Investment Funds
in Luxembourg
A technical guide – September 2013
Contents

Foreword	4
1. 	 Luxembourg investment funds	

1.1. Introduction	
1.2. Luxembourg’s UCI industry	
1.3. Luxembourg...
9.	 Risk management and valuation	

254

10. 	Administration	

284

11. 	Depositary	

314

12. 	Fund documentation and rep...
Foreword
4 | Foreword
It is my great pleasure to welcome you to the 2013 edition of EY’s Investment Funds
in Luxembourg – A Technical Guide.

Ba...
1. 	 Luxembourg
investment funds
1.1. Introduction
This chapter introduces Luxembourg’s
investment fund industry and outli...
Luxembourg
investment funds

1.2. Luxembourg’s UCI industry
Luxembourg is the leading global location for UCIs. The first ...
1.3. Luxembourg’s investment fund solutions
1.3.1. Fund regimes and passports
A. 	Introduction
Luxembourg offers an attrac...
Luxembourg
investment funds

The marketing of AIF may be summarized as follows:
•	 ➢	 ull AIFM regime AIF can be marketed ...
C. 	Overview of fund regimes and basic structures
The choice of regime and basic structure is presented in schematic form ...
Luxembourg
investment funds

The following table outlines the main characteristics of Luxembourg’s three investment fund r...
Regimes
UCITS

2010 Law Part II

SIF

Information for investors

Prospectus
Key Investor information
(KII)
Financial state...
Luxembourg
investment funds

1.3.2. Basic structures
The decision as to whether to create a UCI in contractual form (commo...
1.3.4.1. Vehicles used in conjunction with AIF
Luxembourg vehicles which may be used in conjunction with AIF include comme...
Luxembourg
investment funds

1.3.5. Pension Fund Pooling Vehicles (PFPVs)
Pension Fund Pooling Vehicles (PFPVs) can be set...
Life-insurance companies are required to provide certain information regarding the underlying
investment fund(s) to invest...
Luxembourg
investment funds

Typical organization of a UCI

UCITS

AIF

Initiator

Common fund

Common fund

Depositary

C...
1.4.2. UCI service providers
The principal duties of the main service providers are as follows:

A.	Sponsor, promoter or i...
Luxembourg
investment funds

H.	Distributor
Distributors are intermediaries who perform one or both of the following activ...
the common fund. The management company is responsible for the common fund, including the
appointment and oversight of ser...
Luxembourg
investment funds

•	 ➢	 reate a new group management entity, or use their existing group management entity
C
In...
1.4.3.4. Group management models
Asset management groups, particularly those operating in multiple jurisdictions, have a n...
Luxembourg
investment funds

Emerging mixed models
Two “mixed” models are emerging in practice:
•	 ►	
“Super” entity model...
1.4.3.5. Service provider models
When selecting service providers, two important considerations are whether the service pr...
Luxembourg
investment funds

From a Luxembourg perspective, there are a number of minimum rules which apply in relation to...
2. 	 Current
and future
developments
2.1. Introduction
This chapter outlines current and future
developments in the follow...
Current and future developments

2.2. UCITS
This section focuses on developments related to UCITS:
•	 ➢	 urrent developmen...
The Circular clarifies the requirements of the Law of 17 December 2010 relating to undertakings for
collective investment ...
•	 ➢	 ecurities lending and termination of any securities lending or sale and repurchase agreements
S
(repo) and reverse r...
In July 2012, the CSSF updated its Key Investor Information Document – Frequently Asked Questions
document covering, inter...
•	 ➢	 equirements in relation to the translation of the financial reports of the master UCITS in order to
R
meet the needs...
2.2.10. European Commission consults on UCITS VI, money
market funds and long-term investments
In July 2012, the European ...
•	 ➢	 IF: Section 3.4.3.
A
•	 ➢	 IFM: Chapter 7
A
•	 ➢	 ortfolio management: Chapter 8
P
•	 ➢	 isk management and valuatio...
2.3.1.3. Implementation timeline
AIFM Directive timeline

Marketing AIF

Regulatory agenda

AIFM
Directive
entry into
forc...
Current and future developments

2.3.1.4. Key provisions
The key provisions of the AIFM Directive are summarized in the fo...
2.3.1.5. AIFM in scope
The principal activity of an AIFM is managing AIF, which means performing at least the investment
m...
A “super” AIFM may be created to manage multiple AIF fund ranges, both in its home Member
State and cross-border in other ...
When assessing the extent of delegation, the CSSF is required to assess the entire delegation
structure at the level of th...
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
E&Y - Investment funds in Luxembourg - a technical guide - September 2013
Upcoming SlideShare
Loading in...5
×

E&Y - Investment funds in Luxembourg - a technical guide - September 2013

2,623

Published on

E&Y - Investment funds in Luxembourg - a technical guide - September 2013

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
2,623
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
69
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

E&Y - Investment funds in Luxembourg - a technical guide - September 2013

  1. 1. Investment Funds in Luxembourg A technical guide – September 2013
  2. 2. Contents Foreword 4 1. Luxembourg investment funds 1.1. Introduction 1.2. Luxembourg’s UCI industry 1.3. Luxembourg’s investment fund solutions 1.4. Organization of a UCI 6 6 7 8 16 2. Current and future developments 26 3. UCI structures and specificities 72 4. Authorization, supervision, restructuring and liquidation 92 2.1. Introduction 2.2. UCITS 2.3. Alternative investment funds 2.4. Money market funds 2.5. Exchange traded funds 2.6. Corporate governance 2.7. Other UCI-related developments 2.8. Anti-money laundering and counter terrorist financing (AML/CFT) 2.9. Investment firms and credit institutions 2.10. Insurance and pensions 2.11. Shadow banking 2.12. Securities and derivatives 2.13. Financial benchmarks 2.14. Other developments relevant to UCIs 2.15. Tax 2.16. Value added tax (VAT) 2.17. Financial transaction tax 3.1. Introduction 3.2. Principal regulations 3.3. Types of structures of UCIs 3.4. Specific requirements for 2010 Law UCIs and SIFs 3.5. Minimum capital 3.6. Requirements applicable to specific types of UCI 4.1. Introduction 4.2. Pre-launch considerations 4.3. Authorization 4.4. Updates to the application for authorization 4.5. Ongoing supervision 4.6. Restructuring UCIs 4.7. Mergers of UCIs 4.8. Authorization of a side pocket 4.9. Transfer of foreign UCIs to Luxembourg 4.10. Liquidation of UCIs and compartments 4.11. Dormant compartments 26 27 32 44 45 46 47 49 52 54 56 57 61 62 64 68 69 72 73 73 83 88 89 92 93 93 97 97 98 99 102 103 105 107 5. Investment rules 108 6. Governance and liability 150 7. Management of UCIs: management companies and AIFM 162 8. Portfolio management and advice 234 5.1. Introduction 5.2. UCIs under the 2010 Law 5.3. SIF Law UCIs 5.4. AIF 5.5. EuVECA and EuSEF 6.1. Governance 6.2. Criminal and civil liability 7.1. Introduction 7.2. Scope of activities 7.3. Main applicable regulations 7.4. Setting up and operating a management entity 7.5. Cross-border management passport 7.6. Expenses and taxation of management entities 8.1. Introduction 8.2. Portfolio management 8.3. Investment advice provided to Luxembourg UCIs 8.4. Luxembourg portfolio managers and advisers 8.5. EU portfolio managers and advisers 8.6. Non-EU portfolio managers and advisers 108 109 142 143 147 151 159 163 170 175 176 224 230 235 237 247 248 250 252
  3. 3. 9. Risk management and valuation 254 10. Administration 284 11. Depositary 314 12. Fund documentation and reporting 334 13. Expenses and taxation 368 14. Marketing 390 15. Stock exchange listing 410 9.1. Introduction 9.2. Risk management of UCITS 9.3. Risk management for AIF 9.4. Risk management of SIFs 9.5. Valuation 10.1. Introduction 10.2. The administration function 10.3. Subscriptions and redemptions of shares or units and payment of dividends 10.4. Errors, materiality and compensation to investors 11.1. Introduction 11.2. Appointment 11.3. Eligible entities 11.4. Duties 11.5. Conduct of business and conflict of interest rules 11.6. Liability 11.7. Delegation 11.8. Prime broker 12.1. Introduction 12.2. Constitutional documents 12.3. Initial disclosures to investors 12.4. Periodic investor disclosures and updates 12.5. Financial reporting 12.6. General meetings 12.7. Submission to trade register 12.8. Financial information reporting to authorities 12.9. Electronic transmissions to the CSSF and publication 13.1. Introduction 13.2. Expenses 13.3. Taxation 13.4. Value added tax (VAT) 14.1. Introduction 14.2. Information provided to investors before they invest 14.3. Marketing Luxembourg UCITS in other EU Member States 14.4. Marketing foreign UCITS in Luxembourg 14.5. Marketing of full AIFM regime AIF 14.6. Marketing of simplified AIFM registration regime AIF 14.7. Marketing regulations applicable in Luxembourg 14.8. Marketing intermediaries 15.1. Introduction 15.2. The Luxembourg Stock Exchange (LuxSE) 15.3. Procedures for admission to a securities market of the LuxSE 15.4. Continuing obligations for issuers of securities 15.5. Listing of SIFs 15.6. Transfer, suspension, withdrawal and delisting 255 258 270 277 279 284 285 291 308 314 315 315 317 325 326 328 332 334 336 338 350 352 362 362 362 365 368 369 370 384 390 393 394 399 400 406 408 408 410 411 411 414 415 415 Appendices 416 Appendix I – Understanding UCIs Appendix II – Key regulations and reference texts Appendix III – Withholding Tax Rates Applicable to Luxembourg UCIs Appendix IV – Glossary Appendix V – EY asset management related publications Appendix VI – EY investment fund services 418 426 450 484 490 492
  4. 4. Foreword 4 | Foreword
  5. 5. It is my great pleasure to welcome you to the 2013 edition of EY’s Investment Funds in Luxembourg – A Technical Guide. Back to positive fund flows, but many challenges ahead… future, greater alignment between the compensation paid to both the manufacturer and distributor and the ultimate outcome for the investor. Investment funds, both traditional and alternative products, are again generating strong positive inflows. The inflows into traditional products were initially driven by fixed income, but later widened to equity products. Alternative investment funds, which had seen slow but sustained growth over a long period, have also experienced stronger growth recently. Distribution This is good news for the asset management industry overall. Luxembourg is very well positioned to benefit from this growth with its “UCITS” platform and the emerging “AIF” brand. However many challenges remain, and the question is, with investors appearing to be expressing renewed confidence, will some of the fundamental challenges facing the industry slip down, or even off, the agenda? Dealing with regulation One of the major challenges facing the industry today is dealing with the increasingly sophisticated regulatory environment. Regulatory spend is likely to cost global asset managers, on average, between US$ 50–100m over the next three to five years. Mastering regulation could be a source of real competitive advantage for asset managers over the coming years. The cost of regulation will ultimately squeeze many smaller asset managers and service providers out of the market, potentially limiting choice and leading to higher costs. The global players are exploring ways of sharing these costs with clients and developing added value services. Product developments, meeting investors’ needs and alignment of interests Apart from performance, investors are demanding greater asset diversification and risk mitigation. Asset managers are responding by combining skills that were previously offered separately by traditional and alternative asset managers. This will further drive the convergence of the traditional and alternative managers. At the same time, low cost, transparent products, such as exchange traded funds (ETFs), will continue to experience strong growth. Looking forward, overall, the product offering will need to change substantially. Long-term investors need a greater level of certainty that the investment outcome will meet their requirements; this will entail significant re-designing of products, and greater focus on techniques such as liability-driven investing. This should also mean, in the The industry continues to generate relatively high margins. The real debate is how these margins should be shared between the manufacturer and the distributor; the distributor generally has the upper hand as it “owns” the client relationship. Manufacturers continue to explore possibilities to break big banks’ and insurers’ stranglehold on distribution in continental Europe, but with limited success so far. In some countries, the commission-based model is being replaced by a fee-based model; this could mean that “open architecture” will remain just a “concept”. The key question is: will the ban on commissions have the desired result of ensuring investors get the right product at a reasonable price – or will it result in investors purchasing no product at all because they are not willing to pay the fee for the advice? Education and engagement with the key stakeholders Much has been done to improve the clarity and transparency of investment fund products, but there is still much more to do. The introduction of Key Investor Information Document (KIID), while not perfect, represents real progress. Investor education must be a priority going forward. Key questions include how should we deliver it, who should deliver it and, of course, who should pay for it? For the younger generation, embedding financial education in school curricula would appear to be the way forward. However, education is a much broader issue; it must also focus on the distributor (the UK’s Retail Distribution Review (RDR) could serve as a model), the manufacturer and the press. While my Foreword leaves many questions open, this Guide is designed to answer many of your questions on setting up and running investment funds in Luxembourg. I hope that you find it useful. My team and I look forward to supporting you with the challenges you face over the coming years. Michael Ferguson EMEIA Regulated Funds Practice and Luxembourg Asset Management Leader Foreword | 5
  6. 6. 1. Luxembourg investment funds 1.1. Introduction This chapter introduces Luxembourg’s investment fund industry and outlines Luxembourg’s solutions for investment funds. 1.1.1. What is an investment fund? An investment fund (often referred to as an undertaking for collective investment – UCI – collective investment undertaking – CIU; “UCI” is the term used in this Technical Guide) has the following characteristics: • ➢ here is collective investment of funds T • ➢ he capital is raised from a number of investors T • ➢ he capital is invested in accordance with a defined T investment policy for the benefit of those investors, generally in accordance with the principle of risk spreading The shares or units of some UCIs may be distributed to the general public while others are reserved for certain circles of investors, such as informed, qualified or institutional investors. Depending on the structure of the UCI, these shares or units may be obtained through private placement, direct distribution, distributors, or through stock exchanges. The portfolio of collective investments may consist of transferable securities and/or other assets. Risk spreading is required to prevent excessive concentration of investments. 1.1.2. Why set up a UCI? An investment fund, or UCI, can offer investors the possibility to: • ➢Generate current income or a capital appreciation, or both • ➢Access a diversified portfolio of investments • Benefit from professional management of the portfolio • Share the associated costs • Gain exposure to specific investments in the case of investors who are not able to access the investment directly, for example due to investor qualification requirements 6 | 1. Luxembourg investment funds
  7. 7. Luxembourg investment funds 1.2. Luxembourg’s UCI industry Luxembourg is the leading global location for UCIs. The first Luxembourg fund was established in 1959 and there are now nearly 3,900 UCIs, comprising nearly 13,600 compartments (often referred to as sub-funds)1, with net assets of €2.6 trillion (US$3.4 trillion) as at 31 May 2013, analyzed as follows: Number of UCIs Common funds (FCPs) Net assets in € billion Investment companies Variable capital (SICAV) Total Fixed capital (SICAF) Common funds (FCPs) Investment companies Variable capital (SICAV) Total Fixed capital (SICAF) 2010 Law Part I (UCITS2) 1,061 756 Part II 269 268 4 SIF Law (SIFs) 525 965 36 1,855 1,989 40 3,884 Total 0 1,817 489.4 1,596.8 0.0 2,086.3 541 82.6 1,526 125.2 118.7 0.9 202.2 157.1 13.3 295.6 697.3 1,872.6 14.2 2,584.1 Source: Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier – CSSF) At the end of 2012, there were 6,342 shares or units of UCIs listed by the Luxembourg Stock Exchange. These shares or units were issued by 427 distinct entities. 6,218 of the total listed shares or units were shares or units of Luxembourg UCIs, and 124 were shares or units of foreign UCIs. The success of Luxembourg in attracting investment funds, and becoming a major financial center, may be attributed to a number of factors such as: • ➢ eputation of the Luxembourg brand in the investment fund industry R • ➢ ttractive range of investment fund solutions A • ➢ egulatory environment including accessibility, knowledge and responsiveness of the regulator R • ➢ tability: S • ➢ olitical, economic and social environment P • ➢ egal environment and taxation regime L • ➢ bility to achieve tax neutrality for products by considering direct and indirect taxation implications A at fund and investor levels • ➢ perational factors such as relocation costs, local infrastructure, and the qualifications and O knowledge of the multicultural, multilingual international workforce • ➢ ervice provider considerations such as their expertise and ability to meet specific local S distribution market requirements from Luxembourg • ➢ entral location at the heart of Europe with easy access to other financial centers C Luxembourg investment funds are authorized and supervised by the Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier – CSSF). The Luxembourg fund industry has, since 1988, been successfully represented and promoted by the Association of the Luxembourg Fund Industry (Association Luxembourgeoise des Fonds d’Investissement - ALFI). Since 2008, LuxembourgforFinance, the agency for the development of the financial center, has also been promoting the Luxembourg fund industry. 1 Multiple compartment UCIs are covered in Section 3.3.2.. 2 Undertakings for Collective Investment in Transferable Securities. 1. Luxembourg investment funds | 7 1
  8. 8. 1.3. Luxembourg’s investment fund solutions 1.3.1. Fund regimes and passports A. Introduction Luxembourg offers an attractive range of solutions for the creation of UCIs. Luxembourg UCIs can be established under either of the following regimes: Fund category Product Regime Common name of UCI UCITS – Undertakings for Collective Investment in Transferable Securities Part I of the 2010 Law on UCIs UCITS AIF – Alternative Investment Funds Part II of the 2010 Law on UCIs 2010 Law Part II UCI The Specialized Investment Fund Law (the SIF Law) SIF B. Marketing passports Most Luxembourg UCIs are marketed to investors in a number of countries. Many Luxembourg UCIs – UCITS and Alternative Investment Funds (AIF) – benefit from a “Product” passport enabling them to be marketed to investors in the European Union (EU)/European Economic Area (EEA)3, following a notification procedure. Marketing of Luxembourg UCIs which do not benefit from a “Product” passport is subject to the national regimes of the country where the marketing takes place. UCITS can be marketed to all investors in the EU/EEA4. The UCITS passport means that the shares or units of UCITS can be marketed to all types of investors, both retail and professional, throughout the EEA, following a notification procedure. The marketing of AIF depends on whether or not they are managed in accordance with, and subject to, the full Alternative Investment Fund Managers (AIFM) requirements (“Full AIFM regime AIF”). Full AIFM regime AIF are AIF which are managed by an authorized AIFM and authorized internally managed AIF. Authorized AIFM, and authorized internally managed AIF, must meet the full requirements of the AIFM Directive, which is transposed in Luxembourg by the AIFM Law. AIFM compliance is required when the assets of all the AIF under management exceed certain thresholds. Other AIF are subject to a simplified AIFM registration regime (“Simplified AIFM registration regime AIF”). Chapter 7 covers AIFM requirements in more detail. 3 The EEA includes European Union (EU) Member States plus Iceland, Liechtenstein and Norway. The EEA agreement establishes freedom to provide services across the EEA, and any specific provisions. 4 The EEA Agreement implements the UCITS Directive freedoms across the EEA by including reference to it in Annex, without any specific limitations. 8 | 1. Luxembourg investment funds
  9. 9. Luxembourg investment funds The marketing of AIF may be summarized as follows: • ➢ ull AIFM regime AIF can be marketed to: F • Professional investors in the EU/EEA5: authorized AIFM, and authorized internally managed AIF, benefit from a passport permitting them to market the shares or units of the AIF they manage to professional investors throughout the EU/EEA • Retail investors in the EU/EEA under stricter national rules: each EU/EEA Member State may permit authorized AIFM, and authorized internally managed AIF, to market the shares or units of the AIF they manage to retail investors in the Member State. The Member State may also apply stricter requirements than those applicable to the marketing to professional investors • ➢ implified AIFM registration regime AIF can be marketed to professional investors in the EU/ S EEA under national private placement regimes (i.e., subject to national requirements), where such regimes exist. The passport is not applicable. However, a specific regime exists for the managers of qualifying European Venture Capital Funds (EuVECA) and of qualifying European Social Entrepreneurship Funds (EuSEF) which meet the requirements of the simplified EU/EEA regulatory regimes. Such managers can benefit from a “passport” permitting them to market the shares or units of the qualifying European funds they manage to suitably qualified investors throughout the EU/EEA (see Section 3.4.3.3.). • ➢ U/EEA professional investors may, on their own initiative, purchase the shares or units of any E AIF, irrespective of the domicile of the AIF or AIFM, provided that there is no marketing (also referred to as “reverse solicitation”) • ➢ n addition to the rules applicable to AIF, SIFs can only be distributed to “informed investors” I (see Section 3.4.2.1.) Summary of marketing of Luxembourg UCIs in the EU/EEA Products Regulatory framework Marketing regime Investors UCITS UCITS EU/EEA “passport” Retail and professional AIF Full AIFM regime AIF EU/EEA “passport” Professional Full AIFM regime AIF National regimes Retail EuVECA and EuSEF EU/EEA “passport” Qualified investors Simplified AIFM registration regime AIF National private placement regimes (NPPRs) Professional Any AIF (Full AIFM regime or simplified AIFM registration regime) Reverse solicitation Professional Marketing outside the EEA is subject to each country’s national requirements. Chapter 14 covers the marketing of UCIs. 5 The EEA Agreement did not list the AIFM Directive in Annex at the time of writing, but the AIFM Directive is identified as a “text with EEA relevance”. 1. Luxembourg investment funds | 9 1
  10. 10. C. Overview of fund regimes and basic structures The choice of regime and basic structure is presented in schematic form below: Luxembourg’s solutions for UCIs Choice of regime 2010 Law UCITS Part II SIF Common fund (FCP) A common fund must be managed by a management company Choice of compartment structure Choice of basic structure A UCITS management company is required. It may be either: • A Luxembourg UCITS (Chapter 15) management company • EU/EEA UCITS management company An AIF common fund must be managed by a Luxembourg management company, which may be: • A Luxembourg UCITS (Chapter 15) management company • A Luxembourg non-UCITS (Chapter 16) management company The management company may, in turn, delegate to an AIFM which may be: • An authorized Luxembourg AIFM • An authorized EU/EEA AIFM However, where the assets managed by the management company exceed certain thresholds, the management company is required to either: • Obtain authorization as an AIFM itself • Delegate to another AIFM6 Investment company with variable capital (SICAV) or investment company with fixed capital (SICAF) A UCITS investment company must either: • Be managed by a UCITS management company • A Luxembourg UCITS (Chapter 15) management company • EU/EEA UCITS management company • Manage itself (a selfmanaged UCITS) An AIF investment company must either: • Be managed by: • A management company which may be: • A Luxembourg UCITS (Chapter 15) management company • A Luxembourg non-UCITS (Chapter 16) management company The management company may, in turn, delegate to an AIFM which may be: • An authorized Luxembourg AIFM • An authorized EU/EEA AIFM However, where the assets managed by the management company exceed certain thresholds, the management company is required to either: • Obtain authorization as an AIFM itself • Delegate to another AIFM7 • An AIFM directly. The AIFM may be: • An authorized Luxembourg AIFM • An authorized EU/EEA AIFM • Manage itself (an internally managed AIF). Where the assets of the AIF exceed certain thresholds, the internally managed AIF is required to either: • Obtain authorization as an AIFM • Delegate to another AIFM8 Two structures are possible: • Single compartment structure • Multiple compartment (umbrella) structure. Each compartment of a multiple compartment structure may pursue a different investment policy 6 Section 3.3.1. covers basic structures, Section 3.4.3. covers the requirements applicable to AIF, Section 7.1. introduces management companies and AIFM. 7 Idem. 8 Idem. 10 | 1. Luxembourg investment funds
  11. 11. Luxembourg investment funds The following table outlines the main characteristics of Luxembourg’s three investment fund regimes: Regimes UCITS 2010 Law Part II SIF Regulation Regulated Regulated Regulated Regulator CSSF CSSF CSSF Authorization procedure Prior to set-up Prior to set-up Prior to set-up Structures available Common fund: FCP Investment company: SICAV or SICAF Common fund: FCP Investment company: SICAV or SICAF Common fund: FCP Investment company: SICAV or SICAF Eligible investors9 All All Informed investors10 Distribution in European Union(EU)/European Economic Area (EEA)11 Retail investors: EU/EEA passport Professional investors: EU/ EEA passport Retail investors: national requirements apply Professional investors: EU/ EEA passport if managed by an authorized AIFM12, otherwise national private placement regimes (NPPRs) apply Informed non-professional investors: national requirements apply Professional investors: EU/ EEA passport if managed by an authorized AIFM13, otherwise national private placement (NPPRs) regimes apply Maximum number of shareholders or unitholders No limit No limit No limit14 Minimum number of shareholders or unitholders No minimum No minimum No minimum Minimum investment by a shareholder or unitholder None None €125,000; less if certification Use of compartments (sub-funds) Yes Yes Yes Cross-investment between compartments Yes, subject to conditions Yes, subject to conditions Yes, subject to conditions Multiple share classes Yes Yes Yes Eligible investments Transferable securities such as equities, bonds, money market instruments and certain derivatives Techniques and instruments related to transferable securities Detailed restrictions apply Some restrictions Any (unrestricted) Diversification Detailed requirements General requirements General requirements Risk management Detailed requirements General requirements, and AIFM requirements (where applicable) General requirements, and AIFM requirements (where applicable) No detailed restrictions Fees/expenses including performance and advisory Must be disclosed fees No detailed restrictions Must be disclosed No detailed restrictions Must be disclosed Transferability of shares or units Generally freely transferable Generally freely transferable Subject to informed investor qualification Generally freely transferable 9 Additional restrictions may be included in the constitutional document or prospectus. 10 See Section 3.4.2.. 11 European Union (EU) Member States plus Iceland, Liechtenstein and Norway. 12 See Chapter 7. 13 Idem. 14 Except in the case of a SIF set up as a private limited liability company (S.à r.l.), in which case the maximum number of investors is 40. 1. Luxembourg investment funds | 11 1
  12. 12. Regimes UCITS 2010 Law Part II SIF Information for investors Prospectus Key Investor information (KII) Financial statements15 Periodic disclosures16 Prospectus Financial statements18 Periodic disclosures19 Prospectus or offering document20 Financial statements21 Periodic disclosures22 Required service providers23 UCITS management company (common fund) Depositary Administrator, registrar and transfer agent Auditor Management company (common fund) Depositary Administrator, registrar and transfer agent Auditor Management company (common fund) Depositary Administrator, registrar and transfer agent Auditor Regulator reputational checks Portfolio manager and/or adviser Directors of UCI, or of management company24 Depositary Promoter25 Portfolio manager and/or adviser Directors of UCI, or of management company26 Depositary Directors of SIF, or of management company27 28 Depositary 17 Listing possible Yes Yes Yes Net asset value (NAV) calculation and redemption frequency Minimum twice a month Minimum monthly NAV required, at least for reporting purposes Subscription and redemption price NAV29 NAV30 Subscription and redemption conditions laid down in the constitutional document Tax treatment No tax, except for annual subscription tax of 0.05% on the Net Asset Value (NAV) unless a reduced rate of 0.01% or exemption applies No withholding tax (WHT) on dividends paid, except possibly in application of the European Union (EU) Savings Directive No tax, except for annual subscription tax of 0.05% on the Net Asset Value (NAV) unless a reduced rate of 0.01% or exemption applies No withholding tax (WHT) on dividends paid, except possibly in application of the European Union (EU) Savings Directive No tax, except for annual subscription tax of 0.01% on the Net Asset Value (NAV) unless an exemption applies No withholding tax (WHT) on dividends paid, except possibly in application of the European Union (EU) Savings Directive Luxembourg also offers a specific vehicle, the SICAR, an Investment Company in Risk Capital31. SICARs and SIF SICAVs have a number of common characteristics. SICARs are not covered in this Technical Guide. 15 At least audited annual and unaudited semi-annual financial statements. 16 See Section 12.4.1.. 17 For full AIFM regime AIF, information to be disclosed in the prospectus or separately (see Section 12.3.3.). 18 At least audited annual and unaudited semi-annual financial statements. 19 For full AIFM regime AIF (see Section 12.4.2.). 20 For full AIFM regime AIF, information to be disclosed in the prospectus or separately (see Section 12.3.3.). 21 At least audited annual financial statements. 22 For full AIFM regime AIF (see Section 12.4.2.). 23 Main service providers only listed here; see Section 1.4.. 24 For self-managed UCITS, see Section 3.4.1.5.. 25 Where the 2010 Law Part II UCIs is not managed by a UCITS (Chapter 15) management company. 26 For internally managed AIF, see Section 3.4.3.. 27 "Directors" means, in the case of public limited companies and in the case of cooperatives in the form of a public limited company, the members of the Board of Directors, in the case of partnerships, the managers or general partner, in the case of private limited liability companies, the manager(s) and in the case of common funds, the members of the Board of Directors or the managers of the management company. 28 For internally managed AIF, see Section 3.4.3.. 29 The net asset value per share or unit may be adjusted to incorporate a “swing factor” if swing pricing procedures are in place (see Section 10.3.7.). 30 Idem. 31 Law of 15 June 2004 regarding investment in venture capital (Société d’Investissement en capital à risque - SICAR). 12 | 1. Luxembourg investment funds
  13. 13. Luxembourg investment funds 1.3.2. Basic structures The decision as to whether to create a UCI in contractual form (common fund – FCP) or in corporate form (an investment company, generally with variable capital – SICAV)32 is primarily based on tax, operational and marketing considerations. The following table details the main differences between common funds and investment companies: Basic structures Common fund (FCP) Oversight of service providers Board of Directors of management company Investment company (SICAV or SICAF) Board of Directors, general partner or manager(s)33 Taxable status Tax transparent (with limited exceptions) Not tax transparent (with limited exceptions) Tax implications Individual underlying investors may benefit from certain double taxation treaties (DTTs) SICAV may directly benefit from certain DTTs VAT status VATable person (via its management company) VATable person Control Board of Directors of management company in conjunction with depositary Board of Directors, general partner or manager(s)34 and ultimately by investors35 Shareholders’ or unitholders’ meetings Unitholders’ meetings are not mandatory for At least one meeting of shareholders must a common fund be held annually Luxembourg’s investment fund regimes and basic structures, and the requirements for each, are described in more detail in Chapter 3. 1.3.3. Traditional investment funds Traditional investment funds include: • ➢ quity funds E • ➢ ond funds B • ➢ oney market funds M • ➢ ixed funds M • ➢ unds of traditional investment funds36 F Traditional investment funds may be set up under any of Luxembourg’s investment fund regimes (i.e., as UCITS, 2010 Law Part II UCIs or SIFs) using any of the basic structures mentioned previously. 1.3.4. Alternative investment funds (AIF) Alternative investment funds (AIF), including hedge, real estate, private equity, thematic, multipleasset class alternative funds and funds of alternative investment funds37, will generally be set up either as 2010 Law Part II UCIs or SIFs. Any of the basic structures may be used. UCITS may also, to a limited extent, pursue alternative investment strategies (so-called “alternative UCITS”). 32 See also Section 3.3.. 33 In the case of public limited companies and in the case of cooperatives in the form of a public limited company, the members of the Board of Directors, in the case of partnerships, the managers or general partner, and in the case of private limited liability companies, the manager(s). 34 Idem. 35 Except in the case of a partnership. 36 Appendix I describes in more detail what UCIs are and explains the various types of funds and asset classes. 37 Idem. 1. Luxembourg investment funds | 13 1
  14. 14. 1.3.4.1. Vehicles used in conjunction with AIF Luxembourg vehicles which may be used in conjunction with AIF include commercial companies, referred to as SOPARFIs, and securitization vehicles. This section provides a brief description of these vehicles. SOPARFIs and securitization vehicles are not covered in detail in this Technical Guide. A. SOPARFIs SOPARFI (Société de Participations Financières) is the name usually given to Luxembourg companies whose main corporate purpose is the holding of participations in other companies. The SOPARFI is not a specific vehicle or regime; like other Luxembourg companies it is subject to the Law of 10 August 1915 on commercial companies, as amended (the 1915 Law). SOPARFIs play a central role in structuring of cross-border transactions. SOPARFIs are fast and inexpensive to incorporate. SOPARFIs are unregulated vehicles which can be set up in any Luxembourg corporate form; the most common corporate forms are the public limited company and the private limited liability company. SOPARFIs are not subject to risk spreading requirements or restricted to any specific types of investments. The taxation of SOPARFIs is covered in Subsection 13.3.3.3.A.. B. Securitization vehicles Securitization vehicles (special purpose vehicles) acquire receivables or bear risks associated with commitments taken or activities carried out by third parties and, in exchange, issue securities whose return is directly linked to the risks borne. Luxembourg securitization vehicles are also occasionally used in combination with alternative investment funds. The Law of 22 March 2004 on securitization, as amended (the Securitization Law), provides a legal framework for securitization. It offers initiators flexibility to develop workable and efficient structures for securitization transactions. Luxembourg securitization vehicles may be regulated by the CSSF or unregulated where the securitization vehicle does not make more than three issuances of securities to the public during the year. Luxembourg’s Securitization Law offers investors a very flexible regime for securitization vehicles, a high level of protection and legal certainty as well as a tax-neutral treatment in Luxembourg. Under the Securitization Law, any tangible or intangible asset or activity with a reasonably ascertainable value or predictable future stream of revenues can be securitized. Securitization structures can range from traditional to the most innovative (e.g., such as simple repackaging, term transactions and commercial paper conduits). Luxembourg securitization vehicles can either be set up as corporate entities (sociétés de titrisation), or funds with no legal personality managed by a management company (fonds de titrisation). These can be set up as single or multi-compartment vehicles; each compartment can issue several tranches of securities. The assets of each compartment can be segregated (the protected cell concept). A single securitization vehicle can be established to carry out an entire securitization transaction, or separate securitization vehicles can be established – one to acquire the assets or bear the risks, and another to issue securities to the investors. Multiple layer securitization structures with two or more acquisition or issuing vehicles can be created to optimize the risk spreading. A reference to the Securitization Law in the constitutional documents should be sufficient in order to enable the entity to benefit from the provisions of Luxembourg’s securitization regime. The taxation of Luxembourg securitization vehicles is covered in Subsection 13.3.3.3.B.. 14 | 1. Luxembourg investment funds
  15. 15. Luxembourg investment funds 1.3.5. Pension Fund Pooling Vehicles (PFPVs) Pension Fund Pooling Vehicles (PFPVs) can be set up as Luxembourg common funds, which are tax transparent. PFPVs are also exempt from subscription tax (see Chapter 13 for more information on taxation and VAT issues related to Luxembourg funds). Thus, Luxembourg offers a regime that allows the pooling of pension fund investments in a way that is both tax and cost efficient, in the interest of the beneficiaries (see also Section I.3.12. of Appendix I for a description of PFPVs and Section 3.3.4.2. on co-management and pooling of assets). 1.3.6. Master-feeder structures In master-feeder structures, the feeder UCI invests most of its assets in a master UCI. Therefore, the management of a significant portion of the portfolio of the feeder UCI is effectively performed by the manager of the master UCI. A feeder UCITS is a non-diversified investment structure investing into a diversified product (master UCITS), permitting the pooling of assets. In a UCITS master-feeder structure, a feeder UCITS invests at least 85% of its assets in a master UCITS. It may invest up to 15% of its assets in liquid assets, financial derivative instruments for hedging purposes or, in the case of investment companies, property essential for the direct pursuit of business. An existing UCITS may be converted into a feeder UCITS. Alternatively an existing UCITS may become a master UCITS. A feeder UCITS may also change its master UCITS. The master UCITS, or one or more of the feeder UCITS, can be located in different Member States. See also Section 3.3.4.1.. Master-feeder structures may be used by asset managers as a distribution mechanism to facilitate access to certain markets. For example, some French investors may prefer to invest in a local UCITS. An asset manager which currently only offers a Luxembourg domiciled UCITS may take advantage of the UCITS master-feeder provisions and create a feeder UCITS domiciled in France which invests in the master UCITS domiciled in Luxembourg. This structure will enable the manager to distribute to such French investors while managing only one portfolio of investments. 1.3.7. Unit-linked products Luxembourg life insurers are permitted to offer a range of “unit-linked” life insurance products. “Unitlinked” life insurance products are products which are linked to one or more investment funds, which may be either: • ➢ External” UCIs, which: “ • ➢ an be one of the following: C • A UCITS or another UCI investing in transferable securities • An open-ended fund of AIF (i.e., a fund of hedge funds) • An open-ended real estate UCI • ➢ re subject to investment limits which depend on the category of UCI A • ➢ Internal” funds which do not offer a guarantee. There are two categories: “ • ➢ ollective investment funds which are: C • Subject to specific investment restrictions, which vary according to the characteristics of the investor • Managed by way of a portfolio management mandate, in a similar way to ordinary UCIs • ➢ Dedicated” funds which are: “ • Subject to a minimum investment premium • Subject to specific investment restrictions, which vary according to the characteristics of the investor • Managed by way of a discretionary mandate • ➢ Internal” collective investment funds which guarantee returns “ 1. Luxembourg investment funds | 15 1
  16. 16. Life-insurance companies are required to provide certain information regarding the underlying investment fund(s) to investors before they invest. Luxembourg insurance supervisory authority (Commissariat aux Assurances – CaA) Circular 08/1 clarifies the rules applicable to unit-linked life insurance products. These products are not further covered in this Technical Guide. 1.4. Organization of a UCI This section outlines the typical organization of a UCI, summarizes the roles of the main service providers and outlines the factors impacting the choice of organizational model. 1.4.1. Typical organization of a UCI As part of the formation procedures of a UCI, several service providers must be appointed. The following diagrams show illustrative examples of the organization of UCIs; other models may be possible. 16 | 1. Luxembourg investment funds
  17. 17. Luxembourg investment funds Typical organization of a UCI UCITS AIF Initiator Common fund Common fund Depositary Common fund (FCP) Depositary Sponsor UCITS management company Group/Third-party Management company and AIFM (if applicable) Group/Third-party Paying agent(s) Auditor Portfolio manager Administrator, registrar, transfer, domiciliation agent Distributors Investment company which has not appointed a management company Investment adviser Sponsor Prime broker Paying agent(s) Auditor Portfolio manager Administrator, registrar, transfer, domiciliation agent Distributors Internally managed AIF investment company Board of Directors Depositary Investment adviser Self-managed UCITS investment company Board of Directors Depositary Initiator Prime broker Paying agent(s) Paying agent(s) Auditor Portfolio manager Administrator, registrar, transfer, domiciliation agent Distributors Investment company which has appointed a management company Investment adviser Portfolio manager Administrator, registrar, transfer, domiciliation agent Management company Group/Third-party Initiator Depositary Investment company Board of Directors Management company and/or AIFM Group/Third-party Paying agent(s) Auditor Portfolio manager Investment adviser Key: Distributors Investment adviser Investment company Board of Directors Sponsor Auditor Administrator, registrar, transfer, domiciliation agent Distributors Depositary Prime broker Paying agent(s) Auditor Portfolio manager Administrator, registrar, transfer, domiciliation agent Distributors Investment adviser : Appointed by 1. Luxembourg investment funds | 17 1
  18. 18. 1.4.2. UCI service providers The principal duties of the main service providers are as follows: A. Sponsor, promoter or initiator For UCITS management companies, the CSSF may ask a “sponsor” to issue a letter of assurance (or “sponsorship”), in which the sponsor commits to the CSSF, that the management company respects, and will continue to respect, the applicable prudential requirements (see also Section 7.4.3.). In practice, the “sponsor” will generally be the main shareholder of the management company, or a group entity to which the main shareholder belongs. The creator of a UCI is generally referred to in Luxembourg as the promoter in the case of 2010 Law UCIs and the initiator in the case of SIFs. These terms are not defined in Law. A promoter is required for a 2010 Law Part II UCI which is not managed by a UCITS (Chapter 15) management company. The promoter or initiator generally plays one or more important roles in the activity of the UCI. For example, the promoter or initiator may: • ➢ e the portfolio manager or adviser B • ➢ lay a role in the oversight of the activity of the UCI, generally by being represented on the P Board of Directors of the UCI or its management company and/or Alternative Investment Fund Manager (AIFM) • ➢ e a shareholder of the management company B • ➢ lay a role in the distribution of the UCI P The role of “sponsor” of a Chapter 15 management company replaces the role of “promoter” of a UCI managed by a UCITS management company (see Chapter 7). The CSSF has indicated that it will reconsider the subject of “promotership” in relation to UCIs not managed by a UCITS management company following implementation of the AIFM Law. See also Sections 1.4.3. and 4.3.2.. B. Management company or AIFM Management companies and AIFM are companies that manage UCIs. “Management” includes, in general, portfolio management, administration and distribution. A common fund (FCP) must be managed by a management company. An investment company can appoint a management company or an AIFM, or manage itself (see also Section 1.4.3.1. and Chapter 7). C. Portfolio manager The portfolio manager manages the UCI (or certain of its compartments) with respect to the investment, divestment and reinvestment of the assets of the UCI. It is a delegate of the UCI or of its management company. The portfolio manager is further discussed in Chapter 8. D. Investment adviser The investment adviser advises the portfolio manager, the management company or the UCI itself with respect to the investment, divestment and reinvestment of the assets of the UCI. It does not make decisions. The investment adviser is further discussed in Chapter 8. E. Administrator The administrator is, inter alia, responsible for keeping the accounting records of the UCI, calculating the NAV, assisting in preparing the financial statements, and acting as a contact with the CSSF and the independent auditor. Administration is further discussed in Chapter 10. F. Registrar and transfer agent The registrar and transfer agent is responsible for keeping the principal register of shareholders or unitholders of the UCI, and for arranging the issue, transfer, allotment, conversion, subscription, redemption and/or purchase and sale of shares or units of the UCI (see also Chapter 10). G. Domiciliation agent The domiciliation agent provides the registered office of the UCI. It is responsible for providing office accommodation and other facilities to the UCI, keeping all correspondence of the UCI, and arranging payment of bills on behalf of the UCI (see also Chapter 10). 18 | 1. Luxembourg investment funds
  19. 19. Luxembourg investment funds H. Distributor Distributors are intermediaries who perform one or both of the following activities: • ➢ ctively market the shares or units A • ➢ eceive subscription and redemption orders as appointed agents of the UCI R See also Section 14.8.1.. I. Nominee Nominees act as intermediaries between investors and the UCI of their choice. See also Section 14.8.2.. J. Market maker Market makers are intermediaries participating on their own account and at their own risk in subscription and redemption transactions of UCI shares or units. See also Section 14.8.3.. K. Depositary The depositary is, inter alia, responsible for the safekeeping of the assets of the UCI, and for the day-to-day administration of the assets (e.g., receipts, sales, dividends), based on instructions received from the asset managers or management company (unless they conflict with the constitutional document). It also plays an oversight role. The depositary may delegate the safekeeping of the assets (see also Chapter 11). L. Prime broker A prime broker is an entity subject to prudential regulation and ongoing supervision, which: • ➢ ffers one or more services to professional investors primarily to finance or execute O transactions in financial instruments as counterparty • ➢ ay also provide other services such as clearing and settlement of trades, custodial services, M securities lending, customized technology and operational support facilities38 (see Section 11.8.) M. Paying agent The paying agent arranges for payment of distributions made by the UCI. A paying agent may be required in each country where the UCI is distributed. Generally, the depositary and its network will provide paying agent services (see Section 11.4.1.). Paying agent is a term used differently in the context of the EU Savings Directive (see Section 13.3.4.1.). N. Auditor The financial statements of a UCI must be audited by a Luxembourg independent auditor (réviseur d’entreprises agréé – see Section 12.5.8.). 1.4.3. Organizational model considerations The choice of organizational model for the UCI, its management and service providers will depend on a number of factors, including: • ➢ he basic structure of the UCI T • ➢ reference for a group entity or a third party P • ➢ he other fund ranges of the group. Where the group has fund ranges in multiple jurisdictions, it T may consider cross-border management • ➢ ervice provider considerations S 1.4.3.1. Basic structure of the UCI A common fund (FCP) has no legal personality and must be managed by an authorized management company, regardless of whether it is created under the 2010 Law or the SIF Law. The Board of Directors of the management company, in conjunction with the depositary, has ultimate control of 38 Based on the AIFM Directive and AIFM Law definition of a “prime broker”. 1. Luxembourg investment funds | 19 1
  20. 20. the common fund. The management company is responsible for the common fund, including the appointment and oversight of service providers. An investment company must appoint an approved management company or designate itself as “self-managed”. The Board of Directors of the investment company, and ultimately the shareholders, control the investment company. The Board of Directors is responsible for the investment company, including the appointment and oversight of service providers. It may appoint a management company to manage the investment company, in which case the oversight of some of the service providers is delegated to the appointed management company. The promoter or initiator is usually represented on the Board of Directors of the investment company. Both common funds and investment companies can be single or multiple compartment (sub-fund), and each compartment can have one or more share classes. It is also possible to create master-feeder structures. In master-feeder structures, the feeder UCI invests most of its assets in a master UCI. The key differences between the basic structures of UCIs are summarized in Section 1.3.. The basic structures, multiple compartment UCIs, and share classes, are described in more detail in Section 3.3., and the requirements for UCIs by specific regime (UCITS, Part II 2010 Law and SIF) in Section 3.4.. Master-feeder structures are covered in Section 3.3.4.1.. 1.4.3.2. Group or third party Promoters and initiators can choose between “group” or “third party” models. In the “group” model, the UCI or management entity (management company or AIFM) is created within the group of the promoter or initiator, or an existing group structure is used. In the “third party” model, the promoter or initiator uses a third party. Third parties may also make available independent Board Members and key function holders. A. UCI Promoters and initiators generally create their own UCIs. However, some portfolio managers and investment advisers choose a UCI created by a third party. In this case, a new UCI will be created by the third party, or a new compartment will be created in an existing multiple compartment UCI (see Section 3.3.2.) of the third party; they will then be appointed as the portfolio manager of, or investment adviser to, the compartment. “Third party UCI” is generally a market entry strategy. An option open to promoters and initiators who wish to offer UCI products to their clientele, but do not wish to create or manage the products, is to “white label” third party products. In this case, the third party creates and manages the UCI, but the product is generally marketed under the brand of the promoter or initiator. The association with the third party will depend on the model implemented. “White labeling” enables the same product to be offered to different clients by different promoters, such as private banks. Under one model, specific share classes are created for each promoter or initiator within an existing UCI. In this case, the product is generally primarily marketed under the brand of the third party; the association with the third party is relatively strong. Under another model, some of the fund documentation is branded by the promoter or initiator. The third party is, for example, referred to in the fund documentation as management company, Board, and service providers. The association with the third party is relatively weak. The requirements on key investor information (KII) of a UCITS restrict, to a certain extent, white labeling of UCITS. The KII must, in general, be provided to investors before they invest. The KII must be used without alterations or supplements in all Member States where the UCITS is notified (see Sections 12.3.2. and 14.2.1.). B. Management entity Promoters and initiators who require or wish to use the services of a management company or AIFM (referred to as a “management entity” in this Technical Guide) have the following options: 20 | 1. Luxembourg investment funds
  21. 21. Luxembourg investment funds • ➢ reate a new group management entity, or use their existing group management entity C In practice, the group to which the initiator belongs usually holds a majority shareholding in the management company and is represented on the Board. The group to which the initiator belongs thereby controls the management company and the group entity will be considered the “sponsor” of the management company (see also Section 7.4.3.). • ➢ ppoint a third party management entity A A number of groups and independent management entities offer “third party” management services. In the “third party management entity” model, the promoter or initiator generally does not control the management entity. It may or may not be represented on one of the key committees, such as an investment committee. C. Key function holders When appointing key function holders, promoters, initiators and sponsors have the choice between persons belonging to the group and external (“independent”) persons. Independent persons may make themselves available on a one-to-one basis, or be made available by a “third party” entity to which they belong. Key function holders may include: • ➢ embers of the Board of Directors of the UCI (see Chapter 6) and management company (see M also Section 7.4.6.) • ➢ enior management (also known as “conducting officers” – see Section 7.4.7.) S • ➢ ontrol functions (see Section 7.4.9.) C A number of specialist firms offer “third party” key function holders. 1.4.3.3. Cross-border management The UCITS and AIFM Directives39 have introduced “management” passports. The passports allow a management entity (management company or AIFM) to manage UCIs (UCITS and AIF, respectively) cross-border – i.e., in EU/EEA Member States other than their home Member State (“host” Member States). UCIs may be managed cross-border either directly (free provision of services) or via a branch. Branches do not themselves benefit from a management passport. UCIs which have not appointed a management entity do not have a management passport. The following table illustrates the cross-border management possibilities under selected group models: Cross-border management possibilities under selected group models UCIs which can be managed Management configurations Local UCIs UCIs in host Member State(s) • Directly √ √ • Via a branch in host Member State X √ Self-managed UCIs √ X Management company managing: See also Section 7.5.. 39 Under the “UCITS IV” recast of the UCITS Directive 1. Luxembourg investment funds | 21 1
  22. 22. 1.4.3.4. Group management models Asset management groups, particularly those operating in multiple jurisdictions, have a number of options for the management of their UCIs. UCITS management companies and AIFM may combine authorizations within a single entity and obtain a “dual” authorization as UCITS management company and AIFM. A “dual” authorized management entity is authorized to manage both UCITS and AIF, and can use the “management” passport to perform the activities for which it has been authorized in other EU/EEA Member States. It also benefits from “product” passports to market the UCITS products it manages to any type of investor, and the AIF products it manages to professional investors, in all EU/EEA Member States. The optimal model will probably be based on one or a combination of the following: • ➢ he “super” model: creating a single management entity (a management company and/or AIFM) T for an ensemble of UCIs, or converting an existing management company to a “super” entity Typically “super” entities will manage UCIs cross-border (see also Section 1.4.3.3.). • ➢ he “multiple” model: local management entities in each UCI domicile, or for specific fund ranges T This is the typical legacy structure existing today. • ➢ he “third party” model: appointing one or more third party management entities. Under this T model, one third party “super” management entity or multiple third party management entities are appointed rather than setting up group management entities (see also 1.4.3.2.) • ➢ he “self-managed” model: self-managed UCITS and internally managed AIF (which are subject to T the AIFM Law) are required to comply with most of the requirements applicable to management entities (see Section 7.4.23.). However, neither self-managed UCITS nor internally managed AIF benefit from a passport enabling them to provide services cross-border An increasing number of self-managed UCIs are appointing management entities. The following table briefly summarizes possible management models for UCITS and AIF: Possible management models for UCITS and AIF UCITS AIF UCITS & AIF “Super” model “Super management company” “Super AIFM” “Super Management Company & AIFM” “Multiple” model Multiple management companies Multiple management companies Multiple management companies & multiple AIFM “Third party” model “Third party management company” “Third party AIFM” “Third party management company & AIFM” “Self-managed” model Self-managed UCITS investment company Internally-managed AIF investment company n.a. 22 | 1. Luxembourg investment funds
  23. 23. Luxembourg investment funds Emerging mixed models Two “mixed” models are emerging in practice: • ► “Super” entity model, potentially combining both branches and free provision of services: These asset management groups will convert existing management entities in some Member States into branches of a single “Super” entity, and make use of free provision of services to manage UCIs in new Member States where the group does not operate (such as feeder UCITS in new domiciles). The following is an illustrative example of this model: Member State A Super management entity UCI A1 UCI A2 UCI An UCI A... Branch C UCI B1 UCI B2 UCI B... UCI Bn UCI C1 Member State B UCI C2 UCI D Member State C Feeder UCI E Member States D & E • Home Member State “Super” entity plus international domicile entity model: These asset management groups will opt to keep a management entity in their home domicile, and another in an international fund domicile. One of the management entities will be selected to provide services cross-border to UCIs in other Member States. The following is an illustrative example of this model: Member State A Super management entity UCI A1 UCI A2 UCI An UCI A... Management entity B UCI B1 UCI B2 UCI B... Member State B UCI Bn UCI C1 UCI C2 UCI D Member State C Feeder UCI E Member States D & E 1. Luxembourg investment funds | 23 1
  24. 24. 1.4.3.5. Service provider models When selecting service providers, two important considerations are whether the service provider is a group company or third party, and the domicile of the proposed service provider. A. Group or third party Where the UCI or management company is part of a financial group, the Board of a UCI and/or its management entity may choose between group service providers and third parties. In certain cases, a service provider may be created by two or more groups as a joint venture. In certain cases, delegation within a group is relevant from a regulatory perspective. For example: • ➢ anagement entities may consider delegation to a group internal audit function (see Subsection M 7.4.9.C.) • ➢ T infrastructure of a management company may be provided by a group company (see Section I 7.4.13.) • ➢ onflicts of interest must be considered in a group context (see Section 7.4.18.) C • ➢ n the context of the AIFM letter box provisions, when assessing whether an AIFM delegates I the performance of investment management functions (portfolio management and risk management) to an extent that exceeds by a substantial margin the investment management functions performed by the AIFM itself, one of the factors to be taken into account is whether the delegate is part of the same corporate group as the AIFM (see Subsection 7.4.15.C.) From a practical perspective, some investors prefer that one or more service providers, such as the depositary, are independent of the promoter, initiator or sponsor. B. Domicile Management entities are subject to the delegation requirements of their home Member State. They must also comply with the requirements of the home Member State of the UCIs they manage (the “host Member State” where the UCIs are managed on a cross-border basis) on the constitution and functioning of the UCIs. In certain cases, asset management groups may therefore have the choice between service providers in: • ➢ he domicile of the management company T • ➢ he domicile of the UCI T • ➢ nother country A An asset management group may therefore implement one or a combination of the following service provider models: • ➢ ingle service provider: S • ➢ entralized: a single service provider is selected to serve the UCIs in all host Member States C from a central location • ➢ ecentralized: service providers from the same financial services group are selected D generally one in each host Member State • ➢ ultiple service providers: service providers from different financial services groups are M selected to serve different UCIs 24 | 1. Luxembourg investment funds
  25. 25. Luxembourg investment funds From a Luxembourg perspective, there are a number of minimum rules which apply in relation to the domicile of service providers to UCIs, including the following: • ➢ dministration (see also Chapter 10): A • ➢ CITS: U • A Luxembourg UCITS management company which manages a Luxembourg UCITS is authorized to delegate the administration of the UCITS to an entity established in Luxembourg which is authorized to provide administration services and has adequate organization in order to perform the administration • A Luxembourg UCITS management company which manages a UCITS domiciled in another Member State is authorized to delegate the administration of the UCITS to an entity established in either: • Luxembourg • The Member State where the UCITS is domiciled The entity must be authorized to provide administration services and have an adequate organization in order to perform the administration • ➢ uxembourg AIF (including Part II 2010 Law UCIs and SIFs): the central administration of the L UCI must be in Luxembourg • ➢ epositary: the depositary of a Luxembourg UCI must be established in Luxembourg (see also D Chapter 11) 1.4.4. Restructuring a UCI Asset management groups may decide to restructure UCIs for a variety of reasons including, inter alia, optimization of operating models, cost reduction, economies of scale and focusing on certain target investor markets. Typical types of restructuring of UCIs include: • ➢ estructuring UCIs: R • Conversion of Luxembourg UCIs: 2010 Law UCIs into SIFs and vice versa (see Section 4.6.1.) • Conversion of an existing UCITS to a feeder UCITS (see Section 4.6.2.) • A feeder UCITS changing master UCITS (see Section 4.6.2.) • ➢ ergers of UCIs (see Section 4.7.) M • ➢ reation of a side pocket, typically to hold illiquid assets (see Section 3.3.6. and 4.8.) C • ➢ ransferring foreign UCIs to Luxembourg (see Section 4.9.) T • ➢ iquidation of UCIs and compartments (see Section 4.10.) L 1. Luxembourg investment funds | 25 1
  26. 26. 2. Current and future developments 2.1. Introduction This chapter outlines current and future developments in the following areas: • ➢UCITS • Alternative investment funds • Money market funds • Exchange traded funds • Corporate governance • Other UCI-related developments • Anti-money laundering and counter terrorist financing (AML/CFT) • Investment firms and credit institutions • Insurance and pensions • Shadow banking • Securities and derivatives • Financial benchmarks • Other developments relevant to UCIs • Tax • VAT • Financial transaction tax Further information on many of these topics can be found in the EY asset management related publications in Appendix V and the asset management section of the EY Luxembourg website: www.ey.com/lu 26 | 2. Current and future developments
  27. 27. Current and future developments 2.2. UCITS This section focuses on developments related to UCITS: • ➢ urrent developments: C • CSSF issues Circular on management company substance • CSSF abolishes promoter requirement for UCITS • ESMA issues final guidelines on ETFs and other UCITS issues • ESMA prohibits inclusion of UCIs in UCITS “trash ratio” • ESMA issues KII document Q&A and CSSF updates KII FAQ • ALFI issues guidelines on UCITS liquidity risk management • ALFI issues guidelines on stress testing for UCITS • CSSF issues FAQ on master-feeder structures • ➢ uture developments: F • European Commission issues UCITS V proposal • European Commission consults on UCITS VI, money market funds and long-term investments 2.2.1. CSSF issues Circular on management company substance In October 2012, the CSSF issued Circular 12/546 on the authorization and organization of Luxembourg UCITS management companies (Chapter 15 management companies) and self-managed UCITS investment companies40. The Circular covers, inter alia: • ➢ onditions for obtaining and maintaining authorization as a management company whose activities C are limited to collective management: • Basic principles • Shareholders • Own funds • Governing bodies: Board of Directors and senior management • Central administration and internal control • External audit • Delegation requirements • Program of activities • ➢ onditions for obtaining and maintaining authorization for management companies who carry C out collective portfolio management activities and management of portfolios of investments on a client-by-client basis • ➢ rinciple of proportionality P • ➢ elf-managed investment companies S • ➢ rudential supervision of a Chapter 15 management company P • ➢ rudential supervision of a self-managed investment company P 40 Circular 12/546 on authorization and organization of Luxembourg management companies subject to Chapter 15 of the Law of 17 December 2010 relating to undertakings for collective investment as well as to investment companies which have not designated a management company within the meaning of Article 27 of the Law of 17 December 2010 relating to undertakings for collective investment. 2. Current and future developments | 27 2
  28. 28. The Circular clarifies the requirements of the Law of 17 December 2010 relating to undertakings for collective investment (the 2010 Law) and CSSF Regulation 10-04 on organizational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company. The key changes introduced by the Circular include: • ➢ he concept of sponsor is formalized in relation to UCITS management companies. The CSSF may T request the sponsor to commit to ensure that the management company continues to respect its obligations, in particular in relation to the own funds requirements applicable to the management company • ➢ he members of the Board of Directors of the management company must be of sufficiently good T repute and sufficiently experienced, and dedicate an adequate amount of time and attention to their tasks • ➢ he conducting officers should in principle be permanently present in Luxembourg, although they T may live in a location from which they can in principle come to Luxembourg on a daily basis • ➢ he compliance officer, internal auditor or permanent risk management function cannot be a T member of the Board of Directors of the management company • ➢ management company must have a regularly updated procedures manual A • ➢ he Circular provides indicative lists of activities which may and may not be delegated T The Circular replaces the CSSF Circulars 03/108, 05/185, and 11/508. The requirements applicable to UCITS management companies are covered in Chapter 7. 2.2.2. CSSF abolishes promoter requirement for UCITS The CSSF issued a Communiqué entitled UCI and promoter in October 2012 clarifying that: • ➢ he promoter status no longer exists for UCITS or Part II UCIs which are managed by a UCITS T (Chapter 15) management company; it is replaced by the concept of “sponsor” implemented by CSSF Circular 12/546 (see Section 2.2.1.) • ➢ promoter is still required for 2010 Law Part II UCIs managed by Chapter 16 management A companies • ➢ he CSSF will reconsider the subject of “promotership” following transposition of the Alternative T Investment Fund Managers Directive (AIFM Directive) The sponsor, promoter or initiator of UCIs is covered in Section 1.4.. 2.2.3. ESMA issues final guidelines on ETFs and other UCITS issues In December 2012, ESMA published the complete set of Guidelines on ETFs and other UCITS issues, comprising: • ➢ uidelines on ETFs and other UCITS issues published in July 2012 G • ➢ uidelines on repurchase and reverse repurchase agreements published in December 2012 G The guidelines will significantly impact a wide range of UCITS: • ➢ CITS using efficient portfolio management (EPM) techniques such as securities lending, sale and U repurchase agreements (repos) and purchase and resale agreements (reverse repos) • ➢ pecific categories of UCITS: ETFs, index-tracking UCITS (including leveraged index-tracking S UCITS), UCITS entering into total return swaps (TRS) and UCITS investing in financial indices The guidelines also update UCITS rules in relation to management of collateral for OTC financial derivative instrument (FDI) transactions and EPM techniques. Key requirements implemented, cover inter alia: • ➢ rospectus, KII, and marketing communication disclosure requirements P • ➢ nnual and half yearly reports disclosure A • ➢ anagement of collateral M 28 | 2. Current and future developments
  29. 29. • ➢ ecurities lending and termination of any securities lending or sale and repurchase agreements S (repo) and reverse repo agreement In February 2013, the CSSF issued Circular 13/559 outlining the guidelines and implementing them in Luxembourg from 18 February 2013. UCITS existing at that time benefit from transitional provisions giving them, in certain cases, up to 12 additional months to comply. UCITS, or compartments of UCITS, established after that date are required to comply with the guidelines immediately. In March 2013, ESMA issued a Questions and Answers (Q&A) document on its Guidelines on ETFs and other UCITS issues; the Q&A was updated in July 2013. The Q&A covers: • ➢ nformation to be included in the prospectus I • ➢ CITS ETF label and secondary market U • ➢ fficient portfolio management techniques E • ➢ inancial derivative instruments F • ➢ ollateral management C • ➢ inancial indices F • ➢ ransitional provisions T The Guidelines on ETFs and other UCITS issues are covered in Sections 3.6., 5.2.2., 9.2. and Chapter 12. 2.2.4. ESMA prohibits inclusion of UCIs in UCITS “trash ratio” In November 2012, the European Securities and Markets Authority (ESMA) issued an Opinion on investments by UCITS into UCIs which are not “core” eligible investments of UCITS. According to ESMA’s Opinion, UCIs are not permitted for inclusion in the “trash ratio”. The trash ratio is therefore limited to investments in transferable securities or money market instruments. According to the CSSF Communiqué issued in November 2012, UCITS have until 31 December 2013 to comply with the requirements of ESMA’s Opinion. UCITS are prohibited from making any additional investments into assets which are not eligible for inclusion in the trash ratio, with immediate effect. The “trash ratio” is covered in Section 5.2.2.. 2.2.5. ESMA issues KII document Q&A and CSSF updates KII FAQ In September 2012, the ESMA issued a Questions and Answers (Q&A) document entitled Key Investor Information Document (KIID) for UCITS. The Q&A clarifies, inter alia: • ➢ KII requirements for UCITS that are no longer marketed to the public or UCITS in liquidation A • ➢ rovision of KII to: P • Existing investors within a UCITS who make additional investments or regular subscriptions • Investors within a UCITS umbrella fund, who switch or exchange units in one compartment for units in another • Professional investors • ➢ rovision of amended KIIs to existing investors P • ➢ ombination of two or more share or unit classes into a single KII C • ➢ he choice of the most appropriate representative share or unit class in a representative share or T unit class KII • ➢ eferences to an index in a UCITS investment objectives and policies as a benchmark R • ➢ ignposting a glossary S • ➢ isclosure of the name of the management company in the identification of the UCITS section D 2. Current and future developments | 29 Current and future developments • ➢ ees related to EPM F 2
  30. 30. In July 2012, the CSSF updated its Key Investor Information Document – Frequently Asked Questions document covering, inter alia: • ➢ inimum regulatory documents to be taken into consideration for drafting a KII M • ➢ iling KIIs with the CSSF F • ➢ II in the context of an application for authorization for UCITS, or a compartment K • ➢ esponsibility for the content of the KII R • ➢ II in the context of issuing a share or unit class K • ➢ mpact of temporary suspension of subscriptions and redemptions I • ➢ rovision of translations of the KII to the CSSF P • ➢ ublication of KII on a website P In September 2012, the Association of the Luxembourg Fund Industry (ALFI) issued an updated version of its Key Investor Information Document Q&A. The Q&A, which represents the view of the ALFI working group on KII, covers questions relating to: • Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC as regards key investor information and conditions to be met when providing key investor information or the prospectus in a durable medium other than paper or by means of a website • CESR’s guidelines on the methodology for the calculation of the synthetic risk and reward indicator in the Key Investor Information Document • CESR’s guidelines on the methodology for calculation of the ongoing charges figure in the Key Investor Information Document • ➢ ractical implications of the KII for distribution networks P The KII is covered in Section 12.3.2.. 2.2.6. ALFI issues guidelines on UCITS liquidity risk management In March 2013, ALFI issued practical guidelines on UCITS liquidity risk management. The guidelines cover, inter alia: • Principles of liquidity risk management for UCITS funds (distinguishing between the two perspectives of liquidity risk: market and funding liquidity risk) • Elements of a sound liquidity risk framework • Approaches for measuring liquidity risk (market and funding risk) Liquidity risk management of UCITS is covered in Subsection 9.2.6.C.. 2.2.7. ALFI issues guidelines on stress testing for UCITS In April 2013, ALFI issued practical guidelines on stress testing in the context of UCITS entitled Principles for sound stress testing. The guidelines cover, inter alia: • ➢ ppropriate use of stress testing in UCITS risk governance A • ➢ tress testing methodologies and scenario selection S • ➢ pecific risks of focus S • ➢ eporting and management actions R • ➢ reas of improvements in stress testing practices A Stress testing in the context of UCITS is covered in Section 9.2.6.. 2.2.8. CSSF issues FAQ on master-feeder structures In June 2013, the CSSF issued a frequently asked questions (FAQ) document entitled Master/Feeder Structures covering financial reporting issues in the context of master-feeder structures: • ➢ isclosure of aggregate charges of the feeder UCITS and master UCITS in the annual report of the D feeder UCITS 30 | 2. Current and future developments
  31. 31. • ➢ equirements in relation to the translation of the financial reports of the master UCITS in order to R meet the needs of the feeder UCITS • ➢ atters disclosed in the audit report of the independent auditor of the master UCITS which should M be considered as irregularities at the level of the feeder UCITS Financial reporting in the context of master-feeder structures is covered in Section 12.5.1.. 2.2.9. European Commission issues UCITS V proposal In July 2012, the European Commission issued a proposal for a Directive amending the UCITS Directive (Directive 2009/65/EU) as regards depositary functions, remuneration policies and sanctions − generally known as “UCITS V”. The UCITS V proposal follows the Commission’s Consultation on the UCITS depositary function and on the UCITS managers’ remuneration issued in December 2010. The proposed amendments to the UCITS Directive on the depositary and managers’ remuneration are broadly in line with the provisions of the Alternative Investment Fund Managers (AIFM) Directive. In order to enter into force, the proposed UCITS V Directive must be passed by the European Parliament and adopted by the Council of the European Union. At the time of writing, the political process to achieve this was ongoing. The European Parliament had defined its position on the proposed Directive and the Council of the European Union was working to define its position, in view of trialogue negotiations. The objective of the trialogue between the Commission, the Parliament and the Council is to agree on a common position. A. Depositary regime The proposal covers: • ➢ he appointment of the depositary, including the content of the contract T • ➢ ligible entities E • ➢ uties of the depositary: D • Monitoring and oversight • Cash flow monitoring • Safe-keeping: • Financial instruments • Other assets • Provision of information to competent authorities • ➢ iability: L • Loss of financial instruments held in custody • Other losses • ➢ elegation of safe-keeping: D • Conditions for delegation • Delegation and liability The depositary of UCIs is covered in Chapter 11. B. Remuneration of UCITS managers Management companies will be required to establish and apply remuneration policies and practices that are consistent with and promote sound and effective risk management and do not encourage risk-taking which is inconsistent with the risk profiles, or constitutional documents, of the UCITS they manage. The proposal covers requirements on: • ➢ emuneration policies R • ➢ emuneration committee R • ➢ emuneration principles to be complied with by managers R • ➢ isclosure D Remuneration is covered in Section 7.4.20.. 2. Current and future developments | 31 Current and future developments • ➢ he ad hoc report to be prepared by the auditor of the master UCITS where the master and feeder T UCITS have different accounting years 2
  32. 32. 2.2.10. European Commission consults on UCITS VI, money market funds and long-term investments In July 2012, the European Commission issued a consultation paper entitled UCITS: Product Rules, Liquidity Management, Depositary, Money Market Funds, Long-Term Investments. The consultation paper focuses mainly on the UCITS depositary and the remuneration of UCITS managers. It may pave the way for the proposal of further modifications to the UCITS Directive, generally known as “UCITS VI”, but it also goes beyond UCITS, in relation to the depositary passport, money market funds and long term investment opportunities for retail investors. The consultation paper focuses on eight areas: • ➢ CITS specific: U • Eligible assets and use of derivatives • Efficient portfolio management (EPM) techniques • Over-the-counter (OTC) derivatives • Liquidity management in exceptional circumstances • Outstanding issues related to UCITS IV (such as master-feeder, mergers, notification procedure), as well as alignment with AIFM Directive organizational requirements • ➢ epositary passport D • ➢ oney market funds M • ➢ ong-term investment products accessible to retail investors L At the time of writing: • ➢ legislative proposal modifying the UCITS Directive was expected from the European Commission. A Eligible assets of UCITS are covered in Section 5.2.2. • ➢ legislative proposal implementing a specific regime for money market funds was expected from A the European Commission (see Section 2.4.) • ➢ legislative proposal on long-term investment funds had been published by the European A Commission (see Section 2.3.3.) 2.3. Alternative investment funds This section focuses on developments related to alternative investment funds (AIF): • ➢ urrent developments: C • Luxembourg implements AIFM Directive • European venture capital and social entrepreneurship fund regimes implemented • ➢ uture developments: F • European Commission proposes European long-term investment fund regime 2.3.1. Luxembourg implements AIFM Directive 2.3.1.1. AIFM Directive in brief The Alternative Investment Fund Managers (AIFM) Directive41 regulates the managers of alternative investment funds (AIF) – i.e., investment funds that do not classify as UCITS. The objectives of the AIFM Directive include enhancing investor protection, increasing transparency for investors and regulators, and better managing systemic risks related to AIF. The Directive will impact EU/EEA42 AIFM and non-EEA AIFM, as well as EU/EEA domiciled AIF and non-EEA domiciled AIF, service providers to AIF and investors in AIF. 41 Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers, sometimes also referred to as “AIFMD” 42 The EEA includes European Union (EU) Member States plus Iceland, Liechtenstein and Norway. The EEA agreement establishes freedom to provide services across the EEA, and any specific provisions. The EEA Agreement did not list the AIFM Directive in Annex at the time of writing, but the AIFM Directive is identified as a “text with EEA relevance”. 32 | 2. Current and future developments
  33. 33. • ➢ IF: Section 3.4.3. A • ➢ IFM: Chapter 7 A • ➢ ortfolio management: Chapter 8 P • ➢ isk management and valuation: Chapter 9 R 2.3.1.2. Luxembourg AIFM Law in brief In July 2013, the Luxembourg Parliament passed the Luxembourg AIFM Law transposing the AIFM Directive. Luxembourg’s AIFM Law faithfully reflects the AIFM Directive while at the same time offering the alternative investment industry a pragmatic and flexible approach to the implementation of the AIFM Directive; for example, it offers alternative investment groups the opportunity to choose the operating model which best suits their needs. The AIFM Law creates a specific stand-alone legal framework for AIFM. The Luxembourg AIFM regime will exist alongside Luxembourg’s established regulated management company regimes43. Existing management companies of alternative investment funds (AIF) will be able to obtain AIFM authorization, or, alternatively, continue acting as management companies of the AIF without being authorized as AIFM, provided that they designate an authorized AIFM or provided that the AIF assets under management remain below the AIFMD de minimis thresholds. This allows alternative investment groups to leave existing AIF structures unchanged. On the product side, Luxembourg’s AIFM Law leaves existing AIF product regimes in place. However, they are amended, inter alia, to ensure that AIF which are managed by AIFM meet the AIFM Law requirements. The AIFM Law also updates a number of related Laws, inter alia, with a view to: • ➢ reating a new status of financial sector professional: professional depositary of assets other than C financial instruments • ➢ reating a new “special limited partnership” (S.C.Sp.) regime, based on the English Limited C Partnership • ➢ roviding legal certainty in relation to the taxation of carried interest paid to managers of AIF P • ➢ xempting management services provided to AIF from VAT E • ➢ ubjecting SICARs to conflicts of interest requirements similar to those applicable to SIFs S In June 2013, Luxembourg’s Commission for the Supervision of the Financial Sector (CSSF) issued a Frequently Asked Questions (FAQ) on Luxembourg’s AIFM Law and on Commission Delegated Regulation (EU) No 231/2013 (“Level 2”); the FAQ was updated in July 2013. The CSSF’s FAQ covers: • ➢ IF in scope of the AIFM Law A • ➢ IFM in scope of the AIFM Law A • ➢ pplication for authorization as AIFM A • ➢ egistration of small AIFM R • ➢ he application of the AIFM Law to existing and future Luxembourg management companies and T internally managed AIF • ➢ he relationship between AIFM and credit institutions and investment firms T • ➢ he legal forms of AIF T • ➢ elegation by AIFM D • ➢ ransitional provisions for AIFM and AIF T • ➢ cope of authorized activities of AIFM S • ➢ epositary aspects D • ➢ ooperation agreements signed between Luxembourg and third countries C 43 UCITS management companies (Chapter 15 management companies) and non-UCITS management companies (Chapter 16 management companies). 2. Current and future developments | 33 Current and future developments The AIFM requirements are covered throughout this Technical Guide. This Section provides a brief summary of certain AIFM requirements, Luxembourg AIFM implementation, and current developments. Key AIFM-related topics are covered in more detail the following sections: 2
  34. 34. 2.3.1.3. Implementation timeline AIFM Directive timeline Marketing AIF Regulatory agenda AIFM Directive entry into force Transposition period ends EU AIFM to get authorization EU passport for third countries End of EU national PPRs* July 2011 July 2013 July 2014 2015+ 2018+ AIFM Directive entry into force July 2013: Luxembourg AIFM Law AIFM Directive applicable December 2012: Adoption of Level 2 measures November 2011: ESMA advice to the European Commission EU/EEA AIFM with EU/EEA AIF Transition from NPPRs* to passport Non-EEA AIFM and/ or non-EEA AIF EU NPPRs* continue, subject to additional conditions EU/EEA passport required EU/EEA passport or NPPRs*, subject to conditions EU/EEA passport required * NPPRs = National Private Placement Regimes EU Member States were required to adopt, publish and apply the laws, regulations and administrative provisions necessary to comply with the Directive by 22 July 2013. AIFM existing on 22 July 2013 benefit from one additional year – i.e., until July 2014 – to submit their application for authorization. 34 | 2. Current and future developments
  35. 35. Current and future developments 2.3.1.4. Key provisions The key provisions of the AIFM Directive are summarized in the following diagram: AIFM key provisions at a glance • EU AIFM vs non-EU AIFM: • EU AIF • Non-EU AIF • Cross-border management • Scope • Authorization requirements • Capital requirements II. Marketing and cross-border management I. III. • Remuneration guidelines • Rules of conduct • Conflicts of interest Conduct of business Authorization IV. VI. Specific provisions V. • Leverage • Major holdings and control Transparency • Valuation requirements Functions • Risk and liquidity and service management providers • Depositary: • Eligible entities • Depositary obligations • Depositary liability • Delegation and sub‑delegation (EU/non-EU entities) • Reporting to regulator • Disclosure to investors In December 2012, the European Commission issued the “Level 2” measures (also known as implementing measures) clarifying a number of important elements of the AIFM Directive. The Delegated Regulation covers AIFM Directive exemptions, general operating conditions, depositaries, leverage, transparency and supervision44. The Level 2 measures cover, inter alia: • ➢ IFM organizational requirements A • ➢ elegation D • ➢ ortfolio management P • ➢ isk and liquidity management and professional liability R • ➢ onflicts of interest C • ➢ alculation of assets under management C • ➢ everage L • ➢ epositary D • ➢ ransparency T • ➢ hird country cooperation agreements T 44 Commission Delegated Regulation supplementing Directive 2011/61/EU of the European Parliament and of the Council with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision. 2. Current and future developments | 35 2
  36. 36. 2.3.1.5. AIFM in scope The principal activity of an AIFM is managing AIF, which means performing at least the investment management services of portfolio management and risk management (although it is possible to delegate part of these activities). AIFM may also provide the services of: • ➢ dministration A • ➢ arketing M • ➢ ctivities related to the assets of AIF45 A AIFM may request authorization to provide additional services including: • ➢ iscretionary portfolio management D • ➢ on-core services such as investment advice N AIFM are not permitted to provide any other types of services. There are two main categories of AIFM: • ➢ xternal AIFM: separate legal entities which can manage one or more AIF E • ➢ nternally managed AIF: the activities of internally managed AIF are limited to the management of I the assets of the AIF itself In April 2013, ESMA issued its final Draft regulatory technical standards on types of AIFMs. The aim of the regulatory technical standards is to define when AIFM are AIFM of open-ended AIF or AIFM of closed-ended AIF. The final regulatory technical standards had not been issued by the European Commission at the time of writing. AIFM authorization is required when the AIF assets under management exceed the de minimis thresholds, i.e.: • ➢ here the portfolios of AIF assets under management, including any assets acquired through use W of leverage, in total exceed a threshold of €100 million • ➢ here the portfolios of AIF whose assets under management, in total, exceed a threshold of W €500 million, and when the portfolio of AIF consists of AIF that are not leveraged and have no redemption rights exercisable during a period of five years following the date of initial investment in each AIF Small AIFM, and small internally managed AIF, may also choose to “opt-in” under the AIFM Law in order to benefit from the rights granted to AIFM (in particular passports); in this case, they must comply with all the provisions of the Directive. Other small AIFM are required to comply with registration and reporting requirements. Small AIFM are required to monitor their assets under management on an ongoing basis. When the assets under management exceed the relevant de minimis threshold, and the breach is not of a temporary nature (i.e., it is likely to continue for more than three months), the AIFM has 30 days to apply for AIFM authorization. Managers of some closed-ended AIF existing in July 2013 may benefit from grandfathering clauses; for example, managers of closed-ended AIF “which do not make any additional investments” after 22 July 2013 may continue to manage such AIF without authorization under the AIFM Law. 2.3.1.6. AIFM passports Authorized AIFM benefit from two passports: • ➢ “marketing passport”: this passport permits AIFM to market the AIF they manage to professional A investors throughout the EU/EEA. The AIFM marketing passport is comparable to the passport for the marketing of UCITS. The AIFM regime is expected to create a global “AIF brand” comparable to the UCITS brand. Luxembourg is well positioned to “replicate” the Luxembourg UCITS success story for the distribution of AIF, benefiting from its reputation and expertise as a hub for UCITS products. 45 Services necessary to meet the fiduciary duties of the AIFM, facilities management, real estate administration activities, advice to undertakings on 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. 36 | 2. Current and future developments
  37. 37. A “super” AIFM may be created to manage multiple AIF fund ranges, both in its home Member State and cross-border in other Member States. 2.3.1.7. The relationship between management companies and AIFM The Luxembourg AIFM Law offers existing and future management companies the following possibilities: • ➢ o become authorized AIFM (i.e., to obtain dual authorization) T • ➢ ot to become authorized AIFM, and comply with restrictions on their activities N In practice, the flexibility offered by the AIFM Law to management companies permits alternative investment groups (including promoters, sponsors, advisers, general partners and managers of AIF) to efficiently and pragmatically implement the AIFMD, leaving existing AIF structures in place. For example, alternative investment groups can create a single “super” AIFM for an ensemble of AIF ranges, or convert an existing entity, such as a management company, to a “super” AIFM. The single “super AIFM” would comply with all the requirements of the AIFM Law while each management company would not be required to comply with the AIFM Law. A. Management companies which become authorized AIFM Luxembourg UCITS management companies (Chapter 15 management companies) may choose to obtain an additional authorization as an AIFM; thus, management companies can benefit from dual UCITS management company and AIFM authorizations. Luxembourg management companies of non-UCITS (Chapter 16 management companies) may choose to obtain authorization as an AIFM. B. Management companies which do not become authorized AIFM Luxembourg UCITS and non-UCITS management companies may also continue to perform management company functions for AIF, without obtaining authorization as AIFM. In this case: • ➢ here AIF assets under management of the management company do not exceed the threshold W above which authorization as AIFM is required, they may manage the AIF themselves • ➢ here AIF assets under management of the management company exceed the threshold above W which authorization as AIFM is required, they must designate another authorized entity as AIFM of the AIF they manage. The AIFM may be in Luxembourg or in another EEA Member State • ➢ on-AIFM compliant Chapter 16 management companies are permitted to manage investment N vehicles other than AIF, as defined by the AIFM Law. Such entities may, for example, include holding companies and joint ventures. This activity cannot be the sole activity of the management company 2.3.1.8. Delegation Under the AIFM Law, an AIFM is permitted to delegate its functions, such as portfolio management, risk management or administration. However, an AIFM is not permitted to delegate its activities to the extent that it becomes a letter box entity. The key AIFMD “Level 2” measures, European Commission Delegated Regulation (EU) No 231/2013, cover, inter alia, the situations in which the AIFM is deemed a letter box entity and is no longer considered to be the manager of the AIF. The AIFM is considered to be a letter box entity if it delegates the performance of investment management functions (portfolio management and risk management) to an extent that exceeds by a substantial margin the investment management functions performed by the AIFM itself. In the context of delegation, it is important to distinguish between delegation of functions, which is subject to the AIFM delegation provisions, and other activities, such as provision of advice and the performance of certain preparatory tasks, which may not be subject to the AIFM delegation provisions. 2. Current and future developments | 37 Current and future developments • ➢ “management” passport: this passport permits authorized AIFM to manage AIF established in A other EU/EEA Member States on a cross-border basis. An AIFM can either manage AIF established in a host Member State directly or through a branch established in the host Member State 2
  38. 38. When assessing the extent of delegation, the CSSF is required to assess the entire delegation structure at the level of the AIFM taking into account not only the assets managed under delegation, but also a number of qualitative criteria, including the group structure. As the delegation structure will be assessed by the CSSF as a whole, AIFM which manage multiple AIF are not, in principle, prevented from delegating the performance of both investment management functions of portfolio management and risk management for certain AIF they manage. The CSSF may also, where relevant, take into account the delegation provisions applicable to UCITS management companies46, including those on the partial delegation of functions. Both portfolio management and risk management are multi-faceted functions: • ➢ ortfolio management activities may include, for example, defining the investment strategy, P setting investment limits, executing the investment strategy (including making investment decisions), monitoring the performance of the strategy and its implementation • ➢ isk management activities include, inter alia, establishing and implementing risk limits, R implementing the risk management system, establishing, implementing and maintaining the risk management policy, ensuring that risks are assessed in relation to each investment, testing the risk management system, conducting stress tests and back tests, and implementing a risk management function to coordinate this activity Partial delegation of the multi-faceted investment management functions of portfolio management and risk management may offer AIFM a pragmatic alternative to wholly insourcing at least one of the functions, while remaining compliant with the letter box provisions. In all cases, the AIFM remains responsible for any delegated functions. 2.3.1.9. Remuneration In February 2013, ESMA issued its final Guidelines on sound remuneration policies under the AIFMD. The guidelines cover, inter alia: • ➢ cope of application: S • Remuneration in scope • Entities and staff in scope • ➢ roportionality principle with respect to: P • The individual risk profile, risk appetite and strategy of the AIFM and the AIF it manages • The different characteristics of AIFM • The different categories of staff • ➢ IFM which are part of a group A • ➢ mpact of variable remuneration on the financial situation of the AIFM I • ➢ overnance roles in relation to remuneration: G • Management body • Remuneration committee • Control functions • ➢ isk alignment: R • The general remuneration policy, including the pension policy • Discretionary pension benefits • Prohibitions on severance pay and personal hedging • Specific requirements: • Flexibility of policy on variable remuneration • Risk alignment of variable remuneration • Award process • Pay-out process • ➢ nternal and external disclosure I 2.3.1.10. Reporting In May 2013, ESMA issued a consultation paper on entitled Guidelines on reporting obligations under Article 3 and Article 24 of the AIFMD. 46 In particular, the provisions on delegation in CSSF Circular 12/546. 38 | 2. Current and future developments

×