Luxembourg: Exploiting The AIFM License To Its Full Potential

What does the AIFM license offer?

The AIFM license enables asset managers to manage and market alternative investment funds (AIFs). It also gifts them with cross-border passporting rights to carry out these regulated activities across all 28—soon to be 27—EU Member States. This passport empowers the AIFM to service investors anywhere in the EU from one licensed entity, under the supervision of its local regulatory authority. In light of these capabilities, many AIFMs in Luxembourg have made the synergy-generating move to combine the AIFM license with the UCITS management company license that enables them to also manage retail UCITS funds with broadly similar regulatory substance requirements.

Although combining an AIFM and a MiFID license is not permitted, an increasing number of AIFMs are extending their AIFM licenses so as to be able to provide investment services on an ancillary basis. Their core activity has to remain managing AIFs, but portfolio management for individual accounts such as for pension funds and managed accounts, as well as advisory services to clients across the EU, are permitted on an ancillary basis.

How to get authorised as an AIFM in Luxembourg?

When it comes to obtaining approval from the CSSF there is a specific process that an applicant will need to follow. The forms to be completed are available on the CSSF website: the applicant is required to include a lot of factual information about the business plan, shareholders, financial strength, the directors and senior management of the company, the people heading up the control functions, the AIFs and where they will be marketed, the depositary, and any delegation arrangements. A substantial amount of supporting documentation is also required including the organisation chart, regulatory capital, a detailed risk management process document, and descriptions of policies including IT systems, outsourcing, and remuneration.

Additionally, the senior managers who are responsible for the day-to-day management of the AIFM have to be approved by the CSSF, which will consider their relevant expertise, experience and qualifications. The AIFM will need to have its head office in Luxembourg, where decision-making and control functions must be located too.

The CSSF has a dedicated team that deals with AIFM applicants and this team is required to process an application within three months, a period that may run to six months depending on the facts and circumstances. There is a fee of €10,000 to approve the application and the CSSF will also charge an annual supervisory fee of €25,000 to the AIFM.

Luxembourg is home to a cluster of 233 AIFMs managing all classes of assets and many are operating cross-border business from Luxembourg. The majority provide these cross-border services directly from the Luxembourg AIFM while some players have chosen to establish local branches of the AIFM in target markets. Asset managers continue to build a successful distribution strategy with their AIFM in Luxembourg selling their alternative funds and portfolio management expertise to a range of professional investors across the EU market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.