enactment during the first semester of 2016.

Although the Council of State pointed out that “it understands the usefulness and even the need for reform due to the unintended consequences of the law of 12 July 2013 on alternative investment fund managers” (the AIFM Law), three formal oppositions to the bill of law were raised by the Council of State in its opinion of 8 March 2016, leading to amendments and redraft of the bill by the Budget and Finance Commission.

RAIF: a newcomer in the Luxembourg AIFs landscape

The long standing approach taken so far has been to dictate sound regulation around the fund products (so-called ”products laws”) on the one hand and to impose more or less 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) on the other hand.

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 approval process.

The entry into force of the AIFM Law implementing in the Grand-Duchy of Luxembourg the alternative investment funds managers' directive (AIFMD) have had an unforeseen 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 of that of the AIF.

This dual layer of supervision has created a competitive disadvantage for Luxembourg as compared with its traditional competitors (both onshore and offshore) and accelerated the modernisation and emergence of unregulated vehicles taking the form of common limited partnership (société en commandite simple) and special limited partnership (société en commandite spéciale) appointing an authorised AIFM, giving them access to the European...