29 January 2007
The Luxembourg legislative authorities announced on 5 October 2006 plans to replace the existing law of 19 July 1991 on undertakings for collective investment for institutional investors. The proposed bill on specialised investment funds (SIFs) provides for an updated and more flexible investment vehicle, which is expected to be in place shortly.
Luxembourg is renowned for a number of things. For many, it is simply one of the EU's smallest members, but for financial communities it is regarded as one of the world's most important jurisdictions, offering favourable legal and tax initiatives and being home to the highest concentration of investment funds across Europe.
Over the course of the past year the legislative bodies have been particularly busy with a number of new developments now underway to enhance the country's financial appeal further.
One of the most talked about has been the new law surrounding SIFs. The ultimate aim is to put in place modernised legislation for a more flexible investment vehicle, which will be free of some of the restrictions that existed under the 1991 law - itself a law 'by reference' in that it mainly refers to the law dated 30 March 1988 on undertaking for collective investment.
As the latter will cease to be in force on 13 February 2007, and because some of its former restrictions have not been adapted in line with market changes, the opportunity has arisen for the authorities to kill two birds with one stone.
Put simply, the new legislation intends to satisfy a tangible need in the real estate and hedge funds areas, where the cornerstone of the project is to create a specific ambit for well-informed investors.
Given current market trends, the timing for the new proposals could not be better. As with the hedge fund area, investment in Europe's real estate market has been booming. Real estate has evolved to become a mainstream investment alternative and both institutions and individuals have been seeking to invest in this area.
It is not surprising, therefore, that over the past few years most of the world's largest institutions and real estate promoters have been launching funds in Luxembourg.
In Luxembourg, investors have, to date, been accessing real estate via a number of ways, including through Luxembourg regulated funds such as the fonds commun de placement, société d'investissement à capital variable and société d'investissement en capital à risque, and through a number of unregulated investment vehicles such as the société de participation financière (Soparfi). While each vehicle offers respective incentives, the revised SIF is intended to remove many of the obstacles that have previously been linked to this type of investment vehicle.
Ultimately, the new law aims to create new opportunities through a more flexible and simplified investment structure while continuing to offer investors an attractive tax environment, as with Luxembourg's 1991 law. This is something that the market has been calling for.
For many, the section on 'eligible' investors may be the most appealing aspect. With the increasing number of investors looking to domestic and overseas property for their savings and pensions portfolios, the fact that the doors could soon be open to 'professional and private, well-informed investors' means that many of those who were restricted to invest in the funds under the 1991 act will no longer be deterred.
With the new law investors can look well beyond what is on the shelf and work more directly with their advisers to create products according to their specific needs, while also having the possibility of investing in a wider range of asset classes. Ultimately investors will have much more freedom in their choice and spread of investments. Also important is that smaller sponsors will have the opportunity to launch products, which opens up further opportunities for the investment market.
Fundamentally, the proposed investment policy offers fewer investment restrictions and reporting requirements will be lightened. For example, we could be seeing fewer annual reports following proposals to replace the existing requirements for a semi-annual, non-audited report or long-form report with an annual audited report for the relevant financial year.
Quantitative limits that existed under the 1991 law will be also be removed - making it the responsibility of the SIF manager together with the Commission de Surveillance du Secteur Financier (CSSF) to determine such limits. The law also outlines that the publication of a net asset value and the requirement to subscribe and redeem at that value will no longer be necessary.
The time in which funds can be brought to market would be reduced significantly given that neither a promoter, nor CSSF supervision of a promoter's financial status, will be necessary. Soon there could be the possibility to set up the SIF as soon as the file is registered with the CSSF and prior to the CSSF's approval. It will solely be the professional reputation and expertise of the SIF managers that will be subject to the CSSF's examination.
Other attractions include a choice of several corporate forms for SIFs - public company limited by shares, partnership limited by shares, private limited company or cooperative society having the form of a public company limited by shares - and fewer constraints on the formal content of the prospectus. Furthermore, the new SIF law will be autonomous from other laws dealing with investment funds.
Getting the balance right
A theme running throughout the proposed bill concerns the CSSF and its future role. One of the most significant points being that it will be possible to make the final preparations for the SIF without prior approval from the CSSF. While it is difficult to identify potential drawbacks to the new legislation, some may argue that time, money and effort could be wasted should the fund not be approved by the authorities after its two months of creation.
For many this section may be somewhat unclear, as while there is the good intention of making the process less formal and more flexible, there is also the need to ensure the fund conforms to the legal requirements before it is created. Nevertheless, the financial markets have so far responded well to the proposed changes and companies and legal firms are already making the necessary preparations should the new law come into play.
Overall the future law may well be a positive new development not only for Luxembourg, but importantly for investors worldwide. The SIF could be the next key driver for the Luxembourg fund industry, as it offers the seriousness of being regulated while also providing the flexibility much welcomed by sponsors and investors. If implemented, this new legislation could be a good benchmark of what is yet to come in the future.
-François Pfister is a partner at Oostvogels Pfister Roemers