An AIF shall be managed by a single AIFM responsible for ensuring compliance with the AIFM Law which shall either be:

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1 THE DELEGATION UNDER THE AIFM LAW The law of July 12, 2013 on alternative investment fund managers (the AIFM Law ) 1 regulates the authorisation, activities and transparency requirements of managers qualifying as alternative investment fund managers ( AIFM ). Pursuant to the AIFM Law, an AIFM is a legal entity established in Luxembourg whose activities include the management and/or the marketing of alternative investment funds, the latter being defined as collective investment undertakings, including investment compartments thereof, which (i) raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors and (ii) do not qualify as a UCITS pursuant to Directive 2009/65/EC ( AIF ) 2. An AIF shall be managed by a single AIFM responsible for ensuring compliance with the AIFM Law which shall either be: (i) (ii) an external manager, which is the legal person appointed by the AIF or on behalf of the AIF and is therefore responsible for managing the AIF (the External AIFM ); or where the legal form permits an internal management and where the AIF s governing body chooses not to appoint an External AIFM, the AIF itself shall then be authorised as an AIFM (the Internally Managed AIF ). No legal entity established in Luxembourg and qualifying as an Authorised AIFM 3 pursuant to the AIFM Law shall be entitled to perform any of the AIFM Activities (as defined below) without being authorised by the Commission de Surveillance du Secteur Financier (the CSSF ). 1 The AIFM Law has implemented in Luxembourg the Directive 2011/65/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (the AIFM Directive ). 2 In its Frequently Asked Questions issued on July 11, 2013, the CSSF identifies, as far as Luxembourg entities are concerned the following entities qualifying as AIF, i.e: (i) all undertaking for collective investment established under Part II of the law of December 17, 2010 on undertakings for collective investment as amended; (ii) specialised investment funds (SIF) established under the law of February 13, 2007 on SIF as amended; (iii) investment companies in risk capital (SICAR) established under the law of June 15, 2004 on SICAR as amended as well as (iv) non regulated entities (such as Luxembourg soparfi) that fall under the definition of an AIF pursuant to article 39(1) of the AIFM Law. 3 Authorised AIFM means: (A) AIFMs established in Luxembourg whose AIF s assets under management exceed in total either (i) EUR 100 million, including assets acquired through use of leverage or (ii) EUR 500 million, when the portfolio of assets managed consists of AIFs that are not leveraged and have no redemption rights exercisable during a period of 5 years following the date of the initial investment in each AIF (the thresholds under (i) and (ii) are referred to as the AIFM Thresholds ) and (B) to legal entities established in Luxembourg that do not fall under any of the AIFM Thresholds but have applied for the full AIFM licence under the opt in regime.

2 An External AIFM and an Internally Managed AIF do not benefit from the same range of AIFM Activities as clearly listed in the AIFM Law, the latter being much more restricted in terms of authorised activities under the AIFM Law than an External AIFM. The AIFM Law also authorises an AIFM to delegate certain of its AIFM Activities to a third party, provided, among others, that such delegation can be justified, is strictly controlled by the AIFM and does not result in the AIFM qualifying as a letter box entity. The purpose of this legal alert is to give an overview of the various AIFM Activities that an AIFM is authorised to perform when managing an AIF (I) and of the rules governing their delegation to a third party (II), it being understood that such delegation shall not be used by the AIFM to circumvent its liability towards the AIF(s) and its investors (III). For the purpose of this legal alert, the term AIFM collectively refers to External AIFM and Internally Managed AIF, qualifying as Authorised AIFM 4 under the AIFM Law. I. Overview of the AIFM Activities The AIFM Law considers the investment management functions of the AIF(s), which include, both portfolio management and risk management as the main activities that an AIFM shall perform (the AIFM Main Activities ). Therefore once authorised by the CSSF, an AIFM is de facto considered as competent to perform portfolio and risk management functions in relation to the AIF(s) it manages or intends to manage. In addition, the AIFM Law expressly recognises that an AIFM is also entitled to (i) administer its AIF(s) 5, (ii) to market the AIF(s) within the European Union and (iii) to carry out any other activities relating to the assets of AIF(s) 6 (the Other Activities ). 4 See footnote 2 for the definition of «Authorised AIFM». 5 The administration services of the AIFM include (i) legal and fund management services, customer inquiries, valuation and pricing, including tax returns, regulatory compliance monitoring, maintenance of unit/shareholder register, contract settlements, including certificate dispatch and record keeping. 6 The activities related to the assets of the AIFs are services necessary to meet the fiduciary duties of the AIFM, facilities management, real estate administration activities, advice to undertakings in capital structure, industrial strategy and related matters, advice and services relating to mergers and the purchase of undertakings and other services connected to the management of the AIF and the companies and other assets in which it has invested. 2

3 An External AIFM, unlike an Internally Managed AIF, benefits from a wider scope of activities by also being entitled, pursuant to the AIFM Law, to carry out, in addition to the AIFM Main Activities and the Other Activities 7 : (i) any additional management activities of UCITS subject to authorisation under Directive 2009/65/EC; (ii) (iii) management of portfolios of investments, including those owned by pension funds and institutions for occupational retirement provisions in accordance with Article 19(1) of Directive 2003/41/EC, in accordance with mandates given by investors on a discretionary client by client basis; and non- core services 8 comprising: investment advice, safe- keeping and administration in relation to shares or units of collective investment undertakings, reception and transmission of orders in relation to financial instruments; (the External AIFM Activities and together with the AIFM Main Activities and the Other Activities are hereinafter referred to as the AIFM Activities ). An AIFM is however not entitled to exclusively perform any of the External AIFM Activities considered by the AIFM Law as being complementary to the AIFM Main Activities and Other Activities. II. Rules governing the delegation of the AIFM Activities An AIFM may decide to delegate to a third party the execution of one or more of the AIFM Activities. The AIFM Law authorises and strictly supervises the delegation of the AIFM Activities. In addition, the Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing the AIFM Directive 9 with regards to exemptions, general operating conditions, depositaries, leverage transparency and supervision (the AIFM- CDR ) clarifies the notion of delegation by stipulating the rights and obligations that an AIFM and its delegate(s) shall observe in order to comply with the AIFM Law as set out below. 7 An AIFM will be required to comply with article 1-1, 37-1 and 37-3 of the law of April 5, 1993 on the financial sector as amended, in addition to the provisions of the AIFM Law in case of performance of the External AIFM Activities. 8 Art. 5(5)(b) of the AIFM Law specifies that the non- core services cannot be exercised by the AIFM without being also authorised to perform the External AIFM Activities as set out in point (ii). 9 See footnote 1. 3

4 2.1 General provisions applicable to the delegation of the AIFM Activities As a first requirement, no delegation of one or more AIFM Activities can be effective without the prior approval of the CSSF. Such approval will mainly be based on (i) the characteristics of the delegate vis- à- vis the delegated tasks and the AIF (2.1.1) and (ii) the permanent control of the AIFM on the delegate (2.2.2). No delegation can be authorised if the AIFM is not able to justify its entire delegation on objective grounds (such as optimisation of functions and enterprise process, savings, expertise of the delegates and access of the delegate to worldwide capability of negotiation) and if such delegation prevents the effectiveness of supervision of the AIFM 10 or prevents the AIFM from acting, or the AIF being managed, in the best interests of its investors. Furthermore, the delegation shall neither be used by the AIFM to circumvent its liability, nor to alter its obligations towards its AIF and respective investors Characteristics of the Delegate The AIFM Law enumerates a certain number of characteristics that a delegate is required to have in order to be authorised to perform the AIFM Activities by the CSSF regarding its financial resources, employees and organisational structure. To this effect, the CSSF shall ensure that, in respect of the delegated tasks, the delegate: (i) (ii) (iii) has sufficient resources; employs sufficient personnel with the skills, knowledge and expertise necessary as regards the delegated tasks. Sufficient experience, appropriate theoretical knowledge and appropriate practical experience are required for the persons in charge of the delegated tasks. In this respect, the CSSF will review their CV as regards their professional training and professional past experience which shall be appropriate to the conduct of their business; is of sufficiently good repute. To this effect, the CSSF will ascertain as to whether or not the persons who effectively conduct the business of the delegate have any negative records relevant both in relation to the assessment of their good repute and for the proper performance of the delegated tasks 11 (such record shall include, without limitation, 10 A delegation is deemed to prevent the supervision of the AIFM where, (i) the AIFM, its auditors and the CSSF do not have effective access to data related to the delegated functions and to the premises of the delegate; (ii) the delegate does not cooperate with the CSSF and (iii) the AIFM does not make available all information necessary to enable the CSSF to supervise the compliance performance of the delegated functions with the AIFM Law. 11 Special attention shall be given to any offences related to financial activities, such as obligations relating to the prevention of money- laundering, dishonesty, fraud or financial crime, bankruptcy or insolvency and any information indicating that the relevant person is not trustworthy or honest. 4

5 criminal offences, judicial proceedings, or administrative sanctions relevant for the delegated tasks); and (iv) has an appropriate organisational structure supporting the delegated tasks Rights and Obligations of the AIFM vis- à- vis its Delegate(s) The AIFM Law also imposes on the AIFM a certain number of rights and obligations vis- à- vis its delegates to ensure at any time that the interests of the AIF and its investors are safeguarded. To this effect, the AIFM shall be able to demonstrate that any of its delegates is qualified and capable of undertaking the functions in question and was selected after careful consideration. Furthermore, the AIFM is required to supervise the delegate by being in a position to monitor effectively at any time the delegated activity and to give any further instructions to the delegate. As such, an AIFM shall permanently be in a position to control the activities of the delegates and the risk linked to such delegation. The AIFM is therefore required to have necessary expertise and resources as well as appropriate methods and procedures in place to permanently supervise the delegated functions. To perform its supervisory duties vis- à- vis the delegate, the rights and obligations of the AIFM and the delegate shall be set out in a written agreement stating, among others, that the AIFM has a permanent right of information, inspection, remittance and access to the delegate, its premises and any document pertaining to the AIF and a permanent right of instruction and of monitoring against the delegate. Such agreement shall also require the delegate (i) to disclose to the AIFM any development that may have a material impact on the delegate s liability to carry out the delegated functions effectively and in compliance with applicable law; (ii) to protect any confidential information relating to the AIFM, the AIF and the investors of the concerned AIF and (iii) to establish, implement and maintain a contingency plan for disaster recovery and periodic testing of backup facilities while taking into account the type of delegated functions. Finally, in case the AIFM notices that the delegate no longer complies with the AIFM Law and is no longer acting in the best interest of the AIF and its investors, the AIFM is entitled, pursuant to the AIFM Law, to withdraw the delegation with immediate effect. 5

6 2.2 Specific provisions applicable to the delegation of the AIFM Main Activities As the portfolio and risk management functions of an AIF are considered by the AIFM Law to be the main activities of the AIFM, specific provisions apply to their delegation. Firstly, the AIFM is not entitled to delegate in whole, both the portfolio and risk management functions of a relevant AIF, without taking the risk of being qualified by the CSSF as a letter- box entity. Secondly, contrary to the delegation of the Other Activities, the portfolio or risk management function of the AIF(s) can only be delegated to enterprises which are authorised or registered for the purpose of asset management and subject to supervision (the Authorised Entities ) 12. The AIFM- CDR stipulates that the Authorised Entities shall include: (i) management companies of UCITS (i.e. authorised under Directive 2009/65/EC); (ii) (iii) (iv) (v) investment firms authorised under Directive 2004/3/9/EC; credit institutions authorised under Directive 2006/48/EC having the authorisation to perform portfolio management under Directive 2004/39/EC; external AIFMs authorised under the AIFM Directive; and third country entities authorised or registered for the purpose of asset management and effectively supervised by a competent authority in those countries. In case such delegation is conferred on an enterprise located in a third country as indicated under point (v) above, a written agreement between the CSSF and the supervisory authority of such entity shall exist 13 allowing the CSSF to obtain on request any relevant information; to have access to any documents maintained in the third country; to carry out its supervisory functions by being entitled to inspect the premises of the delegate; to receive any information from the supervisory authority of the delegate for investigating apparent breaches of the AIFM Directive and to cooperate in enforcement in accordance with national and international law applicable to the supervisory authority of the delegate and the CSSF for breaches of the AIFM Directive. Thirdly, the AIFM Main Activities cannot be delegated to any entity whose interests may conflict with those of the AIFM or the investors of the AIF, unless such an entity has functionally and hierarchically separated the performance of its portfolio management or risk management tasks from its potentially 12 When such delegation cannot be made to Authorised Entities, the CSSF may accept, with its prior approval, the delegation of the AIFM Main Activities to other entities (article 18(1)(c) of the AIFM Law). 13 The CSSF has published in its Frequently Asked Questions dated July 11, 2013 the list of the cooperation agreements already executed by the CSSF as of July 22, 2013 with third countries under the AIFM Directive. 6

7 conflicting tasks and the potential conflicts of interests are properly identified, managed, monitored and disclosed to the investors of the AIF. The portfolio and risk management function may be considered to be functionally and hierarchically separated from other potentially conflicting tasks only where (i) persons engaged in portfolio management tasks or risk management tasks are not also engaged in the performance of potentially conflicting tasks such as controlling tasks and (ii) persons engaged in risk management tasks are not supervised by those responsible for the performance of operating tasks. In relation to potential conflicts of interest 14, the AIFM shall ensure that the delegate takes all reasonable steps to identify, manage and monitor potential conflicts of interest that may arise between itself and the AIFM, the AIF or its investors. The AIFM shall ensure that the delegate has a conflicts of interest procedure in place equivalent to the conflicts of interest procedure that the AIFM is required to set up in accordance with the AIFM- CDR 15. Such procedure shall include a description of the measures to be adopted in order to manage any conflicts of interest and to be disclosed to the AIF and its investors 16. In addition, the delegation of portfolio management shall comply with the investment policy of the relevant AIF and the delegate shall receive any instruction in relation to the setting up of the investment policy of the AIF from the AIFM which shall permanently supervise its implementation. Finally, no delegation of any of the AIFM Main Activities can be made to the depositary of the AIFs or to a delegate of the depositary. 2.3 Sub- delegation The AIFM Law authorises the delegate to sub- delegate any of its delegated functions, provided that the AIFM and the CSSF have given their prior consent. When notifying the CSSF of the intention to sub- delegate certain activities already delegated to a third party, such notification shall contain the details of 14 The criteria to determine a conflict of interests shall at least include (i) where the AIFM and the delegate are members of the same group or have any contractual relationship which permits the delegate to control the AIFM or has the ability to influence its actions; (ii) where the delegate and an investor of the AIF are members of the same group or any other contractual relationship enabling the investor to control the delegate or to influence its actions; (iii) the likelihood for the delegate to make a financial gain or avoid a financial loss at the expenses of the AIF or its investors ; (iv) the likelihood that the delegate has a financial or other incentive to favour the interest of another client over the interests of the AIF or its investors ; (v) the likelihood that the delegate receives or will receive from a person other than the AIFM, an inducement in relation to the collective portfolio management activities of the AIFM and its AIFs in the form of monies, goods or services other than the standard commission or fee for that service. 15 In particular to comply with Articles 31 to 34 of the AIFM CDR. 16 Disclosure of conflicts of interests shall be made to the investors in a durable medium or by means of a website (in that latter case, address of the website shall be notified to the investors, the information must be up to date and accessible continuously (Art. 36 of the AIFM- CDR). 7

8 the delegate and the sub- delegate, the name of the competent authority where the sub- delegate is authorised or registered, the delegated functions, the AIF(s) affected by the sub- delegation, a copy of the written consent of the AIFM and the intended date of the sub- delegation. In the case of sub- delegation, the delegate shall permanently supervise the activities of the sub- delegate. The AIFM Law also authorises a sub- delegate to sub- delegate any of its sub- delegated functions, under the same conditions as set out in this paragraph. III. The liability of the AIFM in case of delegation and the concept of the letter box entity The AIFM Law states that the liability of the AIFM towards the AIF and its investors is not affected by the fact that the AIFM has delegated functions to a third party or by any further sub- delegation. Furthermore, the delegation shall not have as a consequence the qualification of the AIFM as a letter- box entity. Such a situation may arise when the AIFM no longer has the resources and expertise to effectively control the delegates and the risks linked to the delegation or where the AIFM lost its contractual rights of inspection, access and instructions vis- à- vis the delegates. In addition, when the AIFM delegates the performance of the AIFM Main Activities to an extent that exceeds, by a substantial margin, the AIFM Main Activities performed by the AIFM itself, such AIFM may be qualified by the CSSF as a letter- box entity. The CSSF will evaluate the character of the letter- box entity through circumstantial evidence relative to the delegation structure, the type of assets managed as well as qualitative criteria including, among others, the invested assets of the AIF, the risk profile and investment strategy of the AIF, the delegated tasks, etc. An AIFM that is qualified as a letter- box entity by the CSSF may face administrative measures and penalties ranging from a simple warning to an administrative fine of up to EUR 250,000. In addition and when appropriate to protect the financial market, the CSSF may announce the withdrawal of the AIFM s authorisation. * * * 8