Adapting The SIF Law For The AIFM Directive Era

Four and a half years after Luxembourg introduced the law creating the Specialist Investment Fund regime for alternative vehicles, the grand duchy's government has drafted legislation amending the SIF rules.

The new legislation, which was placed before the Chamber of Deputies (Parliament) on August 12 and which is expected to become law before the end of this year, aims principally to adapt the SIF law to the requirements of the European Union's Directive on Alternative Investment Fund Managers, which will take effect in July 2013, including rules on delegation, risk management and the handling of actual or potential conflicts of interest.

In addition, in some instances the proposed changes will bring the SIF regime into line with Luxembourg's funds legislation of December 17, 2010, which transposed into national law the Ucits IV Directive governing cross-border distribution of retail funds within the EU as well as introducing other changes affecting non-Ucits funds. For example, the law will enable sub-funds of a SIF umbrella structure to invest in other compartments of the same structure, as is already now the case for Ucits funds.

Moving early to adopt requirements to be introduced by the AIFM Directive is in keeping with Luxembourg's tradition, maintained over more than two decades, of putting EU legislation in place ahead of many competing European jurisdictions, enabling promoters to plan future fund launches with confidence about the stability of the country's regulatory regime.

The first of 18 articles of the draft legislation states that the activity of management of a SIF must comprise at a minimum management of the investment portfolio. This stipulation aims explicitly to exclude from the SIF regime passive funds that seek to create value solely by the long-term holding of assets and to create a distinction between SIFs and private wealth management companies governed by Luxembourg's law of May 11, 2007. However, it does not exclude private equity or real estate funds from the SIF regime. Article 2 requires SIFs to have in place procedures to determine that its investors qualify as sophisticated rather than retail.

Article 3 aligns the SIF rules with various features of the 2010 law. Where the fund's articles of association are drawn up in English, the legislation no longer insists that these be translated into French or German. Funds no longer need to send shareholders physical copies of their annual reports unless this is...