Circular 25/901 also applies to specialised investment funds (“SIFs”) and repeals CSSF Circular 07/309. Part II of our series of articles concentrates on the changes to the SIF regime. Part I and Part III deal with the changes to the SICAR and Part II UCI regimes respectively.
Scope
The circular applies to all SIFs other than closed-ended funds or compartments authorised before entry into force, or SIFs with the ELTIF, MMF, EuVECA or EUSEF label.
Investment limits
The circular notes that the concept of risk spreading in the law of 13 February 2007 relating to specialised investment funds, as amended (the “SIF Law”) is not defined. Previously its interpretation was based on quantifiable investment limits expressed as a maximum percentage applied to a predefined calculation basis (in principle the assets or commitments to subscribe). A different calculation basis may be used if justified to and accepted by the CSSF.
Investment limits are now applied based on investor sophistication. As SIFs may only be subscribed by well-informed investors, limits applicable to unsophisticated retail investors are addressed in Part III of our series.
It is now permissible for a SIF (or compartment) whose securities are reserved for well-informed or professional investors to apply the following limits:
- Up to 50% of its assets or commitments to subscribe may be invested in:
- One and the same entity or person subject to the same existing exemption for securities issued or guaranteed by an OECD Member State or certain other authorities or institutions.
- One and the same undertaking for collective investment or other investment vehicle subject to the same existing exemption for UCIs that apply the same or stricter risk spreading.
- One and the same other assets. Assets whose economic viability is closely linked such that they form a single economic entity are not considered distinct assets.
- Short sales may not result in the fund or compartment holding a short position in securities issued by the same entity representing more than the 50% limit referred to above.
- When using financial derivative instruments, the fund must ensure comparable risk-spreading through appropriate diversification of underlying assets. Counterparty risk not cleared by a clearing institution or mitigated by collateral must be limited having regard to counterparty quality.
- Up to 70% of its assets may be invested in one and the same infrastructure investment. An infrastructure investment may consist in the acquisition of such asset or the exposure to it.
Each compartment of an undertaking for collective investment may be considered as a distinct undertaking for the purposes of the foregoing limits. This principle now extends to compartments of other investment vehicles and securitisation undertakings, provided segregation of liabilities is ensured.
It is now expressly provided that when using intermediary vehicles, investment limits apply to the underlying investments, not the vehicles themselves.
The CSSF may grant further derogations based on duly motivated justification or require compliance with additional investment restrictions for specific investment policies.
Ramp-up and wind-down periods: new clarity
The circular introduces detailed provisions on ramp-up and wind-down periods not previously addressed.
The offering document may provide that investment limits do not apply during the ramp-up period: up to twelve months for UCITS-eligible assets, or up to four years for private investments. The CSSF may approve extensions in exceptional circumstances, generally not exceeding one year.
For private investment funds, the offering document may provide that investment limits cease to apply during wind-down. During any periods when investment limits do not apply the fund must not be exposed to excessive risks or conflicts of interest that had not been previously identified.
Such provisions are without prejudice to AIFM Directive risk management requirements.
Borrowing limits
Where securities are reserved for well-informed or professional investors, no borrowing limits apply; such SIFs may set their own maximum borrowing limit which must be set out in the offering document.
Techniques and collateral management
SIFs may use techniques to manage their portfolio more efficiently, including positions in repurchase or reverse repurchase agreements, securities lending or borrowing, or other arrangements, provided such use complies with the principle to act in investors’ interests and does not result in a change in investment objectives or assumption of higher risks than those communicated to investors. The fund must ensure risk-spreading through an appropriate diversification of the collateral received. The techniques used must be profitable or enable one or more of the following objectives: (a) risk reduction, (b) cost reduction, or (c) generation of additional capital or income for the fund.
Enhanced transparency requirements
The circular clarifies the requirements for disclosing certain important information to investors, without prejudice to the disclosure requirements under the AIFM Directive. The transparency requirements below apply equally to Part II UCIs, SIFs and SICARs. Additional requirements apply when marketing to unsophisticated retail investors. See Part III of our series of articles for those latter requirements. The transparency provisions are subject to the overall requirement that all information provided in the offering document must be correct, clear and not misleading
Specific transparency requirements
For SIFs investing primarily in less liquid assets, the offering document must address temporary investment of significant cash holdings in liquid assets.
Where investments are made in funds or other investment vehicles this must be expressly mentioned in the offering document. If the target entity is not supervised by or registered with an authority with which the CSSF can cooperate this must be clearly indicated in the offering document and taken into consideration at the level of the risks communicated to investors. Where the investment is in funds or vehicles of the same initiator or manager, the offering document must specify applicable fees or charges.
The use of techniques referred to above must be expressly indicated in the offering document.
Where investors have redemption rights, the offering document must clearly describe such rights and relevant terms including the redemption frequency, the notice and settlement period, the available liquidity management tools and their activation conditions, how redemption orders are executed, and for any quantitative limitation, the treatment of the non-executed part of redemption orders, i.e. whether they are cancelled or carried over to the next redemption date.
It is now clearly specified that the offering document must also include a description of the procedures that can be implemented to modify the investment policy or to make any other material change.
Extensions
See Part I of our series of articles.
Conclusion
Circular 25/901 represents a comprehensive modernisation of the regulatory framework for specialised investment funds. The increase in investment limits for single assets from 30% to 50%, the added clarity on ramp-up periods, borrowing limits, and transparency requirements are all welcome changes to ensure the continued attractiveness of the SIF regime. It is to be noted that existing structures may continue under their current frameworks whilst new funds benefit from the enhanced guidance and flexibility the new regime provides.
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