11th Hour Considerations for Fund Managers on Cross-Border Brexit Structuring
by Mark Shaw, Head of our London Representative Office
"As I type this, the latest description of the mood on the Brexit negotiations is "downbeat" following a weekend of mixed reports that have focussed largely on fishing rights.
_Over the last couple of years, when we have been advising financial services clients on post-Brexit structuring, we have always assumed a no-deal outcome, as it is the way in which we could guarantee that clients could continue their cross-border activities when the UK fully departs the EU. As talks developed and financial services were pushed -to quote Barack Obama- to "the back of the queue", this stance became increasingly pertinent. Combined with the growing spectre of a no-deal outcome, and less than four weeks remaining, where does that leave UK fund managers?
The CSSF has helpfully issued CSSF Press Release 20/26 today, which provides some relief and a more useful guidance. Central to its messaging is that passporting rights will be terminated as of 31 December 2020 at midnight and, as such, will be lost as of 1 January 2021.
There are a number of potential pitfalls, particularly around regulatory status changes and the need for notifications, de-notifications and applications. Taking its provisions in a possible order of urgency:
> UK AIFM of Luxembourg AIF
Where there is a UK AIFM of a Luxembourg AIF, the CSSF previously allowed for UK managers to continue to manage such Luxembourg AIFs (albeit subject to the loss of passporting rights under the AIFMD attached to the manager). The application for this relief had expired on 15 January 2020 (CSSF press release 19/54), but it is now extended until 31 December 2020. If you are a manager of such a (typically closed-ended) fund that needs to avail itself of this relief to continue to manage the Luxembourg AIF from the UK, you should act immediately.
Alternatively, and/or in order to preserve your onward passporting rights, you should transfer management to an EU27 AIFM. That AIFM will then be permitted to onwardly delegate portfolio management to the UK, subject to the requirements for delegation to a third country (FCA regulation of the UK entity and oversight by the AIFM).
> UK UCITS/AIF distribution into Luxembourg
Managers of UK UCITS will already be aware that these will be considered AIFs for EU27 purposes, so will need to consider their distribution strategies and also be mindful of their notification and de-notification obligations to the CSSF (note that any change of approach from 1 January 2020 will trigger both a notification and a de-notification obligation). If managers are in any doubt as to their obligations, they should seek advice, but the press release attempts to walk the reader through the minefield.
Marketing to Professional Investors
UK AIFs can be marketed to professional investors in Luxembourg on a private placement basis, and the approach will depend on whether the AIF is managed by an EU27 AIFM (Art 36 AIFMD) or a UK/3rd country AIFM (Art 42 AIFMD) - links are to the relevant resources.
Where a UK AIF was passported into Luxembourg previously under Art 32 of AIFMD (the AIFMD manager passport), the new Art 42 AIFMD notification (helpfully Art 45 of the AIFM Law) would automatically cover the Art 32 AIFMD de-notification. However, managers will need to consider their obligations vis-à-vis all the applicable EU27 member states individually.
Marketing to Retail Investors
This could typically apply to UK UCITS that will be treated as non-EU AIFs. Regulated funds may be marketed to retail investors in Luxembourg; this will likely fall under Art 100(1) of the Law of 2010 for funds other than of the closed ended type managed by a UK manager. However, where a UK fund has an EU27 manager, it will fall under Art 46 of the Law of 2013, which is aimed at marketing of such AIFs to retail investors.
Again, these provisions will apply to distribution in Luxembourg only, so managers should consider their regulatory obligations elsewhere.
> Luxembourg fund managers of UK funds
While this activity will trigger UK regulatory obligations under the Temporary Permissions Regime (TPR), such firms should also ensure that they inform the CSSF of such application
Furthermore, if a Luxembourg IFM manages a UK UCITS, as that UK UCITS will now be designated as an AIF for EU purposes, the IFM must also ensure that it is authorised as an AIFM in Luxembourg. This requirement applies regardless of whether the UK UCITS (AIFs) are marketing in the EU27 from 1 January 2021.
If you are in any doubt as to your regulatory obligations around fund management or distribution, or any other regulatory aspect of Brexit, then please do not hesitate to contact a member of the Investment Funds Practice Group.