Luxembourg Draft Law No. 8628 (the “Draft Law”) transposes Directive (EU) 2024/927 into the Law of 17 December 2010 on undertakings for collective investment (the “UCI Law”) and the Law of 12 July 2013 on alternative investment fund managers (the “AIFM Law”), focusing on delegation, liquidity risk management, supervisory reporting, depositary and custody services, and lending by AIFs. The Draft Law amends both regimes to harmonise with the EU framework and strengthen investor protection.
The following summarises the key changes being proposed to the AIFM Law.
Lending by AIFs: core regulatory framework
The Draft Law establishes a comprehensive regime for lending by AIFs, transposing the full suite of Directive (EU) 2024/927’s harmonised loan-lending framework, including concentration limits, leverage caps, risk processes, prohibited loans to affiliates, grant-and-sell ban, and retention requirements.
AIFMs will be required to have effective policies, procedures and processes in place for loan origination as well as for assessing credit risk and for managing and monitoring their credit portfolio.
A 20% single-borrower cap is imposed when the borrower is a financial undertaking, AIF, or UCITS with new Articles 14 (6) and 14(7) specifying the terms and conditions for applying such cap.
Article 14(8) sets leverage caps for loan-granting AIFs: 175% for open-ended AIFs, 300% for closed-ended AIFs.
Loans to the manager, its staff, the depositary or its delegates, and the manager's delegates or group are prohibited (with a narrow exception for financial undertakings financing third parties).
All loan proceeds net of fees will be required to be allocated to the AIF and the costs and commissions associated with loan management must be disclosed to investors.
There will be a ban on "grant and sell" strategies where loans are originated for the sole purpose of selling those loans to third parties.
Subject to certain targeted exemptions an AIF will be required to retain 5% of the notional value of a loan that it has originated and is selling to a third party.
A new Article 15(3) Imposes a default closed-ended structure for loan-granting AIFs. Derogations may be allowed provided the manager can demonstrate to the CSSF that it has implemented an adequate liquidity management system for the open-ended AIF it intends to manage.
The legislator has taken up the choice given in Directive 2024/927 to allow Member States to prohibit AIFs from granting loans to consumers. Thus, a new article 4-1 specifies that AIFs that grant loans are not authorised to grant loans in Luxembourg to consumers and AIFs are not authorised to manage loans granted to such consumers. The commentary on the Draft Law makes clear that this prohibition applies on the territory of Luxembourg and does not prohibit Luxembourg AIFs from granting loans or managing consumer credit in another Member State if that Member State has not specifically prohibited this on its territory.
Liquidity management tools (“LMTs”) for AIFs
The Draft Law introduces a comprehensive LMT regime:
A new Annex V lists and defines LMTs: suspension; redemption gates; extended notice; redemption fees; swing pricing; dual pricing; anti-dilution levies; redemption in kind and side pockets.
Managers managing open-ended AIFs will be required to select at least two appropriate LMTs from Annex V (other than suspension and side pockets), provided that money market funds may select one. The selection may not consist solely of swing pricing and dual pricing.
Redemption in kind, when used as an LMT, is limited to professional investors and if the redemption in kind corresponds to a proportion of the assets held by the AIF (subject to narrow exceptions).
Policies/procedures for activating/deactivating selected LMTs and operational arrangements are required and should be communicated to the CSSF.
Article 15-1(2) provides that a manager managing an open-ended AIF may, in the interests of investors, activate/deactivate suspension and other LMTs including side pockets. The CSSF is empowered, in exceptional circumstances and after consultation, to require activation/deactivation of suspensions when needed for investor protection or financial stability.
Suspension and side pockets should only be used in exceptional cases where circumstances so require, and it is justified in the interests of investors.
If suspension is activated, the CSSF is to be informed without delay. Similarly, if any of the other LMTs (other than side pockets) are activated outside of the normal course of business the CSSF is to be notified.
In the case of side pockets, the CSSF is to be informed prior to activation or deactivation.
The CSSF shall inform the host members states of the relevant AIFM, ESMA and where there are potential risks to the stability and integrity of the financial system, the ESRB (European Systemic Risk Board), of any such notification received.
Managers who manage open-ended AIFs may use additional liquidity management tools in addition to those set out in Annex V.
Extension of AIFM activities
In order to enhance legal certainty, Annex 1 of the AIFM Law is amended to specify that the management of AIFs may also include the activities of granting loans on behalf of the AIF and managing ad hoc securitisation structures. The commentary to the Draft Law specifies that the inclusion of the additional activity of lending should be interpreted as also covering cross-border lending.
The Draft Law also amends Article 5 of the AIFM Law which sets out the conditions for taking out the activity of an alternative investment fund manager, in a number of respects.
Non-core services – functions and activities for the benefit of third parties
A new point (iv) is added to the list of non-core services, allowing an AIFM to carry out for the benefit of any third party, any function or activity already performed by the manager in relation to an AIF that it manages or in relation to the services it provides in accordance with this paragraph, provided that any potential conflict of interest is appropriately managed.
The commentary on the Draft Law, reflecting the recitals of Directive 2024/927, highlights that the intention of such clause is to support the international competitiveness of EU managers by allowing economies of scale and contributing to the diversification of revenue sources.
Examples of the type of services involved could include human resources or IT services for portfolio management, services related to anti-money laundering, certain corporate services or marketing services for funds.
The commentary provides that the concept of third party must be interpreted broadly to include not only other AIFs but also structures such as co-investment vehicles, intermediary vehicles or carried interest vehicles.
In order to be able to provide such activities, functions or services to third parties for the first time the manager must have an authorisation within the meaning of the new Article 5(4)(b)(iv) and the CSSF should be informed when they begin to offer these additional services.
The commentary also points out that following the entry into force of Regulation (EU) 2023/1114 on markets in crypto-assets, a manager may also provide crypto-asset services equivalent to investment portfolio management and ancillary services for which it is authorised.
Article 5(5)(b) is to be deleted thus removing the prohibition on managers providing ancillary activities referred to in Article 5(4)(b) (i.e. the non-core services) without also being authorised to carry out discretionary portfolio management in accordance with Article 5(4)(a).
Ancillary activities - administration of benchmarks
A new point 5(4)( c) is added allowing external AIFMs to administer benchmarks in accordance with Regulation 2016/1011 on benchmarks. Such AIFMs will not however be authorised to administer benchmarks used in the AIFs they manage (Article 5(5) (e) ).
Ancillary activities - credit management activities
A new point 5(4)(d) is added allowing external AIFMs to provide credit management activities in accordance with Directive 2021/2167 on credit managers and credit purchasers.
AIFM authorisation application
Article 6 of the Draft Law is amended to provide more precision in respect of the information to be included in an application for authorisation as an AIFM. For the most part the information to be provided is already requested pursuant to Luxembourg administrative practice but as regards delegation the law will now be quite prescriptive in terms of the specific information to be provided on delegates, the human and technical resources used to monitor delegates and the periodic monitoring measures to be used.
A new Article 6 (5) provides that the CSSF shall inform ESMA on a quarterly basis of the authorisations of AIFMs granted or withdrawn as well as of any changes to the list of AIFs managed or marketed in the EU by authorised AIFMs.
It is now specified in Article 7 that the conduct of the AIFM’s business must be determined by at least two natural persons who are either employed full-time by the AIFM or are dedicated full-time to the management of the AIFM or are executive members or members of the management body and are domiciled in the EU. The requirement for two full time persons was already generally required by Luxembourg practice therefore will be of limited impact.
Third party AIFMs
With regard to third party AIFMs a new Article 13(2)(a) provides that such management companies, where they intend to manage AIFs on the initiative of a third party, use the name of a third party initiator or appoint a third party initiator as a delegate shall take account of any conflicts of interest and provide the CSSF with detailed explanations and evidence of its compliance with the rules on conflicts of interest.
Delegation and distribution
Article 18 relating to delegation is amended to specify that the delegation of any of the functions set out in Annex 1 or of any the ancillary or non-core functions referred to in Article 5(4) is subject to prior notification to the CSSF.
It is also specified that that the AIFM is obliged to ensure that the functions listed in annex I as well as the ancillary or non-core services are provided in accordance with the provisions of the AIFM Law, regardless of delegation or the regulatory status or geography of the delegate.
A new paragraph 18(7) clarifies that where the marketing function referred to in point 2(b) of Annex 1 of the AIFM Law is carried out by one or more distributors acting on their own behalf and marketing the AIF in accordance with MIFID II or through insurance-based investment products, this shall not be considered a delegation.
Depositary services
Article 21(5a) of Directive 2011/61 gives the home Member State of an AIF the option of allowing a depositary established in another Member State to be appointed as the depositary of the AIF when certain conditions are met. Luxembourg does not meet those conditions therefore Luxembourg AIFs must continue to appoint Luxembourg established depositaries. However, the Draft Law proposes amendments to Article 19
to ensure that a Luxembourg AIFM can manage a non-domestic AIF that has appointed a depositary in a Member State other than that of the AIF, and
to allow a Luxembourg depositary to be appointed to a non-domestic AIF.
The Draft Law also inserts a definition of "central securities depository" (“CSD”) by reference to the Regulation 909/2014 on improving securities settlement and central securities depositaries (“CSDR”) and clarifies that issuer CSD services are not a depositary delegation whereas investor CSD services are a delegation.
Reporting, transparency, and cooperation
The list of pre contractual information to be provided to investors prior to an investment in an AIF is supplemented by the following points:
The name of an AIF should be accurate, clear and not misleading. Thus, it is considered essential to emphasise that it is important pre-contractual information.
The terms and conditions in force with investors regarding redemption, and the possible use and conditions of use of LMTs selected in accordance with the AIFM Law.
A list of fees, charges and commissions incurred by the AIFM in connection with the operation of the AIF and which must be directly or indirectly allocated to the AIF.
In terms of periodic information to be provided to investors the following has been added:
the composition of the loan portfolio;
on an annual basis all fees, charges and commissions that have been directly or indirectly borne by investors;
on an annual basis any parent company, subsidiary or special purpose entity used in connection with the AIF’s investments by or on behalf of the AIFM.
The reporting to the CSSF (Annex IV reporting) has been amended to remove restrictions aimed at focusing on the main transactions and exposures or counterparties and to add other categories of data to be reported (including in relation to delegates and the oversight of delegates and the list of Member States in which units of an AIF are effectively marketed).
A new paragraph in Article 24(5) provides that the CSSF may impose additional reporting requirements upon the request of ESMA and where necessary to ensure the stability and integrity of the financial system or to promote long-term sustainable growth.
There are extensive changes to Article 53 of the AIFM Law relating to cooperation between competent authorities and elsewhere in the AIFM Law to allow for extensive sharing of information and increase cooperation not alone with other competent authorities but also with ESMA, EBA, EIOPA, and the ESCB (Central banks of the European System).
Other changes
A new Article 15-2 is introduced specifying that when an AIFM is exposed to a securitisation transaction that no longer complies with the requirements set out in the Regulation 2017/2402 relating to securitisation, it must act and, if necessary, take corrective measures in the best interests of investors.
In relation to third country AIFs and AIFMs the Draft Law replaces references in various articles to FATF non-cooperative lists with “high-risk third country” in accordance the AML directive 2015/849 and, in addition includes references to EU list of non-cooperative countries and territories for tax purposes.
A new Article 46(4) is added to allow the marketing in Luxembourg of EU AIFs that invest primarily in the shares of a given company to the employees of that company or its affiliated entities as part of employee savings plans or employee participation schemes. When such an AIF is marketed on a cross-border basis in Luxembourg no additional requirements beyond those applicable in the AIFs’ home Member State will be imposed.
Transitional provisions and entry into force
A new Article 58(7) provides for transitional provisions and related conditions applicable to the granting of loans by AIFs and to AIFs granting loans established prior to the adoption of Directive 2024/927.
16 April 2026 is set as the date of entry into force of the changes to the AIFM Law except for those provisions relating to the changes to reporting to the CSSF which will enter into force on 16 April 2027.
Read our related article: Luxembourg Draft Law 8628 I Amendments to UCITS Law
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