Specialized investment fund

A specialized investment fund or SIF is a lightly regulated and tax-efficient regulatory regime aimed for a broader range of eligible investors. This type of investment fund is governed by the Luxembourg law of 13 February 2007 replacing the law of 1991 defining the legal framework for institutional funds and enlarging the distribution scope to “well-informed investors”. The SIF law significantly simplified the rules for setting up investment fund structures ranging from straightforward investment strategies investing in listed securities to hedge funds, real estate and private equity funds.

On 12 July 2013, the SIF regime was amended by the law on alternative investment fund managers (AIFM law). Consequently, the SIF law has been divided into two parts:

Due to the broad definition of AIFs, most SIFs are qualified as SIF AIFs.

Characteristics

Legal structures

The SIF may be structured as a:

A SICAV or SICAF can be set up using different legal forms. It can be set up as a public limited company (SA), a partnership limited by shares (SCA), a private limited liability company (SARL), a cooperative in the form of a public limited company (SCoSA), a limited partnership (SCS) or a special limited partnership (SCSp).

These different entities may create sub-funds each with a different investment policy. The rights of investors and of creditors concerning a sub-fund or which have arisen in connection with the creation, operation or liquidation of a sub-fund are limited to the assets of that sub-fund (i.e. Protected Cell Concept), unless a clause included in the constitutional documents provide otherwise.

Eligible investors

A fund created under the SIF law may be sold to “well-informed investors”. According to the SIF law a well-informed investor is:

Diversification

The Luxembourg regulator (CSSF) issued a circular letter 07/309 on the 3 August 2007 containing guidelines of the principle of risk spreading and investment restrictions for SIF vehicles:

Investment restrictions and leverage

The SIF regime offers a broad scope of eligible assets. There are no specified investment restrictions or leverage rules by the SIF Law. It is simply stated that a SIF should apply the principle of risk diversification. Therefore, assets may include equity bonds, derivatives, structured products, real estate and shareholdings in privately held companies.

The CSSF may provide exemptions from these restrictions on a case-by-case basis. However, the CSSF may also request that additional restrictions are adhered to, in cases of funds with specific investment policies.

Minimum fund size and dividends

The SIF law sets a minimum fund size of €1.25 million which must be reached within 12 months after inception.

Issued shares of a SICAV must be fully subscribed, but only 5% of the amount of the subscription must be paid up in cash or by other means of contribution.

There are no specific restrictions on the payment of dividends. Nevertheless, such payments may not result in the size of the SIF falling below the minimum level of €1.25 million.

Valuation of the assets

Unless otherwise provided for in the issuing document, the valuation of the assets must be based on fair value, determined in accordance with the procedures laid down in the management regulations (FCP) or articles of incorporation (SICAV-SICAF).

Duties and taxes

The CSSF filing duty is fixed at €2650 for a single compartment SIF and €5000 for a multiple compartment SIF. The CSSF annual fee is fixed at €2650 for a single compartment SIF and €5000 for a multiple compartment SIF.

An annual subscription tax of 0,01% on the net asset value (NAV) has to be paid to the Luxembourg government ('taxe d'abonnement').

Appointing a SIF-AIF

A SIF that is qualified as an alternative investment fund according to the AIFM law must be managed by an authorized alternative investment fund manager (AIFM)which may either be established in Luxembourg, in a Member State of the EU, or in a third country.

Following the AIFM Law, a SIF-AIF can be managed in two different ways:

Depositary Functions

Depositaries of SIF AIFs must comply with the new depositary regime as provided for by the AIFM Law.

This new depositary regime imposes specific duties, being the following:

In addition, the liability regime has been reviewed and strengthened by the AIFM Law. The depositary is strictly liable in the case of a loss of financial instruments it held in custody and it must, without delay, return financial instruments of an identical type or of corresponding amount to the SIF AIF or the AIFM acting for the SIF AIF. Avoiding the consequences of this liability regime is very limited.

Any other losses caused by the depositary’s negligent or intentional failure to properly fulfill its obligation under the AIFM Law lie under the depositary’s liability.

Valuation Function

The valuation function (valuation of assets and calculation of NAV) has to be performed either by the AIFM itself or by an external company that will act under the responsibility of the AIFM and that is subject to a mandatory professional registration recognized by law. The NAV (net asset value) must be calculated at least once a year.

Content of annual Report

SIF AIFs have to disclose additional information in their annual reports compared to SIFs, being:

Risk Management

A SIF qualifying as an AIF must establish a risk management function separated hierarchically from that of the operating units. An adequate risk management system must be implemented in order to identify, measure, manage and monitor appropriately all investment risks arisen through the SIF AIF investment strategy.

3. Marketing

The exercisable marketing rules vary depending on whether the SIF is a SIF AIF:

SIF AIFs

Only SIF AIFs managed by an EU authorized AIFM benefit from a passport allowing the AIFM to market the SIFs within the EU.

The marketing of SIF AIFs outside or within Europe to well-informed investors, which do not qualify as professional investors, requires compliance with the NPR (national private placement rules) of each country where such marketing is done.

Other SIFs

SIFs that do not fall under the AIFM Law do not benefit from an EU passport for the marketing of their shares or units and therefore remain subject to the NPR of each country where the SIF is intended to be marketed.

Notes

External links

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