Changes to depositary regime applying to Part II Funds

Posted - 02.03.2018

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Now reading : Changes to depositary regime applying to Part II Funds

The Luxembourg Law of 17 December 2010 ("UCI Law") is amended with effect from 5 March 2018 to provide that for undertakings for collective investment governed by Part II of the UCI Law ("Part II Funds") which are managed by an authorised AIFM and whose issuing documents do not allow the marketing of their shares to retail investors on Luxembourg territory, the AIFMD depositary regime shall apply rather than the UCITS depositary regime.

As a reminder and in a nutshell, the UCITS depositary regime and the AIFMD depositary regime differ in that the AIFMD depositary regime permits (i) contractually agreed transfer of liability from the depositary to a sub-depositary (including a broker acting as sub-depositary) and (ii) extended possibilities for rehypothecation.

In terms of a background to this change, at the time the UCI Law was amended to transpose into Luxembourg law the depositary regime for UCITS as introduced by the so-called UCITS V Directive, the same regime was introduced for Part II Funds. However, to the extent that Part II Funds are AIFs (and not UCITS) it was felt that this constituted gold plating in consideration of the AIFMD depository regime that should be applicable to AIFs generally, including Part II Funds. It is on that basis that the initiative was taken to amend the UCI Law again to eliminate any gold plating.

The prospectus of the relevant Part II Fund must specifically provide that its shares are not marketed to retail investors on Luxembourg territory.

This change is of particular relevance for Part II Funds which pursue an investment strategy that implies the involvement of a prime broker which also acts as sub-depositary, and where the depositary is not willing to accept liability for loss of securities by the prime broker.

The UCI Law now also provides that in the case where a Part II Fund (i) is managed by a registered AIFM or by a non-EU AIFM and (ii) is prohibited by its offering documents from marketing its shares on Luxembourg territory to retail investors, that Part II Fund is subject to the lighter depositary regime (i.e. non-UCITS and non-AIFMD depositary regime) which applies to non-AIF investment structures.

The aforesaid change in the UCI Law was made through a so-called "omnibus law" which brought about a number of other changes to various Luxembourg laws including, inter alia, a relaxation of professional secrecy rules in the context of delegation/outsourcing arrangements on which we will report in the near future by means of a separate newsflash.

For more information, please contact Olivia Moessner at oliviamoessner@elvingerhoss.lu or your usual contact lawyer at Elvinger Hoss Prussen.

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