Luxembourg passed two laws dated 8 April 2019 in relation to the financial sector for the Brexit (together the “Brexit Laws”).
Maximum 21-month grandfathering period to benefit from EU passport
The first Luxembourg Brexit Law covers the scenario in which no withdrawal agreement is entered into between the United Kingdom (UK) of Great Britain and Northern Ireland (commonly known as the “UK”) and the EU, otherwise known as a “hard Brexit”. In case of a hard Brexit, actors in both the UK financial sector and UK investments funds sector will be considered “third-country firms” and will no longer benefit from the European passport to provide their services to EU clients, neither on a cross-border basis nor by way of the establishment of a branch office. To anticipate a smooth transition that ensures the (i) stability of the financial market; (ii) protection of Undertakings for Collective Investments (UCIs) investors; and (iii) continuity of existing contracts, the first Luxembourg Brexit Law provides that, subject to certain conditions, UK firms may be permitted to continue their activities in Luxembourg during a transitional period. Luxembourg legislators thus empowered the supervisory authority of the Luxembourg financial sector the Commission de Surveillance du Secteur Financier (CSSF) to grant that possibility for a limited period of time.
For a maximum period of 21 months from the date of a hard Brexit, the CSSF may allow current UK Alternative Investment Fund Managers (AIFMs), duly authorised by the UK authorities to manage Luxembourg Alternative Investment Funds (AIFs), and continue to carry out in Luxembourg activities such as investment management, administration and marketing (as referred to in Articles 5(2) or 5(4) of the AIFM Law dated 12 July 2013) by way of the free provision of services or the establishment of a branch office. Thus, during the grandfathering period, UK AIFMs should be authorised to market Luxembourg AIFs to professional investors in Luxembourg.
Also, during that grandfathering period, it is expected that UK entities will perform a gap analysis to exercise one of the following three options which should be available to them: (i) termination of the activities in Luxembourg; (ii) application for a license in Luxembourg; or, (iii) transfer of the relevant activity to another EU Member State.
The CSSF will communicate further to the public in due course as regards the actions to be taken by UK firms to benefit from the transitional period provided under the Brexit Laws.
The Reserved Alternative Investment Fund (RAIF) Law of 23 July 2013 (the “RAIF Law”) is not covered under the Brexit Laws. RAIFs are neither supervised nor regulated by the CSSF. The CSSF supervises at the level of the authorised AIFM which in the case of a UK AIFM will benefit from the above-mentioned grandfathering period under the first Luxembourg Brexit Law.
Grandfathering period of 12 months to remedy passive breaches of investment policies/ rules resulting from Brexit and market UK UCITS in Luxembourg
The second Luxembourg Brexit Law further clarifies the situation of Undertakings for Collective Investments and Transferable Securities (UCITS) established in the UK, which are marketed to retail and/or professional investors in Luxembourg at the time of the Brexit. They may continue marketing their shares to retail investors in Luxembourg for a maximum period of 12 months from the Brexit date, applicable in case of a soft or hard Brexit.
The second Luxembourg Brexit Law provides for a 12-month remedy period for Specialized Investment Vehicles (SIFs) to remedy any exclusively Brexit-related breaches of investment restrictions and investment policies. This requirement only covers positions taken prior to the Brexit date, and is also applicable in case of a soft or hard Brexit.
The Brexit Laws do not amend the RAIF Law. Our analysis is that RAIFs will not benefit from this grandfathering period (contrary to SIFs, which will) to remedy passive breaches of investment restrictions and investment policies resulting from the Brexit.
This means that RAIFs should take all necessary measures and actions in anticipation of the Brexit to remove or waive any position which could be deemed as a passive breach after the Brexit date and, as necessary, update their private placement memorandum and/or constitutional documents.
For any other information or queries, please contact Me Renaud Le Squeren or Virginie Leroy (Solicitor)