Licensing and reporting under AIFMD

Value Added Tax (VAT) in the Luxembourg Asset Management industry Specialised Investment Funds Luxembourg - your rock solid partner to re-domicile your offshore fund Eligible investments and investment restrictions Licensing and reporting under AIFMD Global Fund Distribution PwC Luxembourg Market Research Institute Tax structuring in the Luxembourg Asset Management industry Global Tax Reporting UCITS Management Companies licensing Quick Reference Guide Licensing and reporting under AIFMD According to the law of 12 July 2013 on alternative fund managers (the AIFM Law ), access to the status of alternative investment fund manager ( AIFM ) is subject to prior authorisation by the Luxembourg Commission for the Supervision of the Financial Sector (the CSSF ). The AIFM Law and the European Commission Delegated Regulation n 231/2013 of 19 December 2012 clearly set out the authorisation and organisation requirements applicable to Luxembourg AIFMs, whereby the same rules apply to internallymanaged alternative investment funds ( internallymanaged AIFs ) with minor differences 1 Shareholding Authorisation is subject to communication to the CSSF of the identity of the shareholders - whether direct or indirect, natural or legal persons - who have qualifying holdings in the AIF, as well as the amount of these holdings. Shareholders must possess the requisite qualities to ensure a sound and prudent management of the AIF. 2 Initial capital and own funds Authorisation of an AIFM which is appointed as an external manager is subject to the fund having an initial capital of at least EUR 125,000 (this amount is raised to EUR 300,000 for an internally managed AIF). Furthermore, an AIFM must hold sufficient own funds, amounting to at least the greater of the following two sums: 0.02% of the amount by which the value of the portfolios of the AIFs managed by the AIFM exceeds EUR 250 million (the initial capital and the additional amount must not, however, exceed EUR 10 million); one quarter of the preceding year s fixed overheads. www.pwc.lu/am

3 Professional liability risk To cover potential professional liability risks resulting from his/her activities, an AIFM must: either have additional own funds to cover potential liability risks arising from professional negligence equal to at least 0.01% of the value of the portfolios of the managed AIFs; or hold a professional indemnity insurance against liability against such risks with: - a coverage for an individual claim amounting to at least 0.7% of the value of the portfolios of the AIFs managed by the AIFM; and - a coverage for yearly aggregated claims amounting to at least 0.9% of the value of the portfolios of the AIFs managed by the AIFM. 4 Members of the governing body and conducting officers The members of the governing body of the AIF (e.g. the members of the board of directors for a public limited company) and the persons in charge of the day-to-day management (i.e. the conducting officers) must be of adequate repute and sufficiently experienced with regard to the investment strategies pursued by the AIFs managed by the AIFM. 5 Infrastructure and organisational requirements The head office and registered office of every AIF established in Luxembourg must be located within the country. AIFs must, at all times, employ adequate and appropriate human and technical resources necessary for their proper management. In particular, depending on the proportionality principle and the nature of the managed funds, the AIF must have in place sound administrative and accounting procedures, reliable control and safeguard arrangements for electronic data processing and adequate internal control mechanisms. 6 Permanent risk management, compliance and internal audit functionsofficers Every AIFM must establish and maintain operational permanent risk management, compliance and internal audit functions. Each of these three functions must be independent and separate from the services or activities they monitor, in particular the permanent risk management function overseeing the portfolio management. Furthermore, the permanent compliance and internal audit functions must be established by the AIFM. Outsourcing is possible if the establishment of an independent compliance and/or internal audit function would be disproportionate to the size of the business. Finally, the risk management function cannot be delegated to the depositary or a delegate of the depositary of the AIF.

7 Valuation function An AIFM may choose to perform the valuation function internally, providing there are appropriate safeguards against conflicts of interest with the portfolio management and the remuneration policy; otherwise, it may appoint an external valuer. When the AIFM chooses to appoint one or several external valuers, such appointment is subject to delegation rules, and the valuers must meet certain requirements in terms of the mandatory professional registration, the provision of sufficient professional guarantees for the execution of the tasks at hand as well as a notification to the CSSF. The appointed depositary may not be the external valuer unless conflicts are managed and the valuation function is operatively and hierarchically separate from the depositary function. Once the function is delegated to an external valuer, that valuer may not further delegate the task and must assume full responsibility in case of negligence or intentional failure. Regardless of delegation arrangements, the AIFM remains ultimately responsible for the valuation function. 8 Delegation of functions An AIFM must have objective reasons for delegating any of its functions to third parties (i.e. optimising business functions and processes, cost savings, expertise of the chosen delegate in administration/specific markets/investments or access of the chosen delegate to global trading capabilities). The delegate must have appropriate resources, a good repute and sufficient experience, and the delegation cannot result in the AIFM becoming a letter-box entity. The AIFM needs to be in a position to at least perform the portfolio management or risk management in Luxembourg, i.e. the AIFM may partially delegate both portfolio management and risk management functions or fully assign one of the two to another party, with the understanding that the AIFM may not delegate both functions in their entirety at the same time. If the delegation concerns portfolio or risk management, the asset management activities must be regulated; alternatively, the delegate must be authorised by the competent authority of the home Member State or domiciled in a third country having adopted a cooperation agreement. 9 Remuneration The Annex II to the Law provides the framework and principles of a remuneration policy which promotes sound and effective risk management and does not encourage inappropriate risk taking. Some of the noteworthy principles are: fixed and variable remuneration must be balanced; 50% of the variable component should consist of units of AIFs or equivalent assets subject to the proportionality principle; either 40% or 60% of the variable component should be spread over a period of at least five years; and when the remuneration is determined through a performance evaluation, such remuneration must be based on a combined assessment of individual and overall results, include non-financial criteria and be set in a multi-year framework contract. ESMA has published further guidelines on sound remuneration policies under the AIFMD in February 2013. 10 Participation in an investor compensation scheme An AIFM whose authorisation covers discretionary management services is subject to selective MiFID requirements and must participate in a scheme for the compensation of investors which is established in Luxembourg and recognised by the CSSF. In such a case, membership to the AGDL (Luxembourg Deposit Guarantee Association) is compulsory.

11 Required procedures To operate effectively and meet regulatory requirements, the AIFM must have in place the following procedures: decision-making procedures; rules of conduct (including best execution rules, inducements, etc.); conflicts of interest policy; delegation of functions policy; risk management systems and procedures; liquidity management systems and procedures; valuation procedures; accounting and finance procedures; procedures to comply with the internal audit and compliance function; personal transactions procedure, remuneration policy; policy for the exercise of voting rights; record-keeping procedures; anti-money laundering and counter-terrorist financing policy. 12 Procedure to be followed The application for authorisation must be delivered to the CSSF by the interested party or his/her representative. The regulatory body approves the application after examination of the application file and verification of conformity to the legal requirements. Furthermore, the CSSF may request additional information necessary to complete the assessment of the application file. The CSSF will notify the AIFM of its approval, at which point the AIFM is included in an official list. Inclusion in this list implies that authorisation has been granted to the AIFM with regard to the AIF strategies mentioned in the application filing. If it manages additional AIF strategies, the AIFM is required to notify the CSSF accordingly. In principle, the authorisation is valid for an unlimited period of time, and the AIFM (providing it respects all legal obligations) may commence its activity as soon as the approval has been granted. In accordance with the legal provisions concerning taxes to be paid to the CSSF, a lump sum of 10,000 is payable for the processing of each application of a new AIFM whose activity is limited to the collective management of undertakings for collective investment. 13 Reporting requirements Annual report For each of the EU AIFs it manages and for each of the AIFs it markets in the EU, an AIFM must make available an annual report covering every single financial year no later than six months following the end of said financial year. This report must be supplied to investors at their request and must be made available to the CSSF as well as the home Member State of the AIF if required. The AIFM Law stipulates that the annual report must at least contain the following: a balance sheet or statement of assets and liabilities; an income and expenditure account for the financial year; a report on the activities of the financial year; any material changes in the information disclosed to investors; the total amount of remuneration the AIFM paid its staff during the financial year (divided into fixed and variable remuneration), the number of beneficiaries, and - where relevant - any carried interest by the AIF; the aggregate amount of remuneration broken down by senior management and staff members whose actions have a material impact on the risk profile of the AIF. In its Guidelines on sound remuneration policies under the AIFMD, ESMA has indicated that AIFMs will have the flexibility to disclose the required remuneration information through an independent remuneration policy statement, a periodic disclosure in the annual report or any other form. The accounting information must be prepared in accordance with the accounting standards of the home Member State of the AIF or in accordance with the accounting standards of the third country where the AIF is established, the accounting rules being indicated in the AIF management regulations or instruments of incorporation. The accounting information given in the annual report must be audited by one or more external auditors. The auditors report, including any qualifications, shall be reproduced in full in the annual report. An AIFM needs to ensure a compliant annual report is made available for every managed AIF. This requirement comes into effect as soon as the AIFM is authorised. To illustrate, an AIFM authorised on 15 December 2013 will need to ensure that a compliant annual report is available (within six months of the AIF s year-end) for each managed AIF whose financial year ends on 31 December 2013 or a subsequent date.

Reporting obligations to the CSSF An AIFM must regularly report to the CSSF on the principal instruments it trades in on behalf of the AIFs it manages, as well as on the principal markets it operates on. The AIFM must provide information on the main instruments it is trading in, the markets it is a member of or actively trades on, as well as the principal exposures and most important concentrations of each of the AIFs it manages. An AIFM must, for each of the EU AIFs it manages and for each of the AIFs it markets in the EU, provide the following information to the CSSF: the percentage of the AIF s assets which are subject to special arrangements arising from their illiquid nature; any new arrangements for managing the liquidity of the AIF; the current risk profile of the AIF and the systems employed by the AIFM to manage the market risk, liquidity risk, counterparty risk, operational risk, etc.; information on the main asset categories the AIF invested in; and the results of the performed stress tests. If requested, the AIFM must also provide a detailed end-of- quarter list of all AIFs the AIFM manages. In case the AIFM manages AIFs employing leverage on a substantial basis, it shall provide the CSSF with information about the overall level of leverage employed by each AIF it manages, a break-down of leverage arising from borrowing of cash or securities and leverage embedded in financial derivatives, as well as the extent to which the AIF s assets have been reused under leveraging arrangements. That information shall include the identity of the five largest sources of borrowed cash or securities for each of the AIFs managed by the AIFM, and the amounts of leverage received from each of those sources for each of those AIFs. If the CSSF considers such communication to be necessary for the effective monitoring of systemic risk, it may require the AIFM to communicate information in addition to that described above, on both a periodic and an ad-hoc basis. In a section entitled Frequently Asked Questions, the CSSF confirmed the approach proposed by ESMA (ESMA/2013/1339 final report on reporting obligations). Reporting periods are aligned with calendar years and, depending on the size of the AIFM, reports have to be filed either quarterly, semi-annually or annually. The AIFM will start reporting to the CSSF from the quarter following the first time they have information to report onwards, until the end of the first reporting period. In terms of a transitional period, it should be highlighted that the first reporting to the CSSF will pertain to the period beginning 1 July 2014. To illustrate, an AIFM authorised prior to 22 July 2014 would have to report on the following dates: Quarterly reporting Semi-annual reporting Annual reporting First reporting 1 July 2014 30 September 2014 1 July 2014 31 December 2014 1 July 2014 31 December 2014 Second reporting 1 October 2014 31 December 2014 1 January 2015 30 June 2015 1 January 2015 31 December 2015 Third reporting 1 January 2015 31 March 2015 1 July 2015 31 December 2015 1 January 2016 31 December 2016 Additional reporting obligations for an AIFM which acquires control of non-listed companies and issuers The AIFM Law also stipulates additional disclosure and notification requirements for AIFMs that acquire control of nonlisted companies and issuers. These disclosure obligations will apply to AIFs that acquire control (more than 50% of the voting rights) of a company other than a small- or medium-sized enterprise and real estate special purpose vehicles. The notification and required disclosures are summarised below: Required notification AIFM Regulator Company (*) Shareholders of Company Notification upon acquisition/disposal reaching, exceeding or falling out the following thresholds: 10%, 20%, 30%, 50%, 75% of voting rights Upon acquisition of controlling interest: Identification of the AIFM Conflicts of interest Communication policy Future intentions and likely repercussions on employment Financing of acquisition (**) (*) The AIFM must request and make an effort to ensure that the board of directors of the acquired company informs the employee representatives or employees themselves. (**) Investors of the AIF must also be provided with information regarding the financing of the acquisition.

14 How we can help We have a multidisciplinary and multi-industry team of experts in business strategy; operation and structuring; regulatory compliance; tax; accounting and reporting services; human resources; global fund distribution; and assurance services. Our professionals are ready to assist you in: identifying and assessing the many impacts of the Directive on your organisation; and developing an integrated response addressing AIFMD requirements. Integral to this assistance is our in-depth industry knowledge regarding both Luxembourg and Europe, as well as our AIFMD expertise. Our team of experts has stayed on top of each step of the Directive s development and its related implementation measures, and has been engaged in on-going dialogues with key stakeholders, including asset managers, service providers, trade associations and regulators. You can profit from our knowledge and thus transform this challenge into your benefit. Our experts can help you with your: AIFM application Our regulatory experts have successfully assisted and continue to support a number of actors with the preparation of their AIFMD authorisation application, including facilitating the interaction with the regulator. Internal procedures Our regulatory experts have extensive operational knowledge and pragmatic implementation know-how. We can assist you with template procedures, delegation and operational model design compliant with regulatory and industry standards. Risk management Our services in this area are wide-ranging and include: the mapping of AIFMD requirements in light of your current risk management operations and the identification of gaps to be mitigated; the analysis and selection of risk management tools and the implementation thereof; the definition and structuring of tailored reports/dashboards; the production of risk reports using either internally developed or recognised vendor tools. Remuneration Our Human Resources Services experts can assist you in understanding and assessing the impact on the remuneration requirements on your organisation and identified staff as well as design remuneration policies aligned with said requirements.

Diagnostic and Implementation We can help you: define your target business model; assess and identify potential opportunities; complete and/or review impact assessments and gap analyses; design and construct solutions; implement agreed actions. Valuation Our valuation services cover a wide range of asset classes such as transferable securities, OTC derivatives, investments in private equity and real estate. We will: define the optimal valuation governance for you (valuation committee, delegation arrangements and selection of external valuators); determine robust pricing policies that meet your needs and the regulator s requirements; review your internal pricing models; perform due diligence on external valuators; provide independent valuation services. design and construct solutions; implement agreed actions. Raising awareness and building knowledge within your organisation You will benefit from: half-day sessions on AIFM organised by PwC s Academy; and tailored Executive Workshops aligned with your specific needs.

Why PwC Luxembourg? PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,300 people employed from 57 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. It helps its clients create the value they are looking for by giving comfort to the capital markets and providing advice through an industry focused approach. The worldwide PwC network is the largest provider of professional services in audit, tax and advisory. We re a network of independent firms in 157 countries and employ more than 184,000 people. Tell us what matters to you and find out more by visiting us at www.pwc.com and www.pwc.lu. For further information, please contact: Marie-Elisa Roussel-Alenda, Partner, AIFMD Leader +352 49 48 48 2050 marie-elisa.roussel-alenda@lu.pwc.com Olivier Carré, Partner, Regulatory and Compliance Advisory Services Leader +352 49 48 48 4174 olivier.carre@lu.pwc.com Xavier Balthazar, Partner, Regulatory and Compliance Advisory Services +352 49 48 48 3299 xavier.balthazar@lu.pwc.com Nicolas Schulz, Partner, Regulatory and Compliance Advisory Services +352 49 48 48 4211 nicolas.schulz@lu.pwc.com 2014 PricewaterhouseCoopers, Société coopérative. All rights reserved. In this document, PwC Luxembourg refers to PricewaterhouseCoopers, Société coopérative (Luxembourg) which is a member firm of PricewaterhouseCoopers International Limited ( PwC IL ), each member firm of which is a separate and independent legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms.