Investment Funds - UCIs (Part II Funds)
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Investment Funds - UCIs (Part II Funds)

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Companies wishing to establish an investment fund that will not meet the criteria set by the EU Directives to render it eligible for distribution in EU Member States, may which to set up a fund under ...

Companies wishing to establish an investment fund that will not meet the criteria set by the EU Directives to render it eligible for distribution in EU Member States, may which to set up a fund under Part II of the law of 20 December 2002 relating to undertakings for collective investment, as amended (the "2002 Law") (the "Part II Funds").

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  • Dr. Pierre Alexandre DELAGARDELLE
    Partner / Ph.D. / Avocat à la Cour


    Luxembourg,
    a domicile of choice for “non UCITS”
    (Part II Funds)

    Companies wishing to establish an investment fund that will not meet the criteria set by the EU Directives to render it eligible for distribution in EU Member States, may which to set up a fund under Part II of the law of 20 December 2002 relating to undertakings for collective investment, as amended (the '2002 Law') (the 'Part II Funds').

    Part II Funds include hedge, private equity, real estate and other fund of fund funds and may be sold to both retail and institutional investors but subject to each country’s local distribution rules.





    Applicable legislation
    Luxembourg Part II Funds are subject to the following main laws and regulations:

    - Part II of the 2002 Law;

    - IML Circular 91/75 clarifying certain aspects of the UCI legal framework;

    - IML Circular 97/136 on financial information to be provided by public funds;

    - CSSF Circular 02/77 on the protection of investors in case of net asset value (“NAV”) calculation error or breach of investment rules;

    - CSSF Circular 02/80 on the specific rules applicable to Luxembourg Part II Funds pursuising alternative investment strategies;

    - CSSF Circular 08/371 regarding the electronic transmission of prospectuses and financial reports of UCIs and SIFs to the CSSF.

    Prospectus Directive
    Only applicable if the fund is closed ended.

    Open-ended funds may make a public offer in Luxembourg on the basis of their prospectus compliant with the 2002 Law.
    Entity type
    - SICAV (SA) ; or

    - SICAF (SA, SCA, S.à r.l.) ; or

    - FCP.
    Supervision by the CSSF
    Similar to all investment funds in Luxembourg, a Part II Fund is subject to authorisation and supervision by the Luxembourg financial supervisory commission, (Commission de Surveillance du Secteur Financier, “CSSF”).

    The Part II Fund will only be authorised if the CSSF has approved:

    - the constitutional documents and the prospectus;

    - the choice of (a) custodian, (b) central administrator, (c) transfer agent, (d) investment advisor or manager and (d) auditor.

    A Part II Fund may not start its activities without prior authorisation from the CSSF.
    Promoter
    The CSSF will check whether the promoter disposes of the required professional qualification and relevant experience for the exercise of his/her functions.

    With the FCP, the CSSF will check that the management company complies with the applicable legal requirements, as provided for specifically in the 2002 Law. A SICAV can either be self-managed, or function through a separate management company.
    Eligible investors
    Unrestricted.
    Eligible assets / Strategies
    Part II of the 2002 Law does not provide any specific provisions regarding investment policies for Part II Funds. However, there are a number of CSSF circulars and interpretations regarding such. The CSSF has issued circulars regarding investments by Part II Funds in transferable securities, alternative investments, venture capital, future contracts and options and real estate.
    Risk diversification requirements
    Except during a transitional period, investment in any target company may not exceed 20% of the NAV.
    Segregated sub-funds
    The 2002 Law provides for the possibility to create several compartments with strict segregation of assets and liabilities between compartments.
    Substance in Luxembourg / nationality or residency requirements
    The head office of SICAV/F (or of management company of FCP) must be in Luxembourg;

    No nationality / residency requirements for directors / managers.

    Required service providers in Luxembourg
    - Depositary (credit institution);

    - Administrative agent (PFS);

    - Independent auditors.
    Approval process by the CSSF
    Launching of a Part II Fund is subject to prior approval by the CSSF of:

    - articles of incorporation or management regulations, prospectus and agreements with main service providers;

    - directors / managers (must be experienced and reputable);

    - investment manager(s) (if any) (must be experienced and reputable);

    - eligibility of promoter (financial institution with sufficient financial means);

    - choice of depositary and auditor.

    - No offer of securities may be made before CSSF approval.
    Capital
    Fixed or variable capital.
    Minimum capital / net assets requirements

    - For FCPs

    Net assets must reach EUR 1,25 Mio within 6 months from authorisation.

    - For SICAV/Fs

    Upon incorporation:

    (i) SA/SCA: EUR 31,000 ;

    (ii) S.à r.l.: EUR 12,500.

    Share capital must reach EUR 1,25 Mio within 6 months of authorisation.

    Structuring of capital calls and issue of shares / units
    - For FCPs

    Capital calls may be organized either by way of capital commitments or through the issue of partly paid units. Existing unitholders do not have a pre-emptive right of subscription in case of issue of units, unless otherwise provided for in the management regulations.

    Units must be issued at a price based on the NAV (plus costs and actualization interests, if appropriate).

    - For SICAVs

    Capital calls must be organised by way of capital commitments (shares must be fully paid-up).

    Existing shareholders do not have a pre-emptive right of subscription in case of issue of shares, except if otherwise provided for in the articles of incorporation. Issues of shares do not require an amendment of the articles of incorporation before a public notary. Shares must be issued at a price based on the NAV (plus costs and actualization interests, if appropriate).

    - For SICAFs

    Capital calls in an SA/SCA may be organised either by way of capital commitments or through the issue of partly paid shares (to be paid up to 25% at least). An S. à r. l. cannot issue partly paid shares. Existing shareholders of an SA/SCA have a pre-emptive right of subscription in case of increase of capital by way of cash contribution (except if waived by shareholders’ meeting). Issues of shares require an amendment of the articles of incorporation before a public notary.

    Issue price is determined in accordance with the principles laid down in the articles of incorporation.

    Reporting
    The Part II Fund must publish the following financial data:
    - an annual report for each financial year; and

    - a half-yearly report covering the first six months of each financial year.
    Taxation
    Part II funds are subject to an annual subscription tax (taxe d’abonnement) of 0.05% p.a. of their NAV. Classes of shares which are reserved for institutional investors are subject to a subscription tax at a reduced rate of 0.01%.
    Unlike FCPs, SICAV/Fs benefit from certain double tax treaties. Investments may be made through fully taxable subsidiaries benefiting from double tax treaties and the EU parent-subsidiary directive.
    No capital duty is due upon incorporation of Part II UCIs. However, a fixed registration duty of EUR 75 has been introduced.
    INFORMATION SOURCES

    www.cssf.lu;

    The Commission de Surveillance du Secteur Financier (Luxembourg Financial Supervisory Commission).

    www.alfi.lu

    The Association of Luxembourg Fund Industry.
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Investment Funds - UCIs (Part II Funds) Investment Funds - UCIs (Part II Funds) Document Transcript

  •  <br />Dr. Pierre Alexandre DELAGARDELLE<br />Partner / Ph.D. / Avocat à la Cour<br />Luxembourg, <br />a domicile of choice for “non UCITS” <br />(Part II Funds) <br /> <br />Companies wishing to establish an investment fund that will not meet the criteria set by the EU Directives to render it eligible for distribution in EU Member States, may which to set up a  fund under Part II of the law of 20 December 2002 relating to undertakings for collective investment, as amended (the "2002 Law") (the "Part II Funds").<br /> <br />Part II Funds include hedge, private equity, real estate and other fund of fund funds and may be sold to both retail and institutional investors but subject to each country’s local distribution rules.<br /> <br />Applicable legislation<br />Luxembourg Part II Funds are subject to the following main laws and regulations:<br />Part II of the 2002 Law;<br />IML Circular 91/75 clarifying certain aspects of the UCI legal framework;<br />IML Circular 97/136 on financial information to be provided by public funds;<br />CSSF Circular 02/77 on the protection of investors in case of net asset value (“NAV”) calculation error or breach of investment rules;<br />CSSF Circular 02/80 on the specific rules applicable to Luxembourg Part II Funds pursuising alternative investment strategies;<br />CSSF Circular 08/371 regarding the electronic transmission of prospectuses and financial reports of UCIs and SIFs to the CSSF.<br />Prospectus Directive <br />Only applicable if the fund is closed ended.<br /> <br />Open-ended funds may make a public offer in Luxembourg on the basis of their prospectus compliant with the 2002 Law. <br />Entity type<br />SICAV (SA) ; or<br /> <br />SICAF (SA, SCA, S.à r.l.) ; or<br /> <br />FCP.<br />Supervision by the CSSF<br />Similar to all investment funds in Luxembourg, a Part II Fund is subject to authorisation and supervision by the Luxembourg financial supervisory commission, (Commission de Surveillance du Secteur Financier, “CSSF”). <br /> <br />The Part II Fund will only be authorised if the CSSF has approved: <br /> <br />the constitutional documents and the prospectus;<br /> <br />the choice of (a) custodian, (b) central administrator, (c) transfer agent, (d) investment advisor or manager and (d) auditor. <br /> <br />A Part II Fund may not start its activities without prior authorisation from the CSSF.<br />Promoter<br />The CSSF will check whether the promoter disposes of the required professional qualification and relevant experience for the exercise of his/her functions. <br /> <br />With the FCP, the CSSF will check that the management company complies with the applicable legal requirements, as provided for specifically in the 2002 Law. A SICAV can either be self-managed, or function through a separate management company.<br />Eligible investors<br />Unrestricted.<br />Eligible assets / Strategies<br />Part II of the 2002 Law does not provide any specific provisions regarding investment policies for Part II Funds. However, there are a number of CSSF circulars and interpretations regarding such. The CSSF has issued circulars regarding investments by Part II Funds in transferable securities, alternative investments, venture capital, future contracts and options and real estate.<br />Risk diversification requirements<br />Except during a transitional period, investment in any target company may not exceed 20% of the NAV.<br />Segregated sub-funds<br />The 2002 Law provides for the possibility to create several compartments with strict segregation of assets and liabilities between compartments.<br />Substance in Luxembourg / nationality or residency requirements<br />The head office of SICAV/F (or of management company of FCP) must be in Luxembourg;<br /> <br />No nationality / residency requirements for directors / managers.<br />Required service providers in Luxembourg<br />Depositary (credit institution);<br /> <br />Administrative agent (PFS);<br /> <br />Independent auditors.<br />Approval process by the CSSF<br />Launching of a Part II Fund is subject to prior approval by the CSSF of:<br /> <br />articles of incorporation or management regulations, prospectus and agreements with main service providers;<br /> <br />directors / managers (must be experienced and reputable);<br /> <br />investment manager(s) (if any) (must be experienced and reputable);<br /> <br />eligibility of promoter (financial institution with sufficient financial means);<br /> <br />choice of depositary and auditor.<br /> <br />No offer of securities may be made before CSSF approval.<br />Capital<br />Fixed or variable capital.<br />Minimum capital / net assets requirements<br /> <br />For FCPs<br /> <br />Net assets must reach EUR 1,25 Mio within 6 months from authorisation.<br /> <br />For SICAV/Fs<br /> <br />Upon incorporation:<br /> <br />SA/SCA: EUR 31,000 ;<br /> <br />S.à r.l.: EUR 12,500.<br /> <br />Share capital must reach EUR 1,25 Mio within 6 months of authorisation.<br /> <br />Structuring of capital calls and issue of shares / units<br />For FCPs<br /> <br />Capital calls may be organized either by way of capital commitments or through the issue of partly paid units. Existing unitholders do not have a pre-emptive right of subscription in case of issue of units, unless otherwise provided for in the management regulations.<br /> <br />Units must be issued at a price based on the NAV (plus costs and actualization interests, if appropriate).<br /> <br />For SICAVs<br /> <br />Capital calls must be organised by way of capital commitments (shares must be fully paid-up).<br /> <br />Existing shareholders do not have a pre-emptive right of subscription in case of issue of shares, except if otherwise provided for in the articles of incorporation. Issues of shares do not require an amendment of the articles of incorporation before a public notary. Shares must be issued at a price based on the NAV (plus costs and actualization interests, if appropriate).<br /> <br />For SICAFs<br /> <br />Capital calls in an SA/SCA may be organised either by way of capital commitments or through the issue of partly paid shares (to be paid up to 25% at least). An S. à r. l. cannot issue partly paid shares. Existing shareholders of an SA/SCA have a pre-emptive right of subscription in case of increase of capital by way of cash contribution (except if waived by shareholders’ meeting). Issues of shares require an amendment of the articles of incorporation before a public notary.<br /> <br />Issue price is determined in accordance with the principles laid down in the articles of incorporation.<br /> <br />Reporting <br />The Part II Fund must publish the following financial data:<br />an annual report for each financial year; and<br />a half-yearly report covering the first six months of each financial year.<br />Taxation<br />Part II funds are subject to an annual subscription tax (taxe d’abonnement) of 0.05% p.a. of their NAV. Classes of shares which are reserved for institutional investors are subject to a subscription tax at a reduced rate of 0.01%.<br />Unlike FCPs, SICAV/Fs benefit from certain double tax treaties. Investments may be made through fully taxable subsidiaries benefiting from double tax treaties and the EU parent-subsidiary directive.<br />No capital duty is due upon incorporation of Part II UCIs.  However, a fixed registration duty of EUR 75 has been introduced.<br />INFORMATION SOURCES<br />www.cssf.lu;<br />The Commission de Surveillance du Secteur Financier (Luxembourg Financial Supervisory Commission).<br /> <br />www.alfi.lu <br />The Association of Luxembourg Fund Industry.<br /> <br />