Luxembourg, a European hub for
investments funds and wealth
management
Kuwait, 5 March 2014
2 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Agenda
Welcome Bishr Shiblaq, Head of Dubai Representative Office, Arendt & Medernach
Introduction Guy Harles, Co-Chairman of the Strategy Board, Partner, Arendt & Medernach
Overview on Luxembourg investment vehicles Florence Stainier, Partner, Arendt & Medernach
Update on investment fund structuring in Luxembourg Florence Stainier, Partner, Arendt & Medernach
Private wealth management in Luxembourg Guy Harles, Co-Chairman of the Management Board, Partner, Arendt & Medernach
Islamic finance in Luxembourg and Shari’ah compliant case studies Bishr Shiblaq, Head of Dubai Representative Office, Arendt & Medernach
3 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Welcome
Bishr Shiblaq Head of Dubai Representative Office
Arendt & Medernach
4 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Introduction
Guy Harles Co-Chairman of the Strategy Board, Partner
Arendt & Medernach
5 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
About Luxembourg
Capital : Luxembourg
Spoken languages:
English, French, German,
Luxembourgish
GDP (nominal) USD 57
billion
Founding member of i.a.
the European Union (EU),
UN, NATO, OECD, FATF
Founding member of the
Eurozone
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The Luxembourg Financial Centre – Main Pillars
Financial sector
We
alth
Ma
na
ge
me
nt
Inte
rna
tio
nal
Lo
an
s
Asse
t M
an
ag
em
en
t
& I
nve
stm
en
t fu
nd
s
Insu
ran
ce
Str
uctu
red
Fin
an
ce
The 5 Strategic Pillars
of the Luxembourg Financial Sector
7 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
The Luxembourg Financial Center - Advantages
Favorable business environment
Stable government with strong political support for financial services
industry
Investor-friendly legislation (forerunner in implementing EU law)
Flexible and attractive legal and tax framework
Responsive, pragmatic and accessible regulatory and tax authorities
Top level financial center
149 credit institutions (total balance sheet EUR 713 billion)
3,902 investment funds (EUR 2,615 billion AUM) making Luxembourg
the 2nd largest investment fund center worldwide
96 insurance companies and 261 reinsurance companies
Figures as at 31.12.13 Source CSSF
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Economy / Political Stability
Source: CIA World Factbook as 1 January 2012
Political stability
Luxembourg – 8.92/10
2012 (nominal) per capita gross domestic product (in USD)
1 Liechtenstein 141,100
2 Qatar 104,300
3 Luxembourg 81,100
4 Bermuda 69,900
5 Monaco 63,400
6 Singapore 60,500
7 Jersey 57,00
8 Falkland Islands 55,400
9 Norway 54,200
10 Brunei 50,000
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Risk Rating
The ten safest countries (considering the following risks: economic, political, structural, credit rating, debt and access to capital markets)
Rank Country Points (maximum = 100)
Source: Euromoney, January 2013
Standard and Poor’s credit
rating for Luxembourg: AAA
1 Norway 89.87
2 Luxembourg 87.29
3 Singapore 86.81
4 Sweden 86.81
5 Switzerland 86.78
6 Finland 84.54
7 Denmark 82.64
8 Hong Kong 82.43
9 Netherlands 81.82
10 Canada 81.82
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Corporate Taxes
EU/EFTA ranking
1 Luxembourg
2 Cyprus
3 Ireland
4 Denmark
5 Bulgaria
6 Switzerland
9 United Kingdom
11 Spain
12 Netherlan
15 Malta
21 Germany
28 France
30 Italy
Source: Paying taxes 2013, World Bank, IFC and PWC
The Total Tax Rate (TTR)
measures the amount of all
taxes and mandatory
contributions borne by the
business and is expressed
as a percentage of
commercial profits. The
total amount of taxes
borne is the sum of all the
different taxes and
contributions payable after
accounting for deductions
and exemptions.
EU/EFTA ranking
1 Luxembourg 11 Spain
2 Cyprus 12 Netherlands
3 Ireland 15 Malta
4 Denmark 21 Germany
5 Bulgaria 28 France
6 Switzerland 30 Italy
9 United Kingdom
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International presence in Luxembourg
First private banking centre in the Euro zone, third largest in the world for
international private banking
Establishment of numerous multinational companies : Amazon, Arcelor
Mittal, China Airlines, Dupont de Nemours, Ferrero, Procter & Gamble,
SES, Skype, iTunes, PayPal, SAIC, etc.
First stock exchange for international bonds, largest RMB denominated
bonds listed in Europe
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64 DTTs in force
30 DTTs pending
Europe and Central Asia
America
1. Albania
2. Armenia
3. Austria
4. Azerbaijan
5. Belgium
6. Bulgaria
7. Croatia
8. Cyprus
9. Czech Republic
10. Denmark
11. Estonia
12. Finland
13. France
14. Georgia
15. Germany
16. Greece
17. Guernsey
18. Hungary
19. Iceland
20. Ireland
21. Italy
22. Isle of Man
23. Jersey
24. Kazakhstan
25. Kirgizstan
26. Latvia
27. Liechtenstein
28. Lithuania
29. Macedonia
30. Malta
31. Moldova
32. Monaco
33. Netherlands
34. Norway
35. Poland
36. Portugal
37. Romania
38. Russia
39. Serbia and Montenegro
40. Slovakia
41. Slovenia
42. Spain
43. Sweden
44. Switzerland
45. Tajikistan
46. Turkey
47. Ukraine
48. United Kingdom
49. Uzbekistan
Luxembourg Double Tax Treaty (DTT) Network
50. Argentina
51. Barbados
52. Brazil
53. Canada
54. Chile
55. Mexico
56. Panama
57. San Marino
58. Trinidad and Tobago
59. United States of America
60. Uruguay
61. Bahrain
62. Botswana
63. Egypt
64. Israel
65. Kuwait
66. Lebanon
67. Mauritius
68. Morocco
69. Niger
70. Oman
71. Qatar
72. Saudi Arabia
73. Seychelles
74. South Africa
75. Syria
76. Tunisia
77. United Arab Emirates
78. Brunei
79. China
80. Hong Kong
81. India
82. Indonesia
83. Japan
84. Laos
85. Malaysia
86. Mongolia
87. New-Zealand
88. Pakistan
89. Philippines
90. Singapore
91. South Korea
92. Sri Lanka
93. Thailand
94. Vietnam
South and
East Asia Africa and
Middle East
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Investment protection treaties concluded by the Belgo-Luxembourg Economic Union
Treaties pending
Treaties in force
51. Serbia
52. Singapore
53. Slovakia
54. Slovenia
55. South Africa
56. Sri Lanka
57. Thailand
58. Tunisia
59. Turkey
60. Ukraine
61. United Arab
Emirates
62. USA *
63. Uruguay
30. Latvia
31. Lebanon
32. Libya
33. Lithuania
34. Macedonia
35. Madagascar
36. Malaysia
37. Malta
38. Mauritius
39. Mexico
40. Moldova
41. Mongolia
42. Morocco
43. Mozambique
44. Paraguay
45. Peru
46. Philippines
47. Poland
48. Romania
49. Russia
50. Saudi Arabia
64. Uzbekistan
65. Venezuela
66. Vietnam
67. Yemen
68. Bahrain
69. Barbados
70. Belarus
71. Botswana
72. Brazil
73. Comoros
74. Congo, DR
75. Costa Rica
76. Cuba
77. Ethiopia
78. Guatemala
79. Ivory
Coast
80. Korea
81. Liberia
82. Mauritania
83.
Montenegro
84. Nicaragua
85. Oman
86. Pakistan
87. Panama
88. Qatar
89. Rwanda
90. Sudan
91.
Tajikistan
92. Togo
93. Uganda
94. Zambia
* Treaty of friendship,
establishment and navigation Source: KPMG
1. Albania
2. Algeria
3. Argentina
4. Armenia
5. Azerbaijan
6. Bangladesh
7. Benin
8. Bolivia
9. Bosnia &
Herzegovina
10. Bulgaria
11. Burkina Faso
12. Burundi
13. Cameroon
14. Chile
15. China
16. Croatia
17. Cyprus
18. Czech
Republic
19. Egypt
20. El Salvador
21. Estonia
22. Gabon
23. Georgia
24. Hong Kong
25. Hungary
26. India
27. Indonesia
28. Kazakhstan
29. Kuwait
14 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
EU Free Trade Agreements
Source: EU Commission – June 2011
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Overview on
Luxembourg
investment vehicles
Florence Stainier Partner
Arendt & Medernach
16 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Different types of Luxembourg Investment Vehicles
Undertaking
for collective
investment
Specialised
investment
fund
Investment
company in
risk capital
Vehicles for
securitisation
transactions
Société de
Participation
Financière
dedicated to
holding,
managing and
financing
subsidiaries
Common
limited
partnership
(CLP) and
special limited
partnership
(SLP)
Société de
gestion de
Patrimoine
Familial. A
vehicle
dedicated to
the
management
of private
wealth
2010 UCI Law
Part I as
amended
(UCITS) and II
(UCI)
respectively
AIFM Law of
2013
2007 SIF Law
as amended
AIFM Law of
2013
2004 SICAR
Law, as
amended
AIFM Law of
2013
2004 Securitisation
Law
1915
Companies
Law
Supervised:
2007 SIF Law
or 2004 SICAR
Law
Law of 14 May
2007 on the
family wealth
management
company, as
amended
SOPARFI Securitisation
vehicle
Limited
partnership
CLP/SLP
UCI/
UCITS SIF SICAR SPF
17 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Supervised vehicles for every taste (1)
Key criteria
Retail Investors
Mixed Retail and
Non Retail
Investors
Well – Informed Investors,
Institutional Investors and
Professional Investors
Investment restrictions Restricted Flexible Very Flexible N/A
Eligible assets
TS, MMI,
UCIs, cash,
derivatives
Subject to CSSF
prior approval
No
restrictions
Venture
Capital,
Private
Equity
Risk diversification High Medium Low None
UCITS UCI SIF SICAR
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Supervised vehicles for every taste (2)
Supervisory
framework Strong Strong More flexible More flexible
Target Investors All, but mainly
retail All
Well-informed,
Institutional,
Professional
Well-informed,
Institutional,
Professional
Ease of public
distribution
EU Passport
EU passport, if
in the scope of
AIFMD,
Prospectus
Passport for
Closed-ended
funds
EU passport, if in
the scope of
AIFMD,
Private
Placement with
sophisticated
investors
EU passport, if in the
scope of AIFMD,
Private Placement with
sophisticated investors
UCITS UCI SIF SICAR
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Luxembourg Limited Partnerships
CLP
SLP
SCA
Suitable for any
structuring purpose,
including collective
investment
undertakings
A real boost for the
fund raising activities
of private equity
managers
Common Limited
Partnership
Special Limited
partnership
Corporate
partnership by shares
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Luxembourg Limited Partnerships
CLP/SLP/
SCA
High
Confidentiality
Operational
flexibility
Contractual
flexibility
Legal
certainty
Full tax
transparency
Flexible
governance
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Special Limited Partnership: specific features
SLP
No legal
personality
Assets
registered
in the name
of the SLP
Ring-
fencing Domicile
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Update on investment
fund structuring in
Luxembourg
Florence Stainier Partner
Arendt & Medernach
23 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
1. Luxembourg investment fund industry - recent figures
2. New developments:
A. UCITS update
B. AIFMD update
3. Challenges and opportunities for Kuwaiti asset managers
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1. Luxembourg investment fund industry - recent
figures
25 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Luxembourg fund industry – 20 years of sustained
growth
Figures as at 31.12.13 Source CSSF
2.615.363 billion of assets
under management
3.902 UCIs
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Luxembourg the second largest fund center
worldwide
0%
10%
20%
30%
40%
50%
60%
America Europe Africa, Asia & Pacific
Figures as at January 7, 2014 Source: Investment Company Institute (ICI) – Worldwide Mutual Fund Market Data, thrid quarter 2013
Luxembourg is the second largest fund
centre in the world after the USA 57%
22%
12%
10%
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Luxembourg market share of foreign cross-border funds registered for sale
Source: Lipper LIM and PwC analysis, December 31, 2012
Germany 63% Switzerland 67% France 65%
Sweden 68%
South Korea 96%
Japan 60%
Hong Kong 72% Taiwan 76%
Singapore 69%
Bahrain 77%
Chile 68%
Peru 98%
UK 57%
South Africa 60%
Luxembourg funds: the vehicle of choice for cross-
border distribution
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2. New developments
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Undertakings for collective investment in transferable securities (UCITS) are
pooled investment schemes, otherwise known as investment funds (EU) or
mutual funds (US), which meet the criteria laid down by EU Directives in this
area
UCITS benefit from a “European passport” which permits the underlying
shares or units to be offered for sale throughout the European Union following
authorisation of the fund in one Member State
Over the last 20 years UCITS have built up a first class reputation for the high
level of protection afforded to investors. They are recognised by financial
market supervisory authorities around the world (especially in South America &
in Asia) and accepted for distribution in their respective markets
Luxembourg is by far the most popular domicile for UCITS
1. What is a UCITS?
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2. Recent developments
Additional memorandum of understanding (MoU signed with Morocco and Oman)
Discussions on eligible assets (use of derivatives, efficient portfolio’s management,
collateral, …)
Eligibility of funds under trash ratio
Additional substance requirements for self-managed UCITS and management
companies
UCITS V
UCITS VI
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B. AIFMD update
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The AIFMD - What is it about?
Direct regulation of Alternative Investment Fund Managers (“AIFM”)
Indirect regulation of Alternative Investment Funds (“AIF”)
Creation of a European market for alternative investments via a EU
Passport
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The AIFMD - Scope
managing or
EU AIFM marketing in the EU
managing
Non EU AIFM marketing in the EU
EU AIF Non EU AIF
EU AIF
Non EU AIF
EU AIF
EU AIF
Non EU AIF
34 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
The AIFMD - What is an AIF?
Large definition of AIF: any undertaking for collective investment
not subject to the UCITS Directive
which raises capital
from a number of investors
with a view to invest in accordance with a defined investment policy for the
benefit of those investors
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The AIFMD - What is an AIFM?
= legal person whose regular business is to manage one or more AIFs
The AIFM shall be either:
an external manager: the legal person appointed by the AIF or on behalf
of the AIF and which is appointed for managing the AIF (external AIFM),
or
where the legal form of the AIF permits an internal management and where
the AIF’s governing body chooses not to appoint an external AIFM, the
AIF itself, which shall then be authorised as AIFM
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The AIFMD - Are there any exemptions?
Smaller AIF exempted: Management of AIF portfolios with assets < euro 100 million (including assets
acquired through the use of leverage)
Management of AIF with assets < euro 500 million (is case of unleveraged portfolios
and no redemption rights during a 5 years period)
Some actors excluded: Captive funds
Management of pension funds
Employee participation or savings schemes
Supranational institutions
National central banks
Investment undertakings, such as family office vehicles, which invest the private
wealth of investors without raising external capital
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Authorization
Capital
Conduct of business, including
remuneration
Conflicts of interest
Risk management
Delegation
Marketing provisions
At the level of the AIFM
At the level of the AIF
Liquidity management
Valuation
Depositary
Transparency
Leverage
Controlling interests
Marketing provisions
Reporting obligations
The AIFMD - What does it regulate?
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The AIFMD - Timeline
07/2013 22/07/2014 21/07/2015 2018
Transposition
of the Directive
into national
law
(22/07/2013)
Passport
becomes
available for all
EU AIFM
marketing EU
AIFs in the EU
Authorisation
must be
obtained by
existing AIFM
Passport
becomes
available for all
EU AIFM
marketing Non-
EU AIF in the EU
and for Non-EU
AIFM marketing
EU/ Non EU AIF
in the EU
Private
placement
regimes are
replaced by
passport
regime
Grand fathering for existing AIFM Coexistence of passport and private placement regimes
39 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
The AIFMD – Timeline impact on non-EU AIFM
From 2014-2015: Private placement regimes
Non EU AIFM may continue to market non-EU AIF under the private
placement regimes, on a country-by-country basis provided that the
following requirements are fulfilled:
Transparency requirements
Reporting obligations
Cooperation agreement between competent authorities
FATF
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The AIFMD - Timeline impact on non-EU AIFM
From 2015-2018: Dual marketing regime (Private placement or EU
passport)
Requirements for EU passport under the AIFMD:
Member State of reference + legal representative
Cooperation agreement
Tax agreement + FATF
From 2018: End of the private placement regimes
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The AIFMD - Distribution aspects
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3. Challenges and opportunities for Kuwaiti asset
managers
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Key considerations for choosing the right investment
vehicle
What about cross-
border distribution?
Do I need a European
passport?
? Which assets? Real estate or
transferable securities?
Which investment
strategies?
Do I need flexibility?
Listing or no listing?
High or low risk
diversification?
Retail or well-
informed Investors?
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Conditions:
Investment management delegation under the 2010 Law Part I (UCITS)
and the AIFM Law
Only to persons/entities registered or authorized for the purpose
of investment portfolio management
Existence of cooperation between local supervisory authority and
CSSF (MoU)
Kuwaiti asset manager managing a Luxembourg
UCITS or Luxembourg AIF
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No MoU with the CSSF = no investment management delegation
But
Investment management delegation through a subsidiary
established in a country where a MoU has been concluded with
Luxembourg
Advisory function to a regulated investment manager
Kuwaiti asset manager managing a Luxembourg
UCITS or Luxembourg AIF
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Opportunities
Benefit of UCITS passport
High level of regulation: protection of investors, depositary bank
Compliance with Shari’ah principles, as the case may be
For retail and institutional
Investments capacities in the region
Kuwaiti asset manager managing a Luxembourg
UCITS
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Opportunities
Benefit of AIFM passport in Europe - to see in the future impact in Middle
East
Flexibility in terms of investments
Compliance with Shari’ah principles, as the case may be
Only for institutional, high net worth or advised individual
Investments capacities in the region
Kuwaiti asset manager managing a Luxembourg AIF
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Kuwaiti asset manager managing a Luxembourg SIF
(non AIF)
Conditions:
Investment management delegation (under the SIF law)
Only to persons/entities registered or authorized for the purpose of
investment portfolio management
Existence of cooperation between local supervisory authority and
CSSF (MoU)
But CSSF may approve the delegation if the delegated is of
sufficient good repute and has appropriate experience
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Investment management delegation may be approved by the CSSF
Investment management delegation through a subsidiary
established in a country where a MoU has been concluded with
Luxembourg
Advisory function to a regulated investment manager
Kuwaiti asset manager managing a Luxembourg SIF
(non AIF)
50 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Opportunities
Flexibility in terms of investments
Compliance with Shari’ah principles, as the case may be
Only for institutional, high net worth or advised individual
Investments capacities in the region
Kuwaiti asset manager managing a Luxembourg SIF
(non AIF)
51 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Private wealth
management in
Luxembourg
Guy Harles Co-Chairman of the Strategy Board,
Partner
Arendt & Medernach
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Luxembourg largest wealth management center in the
Euro zone
Asset protection
Control &
managing
tax risks
Efficient transfer
of wealth to
future generations
Mitigation of
tax costs
Succession
planning
Family planning Tax structuring
Mitigation of
political risks
Mitigation of
criminal &
economic risks
Diversification Managing risks Wealth
optimization
53 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Overview of available vehicles in the private wealth
sector
Private Wealth
Structures
Corporate Tools
Contractual Tools
SIF
SPF
Insurance Products
SICAR
Fiduciary Agreements
SOPARFI
Family foundation
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Corporate vehicles available
55 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
SOPARFI Holding Company
Non supervised and non regulated corporate vehicle governed by the
Luxembourg law of 10 August 1915 on commercial companies, as
amended
Contract based
No restrictions regarding eligible investors
No restrictions regarding eligible assets
No restrictions regarding investment strategies
No risk diversification rules
Possibility to create hybrid financing instruments, classes of shares
56 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
SOPARFI Holding Company (cont’)
Tax regime:
Fully taxable regime but participation exemption regime (on dividends, liquidation
proceeds and capital gains deriving from qualifying participations)
Benefice of double tax treaties (DTTs) and EU Directives
Large choice of legal forms e.g.:
Public limited company (S.A.)
Private liability company (S.à r.l.)
Civil partnership (S.C.)
Corporate partnership limited by shares (S.C.A.)
57 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
SOPARFI Holding Company (cont’)
Other tax advantages No WHT on royalties payments
No WHT on interest payments made to individuals (except for the Saving
Directive)
No capital duty on incorporation of companies through contributions in cash
(except a fixed registration duty of EUR 75)
No stamp or registration duty on disposal of shares (except a fixed registration
duty of EUR 12 in case of voluntary registration)
Losses may be carried forward indefinitely
Fiscal consolidation regime available
Functional currency available
No CFC rules
No legal thin cap rules but debt-to-equity ratio of 85/15 usually required by tax
authorities for holding activity
Advance tax confirmations and advance pricing agreements available
58 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Family Wealth Management Company (SPF)
Non supervised and non regulated corporate vehicle governed by the
Luxembourg law of 11 May 2007 on the Family Wealth Management
Company, as amended
Investment vehicle dedicated to the management of private, family
wealth of individuals
No family link between the shareholders
Eligible shareholders:
Any individual acting within the framework of the management of his private wealth
Any wealth management entity acting exclusively in the interest of the private wealth
of individuals (Family Office – Trust – Private Foundation)
Any intermediary entity holding the shares on a fiduciary basis on behalf of the
investors
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Family Wealth Management Company (SPF) (cont’)
SPF may acquire, hold, manage and sell any financial assets to the
exclusion of any commercial activity
No risk diversification rules
A SPF company must be set up in the form of :
private limited liability company (S.à r.l.)
public company limited by shares (S.A.)
cooperative in the form of limited company (Coop S.A.) or
partnership limited by shares (S.C.A.)
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Specialised Investment Fund (SIF)
Regulated corporate vehicle (under the supervision of the
Luxembourg supervisory authority – CSSF) governed by the law of
13 February 2007 relating to specialised investment funds, as
amended
Eligible investors are well-informed investors:
institutional investors
professional investors
other sophisticated investors, such as HNWI, who:
Adhere to the informed investor status
Either invest a minimum of 125.000€ or have been subject to an
assessment made by a bank, an investment firm or a management
company certifying their expertise, experience and knowledge in
adequately apprising an investment in the specialised investment fund
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The « umbrella fund » / « multi-compartments » fund might be an
appropriate tool for wealth management purposes
One single legal entity with separate and segregated investment cells
Assets and liabilities of one compartment will be ring-fenced from the
other compartments but only one operational entity
Advantages for high net worth families:
Cost reduction (a single board of directors, the same distributor, same
custodian, same transfer and paying agent, same issuing documents, etc.)
High degree of investment diversification
Very flexible placement strategy for family members
Flexibility and global coverage of investments (market sectors and assets)
Specialised Investment Fund (SIF) (cont’)
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Specialised Investment Fund (SIF) (cont’)
1st scenario:
Family
member A
Family
member B
Family
member C
Board of
Directors
Custodian
Bank
Administrator
Auditor
Compartment Compartment Compartment
A B C
SIF
63 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Specialised Investment Fund (SIF) (cont’)
2nd scenario :
Board of
Directors
Custodian
Bank
Administrator
Auditor
Compartment Compartment Compartment
A B C
SIF
Family
Hedge Funds
PE
Real Estate
Shares Shares
64 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Specialised Investment Fund (SIF) (cont’)
SIF offers investment opportunities to sophisticated retail or private
investors, including HNWI:
No restrictions regarding eligible assets (e.g. gold, works of art
and wine are eligible)
No restrictions regarding investment strategies
Not subject to sector specific investment restrictions
Risk-spreading rules
65 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Investment Company in Risk Capital (SICAR)
Eligible investors :
Institutional investors
Professional investors
Other sophisticated investors, such as HNWI
Specifically designed for private equity : allows to contribute assets to
entities in view of their launch, development or listing on a stock exchange
Investments must show the typical characteristics of risk capital investments
(in particular liquidity risks), e.g. venture capital investments
No diversification rules
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The Luxembourg family foundation
A New bill regarding the Luxembourg family foundation has been
submitted to Parliament on 22 July 2013
The family foundation is limited to the management of private wealth of
individuals and patrimonial entities
No involvement in any commercial, industrial, agricultural or liberal activity
An orphan structure set up through a notorial deed
Capital contribution of min Eur 50.000 paid up in cash or in kind to be
made by individual founder or wealth management entities (e.g. trusts,
foundations)
67 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Luxembourg family foundation- legal framework
The family foundation may:
- own any movable and immovable property, tangible or intangible assets
- Enter into insurance contracts as a subscriber or beneficiary
- Set up other public or private foundations or trusts or be the beneficiary of
such foundations or trusts
- Hold shares in a company as long as it is not involved in the company’s
management
The family foundation may further issue certificates representing rights on
certain assets owned by it:
- The certification mechanism grants certificate holders certain economic rights
on the assets
- The assets remain under the legal control of the family foundation
68 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Family Foundation
Orphan structure
Individual Patrimonial
entity
settlor
and / or
Board of
Management
Supervisory
Board
Management
Assets
Certificate
holders /
Beneficiaries
(including
settlors)
proceeds
Securities
Life insurance
69 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Luxembourg family foundation- taxation framework
Fully taxable entity
Tax exemption on income deriving from:
- Securities (dividends, profit sharing, interest payments)
- Gains on the disposal and transfer of movable properties
- Gains on the transfer of assets in favour of beneficiaries, certificate holders or
settlors of the family foundation or their successors
Net wealth tax exemption
Registration duty or gift tax depending on the kinship
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Fiduciary agreement
Luxembourg law of 27 July 2003 on fiduciary contracts
Continental trust although no unilateral deed but a contractual agreement
Definition: A fiduciary contract is a contract by which a person, the fiduciant
(principal), agrees with another person, the fiduciary, that subject to the
obligations determined by the parties, the fiduciary becomes the owner of
the assets which shall form the fiduciary assets
Limited scope of professionals acting as fiduciary: credit institutions
investment firms
securitisation companies
pension funds, etc. ...
71 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Fiduciary agreement (cont’)
Transfer of ownership
Segregation of the assets (outside the scope of the personal assets of the
fiduciary in case of bankruptcy, insolvency): the fiduciary assets are
segregated: from the personal assets of the fiduciary
from any other fiduciary assets
Fiduciary agreements may be used for various purposes: Management purposes (fiducie–gestion);
Guarantee purposes (fiducie–sûreté);
Credit purpose (fiducie–crédit);
Carrying purpose (fiducie–portage);
Gift or inheritance purpose (fiducie–donation).
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2. Insurance products
Luxembourg has developed a strong experience in using insurance
products as private wealth tools
Luxembourg insurance sector under the supervision of the Commissariat
aux Assurances (CAA)
Definition: a contract pursuant to which, the stipulator, receives from
another person, the promising party, the promise that the promising party
will perform a certain task for the benefit of a third party, the beneficiary
Certain flexibility: as long as the beneficiary has not accepted the
contract: Policy holder remains in control of the assets (≠ transfer of ownership)
Policy holder remains in control of the investment policy (especially if unit-linked insurance
products)
Policy holder benefits from great protection and confidentiality of assets
73 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Insurance products (cont’)
Efficient vehicles for estate planning purposes.
Insurance products benefit from tax advantages, a favourable tax
treatment and from broad international tax recognition.
74 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Islamic Finance in
Luxembourg and
Shari’ah compliant
case studies
Bishr Shiblaq Head of Dubai Representative Office
Arendt & Medernach
75 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Islamic Finance in Luxembourg
76 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Luxembourg : an early mover in Islamic Finance
First Islamic finance institution licensed in Luxembourg in 1978
First Western country to host a Shari’ah compliant insurance
(Company Solidarity Takaful S.A.) in 1983
First Western stock exchange to list a Sukuk (Malaysia Global
Sukuk) in 2002
First EU Central Bank to become a member of the Islamic
Financial Services Board (IFSB)
First Annual IFSB meeting in a Non-Muslim country (May 2011)
77 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Luxembourg : a prime location for setting up
Shari’ah- compliant products
Strong commitment by the Luxembourg authorities
Various initiatives/visits in the Middle East to promote Luxembourg
Working groups and task forces set up in order to develop Islamic
finance in Luxembourg
Governmental study on Islamic finance products
78 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Luxembourg : a prime location for setting up
Shari’ah- compliant products
No need for specific legislation for Shari’ah compliant transactions
No additional requirements imposed by the Luxembourg regulator to
qualify as Shari’ah compliant vehicle
Islamic investment guidelines are commonly accepted by Luxembourg
authorities and service providers:
prohibited activities (Haram) (gambling, alcohol, production or sale of pork
products…) and purification of of haram / cleansing of cash dividends
specific investment limits enable exclusion of Riba and prohibition of
Gharar
ban to invest in any interest bearing assets/debt instruments (Riba)
ban to enter into futures or forward contracts, derivative instruments and
short sales (Gharar / maysir)
specific investment restrictions (in terms of interest revenue and
borrowings)
79 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Luxembourg: the leading non-muslim domicile
for Shari’ah compliant funds
Source : Thomson Reuters’ Global Islamic Asset Management Report 2014
80 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Luxembourg : a prime venue for listing Sukuk
The first international Sovereign Sukuk was listed in Luxembourg
Luxembourg holds the third worldwide rank in Sukuk listing with EUR 5.5
billion Sukuk under management
Luxembourg Stock Exchange (LuxSE), a leading listing market:
Leading Listing Market for bonds, securities and sukuk with 46 % of
international bonds in Europe being listed
Over 4200 issuers from 105 different countries
More than 55 countries have at least one issue of their sovereign debt
listed
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Shari’ah compliant case studies
82 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Investment Bank &
Investors Investment Bank &
Investors
CaymanCo 2
LuxCo 1
LuxCo 2
Equity
Equity & Mudaraba/s
(Profit participating loan). Structured to reduce
taxation at Luxco 1 (as well as minimize capital
duty)
Equity, Qard Al Hassan (Interest free loan) and
Murabaha Structured to minimize (capital duty
and) taxation
UAE Real Estate
Company
Qatar Private Equity
Company Turkey Equity Fund
Equity
Private Equity: Shari’ah compliant transaction
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Sukuk structuring in Luxembourg
84 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Sukuk holders
Sukuk al-Ijara
SPV1
(buyer-lessors)
Originator2
(lessee)
Originator2
(seller)
1
Sukuk
amount
Issuing
Sukuk
3
Rental
Ijara
agreement
Ijara
assets
Proceeds 2
3
4
Redemption amount
Periodic payments
Purchase and sale undertaking
Sukuk al-Ijara are securities representing the ownership of a specific asset under a lease agreement.
They offer a fixed return and can be transferred to other parties in the secondary market.
Structuring overview
1 the Sukuk holders pay the sukuk subscription
amount to the SPV/issuer
2 The seller sells the beneficial title of the assets
(Ijara assets) to the SPV in return for the
purchase price, which is paid upfront by the
SPV
3 The SPV leases the Sukuk assets (Ijara
agreements) to the originator (lessee) for the
duration of the facility. Rental income (Ijara
installments) generated by the Shariah-
compliant assets is distributed to Sukuk
holders through the SPV
4 At maturity a redemption amount is paid
against the transfer of Sukuk certificates, which
are then cancelled
----- Fund flows
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Sukuk holders
Sukuk al-Musharaka
SPV1
(Musharik)
Originator
(Musharik)
1
Sukuk
amount
Issuing
Sukuk
Sale of Musharaka units 5
3
Periodic profits
Musharaka agreements
2 Contribution in
cash or in kind
5
Extra returns
2 Contribution in
cash
Shariah-compliant
project
4 Share of profit
and loss
4 Share of profit
and loss
Sukuk Al-Musharaka are designed for the development of specific projects/ activities involving the contribution
of capital by all parties to the Musharaka agreement
Structuring overview
1 The SPV issues Sukuks under a Musharaka
agreement(partnership) with the originator
2 Each partner (Musharik) provides the
Musharaka with a contribution (Sukuk proceeds
from the SPV, land or cash from the originator)
3 Profits are distributed according to a pre-
determined ratio (e.g.90:10). The originator, in
its capacity of management agent, is in charge
of distributing the fund flows received through
the Musharaka to both Musharik and receives
the potential surplus as performance fees
4 Under the Management agreement, profits are
shared in the pre-agreed ratio between the SPV
and the originator. Any losses are distributed in
accordance with the proportion of capital
provided by the originator and the SPV
5 Profits/losses are passed on to the investors in
the form of periodic returns
86 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Sukuk holders
Sukuk al-Murabaha
SPV1
(buyer-lessors)
Originator
(purchaser)
Commodity
supplier
1
Sukuk
amount
Issuing
Sukuk
Murabaha
agreement
Sale price
on deferred
payment
terms
Spot delivery
Purchase price 2
4
Return from
deferred price
4 3
3
Spot
delivery
Sukuk al-Murabaha are certificates of equal value issued for the purpose of financing the purchase of goods through a
Murabaha agreement, so that the Sukuk holders become owners of the Murabaha commodity.
Structuring overview
1 The Sukuk holders pay the Sukuk
subscription amount to the SPV/issuer
2 The SPV enter into a Murabaha
agreement under which it agrees to sell,
and the originator agrees to purchase,
certain commodities from the SPV on spot
delivery and deferred payment terms
3 The commodity supplier makes spot
deliveries of the commodities to the SPV
in exchange for the purchase price. The
SPV then sells these commodities to the
originator
4 The originator pays the deferred price in
installments to the SPV at regular
intervals, which are passed on to Sukuk
holders
---- Fund flows
87 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Sukuk holders
Mixed-asset Sukuk
SPV1 Originator2
(seller and buyer)
1
Sukuk
amount
Issuing
Sukuk
Sukuk assets
Proceeds 2
3
Periodic payments
Purchase and sale undertaking
•Real estate assets
•Shariah-compliant shares
•Highly-liquid assets
2
Proceeds
A mixed-asset Sukuk is backed by a portfolio of Shariah-compliant investments.
It offers the advantage of a diversified pool of assets, its tradability is assured and the maturing or defaulting assets can be
repurchased
Structuring overview
1 The Sukuk holders pay the Sukuk
subscription amount to the SPV/issuer
2 The originator allocates a portfolio of
Shariah-compliant assets and sells the
beneficial title of these “mixed assets’ to
the SPV in return for the purchase price,
which is paid upfront
3 Returns are paid to Sukuk holders on a
periodic basis form the income generated
by the Shariah-compliant assets
---- Fund flows
88 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach
Innovative Sukuk structures
Luxembourg is a domicile for innovative Sukuk structures:
Deutsche Bank: Al Miyar SA Sukuk issuance platform
Dar Al Istithmar: Al Waseelah Capital SA Sukuk issance platform
The US 1.350 billion International Islamic Liquidity Management
(IILM) landmark Sukuk
The IILM program:
Issuing short-term Shari’ah compliant financial instruments
Facilitating effective cross-border Islamic liquidity management
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Tax treatment of Sukuk
Analysed as debt instrument from a Luxembourg tax perspective
Thus, the remuneration paid to the sukuk holder = interest
payment
remuneration is tax deductible at the level of the sukuk issuer
not subject to a WHT in Luxembourg
Remuneration = income from transferable securities
Luxembourg tax provisions related to typical silent partners and
profit-linked obligations are not applicable
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Undertaking
Counterparty
Case study: Sukuk issuance platform
Investors/Depositors
3
Proceeds
Periodically
Monitors Shariah
compliance
Islamic Investment
Account
Securities Settlement
Securitisation
Undertaking
Market
Investment
Manager
Shariah
Monitor
1 The issuer was established as a securitisation undertaking under
Luxembourg Law, with each issue of securities made by a separate
compartment. The issuer may issue a shariah-compliant note and
certificate to investors.
2 The originator of the Sukuk acts as arranger and undertaking
counterparty in respect of the relevant compartment of the issuer
3 The proceeds of each Sukuk are deposited into segregated securities
accounts, held with a custodian in the name of the relevant compartment
of the issuer. Each custody account, and therefore each Shariah
compliant asset, is held by the issuer for a specific series of Sukuk.
4 The investment manager uses the amounts in the accounts to purchase
Shariah-compliant assets.
5 An independent entity with a Shariah board monitors the Shariah
compliance of the issuer and the underlying investment structure assets
Sukuk issuance platform allows multiple market participants, both islamic
and conventional to become originators
The platform allows for the issuance of tradable Islamic money market
products settling with short settlement cycles, enabling the issuance of
overnight products or other short-dated money market instruments
2
4
5
Cash
Shariah-compliant
shares
Commitment
Amounts
PUD
SUD
Investment
Management
Agreement
1
PUD: Purchase Undertaking Deed
SUD: Sale undertaking Deed
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20%
Case study: possible structure
Equity Investors
Class A Sukuk:
Murabaha Contract
Funds
PPM for Financing Facilities
+
Murabaha Contracts
Murabaha Investors
(Sukuk holders)
Class B Sukuk: Class C Sukuk:
30% 50%
Lux. Securitisation SPV (Murabaha Financing Co)
Min. 20% of Capitalization
Yielding Bonds Distressed
Murabaha Investment Company
Other
Management Agreement
PPM for Equity Investment
+
Subscription Forms
Max. 80% of Capitalization
Manager
Shari’a Advisory Board
Metal Trade between the parties to allow for the
financing of the Murabaha Investment Company in a
Shari’a compliant way
Contact us
Guy Harles, Partner
Private Wealth
Tel : +352 40 78 78 204
Email : [email protected]
Bishr Shiblaq, Head of Dubai Representative Office
Bank Lending, Structured Finance
Tel : +971 44 34 88 65
Email : [email protected]
Florence Stainier, Partner
Investment Funds
Tel : +352 40 78 78 543
Email : [email protected]
Disclaimer
This presentation of Arendt & Medernach is designed to provide with summarized information and illustrations regarding the topics covered
by such a presentation. This information and those illustrations are not intended to constitute legal advice and do not substitute for the
consultation with legal counsel required before any actual undertakings.