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

Investment Fundsin LuxembourgA technical guide – September 2013

Cont

ents

Foreword 41. Luxembourg investment funds 6

1.1. Introduction 61.2. Luxembourg’s UCI industry 71.3. Luxembourg’s investment fund solutions 81.4. Organization of a UCI 16

2. Current and future developments 262.1. Introduction 262.2. UCITS 272.3. Alternative investment funds 322.4. Money market funds 442.5. Exchange traded funds 452.6. Corporate governance 462.7. Other UCI-related developments 472.8. Anti-money laundering and counter terrorist financing (AML/CFT) 492.9. Investment firms and credit institutions 522.10. Insurance and pensions 542.11. Shadow banking 562.12. Securities and derivatives 572.13. Financial benchmarks 612.14. Other developments relevant to UCIs 622.15. Tax 642.16. Value added tax (VAT) 682.17. Financial transaction tax 69

3. UCI structures and specificities 723.1. Introduction 723.2. Principal regulations 733.3. Types of structures of UCIs 733.4. Specific requirements for 2010 Law UCIs and SIFs 833.5. Minimum capital 883.6. Requirements applicable to specific types of UCI 89

4. Authorization, supervision, restructuring and liquidation 924.1. Introduction 924.2. Pre-launch considerations 934.3. Authorization 934.4. Updates to the application for authorization 974.5. Ongoing supervision 974.6. Restructuring UCIs 984.7. Mergers of UCIs 994.8. Authorization of a side pocket 1024.9. Transfer of foreign UCIs to Luxembourg 1034.10. Liquidation of UCIs and compartments 1054.11. Dormant compartments 107

5. Investment rules 1085.1. Introduction 1085.2. UCIs under the 2010 Law 1095.3. SIF Law UCIs 1425.4. AIF 1435.5. EuVECA and EuSEF 147

6. Governance and liability 1506.1. Governance 1516.2. Criminal and civil liability 159

7. Management of UCIs: management companies and AIFM 1627.1. Introduction 1637.2. Scope of activities 1707.3. Main applicable regulations 1757.4. Setting up and operating a management entity 1767.5. Cross-border management passport 2247.6. Expenses and taxation of management entities 230

8. Portfolio management and advice 2348.1. Introduction 2358.2. Portfolio management 2378.3. Investment advice provided to Luxembourg UCIs 2478.4. Luxembourg portfolio managers and advisers 2488.5. EU portfolio managers and advisers 2508.6. Non-EU portfolio managers and advisers 252

9. Risk management and valuation 2549.1. Introduction 2559.2. Risk management of UCITS 2589.3. Risk management for AIF 2709.4. Risk management of SIFs 2779.5. Valuation 279

10. Administration 28410.1. Introduction 28410.2. The administration function 28510.3. Subscriptions and redemptions of shares or units and payment of dividends 29110.4. Errors, materiality and compensation to investors 308

11. Depositary 31411.1. Introduction 31411.2. Appointment 31511.3. Eligible entities 31511.4. Duties 31711.5. Conduct of business and conflict of interest rules 32511.6. Liability 32611.7. Delegation 32811.8. Prime broker 332

12. Fund documentation and reporting 33412.1. Introduction 33412.2. Constitutional documents 33612.3. Initial disclosures to investors 33812.4. Periodic investor disclosures and updates 35012.5. Financial reporting 35212.6. General meetings 36212.7. Submission to trade register 36212.8. Financial information reporting to authorities 36212.9. Electronic transmissions to the CSSF and publication 365

13. Expenses and taxation 36813.1. Introduction 36813.2. Expenses 36913.3. Taxation 37013.4. Value added tax (VAT) 384

14. Marketing 39014.1. Introduction 39014.2. Information provided to investors before they invest 39314.3. Marketing Luxembourg UCITS in other EU Member States 39414.4. Marketing foreign UCITS in Luxembourg 39914.5. Marketing of full AIFM regime AIF 40014.6. Marketing of simplified AIFM registration regime AIF 40614.7. Marketing regulations applicable in Luxembourg 40814.8. Marketing intermediaries 408

15. Stock exchange listing 41015.1. Introduction 41015.2. The Luxembourg Stock Exchange (LuxSE) 41115.3. Procedures for admission to a securities market of the LuxSE 41115.4. Continuing obligations for issuers of securities 41415.5. Listing of SIFs 41515.6. Transfer, suspension, withdrawal and delisting 415

Appendices 416 Appendix I – Understanding UCIs 418Appendix II – Key regulations and reference texts 426Appendix III – Withholding Tax Rates Applicable to Luxembourg UCIs 450Appendix IV – Glossary 484Appendix V – EY asset management related publications 490Appendix VI – EY investment fund services 492

Fore

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4 | Foreword

Foreword | 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…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.

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 regulationOne 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 interestsApart 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

future, greater alignment between the compensation paid to both the manufacturer and distributor and the ultimate outcome for the investor.

DistributionThe 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 FergusonEMEIA Regulated Funds Practice

and Luxembourg Asset Management Leader

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:• ➢ There is collective investment of funds• ➢ The capital is raised from a number of investors• ➢ The capital is invested in accordance with a defined

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

1. Luxembourg investment funds


1. Luxembourg investment funds | 7

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Number of UCIs Net assets in € billion

Common funds

Investment companies Total Common funds

Investment companies Total

(FCPs) Variable capital

(SICAV)

Fixed capital (SICAF)

(FCPs) Variable capital

(SICAV)

Fixed capital (SICAF)

2010 Law

Part I (UCITS2) 1,061 756 0 1,817 489.4 1,596.8 0.0 2,086.3

Part II 269 268 4 541 82.6 118.7 0.9 202.2

SIF Law (SIFs) 525 965 36 1,526 125.2 157.1 13.3 295.6

Total 1,855 1,989 40 3,884 697.3 1,872.6 14.2 2,584.1

Source: Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier – CSSF)

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:

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: • ➢ Reputation of the Luxembourg brand in the investment fund industry • ➢ Attractive range of investment fund solutions• ➢ Regulatory environment including accessibility, knowledge and responsiveness of the regulator• ➢ Stability:

• ➢ Political, economic and social environment • ➢ Legal environment and taxation regime

• ➢ Ability to achieve tax neutrality for products by considering direct and indirect taxation implications at fund and investor levels

• ➢ Operational factors such as relocation costs, local infrastructure, and the qualifications and knowledge of the multicultural, multilingual international workforce

• ➢ Service provider considerations such as their expertise and ability to meet specific local distribution market requirements from Luxembourg

• ➢ Central location at the heart of Europe with easy access to other financial centers

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.


1.3. Luxembourg’s investment fund solutions

1.3.1. Fund regimes and passports

A. IntroductionLuxembourg 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 passportsMost 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.


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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

The marketing of AIF may be summarized as follows:• ➢ Full AIFM regime AIF can be marketed to:

• 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

• ➢ Simplified AIFM registration regime AIF can be marketed to professional investors in the EU/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.).

• ➢ EU/EEA professional investors may, on their own initiative, purchase the shares or units of any AIF, irrespective of the domicile of the AIF or AIFM, provided that there is no marketing (also referred to as “reverse solicitation”)

• ➢ In addition to the rules applicable to AIF, SIFs can only be distributed to “informed investors” (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”.


Luxembourg’s solutions for UCIs

A UCITS management company is required. It may be either:• A Luxembourg UCITS

(Chapter 15) management company

• EU/EEA UCITS management company

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 self-managed UCITS)

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

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 companyThe management company may, in turn, delegate to an AIFM which may be:• An authorized Luxembourg AIFM• An authorized EU/EEA AIFMHowever, 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

SIF2010 Law

Choi

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f re

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of b

asic

str

uctu

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Common fund (FCP)A common fund must be managed by a management company

Investment company with variable capital (SICAV) or investment company with fixed capital (SICAF)

Two structures are possible:• Single compartment structure• Multiple compartment (umbrella) structure. Each compartment of a multiple compartment structure

may pursue a different investment policyChoi

ce o

f co

mpa

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stru

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UCITS Part II

C. Overview of fund regimes and basic structuresThe choice of regime and basic structure is presented in schematic form below:

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.


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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: FCPInvestment company: SICAV or SICAF

Common fund: FCPInvestment company: SICAV or SICAF

Common fund: FCPInvestment company: SICAV or SICAF

Eligible investors9 All All Informed investors10

Distribution in European Union(EU)/European Economic Area (EEA)11

Retail investors: EU/EEA passportProfessional investors: EU/EEA passport

Retail investors: national requirements applyProfessional investors: EU/EEA passport if managed by an authorized AIFM12, otherwise national private placement regimes (NPPRs) apply

Informed non-professional investors: national requirements applyProfessional 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 derivativesTechniques and instruments related to transferable securitiesDetailed 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)

Fees/expenses including performance and advisory fees

No detailed restrictionsMust be disclosed



Transferability of shares or units

Generally freely transferable Generally freely transferable Generally freely transferableSubject to informed investor qualification

C. Overview of fund regimes and basic structuresThe choice of regime and basic structure is presented in schematic form below:

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.


Regimes

UCITS 2010 Law Part II SIF

Information for investors ProspectusKey Investor information (KII)Financial statements15

Periodic disclosures16

Prospectus17

Financial statements18


Prospectus or offering document20

Financial statements21


Required service providers23

UCITS management company (common fund)DepositaryAdministrator, registrar and transfer agentAuditor

Management company (common fund)DepositaryAdministrator, registrar and transfer agentAuditor

Management company (common fund)DepositaryAdministrator, registrar and transfer agentAuditor

Regulator reputational checks

Portfolio manager and/or adviserDirectors of UCI, or of management company24

Depositary

Promoter25

Portfolio manager and/or adviserDirectors of UCI, or of management company26

Depositary

Directors of SIF, or of management company27 28

Depositary

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 appliesNo 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 appliesNo 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 appliesNo 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).


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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) Investment company (SICAV or SICAF)

Oversight of service providers

Board of Directors of management company 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 a common fund

At least one meeting of shareholders must 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:• ➢ Equity funds• ➢ Bond funds• ➢ Money market funds• ➢ Mixed funds• ➢ Funds of traditional investment funds36

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, multiple-asset 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.


1.3.4.1. 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. SOPARFIsSOPARFI (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 vehiclesSecuritization 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..


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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. “Unit-linked” life insurance products are products which are linked to one or more investment funds, which may be either: • ➢ “External” UCIs, which:

• ➢ Can be one of the following:• 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

• ➢ Are subject to investment limits which depend on the category of UCI• ➢ “Internal” funds which do not offer a guarantee. There are two categories:

• ➢ Collective investment funds which are:• 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


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.


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Sponsor

Common fundDepositary

UCITS management

companyGroup/Third-party

Paying agent(s)

Auditor

Portfolio manager

Administrator, registrar, transfer, domiciliation agent

Distributors

Investment adviser

Com

mon

fund

(FC

P)

Initiator

Initiator

Common fund

Investment company

Board of Directors

Prime broker

Prime broker

Management company and AIFM

(if applicable)Group/Third-party

Management company

and/or AIFMGroup/Third-party

Paying agent(s)

Paying agent(s)

Auditor

Auditor

Portfolio manager

Portfolio manager



Distributors

Distributors

Investment adviser

Investment adviser

Inve

stm

ent

com

pany

whi

ch h

as n

ot

appo

inte

d a

man

agem

ent

com

pany

Sponsor InitiatorDepositary Depositary

Paying agent(s)Prime broker

Auditor

Paying agent(s)

Auditor

Portfolio manager

Portfolio manager



Distributors Distributors

Investment adviser

Investment adviser

Self-managed UCITS investment

companyBoard of Directors

Internally managed AIF investment

companyBoard of Directors

Investment adviser

Sponsor

Investment company

Board of Directors Depositary

Management company

Group/Third-partyPaying agent(s)

Auditor

Portfolio manager


Distributors

Inve

stm

ent

com

pany

whi

ch h

as a

ppoi

nted

a

man

agem

ent

com

pany

Depositary

Depositary

Typical organization of a UCI

UCITS AIF

Key: : Appointed by


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:• ➢ Be the portfolio manager or adviser• ➢ Play a role in the oversight of the activity of the UCI, generally by being represented on the

Board of Directors of the UCI or its management company and/or Alternative Investment Fund Manager (AIFM)

• ➢ Be a shareholder of the management company• ➢ Play a role in the distribution of the UCI

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 AIFMManagement 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 managerThe 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 adviserThe 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. AdministratorThe 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 agentThe 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 agentThe 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).


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H. DistributorDistributors are intermediaries who perform one or both of the following activities:• ➢ Actively market the shares or units• ➢ Receive subscription and redemption orders as appointed agents of the UCI

See also Section 14.8.1..

I. NomineeNominees act as intermediaries between investors and the UCI of their choice.


J. Market makerMarket makers are intermediaries participating on their own account and at their own risk in subscription and redemption transactions of UCI shares or units.


K. DepositaryThe 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 brokerA prime broker is an entity subject to prudential regulation and ongoing supervision, which:• ➢ Offers one or more services to professional investors primarily to finance or execute

transactions in financial instruments as counterparty• ➢ May also provide other services such as clearing and settlement of trades, custodial services,

securities lending, customized technology and operational support facilities38 (see Section 11.8.)

M. Paying agentThe 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. AuditorThe 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:• ➢ The basic structure of the UCI• ➢ Preference for a group entity or a third party • ➢ The other fund ranges of the group. Where the group has fund ranges in multiple jurisdictions, it

may consider cross-border management• ➢ Service provider considerations

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”.


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. UCIPromoters 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 entityPromoters 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:


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• ➢ Create a new group management entity, or use their existing group management entity

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.).

• ➢ Appoint a third party management entity

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 holdersWhen 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:• ➢ Members of the Board of Directors of the UCI (see Chapter 6) and management company (see

also Section 7.4.6.)• ➢ Senior management (also known as “conducting officers” – see Section 7.4.7.)• ➢ Control functions (see Section 7.4.9.)

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)

Management company managing:

• Directly √ √

• Via a branch in host Member State X √

Self-managed UCIs √ X

See also Section 7.5..

39 Under the “UCITS IV” recast of the UCITS Directive


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:• ➢ The “super” model: creating a single management entity (a management company and/or AIFM)

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.).

• ➢ The “multiple” model: local management entities in each UCI domicile, or for specific fund ranges

This is the typical legacy structure existing today.

• ➢ The “third party” model: appointing one or more third party management entities. Under this 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.)

• ➢ The “self-managed” model: self-managed UCITS and internally managed AIF (which are subject to 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.


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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:

• 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 B

UCIB1

UCIB2

UCIB...

UCIBn

UCIC1

UCIC2

UCID

FeederUCI E

Management entity B

Member State C Member States D & E

Member State A

UCIA1

UCIA2

UCIA...

UCIAn

Supermanagement entity

Member State B

UCIB1

UCIB2

UCIB...

UCIBn

UCIC1

UCIC2

UCID

FeederUCI E

Branch C

Member State C Member States D & E

Member State A

UCIA1

UCIA2

UCIA...

UCIAn

Supermanagement entity


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:• ➢ Management entities may consider delegation to a group internal audit function (see Subsection

7.4.9.C.)• ➢ IT infrastructure of a management company may be provided by a group company (see Section

7.4.13.)• ➢ Conflicts of interest must be considered in a group context (see Section 7.4.18.)• ➢ In the context of the AIFM letter box provisions, when assessing whether an AIFM 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, 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. DomicileManagement 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:• ➢ The domicile of the management company• ➢ The domicile of the UCI• ➢ Another country

An asset management group may therefore implement one or a combination of the following service provider models:• ➢ Single service provider:

• ➢ Centralized: a single service provider is selected to serve the UCIs in all host Member States from a central location

• ➢ Decentralized: service providers from the same financial services group are selected - generally one in each host Member State

• ➢ Multiple service providers: service providers from different financial services groups are selected to serve different UCIs


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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:• ➢ Administration (see also Chapter 10):

• ➢ UCITS:• 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 domiciledThe entity must be authorized to provide administration services and have an adequate organization in order to perform the administration

• ➢ Luxembourg AIF (including Part II 2010 Law UCIs and SIFs): the central administration of the UCI must be in Luxembourg

• ➢ Depositary: the depositary of a Luxembourg UCI must be established in Luxembourg (see also 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:• ➢ Restructuring UCIs:

• 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.)

• ➢ Mergers of UCIs (see Section 4.7.)• ➢ Creation of a side pocket, typically to hold illiquid assets (see Section 3.3.6. and 4.8.)• ➢ Transferring foreign UCIs to Luxembourg (see Section 4.9.)• ➢ Liquidation of UCIs and compartments (see Section 4.10.)

26 | 2. Current and future developments

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


2. Current and future developments | 27

2

Current and future developments

2.2. UCITS

This section focuses on developments related to UCITS:• ➢ Current developments:

• 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

• ➢ Future developments:• 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:• ➢ Conditions for obtaining and maintaining authorization as a management company whose activities

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

• ➢ Conditions for obtaining and maintaining authorization for management companies who carry out collective portfolio management activities and management of portfolios of investments on a client-by-client basis

• ➢ Principle of proportionality• ➢ Self-managed investment companies• ➢ Prudential supervision of a Chapter 15 management company• ➢ Prudential supervision of a self-managed investment company

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.


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:• ➢ The concept of sponsor is formalized in relation to UCITS management companies. The CSSF may

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

• ➢ The members of the Board of Directors of the management company must be of sufficiently good repute and sufficiently experienced, and dedicate an adequate amount of time and attention to their tasks

• ➢ The conducting officers should in principle be permanently present in Luxembourg, although they may live in a location from which they can in principle come to Luxembourg on a daily basis

• ➢ The compliance officer, internal auditor or permanent risk management function cannot be a member of the Board of Directors of the management company

• ➢ A management company must have a regularly updated procedures manual• ➢ The Circular provides indicative lists of activities which may and may not be delegated

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:• ➢ The promoter status no longer exists for UCITS or Part II UCIs which are managed by a UCITS

(Chapter 15) management company; it is replaced by the concept of “sponsor” implemented by CSSF Circular 12/546 (see Section 2.2.1.)

• ➢ A promoter is still required for 2010 Law Part II UCIs managed by Chapter 16 management companies

• ➢ The CSSF will reconsider the subject of “promotership” following transposition of the Alternative 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:• ➢ Guidelines on ETFs and other UCITS issues published in July 2012 • ➢ Guidelines on repurchase and reverse repurchase agreements published in December 2012

The guidelines will significantly impact a wide range of UCITS: • ➢ UCITS using efficient portfolio management (EPM) techniques such as securities lending, sale and

repurchase agreements (repos) and purchase and resale agreements (reverse repos) • ➢ Specific categories of UCITS: ETFs, index-tracking UCITS (including leveraged index-tracking

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:• ➢ Prospectus, KII, and marketing communication disclosure requirements • ➢ Annual and half yearly reports disclosure • ➢ Management of collateral


2


• ➢ Fees related to EPM• ➢ Securities lending and termination of any securities lending or sale and repurchase agreements

(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:• ➢ Information to be included in the prospectus• ➢ UCITS ETF label and secondary market • ➢ Efficient portfolio management techniques • ➢ Financial derivative instruments • ➢ Collateral management • ➢ Financial indices • ➢ Transitional provisions

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:• ➢ A KII requirements for UCITS that are no longer marketed to the public or UCITS in liquidation• ➢ Provision of KII to:

• 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

• ➢ Provision of amended KIIs to existing investors• ➢ Combination of two or more share or unit classes into a single KII • ➢ The choice of the most appropriate representative share or unit class in a representative share or

unit class KII• ➢ References to an index in a UCITS investment objectives and policies as a benchmark • ➢ Signposting a glossary• ➢ Disclosure of the name of the management company in the identification of the UCITS section


In July 2012, the CSSF updated its Key Investor Information Document – Frequently Asked Questions document covering, inter alia:• ➢ Minimum regulatory documents to be taken into consideration for drafting a KII• ➢ Filing KIIs with the CSSF• ➢ KII in the context of an application for authorization for UCITS, or a compartment • ➢ Responsibility for the content of the KII• ➢ KII in the context of issuing a share or unit class • ➢ Impact of temporary suspension of subscriptions and redemptions • ➢ Provision of translations of the KII to the CSSF• ➢ Publication of KII on a website

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

• ➢ Practical implications of the KII for distribution networks

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 UCITSIn 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:• ➢ Appropriate use of stress testing in UCITS risk governance• ➢ Stress testing methodologies and scenario selection• ➢ Specific risks of focus• ➢ Reporting and management actions• ➢ Areas of improvements in stress testing practices

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:• ➢ Disclosure of aggregate charges of the feeder UCITS and master UCITS in the annual report of the

feeder UCITS


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• ➢ The ad hoc report to be prepared by the auditor of the master UCITS where the master and feeder UCITS have different accounting years

• ➢ Requirements in relation to the translation of the financial reports of the master UCITS in order to meet the needs of the feeder UCITS

• ➢ Matters disclosed in the audit report of the independent auditor of the master UCITS which should 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 regimeThe proposal covers:• ➢ The appointment of the depositary, including the content of the contract• ➢ Eligible entities• ➢ Duties of the depositary:

• Monitoring and oversight• Cash flow monitoring• Safe-keeping:

• Financial instruments• Other assets

• Provision of information to competent authorities• ➢ Liability:

• Loss of financial instruments held in custody• Other losses

• ➢ Delegation of safe-keeping:• Conditions for delegation• Delegation and liability

The depositary of UCIs is covered in Chapter 11.

B. Remuneration of UCITS managersManagement 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:• ➢ Remuneration policies• ➢ Remuneration committee• ➢ Remuneration principles to be complied with by managers• ➢ Disclosure

Remuneration is covered in Section 7.4.20..


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:• ➢ UCITS specific:

• 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• ➢ Depositary passport• ➢ Money market funds• ➢ Long-term investment products accessible to retail investors

At the time of writing:• ➢ A legislative proposal modifying the UCITS Directive was expected from the European Commission.

Eligible assets of UCITS are covered in Section 5.2.2.• ➢ A legislative proposal implementing a specific regime for money market funds was expected from

the European Commission (see Section 2.4.)• ➢ A legislative proposal on long-term investment funds had been published by the European

Commission (see Section 2.3.3.)

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”.

2.3. Alternative investment funds

This section focuses on developments related to alternative investment funds (AIF):• ➢ Current developments:

• Luxembourg implements AIFM Directive• European venture capital and social entrepreneurship fund regimes implemented

• ➢ Future developments:• 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.


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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:• ➢ AIF: Section 3.4.3. • ➢ AIFM: Chapter 7• ➢ Portfolio management: Chapter 8• ➢ Risk management and valuation: Chapter 9

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:• ➢ Creating a new status of financial sector professional: professional depositary of assets other than

financial instruments• ➢ Creating a new “special limited partnership” (S.C.Sp.) regime, based on the English Limited

Partnership• ➢ Providing legal certainty in relation to the taxation of carried interest paid to managers of AIF• ➢ Exempting management services provided to AIF from VAT• ➢ Subjecting SICARs to conflicts of interest requirements similar to those applicable to SIFs

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:• ➢ AIF in scope of the AIFM Law• ➢ AIFM in scope of the AIFM Law• ➢ Application for authorization as AIFM• ➢ Registration of small AIFM• ➢ The application of the AIFM Law to existing and future Luxembourg management companies and

internally managed AIF• ➢ The relationship between AIFM and credit institutions and investment firms• ➢ The legal forms of AIF• ➢ Delegation by AIFM• ➢ Transitional provisions for AIFM and AIF• ➢ Scope of authorized activities of AIFM• ➢ Depositary aspects• ➢ Cooperation agreements signed between Luxembourg and third countries

43 UCITS management companies (Chapter 15 management companies) and non-UCITS management companies (Chapter 16 management companies).


2.3.1.3. Implementation timeline

AIFM Directive timeline

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.

AIFM Directiveentry into

force

Trans-position period ends

EU AIFM to get

authoriz-ation

EU passport for third countries

End of EU

national PPRs*

July 2011AIFM

Directive entry into

forceDecember 2012: Adoption of Level 2 measures

July 2013: Luxembourg AIFM LawAIFM Directive applicable

November 2011: ESMA advice to the European Commission

July 2013

July 2014

2015+ 2018+

Regu

lato

ry a

gend

aM

arke

ting

AIF

EU/EEA AIFM with EU/EEA AIF

Transition from NPPRs* to passport

EU NPPRs* continue, subject to additional conditions

EU/EEA passport required

EU/EEA passport or NPPRs*, subject to conditions

EU/EEA passport required

Non-EEA AIFM and/or non-EEA AIF

* NPPRs = National Private Placement Regimes


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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

• Scope

• Leverage• Major holdings

and control

• EU AIFM vs non-EU AIFM:• EU AIF• Non-EU AIF

• Cross-border management

• Remuneration guidelines

• Valuation requirements

II.Marketing and cross-border management

I.Authorization

VI.Specific provisions

V.Transparency

IV.Functions

and service providers

III.Conduct of

business

• Depositary:• Eligible entities• Depositary obligations• Depositary liability

• Delegation and sub-delegation (EU/non-EU entities)

• Risk and liquidity management

• Rules of conduct• Conflicts of interest

• Authorization requirements

• Capital requirements

• 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:• ➢ AIFM organizational requirements• ➢ Delegation• ➢ Portfolio management• ➢ Risk and liquidity management and professional liability• ➢ Conflicts of interest• ➢ Calculation of assets under management• ➢ Leverage• ➢ Depositary• ➢ Transparency• ➢ Third country cooperation agreements

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.


2.3.1.5. 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:• ➢ Administration• ➢ Marketing• ➢ Activities related to the assets of AIF45

AIFM may request authorization to provide additional services including:• ➢ Discretionary portfolio management• ➢ Non-core services such as investment advice

AIFM are not permitted to provide any other types of services.

There are two main categories of AIFM:• ➢ External AIFM: separate legal entities which can manage one or more AIF• ➢ Internally managed AIF: the activities of internally managed AIF are limited to the management of

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.:• ➢ Where the portfolios of AIF assets under management, including any assets acquired through use

of leverage, in total exceed a threshold of €100 million• ➢ Where the portfolios of AIF whose assets under management, in total, exceed a threshold of

€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:• ➢ A “marketing passport”: this passport permits AIFM to market the AIF they manage to professional

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.


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• ➢ A “management” passport: this passport permits authorized AIFM to manage AIF established in 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

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: • ➢ To become authorized AIFM (i.e., to obtain dual authorization)• ➢ Not to become authorized AIFM, and comply with restrictions on their activities

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 AIFMLuxembourg 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 AIFMLuxembourg UCITS and non-UCITS management companies may also continue to perform management company functions for AIF, without obtaining authorization as AIFM. In this case:• ➢ Where AIF assets under management of the management company do not exceed the threshold

above which authorization as AIFM is required, they may manage the AIF themselves• ➢ Where AIF assets under management of the management company exceed the threshold above

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

• ➢ Non-AIFM compliant Chapter 16 management companies are permitted to manage investment 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.


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: • ➢ Portfolio management activities may include, for example, defining the investment strategy,

setting investment limits, executing the investment strategy (including making investment decisions), monitoring the performance of the strategy and its implementation

• ➢ Risk management activities include, inter alia, establishing and implementing risk limits, 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:• ➢ Scope of application:

• Remuneration in scope • Entities and staff in scope

• ➢ Proportionality principle with respect to:• 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

• ➢ AIFM which are part of a group • ➢ Impact of variable remuneration on the financial situation of the AIFM• ➢ Governance roles in relation to remuneration:

• Management body• Remuneration committee• Control functions

• ➢ Risk alignment:• 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

• ➢ Internal and external disclosure

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.


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The purpose of these guidelines is to ensure common, uniform and consistent application of the reporting obligations to national competent authorities (NCAs) by clarifying AIFM reporting requirements, inter alia, on the information that AIFMs must report to NCAs, the timing of such reporting together with the procedures to be followed when AIFMs move from one reporting obligation to another.

The guidelines provide a template with AIFM-specific information to be reported, which concerns, inter alia:• ➢ Identification of the AIFM• ➢ Principal markets and instruments in which it trades on behalf of the AIFs managed• ➢ Values of assets under management• ➢ Breakdown of investment strategies• ➢ Principal and individual exposures and most important concentration• ➢ Risk profile

ESMA’s consultation paper proposes that AIFM should submit their first reporting on 31 January 2014, or, in the case of funds of funds, 15 February 2014. The first reporting should cover the period from 23 July 2013 to 31 December 2013. The deadline for the first reporting by AIFM to the CSSF remained under discussion at the time of writing.

Compliance with the AIFM reporting requirements may, in practice, be challenging for all AIFM, including small AIFM and small internally managed AIF.

2.3.1.11. Application for authorization

In June 2013, the CSSF published the application form for AIFM.

To become an AIFM, an entity will have to obtain authorization from the CSSF. The application for authorization is designed to demonstrate how the entity will comply with the requirements of the AIFM Law, as well as the delegated acts adopted by the European Commission47. The application must include, inter alia, information on:• ➢ The applicant AIFM, including corporate purpose, existing structure and auditor• ➢ The governing body and senior management• ➢ Ownership structure and qualifying holdings• ➢ Program of activity• ➢ Capital, financial and business information• ➢ How the AIFM will meet organizational and internal governance requirements• ➢ Delegation, sub-delegation and partial delegation to third parties

New AIFM created after 22 July 2013 are required to apply for, and obtain, authorization as AIFM before starting their activities, or, in the case of small AIFM and small internally managed AIF, apply for, and obtain, registration.

Entities performing the functions of AIFM which exist in July 2013 have until July 2014 to submit an application for authorization. Such entities must comply with the AIFM Law requirements from the moment of their authorization as AIFM by the CSSF or, at the latest, by 22 July 2014.

The CSSF has created a specific team to handle applications for authorization and specific questions related to AIFM.

2.3.1.12. Relationship between AIFM and other regulated entities

AIFM are not permitted to obtain authorization as another type of financial sector entity, such as a credit institution, an investment firm or another type of professional of the financial sector (PSF).

Other financial sector entities are not permitted to obtain authorization as an AIFM.

AIFM, credit institutions and investment firms may delegate certain activities to each other, such as portfolio management or investment advice.

47 In particular, European Commission Delegated Regulation (EU) No 231/2013 supplementing Directive 2011/61/EU with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision.


2.3.1.13. Luxembourg AIF

In May 2013, ESMA issued its final Guidelines on key concepts of the AIFMD. The guidelines clarify the definition of AIF. They cover the treatment of compartments of an undertaking and the meanings of the terms • ➢ Collective investment undertaking• ➢ Raising capital• ➢ Number of investors• ➢ Defined investment policy

All undertakings for collective investment (UCIs) under Part II of the Law of 17 December 2010 (the 2010 Law) are considered as AIF under the AIFM Law.

The following types of Luxembourg vehicles qualify as AIF under the AIFM Law if they meet the AIFM definition of AIF48:• ➢ Specialized investment funds (SIFs) under the Law of 13 February 2007, as amended (the SIF Law)• ➢ Investment companies in risk capital (SICARs) under the Law of 15 June 2004, as amended (the

SICAR Law)• ➢ Other currently unregulated Luxembourg vehicles which meet the criteria of an AIF (for example,

some SOPARFIs − Luxembourg companies which have, as their main corporate purpose, the holding of participations in other companies − may qualify as AIF, when they raise capital from a number of investors and invest it in accordance with a defined investment policy)

In practice, most of the regulated investment vehicles will qualify as AIF.

The following summarizes the options open from the perspective of Luxembourg AIF which fall within the scope of the AIFM Law:• ➢ Common funds (FCPs), which do not have a legal personality, are required by the relevant AIF Laws

(the 2010 Law and the SIF Law) to have a Luxembourg management company (Chapter 15 or Chapter 16). The management company has the following options:• Become authorized as AIFM• Appoint an authorized external entity as AIFM

• ➢ Luxembourg AIF in corporate form, including investment companies (SICAVs and SICAFs), have the following options:• Be internally managed AIF• Designate an external AIFM• Designate a management company, which in turn designates an external AIFM

The AIFM Law modifies Part II of the 2010 Law, the SIF Law and the SICAR Law to ensure that relevant provisions of the AIFM Law are applied by AIF whose manager is subject to the AIFM Law. The provisions include those on:• ➢ The depositary of the AIF• ➢ Delegation of functions• ➢ Valuation• ➢ Information provided to investors• ➢ Marketing

For SICARs, the AIFM Law also implements conflicts of interest provisions, in line with those applicable to SIFs. A SICAR must be structured and organized in such a way as to mitigate the risk of any conflict of interest between the SICAR and, where applicable, any person involved in the activities of the SICAR, or directly or indirectly related to the SICAR, adversely affecting the interests of the investors. In case of potential conflicts of interest, the SICAR is required to protect the interests of its investors. A CSSF Regulation is expected to clarify the implementation of the measures on conflicts of interest. SICARs existing in July 2013 must comply with these measures by July 2014.

The Law also clarifies that the central administration of Luxembourg AIF, including 2010 Law Part II UCIs, SIFs and SICARs, must be in Luxembourg, independently of whether the AIFM is a Luxembourg AIFM or an AIFM from another EEA Member State.

48 An AIF is any UCI, including investment compartments thereof, which raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors and which is not a UCITS.


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AIF whose manager is subject to the AIFM Law created before 22 July 2013 benefit from a transitional period up to the date of authorization of their AIFM, or 22 July 2014 at the latest, to comply with the new product requirements.

AIF whose manager is subject to the AIFM Law created between 22 July 2013 and 22 July 2014 are subject to the new product requirements from the date of their authorization, or, where the AIF has an external AIFM which existed before 22 July 2013, from the date of authorization of their AIFM.

The transitional provisions also apply when new compartments are created within an existing umbrella AIF.

AIF which benefit from one of the transitional provisions will be required to submit to the CSSF, by 1 April 2014, information on how it will comply with AIFM Law product rules by 22 July 2014.

AIF whose manager is subject to the AIFM Law created after 22 July 2014 are subject to the new product requirements from the date of their authorization.

2.3.1.14. Impact on typical existing structures

A single AIFM must be identified for each Luxembourg AIF in scope. The AIFM is generally the entity which performs either of the functions of portfolio management or risk management of an AIF, and is responsible for the other function. Where it is not possible to clearly identify the AIFM, then the existing structure must be changed and an AIFM clearly identified.

The following examples describe some typical structures, and outline some of the options available, assuming that the AIF assets under management exceed the AIFM de minimis thresholds:1. A Luxembourg AIF which is managed by a management company will probably be considered

as externally managed AIF. If the structure remains unchanged, the management company may obtain authorization as AIFM or appoint another entity which is an authorized AIFM.

2. A Luxembourg AIF which has appointed an investment manager, but not a management company, may be either an externally managed AIF or internally managed AIF. Where the portfolio management and risk management is performed by the investment manager, the investment manager is likely to be considered as the AIFM. Where the Board of the AIF oversees the portfolio management and performs the risk management, the AIF may be considered as an internally managed AIF. If the structure remains unchanged, then the relevant entity should obtain AIFM authorization.

3. A Luxembourg AIF which is managed by a General Partner may be either an externally managed AIF or internally managed AIF. As in the previous example, it will be necessary to identify the entity which is responsible for the portfolio management and risk management.

4. A Luxembourg AIF which performs the portfolio management and risk management itself, but which has appointed an investment advisor is likely to be considered to be internally managed. If the structure remains unchanged, the AIF should obtain authorization as the AIFM.

2.3.1.15. Depositary of Luxembourg AIF

The depositary of Luxembourg AIF may be a credit institution, an investment firm which is authorized to provide the ancillary service of safe-keeping and administration of financial instruments for the account of clients or, under certain conditions, a specialized financial sector professional (PSF) called a “Professional depositary of assets other than financial instruments”.

The “Professional depositary of assets other than financial instruments” is a new category of financial sector professional (PSF) created by the AIFM Law.

Professional depositaries of assets other than financial instruments may act as depositaries of AIF which do not permit redemption within five years, and, in accordance with their core investment policy, generally do not invest in financial instruments that must be held in custody or generally invest in non-listed companies and issuers with a view to potentially acquiring control.

Professional depositaries of assets other than financial instruments may also perform safekeeping duties as delegates of depositaries of AIF in relation to assets apart from cash and financial instruments which can be held in custody.

2.3.1.16. New limited partnership regime

The AIFM Law introduces a new type of limited partnership, the “special limited partnership” (S.C.Sp.), thereby enhancing Luxembourg’s legal toolbox for structuring international alternative


investments and private equity, via Luxembourg. Leveraging upon the well-established English Limited Partnership regime, the new special limited partnership regime includes the following key provisions:• ➢ The special limited partnership does not have a legal personality• ➢ It is governed by the Limited Partnership agreement, which may be drafted in a flexible manner in

terms of interests, governance, distribution, etc.• ➢ It may be managed by the general partner, but this is not a requirement• ➢ It is available to regulated entities (e.g., SIF, SICAR), as well as non-regulated entities (e.g.,

SOPARFI), independently of whether they qualify as AIF• ➢ Information to be published in the trade register does not include information on limited partners• ➢ It is tax efficient. The special limited partnership will be subject to a transparent tax regime, aligned

to the regime applicable to limited partnerships (exemption from corporate income tax and net worth tax). It is also exempt from municipal business tax provided certain conditions are met49

The AIFM Law also modernizes the legal framework applicable to “common limited partnerships” (S.C.S), as well as making some technical adjustments to the well-established partnership limited by shares (S.C.A.) regime.

2.3.1.17. Regime for taxation of carried interest

The AIFM Law defines “carried interest” as a share in the profits of the AIF accrued to the AIFM as compensation for the management of the AIF and excluding any share in the profits of the AIF accrued to the AIFM as a return on any investment by the AIFM into the AIF.

The Law permits the taxation of carried interest realized by certain physical persons which are employees of the AIF or their management company as “speculative income” under Luxembourg’s Income Tax Law. The applicable tax rate is 25% of the marginal tax rate applicable to the adjusted income.

To benefit from the tax regime, physical persons must not have been Luxembourg tax residents, nor have been subject to tax in Luxembourg on their professional revenues during the five years before the year of implementation of the AIFM Law. The physical persons must, furthermore, establish their tax domicile in Luxembourg during the year of implementation of the AIFM Law, or during the following five years. The favorable tax treatment may be limited in time.

The taxation of carried interest is also covered Section 13.3.5.2..

2.3.1.18. Extension of VAT exemption to management of AIF

In line with the value added tax (VAT) treatment of the management services provided to UCIs, management services provided to the following entities are VAT exempt:• ➢ AIF• ➢ Luxembourg investment funds supervised by the CSSF, and all similar EU investment funds subject

to the supervision of an EU competent authority similar to the CSSF• ➢ Luxembourg pension funds investment funds supervised by the Luxembourg insurance supervisory

authority (the Commissariat aux Assurances – CaA), and all similar EU pension funds subject to the supervision of an EU competent authority similar to the CaA or the CSSF

• ➢ Luxembourg securitization vehicles, and EU vehicles with a similar purpose

2.3.1.19. Cooperation agreements with third countries

Under the AIFMD, cooperation agreements between EU/EEA Member States and third countries are required in case of:• ➢ Delegation of portfolio management and risk management by an AIFM to a third country entity• ➢ Marketing in the EU/EEA under national private placement regimes (NPPRs) and the passport:

• Of non-EEA AIF managed by EEA AIFM• Of AIF managed by non-EEA AIFM

• ➢ Management of EEA AIF by non-EEA AIFM

49 If the general partner of the special limited partnership is a Luxembourg resident corporation which holds less than 5% of the capital of the special limited partnership.


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In July 2013, ESMA announced that it had approved cooperation arrangements between EEA securities regulators with responsibility for the supervision of AIFs and 38 of their global counterparts. ESMA negotiated the agreements on behalf of all EU Member State securities regulators as well as the authorities from Iceland, Liechtenstein and Norway.

In July 2013, the CSSF announced that it has signed Memoranda of Understanding (MoU) with the supervisory authorities of the third countries, based on ESMA’s approved cooperation agreement templates and meeting the requirements of the AIFM Directive for cooperation agreements, including supervisory authorities of the following countries and territories:• ➢ Albania• ➢ Australia• ➢ Bahamas• ➢ Bermuda • ➢ Bosnia Herzegovina• ➢ Brazil• ➢ British Virgin Islands • ➢ Canada• ➢ Cayman Islands • ➢ Guernsey • ➢ Hong Kong

• ➢ India• ➢ Isle of Man• ➢ Israel • ➢ Japan• ➢ Jersey • ➢ Kenya• ➢ Macedonia (FYROM)• ➢ Malaysia• ➢ Maldives• ➢ Mauritius• ➢ Mexico

• ➢ Montenegro• ➢ Morocco• ➢ Pakistan• ➢ Singapore• ➢ Switzerland• ➢ Tanzania• ➢ Thailand• ➢ Turkey• ➢ United Arab Emirates • ➢ United States

2.3.2. European venture capital and social entrepreneurship fund regimes implemented

In March 2013, the European Union (EU) approved two regimes creating EU labels (“designations”) for investment funds investing primarily in small and medium sized enterprises (SMEs):• Regulation on European Venture Capital Funds (EuVECA)50

• ➢ Regulation on European Social Entrepreneurship Funds (EuSEF)51

The EuVECA and EuSEF regimes will initially be available to managers of Undertakings for Collective Investment (UCIs)52 established in the European Economic Area (EEA) whose assets under management do not exceed the AIFM Directive threshold of €500 million applicable to managers of unleveraged, closed-ended alternative investment funds (AIF) 53. The EuVECA and EuSEF regimes are also available to internally managed AIF54.

The regimes create “passports” enabling registered managers of EuVECA and EuSEF which comply with certain organizational requirements and investment rules to market their EuVECA and EuSEF to suitably qualified investors throughout the EEA from 22 July 2013.

The two new regimes are voluntary. If a manager chooses not to meet the requirements of one of the regimes and benefit from one of the passports, the Regulations do not apply; existing national rules and general EU rules continue to apply.

The Regulations were published in the Official Journal of the European Union in April 2013. They are directly applicable in all EU Member States without national transposition from 22 July 2013, coinciding with the date of application of the AIFM Directive.

Member States are required to lay down effective, proportionate and dissuasive sanctions and administrative measures applicable to breaches of the provisions of the Regulation. Additional implementing (“Level 2”) measures and technical standards are also foreseen, clarifying some provisions.

EuVECA and EuSEF are covered in Section 3.4.3.3.

50 Regulation (EU) No 345/2013 of 17 April 2013 on European venture capital funds.51 Regulation (EU) No 346/2013 of 17 April 2013 on European social entrepreneurship funds.52 Referred to as Collective Investment Undertakings (CIU). 53 Article 3 (b) of Directive 2011/61/EU.54 In this case, the internally managed AIF is considered to be the manager of the AIF under these regimes.


2.3.3. European Commission proposes European long-term investment fund regime

In June 2013, the European Commission proposed a new pan-European regime for European long-term investment funds (ELTIF). The ELTIF regime is designed to offer institutional and private investors across Europe the opportunity to make longer term commitments to assets rather than short term gains. ELTIF will invest primarily in companies and projects (such as infrastructure projects) that need long-term capital. The Proposal for a Regulation on European Long-term Investment Funds lays down harmonized European Union (EU) rules on the authorization, managers, eligible assets, investment policies, marketing, redemptions and transparency of ELTIF. These rules are designed to protect both investors in ELTIF and the companies and projects they invest in.

The key requirements of the ELTIF regime include the following:• ➢ ELTIF eligible investment assets are:

• Unlisted companies • Real assets• Other ELTIF• European Venture Capital Funds (EuVECA) • European Social Entrepreneurship Funds (EuSEF)

• ➢ At least 70% of the capital of the ELTIF must be invested in eligible assets within five years of authorization

• ➢ Up to 30% of the capital can be held in assets that would be eligible for UCITS• ➢ ELTIF use of derivatives is limited to hedging duration and exchange risks• ➢ ELTIF face strict limits on their use of leverage• ➢ ELTIF must be managed by authorized Alternative Investment Managers (AIFM) and are subject to

AIFM Directive rules• ➢ ELTIF run for a specified lifetime during which investors do not have the right to get their money

back• ➢ ELTIF which are marketed to retail investors will be “packaged retail investment products” (PRIPs);

the ELTIF features and risks must be explained in the PRIPs key information document (KID)

In order to enter into force, the proposed Regulation 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 had begun.

2.4. Money market funds

This section focuses on developments related to money market funds (MMFs). These include:• ➢ Expected European Commission proposal on money market funds • ➢ IOSCO issues recommendations on money market funds

Money market funds are covered in Section 3.6.1..

2.4.1. European Commission proposal on money market funds expected

At the time of writing, a legislative proposal for a specific money market fund (MMF) regime was expected from the European Commission.


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Currently, all European MMF are already subject to ESMA’s Guidelines on the common definition of European money market funds issued in May 2010.

The Commission’s proposal is expected to go further, and lay down requirements on eligible assets of MMF, investment policies and risk management, valuation rules, specific requirements for constant net asset value (CNAV) MMF, rules in relation to external support and transparency requirements.

The Commission’s proposal is expected before the end of 2013. Any proposal from the European Commission will have to go through the process of adoption by the European Parliament and the Council of the European Union before it becomes applicable in Member States. If the proposal takes the form of a Regulation, as expected, the Regulation will be directly applicable in all Member States without national transposition.

2.4.2. IOSCO issues recommendations on money market fundsIn October 2012, IOSCO published its final Policy Recommendations for Money Market Funds.

The recommendations aim to provide the basis for common standards for the regulation and management of MMF. They include, inter alia:• ➢ Definition of MMF in collective investment scheme (CIS) regulation• ➢ Specific limitations on the types of assets in which MMF may invest and the risks they may take• ➢ Valuation of assets: use of fair value, or, in limited circumstances, the amortized cost method• ➢ Liquidity management: sound liquidity management policies and procedures, and tools to deal with

exceptional market conditions and substantial redemption pressures• ➢ Stable NAV MMF: measures designed to reduce the specific risks associated with the stable NAV

feature and internalize the costs arising from these risks• ➢ Use of credit ratings by MMF• ➢ Credit rating agencies’ rating methodologies for MMF• ➢ Disclosure to investors on inter alia:

• The absence of a capital guarantee and the possibility of principal loss• Valuation practices and the applicable procedures in times of stress

• ➢ Ensuring that MMF are subject to guidelines in relation to their use of repos

2.5. Exchange traded funds

This section focuses on developments related to exchange traded funds (ETF). These include:• ➢ ESMA issues final guidelines on ETFs and other UCITS issues• ➢ IOSCO issues principles for ETFs

2.5.1. ESMA issues final guidelines on ETFs and other UCITS issues

Exchange traded funds are subject to ESMA’s guidelines on ETFs and other UCITS issues (see Section 2.2.3.).


2.5.2. IOSCO issues principles for ETFs

In June 2013, IOSCO published its final Principles for the Regulation of Exchange Traded Funds.

The principles address only Exchange Traded Funds (ETFs) that are organized as collective investment schemes (CIS), and not other exchange traded products (ETP such as, where relevant, exchange-traded commodities, exchange-traded notes and exchange-traded vehicles).

The report outlines nine principles against which the industry and regulators can assess the quality of regulation and industry practices relating to ETFs.

The principles cover:• ➢ ETF classification and disclosure:

• ETF classification• ETF portfolios• ETF costs, expenses and offsets• ETF strategies

• ➢ Structuring of ETFs:• Conflicts of interest• Managing counterparty risks

2.6. Corporate governance

This section focuses on corporate governance developments relevant to UCIs. These include:• ➢ ALFI updates Code of Conduct for Luxembourg Investment Funds• ➢ Commission outlines action plan on company law and corporate governance

2.6.1. ALFI updates Code of Conduct for Luxembourg Investment Funds

In June 2013, ALFI issued an updated version of its Code of Conduct. The objective of the Code of Conduct is to provide Boards of Directors with a framework of high-level principles and best practice recommendations for the governance of Luxembourg investment funds and of management companies, where appropriate.

The updates to the Code of Conduct include: • ➢ A new principle on external governance (i.e., the exercise of shareholder rights)• ➢ A new principle on the remuneration of Board members• ➢ A recommendation that consideration should be given to the appointment of one or more

independent Directors• ➢ A focus on the role of the chairperson• ➢ A recommendation that the Board conduct a periodic review of its performance and activities• ➢ An update of the description of the Board’s responsibilities with respect to risk management,

internal controls and conflicts of interest

ALFI recommends that it is appropriate to apply the Code of Conduct to all UCIs - listed and unlisted – and to management companies in order to have a uniform and consistent approach in the marketplace.

ALFI’s Code of Conduct is covered in Section 6.1.5..


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Current and future developments2.6.2. Commission outlines action plan on company law and

corporate governance

In December 2012, the European Commission issued its action plan entitled European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies.

The plan covers, inter alia:• ➢ Board diversity: strengthening disclosure requirements on Board diversity: such requirements

could be implemented by modifying the Accounting Directive (Directive 78/660/EEC)• ➢ Management of non-financial risks: strengthening disclosure requirements on non-financial

risks, with a view to encouraging companies to adopt a sustainable, long-term approach to their businesses. Such requirements could be implemented by modifying the Accounting Directive

• ➢ Corporate governance disclosures: improving the quality of corporate governance reports, and in particular departures from corporate governance codes. This might be implemented through a Commission recommendation

• ➢ Investor cooperation:• Increasing transparency in relation to shareholdings in Europe, with a view to facilitating

dialogue between shareholders on corporate governance issues, while protecting the privacy of retail investors. This might be implemented through changes in the area of securities law legislation

• Improving legal certainty on the distinction between investor cooperation on corporate governance issues and acting in concert. This might be achieved through the issuance of guidance

• ➢ Remuneration policies: improving transparency on remuneration policies and individual remuneration of Directors, and granting shareholders the right to vote on remuneration policy and the remuneration report. This could be achieved by modifying the Shareholders’ Rights Directive (Directive 2007/36/EC)

• ➢ Related party transactions: improving shareholders’ control over related party transactions. This could be achieved by modifying the Shareholders’ Rights Directive

• ➢ Proxy advisors: improving transparency and conflicts of interest frameworks for proxy advisors. This might be achieved by modifying the Shareholders’ Rights Directive

• ➢ Disclosures by institutional shareholders: strengthening disclosure requirements for institutional investors, including asset managers, in relation to voting and engagement policies, and voting records. Such requirements could be implemented by modifying the Shareholders’ Rights Directive

• ➢ Company law: improving European company law, including on cross-border transfer of registered office, cross-border mergers and divisions, communication on group’s structure and recognition of “group interest”, administrative and legal framework for small and medium-sized enterprises’ (SMEs) operating cross-border, and promoting the European Company (SE) and the European Cooperative (SCE)

2.7. Other UCI-related developments

This section focuses on developments directly relevant to UCIs. These include:• ➢ Commission proposes PRIPS KID for retail products• ➢ IOSCO issues liquidity risk management principles for UCIs

2.7.1. Commission proposes PRIPS KID for retail products

In July 2012, the European Commission issued its proposal for a Regulation on key information documents for investment products. The proposal follows the Commission’s Communication on Packaged Retail Investment Products (PRIPs) in April 2009, and the adoption of the Key Investor Information (KII) document for UCITS.

Investment product manufacturers are required to draw up a key information document for each “investment product” they produce and publish the document on a website of their choice before the product can be sold to retail investors.


A person selling an investment product (the seller) to retail investors is required to provide such investors with the key information document in good time before the conclusion of a transaction relating to the investment product. In case of distance communication, under certain conditions, the seller may provide the retail investor with the key information document immediately after the conclusion of the transaction. The seller must provide the key information document to retail investors free of charge.

An “investment product” is an investment where, regardless of the legal form of the investment, the amount repayable to the investor is exposed to fluctuations in reference values or in the performance of one or more assets which are not directly purchased by the investor, including UCIs. Certain products may be exempt.

The key information document must be short, accurate, fair, clear and not misleading. It must be:• ➢ Presented and laid out in a way that is easy to read, using characters of readable size• ➢ Clearly expressed and written in language that communicates in a way that facilitates the retail

investor’s understanding of the information being communicated

The key information document must contain the following information:• ➢ Title: “Key Information Document” and a required explanatory statement• ➢ The name of the investment product and identity of the investment product manufacturer• ➢ Sections entitled:

• “What is this investment?” covering the nature and main features of the investment product• “Could I lose money?” providing a brief indication of whether loss of capital is possible• “What is it for?” indicating the recommended minimum holding period and expected liquidity

profile, and the possibility and conditions related to divestment before maturity• “What are the risks and what might I get back?” providing the risk reward profile of the product,

including a summary indicator of the profile and warnings in relation to any specific risks not fully reflected in the summary indicator

• “What are the costs?” covering direct and indirect costs• “How has it done in the past?” covering past performance• For pension products “What might I get when I retire?”

The investment product manufacturer may only include other information where it is necessary for the retail investor to take an informed investment decision about a specific investment product.

The investment product manufacturer is required to review the information contained in the key information document regularly and revise the document where the review indicates that changes need to be made.

UCITS, their management companies and persons selling shares or units of UCITS, should be exempt from the requirements of the proposed Regulation until five years after its entry into force; this period may be extended following a review of the Regulation by the European Commission. The review may also cover the possible extension of the scope of the Regulation to other financial products.

In order to enter into force, the proposed Regulation 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 was working to define its position, and the Council had already defined its position.

The Regulation will be directly applicable in all Member States, without national transposition.

The UCITS KII is covered in Section 12.3.2..

2.7.2. IOSCO issues liquidity risk management principles for UCIs

In March 2013, International Organization of Securities Commissions (IOSCO) published its final Principles of Liquidity Risk Management for Collective Investment Schemes.


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2.8. Anti-money laundering and counter terrorist financing (AML/CFT)

This section focuses on anti-money laundering and counter terrorist financing (AML/CFT) developments. These include:• ➢ Luxembourg enhances AML/CFT requirements• ➢ CSSF issues Circular on deficient or non-satisfactory AML/CFT regimes• ➢ ALFI issues updated guidance on AML/CFT for investment funds• ➢ European Commission proposes fourth AML/CFT Directive

2.8.1. Luxembourg enhances AML/CFT requirements

In December 2012, the CSSF issued Regulation No 12/02 on the fight against money laundering and terrorist financing. The Regulation clarifies and completes certain elements of Luxembourg’s anti-money laundering and counter terrorist financing (AML/CFT) framework and makes certain existing professional obligations legally binding. Following the release of the Regulation, certain CSSF anti-money laundering and counter terrorist financing Circulars have been repealed.

Regulation No 12/02:• ➢ Clarifies certain elements of the Law of 12 November 2004 on the fight against money laundering

and terrorist financing, as amended, inter alia, by the Law of 27 October 2010 enhancing the anti-money laundering and counter terrorist financing legal framework and the Grand-Ducal Regulation of 1 February 2010, with regard to the following topics:• Risk-based approach• Client due diligence• Internal organization• Cooperation with authorities• Review by the external auditor

• ➢ Makes existing anti-money laundering and counter terrorist financing (AML/CFT) professional obligations, including some that were previously only covered by circulars, legally binding

• ➢ Implements some changes to Luxembourg’s existing AML/CFT professional obligations• ➢ Takes into account some of the features of the Financial Action Task Force (FATF)55

recommendations released in February 2012 • ➢ Provides some specific guidance for the investment fund industry

The main areas clarified by the Regulation are:• ➢ UCIs distributing via intermediaries• ➢ AML/CFT risk assessment• ➢ AML policies, procedures and controls• ➢ Country risk assessment• ➢ Numbered accounts

The report outlines principles against which both the industry and regulators can assess the quality of regulation and industry practices relating to liquidity risk management for collective investment schemes (CIS).

The principles are addressed to the entity responsible for the overall operation of the CIS, and its compliance with the legal and/or regulatory framework. They cover:• ➢ The pre-launch phase• ➢ Day-to-day operations

The principles mainly focus on open-ended CIS; however, some may also be relevant to closed-ended CIS.

55 An intergovernmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing.


• ➢ Client acceptance• ➢ Client account opening and identity verification• ➢ Occasional transactions• ➢ Ultimate beneficial owner identification• ➢ Client identification and due diligence• ➢ Incomplete payment messages• ➢ Information on the purpose and intended nature of relationship• ➢ Record-keeping• ➢ Cross-border correspondent banking• ➢ Monitoring of client relationships and transactions• ➢ Third party introduction regime• ➢ Outsourcing• ➢ AML/CFT officer• ➢ Internal and external audit• ➢ Hiring and training• ➢ Cooperation with authorities

The Regulation clarifies, inter alia, that where shares or units of investment funds (UCIs) or investment companies in risk capital (SICARs) are subscribed by intermediaries acting on behalf of clients, the investment fund, its management company, the SICAR or its representative must apply enhanced due diligence to the intermediary in order to ensure that the intermediary applies AML/CFT measures that can be considered as equivalent to Luxembourg’s.

Following the release of the Regulation, the CSSF issued Circular 13/556 formally repealing:• ➢ CSSF Circular 08/387 on the fight against money laundering and terrorist financing and

prevention of the use of the financial sector for the purpose of money laundering and terrorist financing

• ➢ CSSF Circular 10/476 amending certain elements of CSSF Circular 08/387

The following CSSF Circulars remain in force:• ➢ CSSF Circulars 11/519 and 11/529 on the risk analysis regarding the fight against money

laundering and terrorist financing, applicable to credit institutions and other financial sector professional entities, respectively, under the supervision of the CSSF

• ➢ CSSF Circular 11/528 on the abolition of the transmission to the CSSF of suspicious transaction reports regarding potential money laundering or terrorist financing

• ➢ CSSF Circular 10/486 and 10/484 amending CSSF Circulars 03/113 and 01/27, both relating to the role of external auditors

The Regulation does not indicate an implementation deadline; its provisions should, therefore, be implemented as soon as possible by entities in scope.

AML/CFT requirements are covered in Section 10.3.5..

2.8.2. CSSF issues Circular on deficient or non-satisfactory AML/CFT regimes

The CSSF issued Circular 13/567 in June 2013 in light of Financial Action Task Force (FATF) statements regarding jurisdictions whose AML/CFT regime:• ➢ Has substantial and strategic deficiencies• ➢ Is not making sufficient progress in remedying the deficiencies• ➢ Is not satisfactory

The CSSF Circular replaces previous CSSF Circulars on this topic.

Deficient or non-satisfactory AML/CFT regimes are covered in 10.3.5.4.6.D..


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Current and future developments2.8.3. ALFI issues updated guidance on AML/CFT for

investment fundsIn July 2013, AML/CFT guidance for the Luxembourg fund industry entitled Practices and Recommendations aimed at reducing the risk of money laundering and terrorist financing in the Luxembourg Fund Industry was issued by the Association of the Luxembourg Fund Industry (ALFI), in association with the Luxembourg Bankers’ Association (ABBL), the Association of Luxembourg Compliance Officers (ALCO) and the Association of Professionals in Risk Management, Luxembourg (ALRiM).

The Practices and Recommendations cover:• ➢ AML/CFT responsibilities• ➢ Risk-Based Approach • ➢ The due diligence process • ➢ Suspicious transaction reporting• ➢ Direct investor due diligence • ➢ Correspondent relationship due diligence • ➢ Third party introducer• ➢ Performance of identification and verification of identity by third outsourced parties and delegation

arrangements

The Practices and Recommendations have been updated to align them with international standards, including the 2012 Financial Action Task Force (FATF) Recommendations entitled International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation. They replace the ALFI/ABBL/ALCO Practices and Recommendations aimed at reducing the risk of money laundering and terrorist financing in the Luxembourg Fund Industry of 2006.

The updated Practices and Recommendations introduce new notions, such as the notion of “correspondent relationships” representing the business relationship between the UCI (or a third party acting on behalf of the fund, such as service providers) and any intermediary, for which specific due diligence must be performed and documented.

AML/CFT requirements are covered in Section 10.3.5..

2.8.4. European Commission proposes fourth AML/CFT Directive

In February 2013, the European Commission issued a Proposal for a Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing.

The proposed fourth anti-money laundering and counter terrorist financing (AML/CFT) Directive aims to strengthen the EU AML/CFT regime, inter alia, in line with the international recommendations of the Financial Action Task Force (FATF) updated in February 2012; it should replace and update the third AML/CFT Directive.

The main enhancements to the EU’s AML/CFT regime include:• ➢ Implementation of a risk based approach in three main areas:

• Obliged entities covered by the Directive will be required to identify, understand and mitigate their risks, and to document and update the assessments of the risks that they face

• Member States will be required to identify, understand and mitigate the risks that they face• The utilization of the resources of supervisory authorities

• ➢ Simplified and enhanced customer due diligence:• No exemptions would apply to the requirement to perform due diligence• Decisions on when and how to undertake simplified due diligence would have to be justified on

the basis of risk; the minimum factors to be taken into account would be set down• Politically exposed persons (PEPs): enhanced due diligence should always be conducted on PEPs,

including domestic PEPs• ➢ Beneficial owner: legal persons are required to hold information on their own beneficial ownership.

This information should be made available both to competent authorities and obliged entities


2.9. Investment firms and credit institutions

This Section focuses on developments impacting investment firms and credit institutions which are relevant to the asset management industry:• ➢ MiFID II negotiations in progress• ➢ CSSF adopts guidelines on MiFID suitability and compliance function• ➢ CRD IV Package finalized• ➢ Basel Committee reviews capital requirements for bank investments in UCIs

2.9.1. MiFID II negotiations in progress

In October 2011, the European Commission issued its proposed Review of the Markets in Financial Instruments Directive (MiFID). The objective of the proposed revision of the MiFID Directive is to establish “a safer, sounder, more transparent and more responsible financial system that works for the economy and society as a whole”.

The proposed legislative measures consist of:• ➢ A recast of the MiFID Directive (Directive 2004/39/EC)• ➢ A Regulation directly applicable in all Member States (MiFIR)

The proposed modifications to the MiFID regime include, inter alia:• ➢ Execution-only services: clarifying the conditions and arrangements under which investors will be

able to transact freely in the market in financial instruments • ➢ Rules of conduct for investment firms, irrespective of client categorization• ➢ Investment advice: clarifying the conditions to be met when advice is provided “on an independent

basis” • ➢ Inducements: bans on inducements in relation to portfolio management and independent advice• ➢ Cross-selling: introducing a framework for cross-selling practices • ➢ Post-trade transaction reporting to the supervisory authority • ➢ Board governance of investment firms: reputation, knowledge, skills and experience of Board

Members, commitment of sufficient time to perform their duties, and acting with honesty, integrity and independence of mind

• ➢ Algorithmic trading: requirements for systems and risk controls• ➢ Third country investment firms providing investment services or activities in the EU• ➢ New types of trading venues:

• Organized trading facilities: creating a new category of trading venue called organized trading facilities (OTFs), which could be platforms for trading standardized derivative contracts. OTFs will be subject to pre- and post-trade transparency, organizational, investor protection, conduct of business and best execution, and supervisory requirements, but have a degree of discretion over how a transaction will be executed

• SME growth markets: creating a new subcategory of markets specialized in SMEs. MTFs can register as an SME growth market if they meet certain conditions.

• ➢ Derivatives trading: requiring the trading of derivatives which are eligible for clearing and which are sufficiently liquid to be traded on eligible platforms: regulated markets, MTFs or OTFs

In order to enter into force, the MiFID II package 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 agreed on its position on the MiFID II package

• ➢ Third country equivalence: the concept of positive “equivalence” will be removed. Customer due diligence will henceforth become more risk-based, and less focused on geographical factors

• ➢ Threshold for cash payments: the threshold for traders in high value goods dealing with cash payments is reduced from €15,000 to €7,500

In order to enter into force, the proposed 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 had begun.


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in September 2012, and passed its own MiFID II texts in October 2012. The Council of the European Union finalized its position in June 2013. Trialogue negotiations between the Commission, the Parliament and the Council will aim to achieve an agreement on a common position, with a view to a second vote on the modified texts in the European Parliament by the end of 2013.

2.9.2. CSSF adopts guidelines on MiFID suitability and compliance function

In July 2012, ESMA issued two sets of guidelines clarifying certain aspects of the MiFID requirements:• ➢ Guidelines on certain aspects of the MiFID suitability requirements, designed to address a number

of issues observed regarding compliance with MiFID suitability requirements. They cover, inter alia:• Arrangements necessary to understand clients and investments and ensure suitability of the

investment• Qualifications of investment firm staffThese guidelines were implemented in February 2013 by CSSF Circular 13/560. The Circular modifies CSSF Circular 07/307 on MiFID: Conduct of business rules in the financial sector. They are applicable to management companies, investment firms and banks.

• ➢ Guidelines on certain aspects of the MiFID compliance function requirements with the objective of helping investment firms to increase the effectiveness of the compliance function and to comply with the organizational provisions. They cover, inter alia:• Responsibilities of the compliance function• Organizational requirements for the compliance functionThese guidelines were implemented in Luxembourg by CSSF Circular 13/563. The Circular modifies CSSF Circular 12/552 on Central administration, internal governance and risk management. They are applicable to investment firms and banks. The guidelines are summarized in Section 7.4.9.A.

2.9.3. CRD IV Package finalized

The “CRD IV Package” implementing stricter capital requirements for banks and investment firms and transposing the Basel III framework in the EU was passed by the European Parliament in April 2013 and adopted by the Council of the European Union in June 2013.

The package consists of:• Directive 2013/36/EU of the European Parliament and of the Council on access to the activity

of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (CRD IV)

• Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (CRR)

Both texts were published in the Official Journal of the European Union in June 2013.

The measures in the CRD IV Package include:• ➢ Tighter definitions of common equity and Tier 1 capital• ➢ Short and medium-term quantitative liquidity ratios• ➢ Procyclicality measures, including capital buffers• ➢ The introduction of a leverage ratio• ➢ Measures to limit counterparty credit risk

The CRD IV Package is relevant for the investment fund industry because it impacts credit institutions and investment firms, inter alia, in their role as:• ➢ Investors in UCIs: the Package may influence investments made by credit institutions and

investment firms into UCIs• ➢ Service providers to UCIs, particularly depositories (for example, when they provide short-term

liquidity coverage and thereby become exposed to the UCI)• ➢ Counterparties to transactions of UCIs; this impact of the Package needs to be considered in

conjunction with EMIR (see Section 2.12.1.)


The provisions of the CRD IV Package will be phased in over a period of time from 1 January 2014 until at least 1 January 2019.

2.9.4. Basel Committee reviews capital requirements for bank investments in UCIs

In July 2013, the Basel Committee on Banking Supervision (BCBS) issued a consultation document entitled Capital requirements for banks’ equity investments in funds providing a set of proposals that would revise the prudential treatment of banks’ equity investments in funds.

The Committee’s proposal is based on the general principle that banks should apply a look-through approach to identify the underlying assets whenever investing in schemes with underlying exposures such as investment funds.

Following this principle, the proposed policy framework consists of three approaches, with varying degrees of risk sensitivity: • The “look-through approach” (LTA)• The “mandate-based approach” (MBA)• The “fall-back approach” (FBA)

To ensure that banks have appropriate incentives to enhance the risk management of their exposures, the degree of conservatism increases with each successive approach.

2.10. Insurance and pensions

This Section focuses on developments impacting insurance and reinsurance undertakings and pension schemes which are relevant to the asset management industry:• ➢ Postponed implementation of Solvency II• ➢ EIOPA consults on Solvency II interim measures • ➢ European Commission publishes agenda for pension reform

2.10.1. Postponed implementation of Solvency II

Solvency II is an EU Directive that sets out stronger risk management requirements for European insurers and reinsurers, and implements a modern, sophisticated, risk-sensitive regime by which all European insurers and reinsurers will determine their capital requirements. Under Solvency II, insurers will need to implement strong risk management practices that extend across their business decision-making processes at senior executive and Board levels.

Solvency II lays down:• ➢ Pillar 1: Quantitative requirements and how to calculate them • ➢ Pillar 2: Qualitative requirements (risk management and supervision) • ➢ Pillar 3: Requirements for supervisory reporting and disclosure of information

The Solvency II Package is relevant for the investment fund industry because it impacts insurers, inter alia, in their role as investors in UCIs:• ➢ Insurers may review the mandates that they award to asset managers• ➢ An overall shift towards fixed income is expected• ➢ For hedge funds, in general, blanket capital charges will apply to all investments in hedge funds

without consideration of the individual risk profiles of different strategies; however, use of internal models may mitigate this

• ➢ The data demands of insurers are an additional challenge for asset managers: under Solvency II, insurers will require detailed, accurate asset data and quantifiable credit and liquidity risk metrics


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At the time of writing, the European Insurance and Occupational Pensions Authority (EIOPA) was working on the assumption that Solvency II would be applicable from 1 January 2016.

2.10.2. EIOPA consults on Solvency II interim measures

In March 2013, the European Insurance and Occupational Pensions Authority (EIOPA) published a number of consultation papers outlining Guidelines on preparing for Solvency II. The purpose of the guidelines is to support both National Competent Authorities (NCA’s) and undertakings in their preparation for the implementation of Solvency II requirements.

The Guidelines are interim measures covering the areas that EIOPA considers fundamental to ensure effective preparation for Solvency II: • ➢ System of Governance• ➢ Forward looking assessment of the undertaking’s own risk (based on the Own Risk and Solvency

Assessment (ORSA) principles)• ➢ Submission of information to NCAs• ➢ Pre-application for internal models

2.10.3. European Commission publishes agenda for pension reform

In March 2012, the European Commission published a white paper entitled An Agenda for Adequate, Safe and Sustainable Pensions.

The paper covers:• ➢ The current pension challenges:

• Securing the financial sustainability of pensions systems• Maintaining adequacy of pensions benefits• Raising the labor market participation of women and older workers• The role of EU Member States and of the European Union

• ➢ The need for pension reforms:• Balancing time spent in work and retirement• Developing complementary private retirement savings

• ➢ EU policy instruments:• Legislation• Funding• Policy coordination

The Commission has committed to take initiatives in the area of developing complementary private retirement savings including, inter alia:• ➢ Cooperating with Member States to assess and optimize the efficiency and cost-effectiveness of tax

and other incentives for private pension saving and supporting Member States and social partners wishing to design cost-effective supplementary pension schemes

• ➢ Encourage the provision of better information to individuals for their retirement planning• ➢ Review the Institutions for Occupational Retirement Provision (IORP) Directive • ➢ Present an initiative aimed at raising the quality of third-pillar retirement products and improving

consumer information and protection standards via voluntary codes and possibly an EU certification scheme for such products

• ➢ Resume work on a pension portability Directive• ➢ Take action on any discriminatory tax obstacles to cross-border mobility and cross-border

investments in the area of pensions and life insurance

At the time of writing, the European Commission had announced its intention to publish a proposal on governance, transparency and reporting requirements for occupational pension funds in autumn 2013; the proposal should not cover solvency rules for pension funds.


2.11. Shadow banking

The European Commission and the Financial Stability Board (FSB) have both issued papers on shadow banking which highlight a number of issues relevant to asset management.

2.11.1. European Commission issues green paper on shadow banking

In March 2012, the European Commission issued a Green Paper on Shadow Banking. The paper takes stock of on-going reflections on shadow banking, in view of existing, proposed and possible future regulatory measures within the EU and the challenges faced by supervisory authorities.

Shadow banking is defined by the Financial Stability Board as “the system of credit intermediation that involves entities and activities outside the regular banking system”. Shadow banking entities and activities cover, inter alia:• ➢ Entities operating outside the regular banking system such as:

• Money market funds (MMFs) and other types of investment funds or products with deposit-like characteristics, which make them vulnerable to massive redemptions (“runs”)

• Investment funds, including exchange traded funds (ETFs), that provide credit or are leveraged• Special purpose entities or vehicles which perform liquidity and/or maturity transformation

• ➢ Activities including: • Securitization• Securities lending• Repurchase transactions (repo)

The Commission has identified key areas for further consideration:• ➢ Asset management:

• Exchange traded funds (ETFs) (see also Section 2.5.)• Money market funds (MMFs) (see also Section 2.4.)

• ➢ Banking regulation:• Review of consolidation rules for shadow banking entities, subjecting them to Basel III/CRD

framework• Refining the requirements on exposure to shadow banking entities

• ➢ Securities lending and repurchase agreements (see also Section 5.2.2.6.)• ➢ Securitization

2.11.2. FSB consults on shadow banking

In November 2012, the Financial Stability Board (FSB) published a consultative document on Strengthening Oversight and Regulation of Shadow Banking.

The FSB’s proposed framework for strengthening the regulation and oversight of the shadow banking system covers, inter alia:• ➢ Banks’ interactions with shadow banking entities• ➢ Money market funds (MMF)• ➢ Management of client cash pools with features that make them susceptible to runs• ➢ Securitization• ➢ Securities lending and repos• ➢ Collateral valuation and management• ➢ Central clearing


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Current and future developments2.12. Securities and derivatives

This Section focuses on developments in securities and derivatives which impact the asset management industry:• ➢ EMIR: implementation of regulation on OTC derivatives clarified• ➢ Luxembourg clarifies implementation of short selling requirements • ➢ Credit rating framework amended• ➢ European Commission proposes framework for securities settlement • ➢ European Commission consults on Securities Law Directive• ➢ Target2-Securities (T2S) implementation clarified• ➢ IOSCO issues recommendations on securitization

2.12.1. EMIR: implementation of regulation on OTC derivatives clarified

In January 2013, the CSSF issued Circular 13/557 providing guidance on Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (generally known as the European Markets Infrastructure Regulation – EMIR).

The Circular covers:• ➢ Scope of application• ➢ Requirements:

• Clearing obligation• Risk mitigation techniques for derivatives contracts not cleared by a central counterparty (CCP)• Reporting obligation

• ➢ Exemptions: pension schemes and intra-group• ➢ CCPs• ➢ Trade repositories• ➢ Key considerations for counterparties

The Circular followed the release by the European Commission of the regulatory technical standards and implementing technical standards (“Level 2 measures”) under Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories in December 2012.

The regulatory technical standards were published in the Official Journal of the European Union in February 2013.

The Level 2 measures cover, inter alia:• ➢ OTC derivatives: indirect clearing arrangements, criteria for assessing the classes of OTC

derivatives subject to the clearing obligation, non-financial counterparties and risk mitigation for OTC derivative contracts not cleared by a CCP

• ➢ CCPs: recognition of third country CCPs, margins, default fund and collateral requirements• ➢ Trade repositories: reporting obligation and transparency and data availability

The first clearing obligation will enter into force after two criteria are met:• ➢ At least a CCP is authorized or recognized under EMIR to clear a certain class of derivatives• ➢ The relevant technical standards for that class of derivatives have been adopted by the European

Commission, on the basis of draft standards submitted by ESMA

Existing CCPs have until 15 September 2013 to apply for authorization.

Once a CCP has been authorized under EMIR to clear a certain class of OTC derivatives, ESMA will, within six months, determine whether the classes of OTC derivatives that the CCP is able to clear should be subject to the clearing obligation and, if so, will specify the date of entry into force of such obligation, including any phase-in. The first clearing obligation could enter into force very soon after the first authorizations or recognitions of CCPs under EMIR.


The reporting obligation for OTC derivative contracts begins at the earliest on:• ➢ 23 September 2013 for credit and interest rate derivatives (if a trade repository has been

registered under EMIR for these classes of derivatives before 25 June 2013)• ➢ 1 January 2014 for other classes of derivatives (if a trade repository has been registered under

EMIR for these types of classes of derivatives before 1 October 2013)

The EMIR reporting obligation applies to derivative contracts which were entered into before 16 August 2012 and remained outstanding on that date, and those entered into on or after 16 August 2012.

The regulatory technical standards clarifying operational risk mitigation techniques requirements for non-CCP cleared OTC derivatives enter into force as follows:• ➢ Exchange of collateral: from 16 August 2012. The requirements to be met by collateral are laid

down in the technical standards• ➢ Operational risk mitigation techniques:

• Timely confirmation and contract valuation: 15 March 2013• Portfolio reconciliation, portfolio compression, and dispute resolution: 15 September 2013

EMIR is covered in Section 8.2.3.B..

2.12.2. Luxembourg clarifies implementation of short selling requirements

In October 2012, the CSSF issued Circular 12/548 on the Entry into force of Regulation (EU) No 236/2012 of March 2012 on short selling and certain aspects of credit default swaps and details on certain practical aspects of notification, disclosure and exemption procedures (the Short Selling Regulation).

The European legislative framework on short selling and certain aspects of credit default swaps is applicable since 1 November 2012; it is binding in its entirety and directly applicable in Luxembourg.

This Circular provides practical details and guidance in relation to:• ➢ Notification or disclosure of significant net short positions to the CSSF• ➢ Exemption for market making activities and primary market operations• ➢ Publication, by ESMA and by the CSSF, of relevant information in relation to the application of the

Short Selling Regulation

In June 2013, the Luxembourg Parliament passed a Law on short selling implementing Regulation (EU) No 236/2012 on short selling and certain aspects of credit default swaps; the Law confirms that the CSSF is the relevant competent authority in Luxembourg.

Short selling is covered in Section 8.2.3.C..

2.12.3. Commission proposes measures on market abuse

In October 2011, the European Commission issued a proposed package of measures on market abuse. The proposed package aims to cover gaps in the current EU market abuse regime, reinforce the powers of regulators to detect market abuse, and strengthen sanctions for cases of market abuse. The proposed package was updated in July 2012 to cover actions likely to impact the calculation of a benchmark.

The proposed package consist of:• ➢ A Regulation on market abuse• ➢ A Directive on criminal sanctions

The proposed modifications to the market abuse regime include, inter alia:• ➢ Extending the scope of the market abuse framework to apply to any financial instrument admitted

to trading on an MTF or an OTF, as well as financial instruments traded over-the-counter (OTC) which have an effect on the underlying market


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• ➢ Enhancing measures on market abuse in relation to commodities and emission allowances• ➢ Extending the scope of the market abuse framework to cover any action which manipulates the

calculation of a benchmark (see also Section 2.13.)• ➢ Reinforcing the powers of competent authorities to detect market abuse, including:

• Extending suspicious transaction reporting to orders and OTC transactions• Creating the new offence of “attempted market manipulation”

• ➢ Increasing the minimum administrative sanctions for market abuse• ➢ Imposing criminal sanctions on insider dealing and market manipulation when committed

intentionally, and criminalizing inciting, aiding and abetting such offences

In order to enter into force, the market abuse package 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. Both institutions had agreed upon a common position, but neither had passed the package. Once adopted, EU Member States will have two years to transpose the Directive into national law.

Market abuse is covered in Section 8.2.3.D..

2.12.4. Credit rating framework amended

In May 2013, Regulation 462/2013 amending Regulation (EC) No 1060/2009 on credit rating agencies was published in the Official Journal of the European Union, following the vote in the European Parliament in January 2013 and approval by the Council of the European Union in April 2013.

The amending Regulation covers, inter alia:• ➢ Measures to reduce financial institutions’ reliance on credit ratings• ➢ Structured finance instruments (SFIs)• ➢ Sovereign debt ratings• ➢ Ratings agency rotation rules• ➢ Disclosure

2.12.5. European Commission proposes framework for securities settlement

In March 2012, the European Commission issued its proposed Regulation on improving securities settlement in the European Union and on central securities depositories (CSDs) and amending Directive 98/26/EC.

A central securities depository (CSD) is a legal person that operates a securities settlement system and performs at least one the following other core services:• ➢ Notary service (initial recording of securities in a book-entry system) or• ➢ Central maintenance service (maintaining securities accounts at the top tier level)

For market participants, the proposed regulation aims to:• ➢ Make securities settlement safer and more efficient• ➢ Allow issuers of financial instruments to choose their location of preference without regard for the

nationality of the CSD• ➢ Harmonize the settlement period for transferable securities traded on regulated markets,

multilateral trading facilities (MTFs) or organized trading facilities (OTFs) at a maximum of two days after the trading day

• ➢ Allow users to choose between all CSDs in Europe• ➢ Subject market participants that fail to deliver securities on the agreed settlement date to

penalties, and require them to buy those securities in the market in order to deliver them to counterparties

• ➢ Require issuers and investors to keep an electronic record for virtually all securities, and to record them in CSDs if they are traded on regulated markets


The proposed regulation requires CSDs to comply with strict organizational, conduct of business and prudential requirements, and grants them a “passport” to provide their services in other Member States.

In order to enter into force, the proposed Regulation 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 regulation; the Council of the European Union was working to define its position.

2.12.6. European Commission consults on Securities Law Directive

In November 2010, the European Commission issued a consultation document entitled Legislation on legal certainty of securities holding and dispositions. The Commission is proposing to establish an EU legal framework for holding and disposing securities held through securities accounts and the exercise of rights attached to securities to ensure that the core mechanisms of Member States’ legal frameworks are compatible.

The paper covers, inter alia:• ➢ The rights of account holders• ➢ Methods for acquisition and disposition of account-held securities and interests therein, and their

legal effectiveness• ➢ The protection of account holders’ securities in the event of insolvency of the account provider• ➢ Protection of acquirers against reversal• ➢ The provision of instructions in relation to account-held securities• ➢ Determination of the applicable law in cross-border situations• ➢ Cross-border recognition of rights attached to securities• ➢ Non-discriminatory charges in respect of cross-border holdings of securities• ➢ The regulation of account providers by making them investment firms subject to authorization and

supervision under MiFID

At the time of writing, a legislative proposal from the European Commission on this topic was expected.

2.12.7. Target2-Securities (T2S) implementation clarified

Target2-Securities −T2S – is a single pan-European IT platform for domestic and cross-border settlement of securities. T2S is designed to reduce the cost of securities settlement and make securities transactions safe.

T2S offers European financial services industry:• ➢ A single IT settlement platform• ➢ A single set of standards for settlement• ➢ A single operational framework for settlement

T2S is owned and operated by the Eurosystem − the European Central Bank (ECB) and national central banks.

T2S is designed to:• ➢ Bring settlement costs down to one of the lowest levels in the world• ➢ Harmonize settlement procedures, enabling central securities depositaries (CSDs) and banks to

rationalize their processes and systems• ➢ Contribute to financial stability• ➢ Foster competition, ultimately benefiting investors and issuers

T2S offers financial institutions three types of settlement models going forward:• ➢ Indirect connectivity via CSDs: a single, global CSD, or various local or regional CSDs• ➢ Indirect connectivity via a custodian, generally a global custodian• ➢ Direct connectivity; the financial institution will still require connection to its local CSD for certain

services


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User testing of T2S begins in 2014. The first wave of migration to T2S is scheduled to begin in June 2015, the second waves in July 2016 and the final wave in November 2016.

2.12.8. IOSCO issues recommendations on securitization

In November 2012, IOSCO published its report entitled Global Developments in Securitisation Regulation.

The report includes recommendations covering, inter alia:• ➢ Incentive alignment and risk retention: a roadmap toward convergence and implementation of risk

retention requirements• ➢ Transparency and standardization covering:

• Standardized templates for asset level disclosure• Disclosure to assist investors making informed investment decisions• Issues for further consideration:

• Review of prudential treatment of securitization products compared with other types of structured or collateralized financing

• Further harmonization of accounting approaches to consolidation of securitization SPVs• Industry efforts to develop less complex and standardized products and encourage more liquid

securitization products

2.13. Financial benchmarks

This Section focuses on developments in financial benchmarks which are relevant to the asset management industry:• ➢ European Commission consults on benchmarks• ➢ ESMA and EBA issue principles for benchmarks• ➢ IOSCO consults on principles for benchmarks

2.13.1. European Commission consults on benchmarks

In September 2012, the European Commission issued a Consultation document on the regulation of indices: A Possible Framework for the Regulation of the Production and Use of Indices serving as Benchmarks in Financial and other Contracts.

The consultation paper covers:• ➢ Overview of indices and benchmarks: types of index, producers of indices, methodologies, and uses

of indices• ➢ Definition of indices and benchmarks• ➢ Calculation of benchmarks: use of actual transaction data, governance and transparency of

underlying data, contributors of data, index calculations• ➢ The purpose of benchmarks, their use, and controlling their use• ➢ Provision of benchmarks by private and public bodies• ➢ Impact of potential regulation: transition, continuity and international issues

2.13.2. ESMA and EBA issue principles for benchmarks

In June 2013, ESMA and EBA issued a joint paper entitled Principles for Benchmarks-Setting Processes in the EU.

The Principles are designed to address the problems identified with benchmark-setting processes and provide benchmark users and benchmark service providers with a common framework for carrying out these activities.


The paper covers, inter alia:• ➢ General framework for benchmark setting: methodology, governance structure, supervision and

oversight, and transparency • ➢ Principles for:

• ➢ Benchmark administrators • ➢ Benchmark submitters• ➢ Benchmark calculation agents • ➢ Benchmark publishers• ➢ Benchmark users

• ➢ Principles for the continuity of benchmarks

The Principles should facilitate the transition to any potential future EU legal framework for benchmarks.

2.13.3. IOSCO consults on principles for benchmarks

In April 2013, IOSCO published a consultation paper entitled Principles for Financial Benchmarks. The consultation paper follows the paper issued in January 2013 on Financial Benchmarks.

The consultation paper covers, inter alia:• ➢ Governance:

• Roles and responsibilities of benchmark administrators• Oversight of third parties performing activities relating to the benchmark determination process• Managing conflicts of interest• Implementation, review and update of a control framework• Internal oversight: review and challenge all aspects of the benchmark determination process

• ➢ Quality of the benchmark: design, data sufficiency, hierarchy of data inputs and periodic review• ➢ Quality of the methodology: content, benchmark cessation/transition, submitter code of conduct

and internal controls over data collection • ➢ Accountability: complaints procedures, audit and record keeping

2.14. Other developments relevant to UCIs

This Section focuses on other developments relevant to the asset management industry:• ➢ Luxembourg implements regime for Family Offices• ➢ Luxembourg proposes draft law facilitating the “paperless office” • ➢ IOSCO consults on protection of client assets

2.14.1. Luxembourg implements regime for Family Offices

In December 2012, the Luxembourg Parliament passed a Law creating a Luxembourg legal framework for Family Offices, and their activities. The Family Office completes Luxembourg’s range of attractive solutions for the management and structuring of the private wealth of high net worth individuals (HNWI) and families.

A “Family Office” is an entity which provides, on a professional basis, “advice or estate services” to physical persons, families or estate entities.

Family Office “advice or estate services” can be provided, inter alia, by:• ➢ Banks• ➢ Investment advisers• ➢ Private portfolio managers• ➢ Corporate domiciliation agents• ➢ Professionals providing company formation and management services


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The Law also creates a specific new category of financial sector professional (PSF): “Family Offices”.

Only entities whose authorization permits them to provide Family Office services are authorized to use the “Family Office” name.

The new legal regime for Family Offices complements Luxembourg’s existing solutions for structuring private wealth, such as the private wealth management vehicle (the SPF56), the specialized investment fund (SIF), and financial holding companies (known as SOPARFI57).

2.14.2. Luxembourg proposes draft law facilitating the “paperless office”

In February 2013, a draft law on electronic archiving, modifying the Law of 5 April 1993 on the financial sector, as amended (1993 Law), was submitted to the Luxembourg Parliament. Elements of the law will be clarified by a Grand-Ducal Regulation, a draft of which was also submitted to the Parliament together with the draft law.

The draft law:• ➢ Defines the requirements for the dematerialization of originals, and the requirements for

preservation of digital copies and originals• ➢ Lays down the requirements under which copies may benefit from a presumption of conformity

with the original• ➢ Lays down the rules applicable to dematerialization and preservation service providers (prestataire

de services de dématerialistion ou de conservation – PSDC). Legal entities which exercise the activities of dematerialization and preservation for their own needs or those of the group to which they belong may also obtain the status of PSDC. Entities may be authorized to perform either or both activities of dematerialization and preservation

The draft law also modifies the 1993 Law, creating two new types of financial sector professionals (PSF) providing, respectively, dematerialization and preservation services to financial sector entities (credit institutions, financial sector professionals (PSF), payment and electronic money institutions, undertakings for collective investment (UCIs), specialized investment funds (SIFs), investment companies in risk capital (SICAR), pension funds, authorized securitization vehicles, insurance and reinsurance undertakings).

Such service providers are subject to authorization and supervision of the CSSF; the CSSF can collaborate with the Luxembourg Institute of Normalization, Accreditation, Security and Quality of Products and Services (Institut Luxembourgeois de la Normalisation, de l’Accréditation, de la Sécurité et Qualité des Produits et Services – ILNAS) in execution of its tasks.

Storage of data which does not involve preservation of an electronic original or a true copy is not covered by the draft law.

There is currently no EU-wide regulation in the specific area covered by the draft Law, although a proposed EU framework is expected in the foreseeable future.

2.14.3. IOSCO consults on protection of client assets

In February 2013, IOSCO published a consultation report entitled Recommendations Regarding the Protection of Client Assets.

The draft Principles should be applied in cases where an intermediary has responsibility for safeguarding client assets, as opposed to cases where an intermediary does not have such responsibility.

The principles cover:• ➢ Maintenance of accurate, up-to-date records and accounts of client assets• ➢ Statements provided to clients detailing the client assets held for them or on their behalf

56 Société de gestion de patrimoine familial.57 Société de participations financières.


• ➢ Arrangements to safeguard the clients’ rights in client assets and minimize the risk of loss and misuse

• ➢ When placing or depositing client assets in a foreign jurisdiction, understanding the foreign regime in order to comply with applicable domestic requirements

• ➢ Disclosure of the relevant client asset protection regime, and the inherent risks• ➢ Safeguards to be implemented where clients are permitted to waive or modify the degree of

protection applicable or to opt out of the client protection regime• ➢ Regulatory oversight

The depositary of UCIs is covered in Chapter 11.

2.15. Tax

This Section focuses on tax developments relevant to the asset management industry:• ➢ Luxembourg adopts new tax measures applicable from 2013• ➢ Luxembourg updates double taxation treaty network• ➢ Luxembourg enhances tax administrative cooperation• ➢ Luxembourg announces automatic exchange of information in 2015• ➢ Luxembourg signs OECD convention on exchange of information• ➢ European Commission proposes wider scope of automatic exchange of information in EU• ➢ Luxembourg implements regime for the taxation of carried interest (see Section 2.3.1.17.)• ➢ Final FATCA regulations issued and Intergovernmental Agreements ongoing• ➢ Luxembourg issues draft law on unconditional deferral of exit taxes

2.15.1. Luxembourg adopts new tax measures applicable from 2013

In December 2012, the Luxembourg 2013 Budget was adopted, together with a separate Law introducing new tax measures which are applicable as of fiscal year 2013. The new measures, applicable from 1 January 2013, include:• ➢ Changes to the minimum tax regime (see Section 13.3.3.3.A.)• ➢ Increase of contribution to the employment fund from 5% to 7% (see Section 13.3.3.3.A.)• ➢ Amendments to the net worth tax reduction (see Section 13.3.3.3.A.)• ➢ Changes to the taxation of stock options

2.15.2. Luxembourg updates double taxation treaty network

In July 2013, following a vote in the Luxembourg Parliament in May 2013, a Law approving certain new double taxation treaties (DTTs) and amending protocols to existing DTTs was published in the Official Gazette (Mémorial):• ➢ New DTTs between Luxembourg and the following countries: Germany, Laos, Macedonia,

Seychelles, Sri Lanka and Tajikistan• ➢ Amendments to existing DTTs or protocols amending existing DTTs between Luxembourg and the

following countries: Canada, Italy, Kazakhstan, Malta, Poland, Romania, Russia, South Korea and Switzerland

All the DTTs covered by the draft law introduce provisions on the information exchange in order to incorporate the Organization for Economic Cooperation and Development (OECD) Model Convention standards on the exchange of information (often known as “Article 26”).


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In April 2013, a draft law was submitted to the Luxembourg Parliament approving the new DTT with Taiwan. The Taiwan DTT will be applicable to Luxembourg resident UCIs. The withholding tax applicable will amount to 15%.

Luxembourg has also signed or initialed a number of new bilateral DTTs, amendments to existing DTTs or protocols which have not yet entered into force, inter alia, with Andorra, Belgium, Czech Republic, Guernsey, Hungary, Isle of Man, Jersey, Saudi Arabia, Serbia and Singapore.

In August 2012, the Portuguese tax authorities published a technical note regarding the entitlement of Luxembourg domiciled investment companies with variable capital (SICAVs) to benefit from the DTT between Luxembourg and Portugal. The note clarifies that Treaty benefits should apply, provided the SICAV meets the residency requirements of the Treaty. However, it does not clarify whether Treaty benefits will be extended to entities other than SICAVs. Historically, Treaty benefits were not generally extended to Luxembourg SICAVs, due to interpretations of an article of the Treaty.

The application of Luxembourg DTTs to investment funds is covered in Section 13.3.3..

2.15.3. Luxembourg enhances tax administrative cooperation

In March 2013, the Luxembourg Parliament voted a Law transposing the Directive 2011/16/EU on administrative cooperation in the field of taxation (“the Law”). The Law was published in the Luxembourg’s Official Gazette, the Mémorial, on 4 April 2013 and entered into force with effect from 1 January 2013.

The Law repeals the Law of 15 March 1979 on international administrative assistance for direct taxes, as amended.

The Law lays down the rules and procedures under which Luxembourg will cooperate with other EU Member States on the exchange of tax related information that is foreseeably relevant to the administration and enforcement of the domestic laws of the Member States. The Law complements Luxembourg’s legislation enabling the exchange of information provided for by double taxation treaties (DTTs). In recent years, Luxembourg has signed new DTTs and amended existing DTTs with other countries which comply with the Organization of Economic Cooperation and Development (OECD) standards on the exchange of information between tax authorities.

The Law applies to all taxes except value added tax (VAT), customs duties, and excise duties covered by other EU legislation on administrative cooperation between EU countries. It does not apply to social security contributions.

The Law implements almost all provisions of the Directive, inter alia:• ➢ Inclusion of information held by a bank or other type of financial institution in the scope of

exchange of information on request regarding taxable periods as from 1 January 2011• ➢ Introduction of deadlines for the exchange of information• ➢ Introduction of other forms of administrative cooperation

The Law does not implement the Directive’s provisions on the automatic exchange of available information, which must become effective as of 1 January 2015 and will cover certain specific categories of income (professional income, director fees, pensions, life assurance and real estate income) to the extent such information is in the tax authorities’ possession (see also Section 2.15.6.).

Administrative cooperation is covered in Section 13.3.4.4..

2.15.4. Luxembourg announces automatic exchange of information in 2015

Following Luxembourg’s adoption of a Law in March 2013 on administrative cooperation between EU Member States in the field of taxation, Luxembourg announced that it would implement automatic exchange of information on interest payments from 2015 onwards.


2.15.5. Luxembourg signs OECD convention on exchange of information

In May 2013, Luxembourg signed the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters and was added to a list of more than 50 countries which have agreed to automatically exchange tax information.

This convention aims to:• ➢ Facilitate administrative co-operation for the global campaign against tax evasion • ➢ Reflects modern international standards of exchange of information for tax purposes, including:

• Assistance in recovery• Service of documents

2.15.6. European Commission proposes wider scope of automatic exchange of information in EU

In June 2013, the European Commission issued a Proposal for a Council Directive amending Directive 2012/16/EU as regards mandatory automatic exchange of information in the field of taxation.

The proposal aims to extend the automatic exchange of information between EU tax administrations, as part of the intensified fight against tax evasion by adding, inter alia, dividends, capital gains, all other forms of financial income and account balances to the list of categories which will be subject to automatic information exchange. The Administrative Cooperation Directive will be modified respectively.

The package of the proposed Directive on automatic exchange of information, the EU Savings Tax Directive58, as amended, and the Administrative Cooperation Directive59, as amended, will enable EU Member States to share as much information amongst them as they have committed to doing with the US under the Foreign Account Tax Compliance Act (FATCA) (see Section 2.15.7.).

This includes inter alia:• ➢ Interest income• ➢ Dividends• ➢ Capital gains• ➢ Sales proceeds or distributions of all investment funds, including UCITS, that invest in debt claims• ➢ Income from innovative financial instruments that are substantially similar to debt claims• ➢ Income from life insurance products • ➢ All other forms of financial income • ➢ Account balances

The EU Member States shall transpose the Directive on automatic exchange of information into their domestic legislation before 31 December 2014, in order to apply the provisions from 1 January 2015.

2.15.7. Final FATCA regulations issued and Intergovernmental Agreements ongoing

In January 2013, US Treasury and the Internal Revenue Service (IRS) issued the final regulations under the Foreign Account Tax Compliance Act (FATCA)60 provisions of the 2010 Hiring Incentives to Restore Employment Act (HIRE Act). The final regulations address many of the major items that

58 Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments.59 Council Directive 2011/16/EU on administrative cooperation in the field of taxation and repealing Directive 77/799/

EEC.60 Provisions of Internal Revenue Code Sections 1471 – 1474 (also referred to as the “chapter 4” provisions)


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required further clarification following the proposed regulations issued in February 2012. In July 2013, the IRS released Notice 2013-43 announcing a delay of key timelines with respect to the FATCA regulations.

According to the IRS, the final regulations incorporate a targeted, risk-based approach aimed at limiting the scope of impacted entities, obligations and accounts and reducing due diligence and compliance burdens while maintaining the policy objective of improved information reporting with respect to US taxpayers with assets invested in non-US jurisdictions.

The final regulations reflect significant modifications in several areas that are critical, inter alia, to foreign financial institutions (FFIs) and to non-financial foreign entities (NFFEs) that will need to document their FATCA status to FFIs and other withholding agents. The final regulations reduce some of the administrative burden for the asset management industry by introducing the sponsored entity concept, allowing one entity (the sponsor) to take over most FATCA duties for one or more FFIs (sponsored entities).

To make compliance with the reporting requirements of FATCA feasible, particularly for FFIs in jurisdictions where existing laws prohibit such reporting, Intergovernmental Agreements on the implementation of FATCA (IGAs) are being negotiated by the United States with several countries, including Luxembourg. In May 2013, the Luxembourg Ministry of Finance announced that the Luxembourg IGA would be a so-called Model I IGA, whereby FFIs established in Luxembourg will be required to report the required information to the Luxembourg tax authorities, who will forward the information to the IRS – instead of having to report directly to the IRS.

Key dates in the final regulations as amended in line with Notice 2013-43 include:• ➢ The FATCA registration website is projected to be accessible to FFIs on 19 August 2013, allowing

information to be input, amended and saved. However, registration will not be finalized, and Global Intermediary Identification Numbers (GIINs) will not be issued, until after 1 Jan 2014. FFIs whose registration is finalized by 25 April 2014 will be included in the first IRS FFI list, to be issued by 2 June 2014

• ➢ Payments to reporting Model I FFIs (i.e., FFIs established in a country with a Model I IGA and required to report) prior to 1 January 2015 will not be subject to withholding even if the FFI has no GIIN yet

• ➢ Withholding by FFIs61 and US withholding agents will generally not apply to payments with respect to pre-existing accounts made before 1 July 2016, except for payments made to payees with certain indicia of FFI status (prima facie FFIs) that have not indicated they are compliant FFIs, to undocumented NFFEs, and to high value individual accounts that are considered “recalcitrant”

• ➢ Withholding by FFIs62 and US withholding agents on fixed or determinable annual or periodical (FDAP) payments with respect to new account holders begins as of 1 July 2014 if appropriate documentation is not received at account opening or if a US account holder has not provided a waiver of data privacy

• ➢ The final regulations do not define “foreign passthru payments”, but provide that withholding will not be required on either foreign passthru payments or gross proceeds from sales or dispositions of property occurring before 1 January 2017

Information reporting by FFIs on US accounts is phased in as follows:• ➢ FFIs must report the identity of US account holders that are US Specified Persons no later

than 31 March 2015 (with respect to the 2014 calendar year for US accounts identified by 31 December 2014)

• ➢ FFIs must report information about certain income paid to US accounts starting in 2016 (with respect to the 2015 calendar year)

• ➢ FFIs must report full information (e.g., gross proceeds to the extent applicable) on US accounts starting in 2017 (with respect to the 2016 calendar year)

For further information, see Section 13.3.4.4.2..

61 Model I FFIs only withhold on payments to non-participating FFIs62 Idem.


2.15.8. Luxembourg issues draft law on unconditional deferral of exit taxes

In March 2013, the Luxembourg Government submitted a draft law to the Parliament amending the exit tax rules for individuals and companies. The draft law provides for an unconditional payment deferral of the capital gains tax until the actual disposal of the transferred assets or the transfer of tax residence outside of the European Economic Area (EEA), i.e., the Member States of the European Union as well as Iceland, Liechtenstein and Norway.

The draft law aims also to amend the current regime on the roll-over relief on capital gains realized upon the transfer on certain eligible assets.

The new rules will enable businesses and companies to exercise their right of freedom of establishment. For many international groups, flexibility to move their business or assets cross-border enables them to react to market changes and new opportunities.

2.16. Value added tax (VAT)

VAT developments relevant to the Luxembourg fund industry include:• ➢ Extension of VAT exemption to management of AIF (see Section 2.3.1.18.)• ➢ Luxembourg prepares for VAT free zone • ➢ Luxembourg votes Law on electronic invoicing

2.16.1. Luxembourg prepares for VAT free zone

The establishment of VAT-free zones is possible in Luxembourg since 2011. The purpose of the VAT free zone regime is to implement a VAT suspension system for transactions concerning goods in specific locations.

By implementing VAT free zones, the Government aims to increase Luxembourg’s competitiveness in the logistics sector, positioning the Grand Duchy as a storage and warehouse center for high value goods, such as jewelry, artwork and wine. The goods concerned may also include basic food products, chemicals in bulk and certain metals.

According to this new regime, no VAT is due when the goods enter the VAT free zone, regardless of whether this entry takes place following a local supply of goods, an intra-community acquisition of goods or an import of goods. Furthermore, transactions in relation to the entry of goods within the VAT free zone regime (such as transport, goods handling…), as well as the operations performed on the goods placed under this regime (storage, maintenance, improvement, valuation, works on the goods, sale), are also exempt from VAT.

This VAT exemption is considered as being temporary and only applicable for the time during which the goods are in the VAT free zone. VAT will become payable when the goods leave the warehouse.

The VAT free zone regime increases the attractiveness of Luxembourg for the creation of new “passion investment funds” investing in such assets, and provides an opportunity to repatriate the exotic assets of such existing funds to Luxembourg.

The Luxembourg Freeport which should be operational by the end of 2014 should participate to the development of such funds in Luxembourg and will operate under the supervision of the Customs Authorities.


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Current and future developments2.16.2. Luxembourg votes Law on electronic invoicing

In March 2013, a Law transposing, inter alia, Council Directive 2010/45/EU of 13 July 2010 amending Directive 2006/112/EC on the common system of value added tax as regards the rules on invoicing was voted by the Luxembourg Parliament.

The Directive aims to:• ➢ Harmonize at European level the conditions covering the issuance and content of the invoices

across the EU, reducing the burden on businesses• ➢ Align the VAT rules with technological developments, taking into account new invoicing methods

used by businesses in their international transactions

The new requirements also change the rules relating to the chargeability of VAT.

A new chapter is added to Luxembourg’s VAT Law bringing together the new invoicing obligations. It aims to simplify a number of VAT invoicing requirements, including electronic invoicing, with the objectives of tackling fraud and increasing the use of electronic invoicing.

Despite the fact that, in certain cases, the Directive leaves some discretion to Member States, common and clear rules will simplify and bring more legal certainty, notably for Luxembourg businesses dealing with cross-border transactions for which invoices have to be issued in compliance with the national legislation of other Member States.

The Law applies since 1 January 2013.

2.17. Financial transaction tax

2.17.1. European Commission proposes EU wide financial transaction tax

In September 2011, the European Commission published its proposals for the introduction of an EU wide Financial Transaction Tax (FTT). In February 2013, the European Commission adopted the revised Proposal for a Council Directive implementing enhanced cooperation63 in the area of Financial Transaction Tax (FTT).

The key objectives of the FTT include:• ➢ Harmonizing legislation concerning indirect taxation on financial transactions• ➢ Ensuring that financial institutions make a fair and substantial contribution to covering the costs of

the recent crisis and creating a level playing field with other sectors from a taxation point of view• ➢ Creating appropriate disincentives for transactions that do not enhance the efficiency of financial

markets or of the real economy, thereby complementing regulatory measures to avoid future crises

Under the proposed directive, all financial transactions carried out by “financial institutions” will be subject to FTT where there is an established link to the FTT-zone. In the initial phase, the 11 participating EU FTT-zone Member States will be Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia. The tax will have an impact beyond countries that enact FTT and beyond the financial sector.

“Financial institutions” would include credit institutions, investment firms, insurance and reinsurance undertakings, UCITS, pension funds, alternative investment funds (AIF), securitization vehicles, regulated markets and other organized trading venues or platforms.

63 The enhanced cooperation procedure allows a group of Member States to cooperate within an EU framework without all Member States participating. At least nine Member States must address a formal request to the European Commission, describing the scope and the objectives of the cooperation, and should sign this request. The enhanced cooperation allows any other Member State to join at a later stage upon request.


Financial transactions include:• ➢ The purchase and sale of a financial instrument before netting or settlement• ➢ The transfer between entities of a group of the right to dispose of a financial instrument as owner

and any equivalent operation• ➢ The conclusion of derivatives contracts before netting or settlement • ➢ An exchange of financial instruments• ➢ A repurchase agreement, a reverse repurchase agreement, a securities lending and borrowing

agreement

Exchanges of financial instruments should be treated as two taxable transactions. However, repo and reverse repo transactions, and securities lending and borrowing agreements, are to be treated as giving rise to one transaction only. Each material modification to a taxable financial transaction should be considered as a new taxable transaction.

The FTT would, however, not apply to:• ➢ Primary market transactions• ➢ Day-to-day financial activities of citizens and businesses• ➢ Currency transactions on spot markets • ➢ Traditional investment banking activities in the context of the raising of capital or financial

transactions carried out as part of restructuring operations

The tax rates must be fixed by each participating Member State, and a participating Member State must apply the same rate to all financial transactions that fall under the same category. Those rates must not be lower than: • ➢ 0.1% for financial transactions other than those related to derivatives contracts • ➢ 0.01% for financial transactions related to derivatives contracts

The “residence” principle and the “issuance” principle will apply to determine whether there is a link to the FTT-zone:• ➢ The “residence principle”: the FTT will be due if any party to the transaction is established in a

participating EU Member State, regardless of where the transaction takes place. This is the case both if a financial institution engaged in the transaction is, itself, established in the FTT-zone, or if it is acting on behalf of a party established in that jurisdiction

• ➢ The “issuance principle”: financial instruments issued in the participating Member States (i.e., issued by a person established in a participating Member State) will be taxed when traded, even if those trading them are not established within the FTT-zone

Participating Member States will not be permitted to maintain taxes on financial transactions other than the EU FTT or VAT. Domestic FTT regimes (e.g., France, Italy) would need to be repealed or amended accordingly.

In order to enter into force, the proposed Directive must be adopted by the Council of the European Union. At the time of writing, the proposed Directive was subject to discussions and negotiations between all EU Member States (including those that are not part of the group of participating Member States). The European Parliament had given its (non-binding) opinion on the proposal. Once the Directive is adopted, the participating Member States will then have to adopt domestic law and administrative provisions to apply the FTT.


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72 | 3. UCI structures and specificities

3. UCI structures and specificities

3.1. Introduction

This chapter:• ➢ Provides an overview of principal

regulations applicable to Luxembourg investment funds (Undertakings for Collective Investment – UCIs)

• ➢ Outlines the types of structures, including the key characteristics of UCIs

• ➢ Includes an explanation of the concepts of master-feeder structures and co-management or pooling of assets

• ➢ Outlines the requirements applicable to:• Undertakings for Collective Investment

in Transferable Securities (UCITS)• 2010 Law Part II UCIs• Specialized Investment Funds (SIFs)• Alternative Investment Funds (AIF): full

Alternative Investment Fund Managers (AIFM) regime AIF and simplified AIFM registration regime AIF

• European Venture Capital Funds (EuVECA) and European Social Entrepreneurship Funds (EuSEF)

• ➢ Outlines minimum capital requirements• ➢ Provides an overview of the requirements

applicable to specific types of UCI• Money market funds (MMFs)• UCITS exchange traded funds (ETFs)• Index tracking UCITS• UCIs using efficient portfolio

management (EPM) techniques, such as securities lending and currency hedging transactions

• UCITS using financial derivative instruments (FDIs)

• Structured UCITS


3. UCI structures and specificities | 73

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UCI structures and specificities

3.2. Principal regulations

The principal regulations applicable to Luxembourg UCIs comprise Luxembourg laws, regulations and circulars issued by the Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier – CSSF), and also certain Grand-Ducal regulations.

The principal law on UCIs is the Law of 17 December 2010, as amended (the 2010 Law) which covers:➢Part I: UCITS➢Part II: other UCIs (2010 Law Part II UCIs)➢Part III: marketing of foreign UCIs other than UCITS➢Part IV: management companies (see Chapter 7)➢Part V: general provisions applicable to UCITS and Part II UCIs

The 2010 Law, inter alia, transposes the recast UCITS Directive (Directive 2009/65/EC – often referred to as UCITS IV) into Luxembourg Law.

The other law on UCIs is the Specialized Investment Fund Law of 13 February 2007, as amended (the SIF Law) covering SIFs.

The Law of 12 July 2013 on Alternative Investment Fund Managers (the AIFM Law), transposing the AIFM Directive (Directive 2011/61/EU) also lays down requirements applicable to AIF.

Finally, two EU Regulations, each creating a fund regime, are directly applicable in Luxembourg: Regulation (EU) No 345/2013 of 17 April 2013 on European venture capital funds (EuVECA) and Regulation (EU) No 346/2013 of 17 April 2013 on European social entrepreneurship funds (EuSEF).

3.3. Types of structures of UCIs

UCITS, 2010 Law Part II UCIs and SIFs can be structured:• ➢ In contractual form as a common fund (FCP). A common fund must be managed by a management

company• ➢ In corporate form as an investment company:

• With variable capital (SICAV) • With fixed capital (SICAF)

While a UCITS must be open-ended64, non-UCITS can be open-ended or closed ended. The different basic structures are outlined in Section 3.3.1..

A UCI may take the form of a single compartment UCI (a “stand alone” UCI) or a multiple compartment UCI (a multiple “sub-fund” UCI, also known as an “umbrella” UCI). Multiple compartment UCIs are covered in Section 3.3.2.. Share classes can be created within a single UCI, or within one or several compartments of a multiple compartment UCI; this is covered in Section 3.3.3..

In order to manage portfolios in an efficient manner, it is also possible to create master-feeder structures as outlined in Section 3.3.4.1. and to co-manage or to pool funds, as outlined in Section 3.3.4.2..

64 The shares or units of open-ended UCIs are, at the request of holders, redeemed directly or indirectly, out of the UCI’s assets.


Cross investment between compartments of a multiple-compartment UCI is permitted under certain conditions, as described in Section 3.3.5.. Side pockets may be created in exceptional circumstances, typically to hold illiquid assets as described in Section 3.3.6..

3.3.1. Basic structures

3.3.1.1. Common fund

Common fund – (fonds commun de placement – FCP)

A common fund is a co-proprietorship whose joint owners are only liable up to the amount they have contributed and whose ownership rights are represented by units.

A common fund has no legal personality and must be managed by an authorized management company:• ➢A UCITS common fund must be managed by a Luxembourg management company or a

management company established in another EU/EEA Member State65 • An AIF common fund must be managed by a Luxembourg management company. The management

company may either:• Manage the AIF itself; where the assets of all the AIF managed by the management company

exceed certain thresholds, the management company will be required to obtain authorization as an AIFM

• Designate an authorized AIFM in Luxembourg or another EU/EEA Member State

Management companies and AIFM are covered in Chapter 7.

A common fund is deemed in most cases to be tax transparent.

The constitutional document of a common fund is the management regulations (also known as fund rules). In accordance with the 2010 Law, the management regulations of a Luxembourg common fund are subject to Luxembourg Law (see Section 12.2.1.).

3.3.1.2. Investment company➢• Investment company with variable capital – (société d’investissement à capital variable – SICAV)• ➢ Investment company with fixed capital – (société d’investissement à capital fixe – SICAF)

An investment company with variable capital (SICAV) is a company whose capital is always equal to its net assets. No formalities are required for increases and decreases in capital.

The share capital of an investment company with fixed capital (SICAF) may only be increased or decreased by way of a decision of the general meeting of shareholders to be held before a notary, and subject to applicable publication requirements. However, the capital may be increased by the SICAF’s managing body directly, without requiring an extraordinary general meeting of shareholders to decide upon the increase, via the authorized share capital mechanism. In such a case, notarization and publication requirements will still apply.

65 The European Economic Area (EEA) Member States are the European Union (EU) Member States plus Iceland, Liechtenstein and Norway. The reference to the EEA is clarified in 1.3.1.B.



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An investment company may be managed in the following ways:• ➢ It can appoint an authorized management company or AIFM:

• A UCITS investment company may appoint a Luxembourg management company or a management company established in another EU/EEA Member State66

• An AIF investment company may either: • Appoint a Luxembourg management company; the management company may either:

• Manage the AIF itself; where the assets of all the AIF managed by the management company exceed certain thresholds, the management company will be required to obtain authorization as an AIFM

• Designate an authorized AIFM in Luxembourg or another EU/EEA Member State• Appoint an AIFM in Luxembourg or another EU/EEA Member State

• ➢ It can manage itself:• A UCITS investment company which manages itself is called a self-managed UCITS. The specific

requirements applicable to self-managed UCITS are covered in Sections 3.4.1.5. and 7.4.23.• An AIF investment company which manages itself is called an internally managed AIF. The

specific requirements applicable to internally managed AIF are covered in Section 7.4.23.

Management companies and AIFM are covered in Chapter 7.

An investment company is not tax transparent (with limited exceptions).

The constitutional document of an investment company is the articles of incorporation (also known as instruments of incorporation, articles of association or statutes) (see Section 12.2.2.).

UCIs established as investment companies are also subject to the Luxembourg laws covering commercial companies (in particular the Law of 10 August 1915 on commercial companies, as amended – the 1915 Law) insofar as the law governing the UCI (the 2010 Law, as amended, or the SIF Law, as amended) does not derogate from it.67

Investment companies may, in some cases, be subject to the requirements on remuneration policies in the financial sector (see Section 7.4.20.).

While a 2010 Law SICAV must be set up as a public limited company (société anonyme – S.A.) or a European company (S.E.), a SIF SICAV can be set up as a public limited company, a private limited liability company (société à responsabilité limitée – S.à r.l.), a partnership limited by shares (société en commandite par actions – S.C.A.), a limited partnership (société en commandite simple – S.C.S.), a special limited partnership (société en commandite spéciale – S.C.Sp.), or a cooperative company organized as a public limited company (société coopérative organisée sous forme de société anonyme). A SICAV set up as a public limited company or a private limited liability company may be created for a single shareholder, enabling SICAVs to be incorporated by a single entity/person and permitting their creation for a single investor.

A 2010 Law Part II SICAF or a SIF SICAF may take any commercial company form, including the aforementioned legal forms or, in addition, that of an unlimited company (société en nom collectif).

67 UCIs established as European investment companies must meet the requirements imposed on Luxembourg public limited companies by the 1915 Law, as amended, insofar as the law the UCI is under does not derogate from it, as well as certain other provisions set out in the Law of 25 August 2006 on the European company.


The following table details the main differences between the corporate forms which may be used to create investment companies:

Main corporate forms of investment companies

Public limited company

European company

Private limited liability company

Partnership limited by shares

Special limited partnership

Limited partnership

Cooperative company organized as a public limited company

French name société anonyme

société européenne68

société à responsabilité limitée

société en commandite par actions

société en commandite spéciale

société en commandite simple

société coopérative organisée sous forme de société anonyme

Common abbreviation

S.A. S.E. S.à r.l. S.C.A. S.C.Sp. S.C.S.

Possible use by investment companies

• 2010 Law SICAV or SICAF

• SIF Law SICAV or SICAF

• 2010 Law SICAV or SICAF


• 2010 Law Part II SICAF










Legal entity Yes Yes Yes Yes No Yes Yes

Listing possible

Yes Yes No Yes No No No

Main corporate forms of investment companies

Public limited company

European company

Private limited liability company

Partnership limited by shares

Special limited partnership

Limited partnership

Cooperative company organized as a public limited company

Minimum subscribed share capital69

€31,000 €120,000 €12,500 €31,000 None None None

Minimum number of shareholders or partners

1 1 1 2 (1 general partner and 1 limited partner)

2 (1 general partner and 1 limited partner)

2 (1 general partner and 1 limited partner)

7

Maximum number of shareholders or partners

Unlimited Unlimited 40 Unlimited Unlimited Unlimited Unlimited

Minimum number of Directors or managers

One-tier: 3 Directors; Two-tier70: 2 members of management Board, 3 members of supervisory Board71

3 managers72 3 managers or a general partner (whose Board is composed of at least 3 members)

3 managers or a general partner73 (whose Board is composed of at least 3 members)

3 managers or a general partner74 (whose Board is composed of at least 3 members)

3 Directors75

68 More generally known by the Latin name societas europaea69 Minimum capital requirements are covered in Section 3.5.70 Whereas a one-tier structure has a single governing body, a two-tier structure has a Management Board and

Supervisory Board. The Management Board has the power to execute all activities necessary to achieve the company’s objectives and must have at least two members (one member is permitted if the share capital of the company is less than €500,000, or if the company has a single shareholder). The Supervisory Board is in charge of the control and supervision of the company and cannot in any way play a role in the management of the company.

71 Where there is more than one shareholder72 In practice.73 Expected minimum requirement.74 Expected minimum requirement.75 In practice.


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3.3.2. Multiple compartment UCIs

Multiple compartment UCIs (otherwise known as umbrella funds) are single legal entities which comprise, or may comprise, two or more compartments (sub-funds), each with different features – generally a different investment policy.

Different compartments may, for example, invest in different asset classes.

Multiple compartment structures are favored by the larger promoters and initiators of UCIs.

The assets of each compartment of a multiple compartment UCI are generally segregated, and the accounting records of each compartment are kept separate.

Multiple compartment UCIs are recognized under Article 181 of the 2010 Law, as amended, and Article 71 of the SIF Law, as amended. Multiple compartment UCIs may be created provided their constitutional document expressly permits it and specifies the applicable operational rules, and their prospectus or offering document specifies the investment policy and specific features of each compartment. By way of derogation from the Luxembourg Civil Code, the rights of investors and of creditors concerning a compartment, or which have arisen in connection with the creation, operation or liquidation of a compartment, are limited to the assets of that compartment (i.e., segregation of assets and liabilities on a compartment by compartment basis – protected cell concept), unless a clause included in the constitutional document provides otherwise.

Investors may, if permitted by the constitutional document, prospectus or offering document, “switch” all or part of their investment from one compartment to another, in principle without incurring significant charges.

By permitting investors to switch between compartments, promoters and initiators may retain in the same UCI those investors who wish to change their investment strategy.

A. All multiple compartment UCIsAll multiple compartment UCIs must meet the following conditions:• ➢ The constitution of a multiple compartment UCI must ensure that each compartment is treated

as a separate entity having its own funding, capital gains and losses, expenses, etc.• ➢ The opening of a new compartment requires CSSF approval and a prospectus update (for

example, by means of an insert)• ➢ The UCI must have a single name; and each compartment should have a distinct name• ➢ The UCI must have a single depositary (i.e., the same depositary for all compartments); the

depositary may use a sub-custodian network• ➢ The UCI must have a single auditor (i.e., the same auditor for all compartments)• ➢ Shareholders or unitholders may, in principle, be able to move from one compartment to

another without incurring significant charges; the fund documentation of the UCI may restrict this possibility

• ➢ The constitutional document must state the presentation currency of the combined financial statements of the UCI, obtained by aggregating the various compartments

• ➢ The net asset value (NAV) of a share or unit is calculated by reference to the net assets of the compartment for which that share or unit has been issued, by reference to the net assets of the share or unit class in which this share or unit has been issued. The value of shares or units in respect of the same UCI consequently differs between compartments, and within one compartment, between share or unit classes

• ➢ Subscription and redemption of shares or units of each compartment must, for 2010 Law UCIs, be executed at a price obtained by dividing the NAV of each compartment (or, where relevant, of each share or unit class) by the number of shares or units in circulation; SIFs are required to follow the rules laid down in their constitutional document (see Section 10.3.3.)

• ➢ Certificates or other documents evidencing the rights of shareholders or unitholders may only differ in respect of the designation of the particular compartment for which they are issued

• ➢ Diversification rules specified by the law or the regulator must be complied with by each compartment, except those restrictions relating to significant influence over an issuer which also apply to all compartments taken together (see Section 5.2.2.4.)

One compartment of a multiple compartment UCI may invest in other compartments of the same UCI (see Section 3.3.5.).


76 Subject to restrictions for cross investments (see also Section 3.3.5.)77 This graphic is designed to illustrate a multiple-compartment, multiple share or unit class structure; it is not designed

to represent a typical structure.

US equityCompartments, each with specific features

UCI

Share or unit classes, each with specific features

Fee structure (combinations of entry, exit &

ongoing)

Europe equity

Multiple compartment UCI

Dividend policy (Distribution or capitalization)

UK equity

Currency (e.g., €, US$,

JPY) or hedged

Europe bonds

Investor type (e.g., professional,

retail)

Euro long/short

B. Multiple compartment common fundsIn addition to the requirements described in Subsection A., multiple compartment common funds must meet the following conditions:• ➢ The UCI must have a single management company (i.e., the same management company for all

compartments)• ➢ The UCI must have a set of management regulations, either global or per compartment, which

define the general rules of valuation, supervision, subscription and redemption and investment restrictions

C. Multiple compartment investment companiesIn addition to the requirements described in Subsection A., multiple compartment investment companies must meet the following conditions:• ➢ Every company must have a capital represented by shares, which consequently implies that:

• ➢ There is a single share capital expressed in a single currency• ➢ The nominal or par value is expressed in that same currency• ➢ The annual accounts are also expressed in that same currencyHowever, the NAV of each compartment or, where relevant, of each share class, is denominated in the currency of the relevant compartment or share class (see Section 3.3.3.)

• ➢ Each share gives the right to one vote. The CSSF recommends that the equality of voting rights is emphasized in the articles of incorporation. In addition, the articles of incorporation should distinguish between decisions in which all shareholders have an interest and which are taken at the company’s general meeting of shareholders and those concerning the particular shareholders of one compartment which are taken at the general meeting of shareholders of that compartment (see also Section 12.2.2. and 12.6.)76

• ➢ The articles of incorporation must list the conditions for suspension of the NAV calculation and the subscription and redemption of shares of the UCI and of an individual compartment

3.3.3. Share or unit classes

Multiple share or unit classes may be created within a UCI or, in the case of a multiple compartment UCI, within a compartment.

While the investment policy is defined at the level of the UCI or the compartment, share or unit classes permit the implementation of features, generally customized to one or more specific needs or preferences, such as a specific fee structure, currency of denomination, hedging policy, dividend policy, investor type or country of distribution.

Identification numbers (such as ISIN numbers) are attributed at the level of the share or unit class.

Schematic of a possible multiple compartment, multiple share or unit class structure77


3


3.3.4. Management of assets

Assets may be managed using master-feeder structures or co-management or pooling to manage portfolios in an efficient manner.

3.3.4.1. 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.

Master-feeder structures can be created under any of Luxembourg’s fund regimes. They can also be created in combination with foreign UCIs – the Luxembourg UCI being the master and the foreign UCI the feeder and vice versa.

Specific requirements are applicable to master-feeder UCITS structures – i.e., where both the master and feeder are UCITS.

UCITS are, inter alia, required to meet detailed diversification requirements (see Section 5.2.2.). The possibility to create a feeder UCITS represents a specific derogation from UCITS investment rules, and is therefore subject to specific requirements. These are outlined in the remainder of this section.

Master-feeder UCITS structures are covered by Chapter 9 of the 2010 Law.

To be deemed a master-feeder UCITS structure under the 2010 Law, the feeder UCITS must invest at least 85% of its assets into a single master UCITS. The feeder UCITS may invest up to 15% of its assets in liquid assets, financial derivative instruments or, in the case of investment companies, moveable and immoveable property essential for the direct pursuit of business (see also Subsection 5.2.2.8.1.VII.).

A master UCITS cannot itself be a feeder and cannot invest in a feeder UCITS.

The master UCITS and the feeder UCITS can be located in different EU/EEA Member States.

Before investing into a master UCITS, the feeder UCITS will have to obtain the approval from the CSSF. The master UCITS and feeder UCITS are required to enter into an agreement, inter alia to provide the feeder UCITS with all documents and information necessary for the feeder UCITS to be able to comply with the requirements of the 2010 Law. The minimum content is detailed in CSSF Regulation 10-5 and includes, inter alia:• ➢ Access to information, including:

• ➢ How and when the master UCITS provides the feeder UCITS with its constitutional document, prospectus and Key Investor Information (KII), information on delegation of portfolio management and risk management functions, and, where applicable, internal operating documents

Feeder UCITS A≤15% of assets

(e.g. liquid assets)

Country X

Country XFeeder UCITS B≤15% of assets

(e.g. liquid assets) Country ZFeeder UCITS C≤15% of assets

(e.g. liquid assets)

Country Z

Master UCITS

≥ 85%of assets

≥ 85%of assets

≥ 85%of assets

Possible master-feeder scenario


• ➢ The details of constitutional document or bilateral agreement breaches which the master UCITS will notify to the feeder UCITS, the manner and the timing thereof (see Section 10.4.3.6.)

• ➢ Where the feeder UCITS uses financial derivative instruments for hedging purposes, how and when the master UCITS will provide the feeder UCITS with information about its actual exposure to financial derivative instruments to enable the feeder UCITS to calculate its own global exposure

• ➢ A statement that the master UCITS will inform the feeder UCITS of any other information-sharing arrangements entered into with third parties, and, where applicable, how they will be made available to the feeder UCITS

• ➢ Basis of investment and divestment by the feeder UCITS, standard dealing arrangements and events affecting dealing arrangements (see Section 10.3.1.1.)

• ➢ Standard arrangements for the audit report• ➢ Changes to standing arrangements• ➢ The applicable law (i.e., the law of the master’s and/or feeder’s home Member State) and that both

UCITS agree to the exclusive jurisdiction of the courts of that Member State.

Where both the master UCITS and feeder UCITS are managed by the same management company, the agreement may be replaced by internal conduct of business rules, which should cover, inter alia:• ➢ Measures to mitigate conflicts of interest that may arise between the feeder UCITS and the master

UCITS, or between the feeder UCITS and other shareholders and unitholders of the master UCITS, to the extent that these are not sufficiently addressed by the measures applied by the management company (see Section 7.4.18.)

• ➢ Basis of investment and divestment by the feeder UCITS, standard dealing arrangements and events affecting dealing arrangements (see Section 10.3.1.1.)

• ➢ Standard arrangements for the audit report

The prospectus of the feeder UCITS must declare explicitly its status as a feeder UCITS. The prospectus must include, inter alia, information on the investment objectives and policies of both master UCITS and feeder UCITS, a summary of the agreement (or internal conduct of business rules) between master UCITS and feeder UCITS, costs and tax implications as well as an indication of where to obtain the prospectus of the master UCITS (see also Subsection 12.3.1.J.).

Master UCITS and feeders UCITS may have different depositaries and auditors. Such depositaries and auditors must enter into information-sharing agreements (see also Section 11.4.6.2.).

An existing UCITS may convert to a feeder UCITS. A feeder UCITS may also change its master UCITS. Prior to making such changes, the UCITS must inform its shareholders or unitholders and provide certain information to them including, inter alia, its KII and the KII of the master UCITS. The shareholders or unitholders will then have 30 days to request the redemption of their shares or units free of charge (except for divestment costs) (see also Section 4.6.2.).

If any distribution fee or commission is received due to the investment of the feeder UCITS in the master UCITS (by the feeder UCITS itself, its management company or by any other person acting on behalf of the feeder UCITS or its management company), this distribution fee or commission should be paid to the feeder UCITS.

An existing UCITS may become a master UCITS.

A master UCITS should immediately inform the supervisory authority of its home Member State of the identity of each feeder UCITS which invests in its shares or units. The master UCITS must not charge subscription or redemption fees to the feeder UCITS.

Taxation issues in relation to master-feeder structures are covered in Section 13.3..


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3.3.4.2. Co-management and pooling of assets

To ensure efficient portfolio management, and provided the investment policies so permit, the management of a UCI may decide to co-manage, or pool, certain assets within a single fund vehicle (intra-pooling) or between two or more Luxembourg fund vehicles (extra-pooling). Cross-border pooling between fund vehicles domiciled in different national jurisdictions may also be permitted. The assets being co-managed are commonly referred to as a “pool”. Pooling enables different compartments of a fund or funds to invest in a pool or several pools of assets. This arrangement is an administrative process that can reduce portfolio management, administration and custody costs without changing the legal rights and obligations of shareholders or unitholders.

The pools are not legal entities and are not directly accessible to investors. Each of the co-managed funds remains entitled to its specific assets, and responsible for its liabilities. Where the assets of one or more funds are pooled the assets of the pool attributable to each fund will initially be based on the value of the assets allocated to the pool. Subsequently, each fund’s portion of the pool will vary according to withdrawals from and additional allocations to the pool.

Each line item held within the pool, as well as all gains and losses made by the pool, must be allocated to each fund investing in the pool in accordance with the ratio of the pool each fund is entitled to.

* In the scenario, Compartment C invests 100% in Pool II

Pool I(e.g. fixed income)

Pool II(e.g.

equity)

Compartment A Compartment B

Umbrella UCI (SICAV/FCP)

Pool IInvestments

Pool IIInvestments

}}}

Fund vehicle

Pools

Underlying Investments

*

Intra-pooling

Pool I(e.g. fixed income)

Pool II(e.g.

equity)

Compartment A Compartment B Compartment C

Umbrella UCI 1

Pool IInvestments

Pool IIInvestments

Extra-pooling

Compartment M Compartment N

Umbrella UCI 2

*

Compartment C

The impact of the European Market Infrastructure Regulation (EMIR) should be considered in the framework of existing and future pooling structures. EMIR is briefly introduced in subsection 8.2.3.B.


3.3.5. Cross investment

Multiple compartment UCIs are permitted to invest in other compartments of the same UCIs (cross investment) as long as certain conditions are met.

Conditions to be met in the case of cross investment

2010 Law UCIs SIFs

Such investment is provided for in the:• Constitutional document• Prospectus or offering document

XX

78

X

The target compartment does not invest in the investing compartment X X

Not more than 10% of the assets of the target compartment must be invested in other compartments of the same UCI X

The voting rights of the investing compartment in relation to its investment into the target compartment are suspended during the period of investment

X X

The value of cross investments must not be taken into account in calculating the net assets in the context of meeting the minimum net assets requirements

X X

There is no duplication of management, subscription or redemption fees for the assets cross invested X

3.3.6. Creation of a side pocket

Where a UCI or a compartment thereof is invested in illiquid assets, some or all of these assets may, under certain conditions, be transferred to a side pocket. Side pockets may be created within both 2010 Law UCIs and SIFs. However, a side-pocket may only be created under a UCITS in very restricted circumstances. Side pockets may not be used to solve temporary valuation problems.

Two main types of side pocket are:• ➢ A spin-off from an existing share class or unit class to a new share class or unit class• ➢ A spin-off from an existing compartment to a new compartment

On the date of creation of the side pocket, the illiquid assets are allocated to the new share class, unit class or compartment – the side pocket. The investors of the existing share class, unit class or compartment receive shares or units in the side pocket on a pro rata basis according to their holding in the existing share class, unit class or compartment.

The side pocket is closed to any new subscriptions and suspended for redemptions (and conversions).

The manager is required to manage the assets in the side pocket with the objective of realizing them in the best interests of, and distributing the proceeds to, investors. Upon the sale of the assets in the side pocket, its shares or units are redeemed or cancelled.

The fast-track procedure for the creation of a side pocket is outlined in Section 4.8..

78 In practice, for SIFs, such information may also be disclosed in the constitutional document


3


This section outlines specific requirements applicable to 2010 Law UCIs and SIFs.

In addition to the requirements outlined in this Section, UCIs may be subject to specific requirements on:• ➢ Investment rules, covered in Chapter 5• ➢ Portfolio management, covered in Chapter 8• ➢ Risk management and valuation, covered in Chapter 9• ➢ Prospectus and issuing document, and financial reporting, covered in Chapter 12• ➢ Marketing, covered in Chapter 14

Requirements common to all Luxembourg AIF, including 2010 Law Part II UCIs and SIFs, are covered in Section 3.4.3..

3.4.1. UCIs established under the 2010 Law

3.4.1.1. Definition of a UCI under the 2010 Law

This Section outlines the provisions of the 2010 Law which must be complied with by UCITS and 2010 Law Part II UCIs.

A. Collective investment of fundsThere must be collective investment of funds which is understood to be the mutual investment of capital raised from individual investors. Such investments may be made in transferable securities or other assets; they must be made in compliance with the applicable investment restrictions (UCITS and Part II UCIs are subject to different investment restrictions – see Chapter 5), as well as the fund documentation (see Chapter 12). The objective of this investment is to generate income or obtain capital appreciation. Consequently, a UCI may normally not acquire holdings where, beyond seeking return, the objective is to achieve a position of significant influence or control over the long-term. As an exception, Part II UCIs which invest in venture capital (see Section 5.2.3.3.) may acquire significant holdings or control as this is indicative of the nature of such investment policy rather than a desire for control.

B. Raised from the publicThe funds invested collectively must be raised from the public. The public is approached when the raising of funds is not confined to a restricted circle of investors.

C. Diversification of riskThe investments arising from the collective investment of funds must be made according to the principle of diversification of risk, in order to prevent the risk attached to an excessive concentration of investments (see also Section 5.2.).

3.4.1.2. Promoters and initiators of 2010 Law UCIs

A promoter is required for a 2010 Law Part II UCI which is not managed by a UCITS (Chapter 15) management company (see Section 1.4.2.A.).

In general, the promoter or initiator is represented in the governing bodies of the UCI, or is a shareholder of the management company of a common fund.

3.4.1.3. Distinction between Part I and Part II UCIs

The 2010 Law distinguishes between UCITS (set up under Part I of the 2010 Law) and Part II UCIs (set up under Part II of the 2010 Law). The distinction between UCITS and 2010 Law Part II UCIs is covered in Section 1.3..

3.4. Specific requirements for 2010 Law UCIs and SIFs


3.4.1.4. Requirements applicable to UCITS (Part I UCI)

In addition to complying with the definition of a UCI in Section 3.4.1.1., a UCITS must:• ➢ Comply with the specific investment and borrowing rules (see Section 5.2.2.)• ➢ Be open-ended – i.e., the shares or units of the UCITS are, at the request of holders, redeemed

directly or indirectly, out of the UCITS’ assets. Action taken by a UCITS to ensure that the stock exchange value of its shares or units does not significantly vary from its net asset value (NAV) is regarded as equivalent to such redemption

• ➢ Have an approved UCITS management company (either a management company under Chapter 15 of the 2010 Law with its registered office in Luxembourg, or authorized under the UCITS Directive in another Member State), or alternatively in the case of an investment company, designate itself as “self-managed” and comply with the requirements similar to those of such an approved management company (see 3.4.1.5.)

In accordance with Article 3 of the 2010 Law, specifically excluded from Part I are UCIs:• ➢ Which are closed-ended (see Section 3.3.)• ➢ Which raise capital without promoting the sale of their shares or units to the public within the EU• ➢ The shares or units of which, under their constitutional document, may only be sold outside the EU

(even though they may be quoted on the Luxembourg Stock Exchange (LuxSE))• ➢ For which the specific investment and borrowing rules (see Section 5.2.2.) are inappropriate in

view of their investment and borrowing policies

3.4.1.5. Requirements applicable to a self-managed UCITS

As stated in Section 3.4.1.4., a UCITS investment company must either appoint a management company (which complies with Chapter 15 of the 2010 Law – see Chapter 7) or designate itself as “self-managed” (all common funds are managed by a management company). The requirements applicable to a self-managed investment company as stated in Articles 27 and 39 of the 2010 Law and in CSSF Circular 12/546 may be summarized as follows:• ➢ Minimum capital at date of authorization is €300,000 (see also Section 3.5.)• ➢ The application must be accompanied by a business plan (program of activity), setting out, inter

alia, the organizational structure of the UCITS (see also Section 4.3.2.)• ➢ It may only manage assets of its own portfolio and may not, under any circumstances, manage

assets on behalf of a third party

A self-managed UCITS must also comply with most of the rules which are applicable to a UCITS management company (see Section 7.4.23.).

3.4.1.6. Delegation by investment companies

A self-managed UCITS investment company must comply with the rules which are applicable to a UCITS management company in relation to delegation (see Section 7.4.15.)

2010 Law Part II investment companies are required to comply with the requirements on delegation similar to those applicable to Chapter 16 management companies (see Subsection 7.4.15.D.). Those qualifying as full AIFM regime AIF will have to comply with provisions of the AIFM Law in relation to delegation (see Section 3.4.3.1.).

3.4.1.7. 2010 Law investment companies exercising voting rights

A 2010 Law investment company that has designated a management company but has not specifically mandated the management company to exercise the voting rights attached to the instruments held in its portfolio, is required to develop its own strategy for the exercise of voting rights (see Subsection 8.2.1.G.).


3


3.4.2. SIFs

3.4.2.1. Objective of a SIF

The primary objective of a SIF must be the collective investment of the funds raised from its investors while applying the principle of risk diversification.

A. Collective investment of fundsThere must be collective investment of funds which is understood to be the mutual investment of capital raised from individual investors.

B. Raised from “informed investors”SIFs can only raise capital from informed investors who are able to understand and assess the risks associated with investment in such a fund. “Informed investors” are:• ➢ Institutional investors• ➢ Professional investors• ➢ Other types of investors who have declared in writing that they are informed investors, and

meet either of the following criteria:• They invest a minimum of €125,000. The CSSF has clarified that in the case of co-investment,

each investor must invest the minimum amount• They have an appraisal from a bank, an investment firm or a management company (all

of these with a European passport) certifying that they have the appropriate expertise, experience and knowledge to adequately understand the investment made in the fund

Directors79 and other persons who intervene in the management of the SIF are exempt from these requirements.

C. Diversification of riskThe investments of the SIF must be made according to the principle of diversification of risk.

3.4.2.2. Risk management

Risk management requirements applicable to SIFs are covered in Section 9.4..

3.4.2.3. Conflicts of interest

SIFs must be structured and organized in such a way as to mitigate the risk of any conflict of interest between the SIF and, where applicable, any person involved in the activities of the SIF or directly or indirectly related to the SIF, which may potentially adversely affect the interests of the investors. In case of potential conflicts of interest, the SIF is required to protect the interests of its investors.

CSSF Regulation 12-01 details the conflicts of interest requirements to be applied by SIFs.

For the purpose of identifying potential conflicts of interest whose existence may damage the interests of the SIF, SIFs must take into account, as a minimum, whether any person involved in the activities of the SIF, or directly or indirectly linked to the SIF, is in any of the following situations:• ➢ The person is likely to make a financial gain, or avoid a financial loss, at the expense of the SIF• ➢ The person has an interest in the outcome of a service provided to the SIF or to another client or

of an activity carried out for their benefit, or of a transaction carried out on behalf of the SIF or of another client, which is distinct from the interest of the SIF in that outcome

• ➢ The person has a financial or other incentive to favor the interests of another client or group of clients over the interests of the SIF

• ➢ The person carries on the same activities for the SIF as for one or several clients that are not SIFs• ➢ The person receives or will receive from a person other than the SIF an inducement in relation to

the collective portfolio management activities performed for the benefit of the SIF, in the form of monies, goods or services, other than the standard commission or fee for that service

79 “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.


The Regulation requires SIFs to establish, implement and maintain an effective written conflicts of interest policy which:• ➢ Identifies, in relation to portfolio management activities performed by or on behalf of the SIF, the

circumstances which constitute or may potentially give rise to a conflict of interest entailing a material risk of damage to the interests of the SIF

• ➢ Defines the procedures to be followed and the measures to be taken in order to manage conflicts of interest

The conflicts of interest policy must be proportionate to the organizational structure of the SIF, and to the nature, scale and complexity of its activities.

Where the SIF belongs to a group, the conflicts of interest policy must take into account the potential conflicts of interest resulting from the structure and activities of other members of the group. The conflicts of interest procedures and measures must ensure that persons engaged in activities entailing a conflict of interest act with a level of independence, appropriate to the size and activities of the SIF, and of the group to which it belongs, and to the extent of the risk of damage to the interests of the SIF.

SIFs are also required to establish, implement and maintain a policy to prevent any relevant person from entering into personal transactions which may give rise to conflicts of interest.

SIFs are also required to set up an adequate policy aiming to prevent or manage any conflicts of interest resulting from the exercise of voting rights attached to instruments held.

The Regulation requires SIFs to keep, and regularly update, a record of the types of collective portfolio management activities performed by or on behalf of the SIF for which a conflict of interest entailing a material risk of damage to the interests of the SIF has arisen, or may arise.

Where the organizational and administrative arrangements made by the SIF to manage conflicts of interest are not sufficient to guarantee, with reasonable confidence, that risks of damage to the interests of the SIF or its investors will be prevented, the Directors must be informed promptly so that they can take any measure necessary to ensure that the SIF will act in its best interests, and those of its investors. The SIF is required to inform the investors of any such conflicts of interest, and explain the measures adopted by the SIF (see also Section 12.4.4.1.).

SIFs are required to confirm to the CSSF that they have set up a conflicts of interest policy in their application for authorization (see Section 4.3.).

Conflicts of interest requirements applicable to management companies and AIFM are covered in Section 7.4.18..

3.4.2.4. Delegation

When a SIF or its management company delegates one or more of their own functions to third parties, such delegation must be made with a view to conducting operations in a more efficient manner, and the following conditions must be complied with:• ➢ The CSSF must be adequately informed of any delegation• ➢ The mandate cannot prevent the effectiveness of supervision of the SIF, and in particular must not

prevent the SIF from acting, or the SIF from being managed, in the best interests of the investors• ➢ When the delegation concerns portfolio management, the requirements outlined in Section

8.2.2.E. must be met• ➢ When the delegation concerns risk management, the requirements outlined in Section 9.4.4. must

be met• ➢ The Directors of the SIF, or of its management company in case of a common fund, must be able to

demonstrate that:• The delegate is qualified and capable of undertaking the functions in question• The delegate was selected with all due care • The SIF is in a position to monitor effectively the delegated activity, to give further instructions

at any time to the delegate or to withdraw the mandate with immediate effect in order to protect the interests of the investors

• ➢ The prospectus or offering document of the SIF must list the delegated functions


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3.4.3. Requirements applicable to AIF

AIF, including 2010 Law Part II UCIs and SIFs will either fall into one of the following categories:• ➢ Full AIFM regime AIF (see Chapter 7):

• AIF managed by an authorized AIFM• Authorized internally managed AIF

• ➢ Simplified AIFM registration regime AIF (i.e., where the AIF assets under management fall below the de minimis thresholds outlined in Section 7.2.2.D.):• AIF managed by simplified registration regime AIFM (see Section 7.2.2.E.)• Simplified AIFM registration regime internally managed AIF (see also Section 7.4.25.)

3.4.3.1. Full AIFM regime AIF

AIF managed by authorized AIFM must be managed in accordance with AIFM Directive requirements. These requirements are implemented in Luxembourg by the AIFM Law.

Internally managed AIF which are in scope of the AIFM Law must also be managed in accordance with AIFM Law requirements.

AIFM compliance is required when the assets under management of all AIFs managed by an AIFM, or of an internally managed AIF, exceed certain thresholds (see Subsection 7.2.2.D.).

AIFM requirements are covered in Chapter 7. The specific requirements applicable to authorized internally managed AIF are covered in Section 7.4.23..

The relevant provisions of the AIFM Law must be applied by full AIFM regime AIF, or their AIFM acting on their behalf. The provisions include those on: • ➢ Investments in securitization vehicles (see Section 5.4.1.)• ➢ Major holdings and control over portfolio companies (see Section 5.4.2.)• ➢ Risk management, including leverage (see Section 9.3.)• ➢ Delegation of functions (see Section 7.4.15.)• ➢ The depositary of the AIF (see Chapter 11)• ➢ Valuation (see Section 9.5.)• ➢ Information provided to investors (see Chapter 12)• ➢ Marketing (see Chapter 14)

Full AIFM regime AIF created before 22 July 2013 benefit from a transitional period up to the date of authorization of their AIFM, or 22 July 2014 at the latest, to comply with these provisions (grand-fathering clause).

Full AIFM regime AIF created between 22 July 2013 and 22 July 2014 are subject to these provisions from the date of their authorization, or, where the AIF has an external AIFM which existed before 22 July 2013, from the date of authorization of their AIFM (i.e., 22 July 2014 at the latest).

The transitional provisions also apply when new compartments are created within an existing umbrella AIF.

AIF which benefit from one of the transitional provisions will be required to submit to the CSSF, by 1 April 2014, information on how it will comply with these provisions.

Full AIFM regime AIF created after 22 July 2014 are subject to new provisions from the date of their authorization.

3.4.3.2. Simplified AIFM registration regime AIF

AIF which are managed by simplified registration regime AIFM are impacted by AIFM requirements. Simplified registration regime AIFM are subject to registration and reporting requirements, which includes, inter alia, the requirement to provide detailed information to the CSSF on each AIF they manage (see Sections 7.2.2.E. and 7.4.25.).


Simplified AIFM registration regime internally managed AIF are subject to the same registration and reporting requirements as simplified registration regime AIFM.

Simplified registration regime AIFM, and simplified AIFM registration regime internally managed AIF, may 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 AIFM Law (see Section 3.4.3.1.).

Simplified registration regime AIFM are required to monitor their assets under management, and when the assets under management exceed the relevant de minimis threshold on more than a temporary basis, apply for authorization as an AIFM (see Section 7.4.25.).

3.4.3.3. EuVECA and EuSEF

The managers of qualifying European Venture Capital Funds (EuVECA) and of qualifying European Social Entrepreneurship Funds (EuSEF) which are subject to a simplified EU/EEA regulatory regime 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.

The applicable regimes are:• ➢ Regulation on European Venture Capital Funds (EuVECA)80

• ➢ Regulation on European Social Entrepreneurship Funds (EuSEF)81

The regimes create labels (“designations”) for investment funds investing primarily in small and medium sized enterprises (SMEs) and offer their managers “passports” enabling them to market their EuVECA and EuSEF to suitably qualified investors throughout the EU/EEA.

The EuVECA and EuSEF regimes will initially be available to managers of UCIs established in the EU/EEA falling below the AIFM Directive threshold of €500 million applicable to managers managing unleveraged, closed-ended alternative investment funds (AIF) which comply with the organizational requirements and investment rules. The regimes are also available to internally managed AIF.

The two new regimes are voluntary. If a manager chooses not to meet the requirements of one of the regimes and not to benefit from one of the passports, the Regulations do not apply; existing national rules and general EU rules continue to apply.• ➢ The managers of EuVECA and EuSEF are covered in Section 7.4.26.• ➢ The applicable investment restrictions are covered in Section 5.5.• ➢ The information to be disclosed to investors before they invest is covered in Section 12.3.5.• ➢ The annual reporting requirements are covered in Section 12.5.4.• ➢ The marketing of EuVECA and EuSEF is covered in 14.6.4.

80 Regulation (EU) No 345/2013 of 17 April 2013 on European venture capital funds81 Regulation (EU) No 346/2013 of 17 April 2013 on European social entrepreneurship funds

3.5. Minimum capital

UCITS with a management company, UCIs under Part II of the 2010 Law and SIFs must have a minimum capital/net assets of €1,250,000 which must be achieved within six months of authorization in the case of 2010 Law UCIs and twelve months in the case of SIFs.

For a self-managed SICAV under Part I of the 2010 Law, the minimum capital at the date of authorization is €300,000.

Measures are to be taken when the capital of the UCI falls below two-thirds and one-fourth of the minimum capital (see also Section 4.10.1.).

The shares or units of an investment company must be fully subscribed. Those of a 2010 Law SICAV must be fully paid up. However, in the case of a SIF investment company, only 5% of the amount of the subscription per share or unit must be paid up. This will enable structures such as private equity funds to make capital calls over a period of time.


3


Specific types of UCIs subject to specific requirements include:• ➢ Money market funds (MMFs), which are subject to guidelines defining the requirements to be met

for investment funds to be labeled as MMF (see Section 3.6.1.)• ➢ UCITS exchange traded funds (ETFs), which are subject to specific rules and disclosure

requirements, and must meet additional requirements in relation to the protection of investors dealing on a secondary market (see Section 3.6.2.)

• ➢ Index tracking UCITS, which are subject to disclosure and reporting requirements (see Section 3.6.3.)

• ➢ UCIs using efficient portfolio management (EPM) techniques, such as securities lending and currency hedging transactions, which are subject to specific rules (see Section 5.2.2.) and disclosure requirements (see Chapter 12) on the use of such techniques

• ➢ UCITS using financial derivative instruments (FDIs), including, inter alia, financial indices, which are subject to specific rules (see Section 5.2.2.) and disclosure requirements (see Chapter 12)

• ➢ Structured UCITS, which are subject to specific disclosure requirements (see Section 3.6.4.)

See also Appendix I.3. on the types of UCIs.

3.6.1. Money market funds (MMFs)

MMFs are subject to ESMA’s (previously CESR’s82) Guidelines on a common definition of European money market funds issued in May 2010. ESMA considers that in order to ensure alignment with investor expectations and improve investor protection, the “money market fund” label should be restricted to funds which operate with the objectives of preservation of capital combined with daily liquidity.

ESMA’s guidelines set out a two-tiered approach for a definition of a European money market fund (MMF):• ➢ Short-term money market funds • ➢ Money market funds

Both short-term money market funds and money market funds must comply with general guidelines and also have to comply with specific guidelines relating to their category. In both cases, specific disclosure is required to draw attention to the difference between the MMF and investment in a bank deposit.

The guidelines inter alia restrict eligible investments, limit the weighted-average maturity of investments, and require a daily net asset value (NAV) calculation.

ESMA’s guidelines apply both to UCITS and non-UCITS MMF. Other money market-type funds can continue to be authorized but cannot use the money market fund label since the introduction of the guidelines.

See also Subsection 5.2.2.3.B. on money market instruments as eligible assets.

At the time of writing, the European Commission was expected to issue a proposal creating a specific regulatory regime for MMFs.

3.6. Requirements applicable to specific types of UCI

82 The Committee of European Securities Regulators (CESR) became the ESMA on 1 January 2011.

80 Regulation (EU) No 345/2013 of 17 April 2013 on European venture capital funds81 Regulation (EU) No 346/2013 of 17 April 2013 on European social entrepreneurship funds


3.6.2. UCITS exchange traded funds (ETFs)

UCITS exchange traded funds (ETF) are subject to ESMA’s Guidelines on ETFs and other UCITS issues issued in July 2012.

With respect to UCITS ETFs83 these guidelines require:• ➢Use of the “UCITS ETF” identifier in the name, constitutional document, prospectus, KII, and

marketing communications. This English identifier should be used independently of the language of the document. The identifiers “UCITS ETF”, “ETF” or “exchange-traded fund” cannot be used by other UCITS

• Prospectus, KII and marketing communication disclosure on the policy on portfolio transparency and where information on the portfolio and the indicative net asset value (iNAV) can be obtained

• Prospectus disclosure on how the iNAV is calculated, and the frequency of calculation• Prospectus, KII, and marketing communication disclosures for an actively-managed UCITS ETF:

• That it is actively managed• Strategy to meet the stated investment policy, including any intention to outperform an index

• Treatment of secondary market investors:• Inclusion of a warning in the prospectus and marketing communications to the effect that shares

or units purchased on the secondary market are generally not redeemable from the ETF• Providing secondary market investors with the possibility to sell their shares or units back to the

ETF in case the stock exchange value of the shares or units of the ETF varies significantly from the NAV (e.g., in case of market disruption)

Disclosure requirements are covered further in Chapter 12.

The final guidelines, comprising both the Guidelines on ETFs and other UCITS issues and the final rules on repurchase (repo) and reverse repurchase (reverse repo) agreements, became effective in February 2012. UCITS existing at that time benefit from transitional provisions giving them, in certain cases, up to 12 additional months to comply. UCITS established after that date are required to comply with the guidelines immediately.

3.6.3. Index-tracking UCITS

For index-tracking UCITS, ESMA’s Guidelines on ETFs and Other UCITS issues require:• ➢ Prospectus disclosure on the description of the index, including a link to information on its

underlying components, how the index will be tracked and implications in terms of exposure to the underlying index and counterparty risk, anticipated tracking error (in normal market conditions), and factors impacting the ability of the UCITS to track the performance of the index. The prospectus can direct investors to a web site where the exact compositions of indices are published

• ➢ Summary KII disclosure on how the index will be tracked and implications in terms of exposure to the underlying index and counterparty risk

• ➢ Annual and semi-annual report disclosure on actual tracking error, explanation of any divergence with anticipated tracking error, and annual tracking difference

For index-tracking leveraged UCITS, the guidelines require:• ➢ Compliance with the limits and rules on global exposure, either through the commitment or VaR

approach• ➢ Prospectus disclosure and KII disclosure in summary form on the leverage policy, associated costs

and risks, impact on returns, impact of any reverse leverage (short exposure), and a description of how the performance may differ significantly from the multiple of the index over the medium to long term

Disclosure requirements are covered further in Chapter 12 and global exposure in Section 9.2..

83 A UCITS ETF is a UCITS at least one share or unit class of which is traded throughout the day on at least one regulated market or Multilateral Trading Facility with at least one market maker which takes action to ensure that the stock exchange value of its shares or units does not significantly vary from its net asset value and where applicable its indicative Net Asset Value (iNAV).


3


3.6.4. UCIs using efficient portfolio management (EPM) techniques

UCIs using efficient portfolio management (EPM) techniques, such as securities lending and currency hedging transactions are subject to specific rules (see Section 5.2.2.) and disclosure requirements (see Chapter 12).

3.6.5. UCITS using financial derivative instruments (FDIs)

UCITS using financial derivative instruments (FDIs), including, inter alia, financial indices, are subject to specific rules (see Section 5.2.2.) and disclosure requirements (see Chapter 12).

3.6.6. Structured UCITS

Structured UCITS are defined as UCITS which provide investors, at certain predetermined dates, with algorithm-based payoffs that are linked to the performance or to the realization of price changes or other conditions, of financial assets, indices or reference portfolios or UCITS with similar features. They include capital-protected and guaranteed UCITS.

Structured UCITS are subject to specific requirements in relation to risk management (Section 9.2.), prospectus (see Section 12.3.1.) and KII (see Section 12.3.2.).

92 | 4. Authorization, supervision, restructuring and liquidation

4.1. Introduction

This chapter describes the procedures to be followed when setting up or amending a UCI in Luxembourg, as well as ongoing supervisory requirements. The chapter also sets out requirements and considerations for conversions and mergers of UCIs, the fast track authorization procedure for the creation of a side pocket, transfer of foreign UCI to Luxembourg and liquidation of UCIs and compartments, as well as dormant compartments.

In addition, conversions and mergers of UCIs should be considered not only from a regulatory perspective (covered in this Chapter) but also from an expenses and taxation perspective (see Chapter 13).

4. Authorization, supervision, restructuring and liquidation


4. Authorization, supervision, restructuring and liquidation | 93

Authorization, supervision, restructuring and liquidation 4All UCIs created in Luxembourg, be they UCITS, 2010 Law Part II UCIs or SIFs, must obtain

authorization from the CSSF prior to launch.

In practice, a large amount of work would be performed by the promoter or initiator, management company (if applicable and already existing), various professional advisors and main service providers before submission of the application for authorization of a UCI.

Typically, such work carried out prior to authorization will deliberate and decide upon, inter alia:• ➢ Commercial design • ➢ Fund structuring• ➢ Distribution strategy• ➢ Valuation and accounting• ➢ Fund information• ➢ Operations and controls • ➢ Service providers• ➢ Governance

The fund management options, including appointing an existing management company, or setting up a new management company, are covered in Section 1.4.3., and Chapters 3 and 7.

The costs associated with the set-up of a UCI are outlined in Section 13.2..

4.2. Pre-launch considerations

4.3. Authorization

4.3.1. Authorization process

The authorization process for setting up a new UCI or a new compartment of an existing UCI can be summarized as follows:

Initial submission

Acknowledge-ment

Examination Completion of examination

Final documents

Registration

UCI

Mai

n do

cum

ents

ex

chan

ged

Initial submission of request for authorization including:• Application

form• Required

information and draft documents

Acknowledgement • Comments• Requests for

further information or supporting documents

Final documents Registration on official list and issuance of: • Accreditation letters• Attestations• Visa-stamped

prospectus or offering document

• Identification codes

CSSF

The authorization process


• ➢ Initial submission to the CSSF of request for authorization

The request for authorization is submitted in the form of an application file which should include:• ➢ Application form for the set up of a UCI• ➢ Required information and draft documents (see Section 4.3.2.)

The application file should be submitted via either:• ➢ The secured e-file system

e-file (e-file.lu) is a communication platform for the transmission of data, documents and regulatory and statistical reports between financial institutions and the Luxembourg authorities (see also Section 12.9.1.).

• ➢ E-mail

The CSSF recommends applicants to file an application only once all constituents of the project are in final draft form.

• ➢ Acknowledgement of receipt of the application file

The CSSF will acknowledge receipt of the application file within two working days and indicate the officer in charge of examining the application.

• ➢ Transmission of comments and, where relevant, further requests of information or documents after initial examination

Within 10 working days of its acknowledgment of the receipt of the authorization application, the CSSF will provide feedback to the applicant (or contact person designated in the application form). The CSSF may:• ➢ Make comments on the information and documents transmitted• ➢ Require further information and/or supporting documents to complete the file or explain specific

considerations of the application

This phase may be repeated until the CSSF is fully satisfied with the documentation and information submitted.

In case the applicant does not respond to requests for additional information from the CSSF within a reasonable period of time not exceeding three months, the CSSF will contact the applicant to clarify whether the application is to be continued or to be withdrawn.

• ➢ Completion of examination phase

Once the CSSF informs the applicant about the completion of the examination phase of the application, changes of scope or alterations of the last draft versions of constitutional documents on the basis of which the examination has been completed are no longer permitted.

Any such alterations at this stage will result in the application returning to the examination phase.

• ➢ Submission of final version of compulsory documents

The applicant transmits to the CSSF the final clean version of the required documents as agreed upon and retained during examination. Prospectuses or offering documents have to be submitted in accordance with the requirements of CSSF Circular 08/371 of 5 September 2008 on the electronic transmission of prospectuses and financial reports of UCIs to the CSSF (see Section 12.9.1.). The constitutional document and agreements have to be submitted in signed form.

• ➢ Registration on the official list

Upon satisfactory receipt of all required documents as requested, the CSSF will proceed with the registration of the UCI on the relevant official list. 2010 Law UCIs and SIFs are entered by the CSSF on official lists which are published on the website of the CSSF and in the official gazette (the Mémorial).


Authorization, supervision, restructuring and liquidation 4

In parallel, the CSSF will, within five working days:• ➢ Issue, where applicable, the official authorization letter, the related attestations (for UCITS) and

identification codes• ➢ Register the documentation • ➢ Return a visa-stamped version of the prospectus or offering document previously submitted via

the e-file system

4.3.2. Required information and draft documents

The application file submitted to the CSSF must include the application form and the following information and documents in English, French or German (all documents in one language only):• ➢ Draft constitutional document: management regulations (common funds) or articles of

incorporation (investment companies)• ➢ Draft prospectus for 2010 Law UCIs (see Section 12.3.1.) or offering document for SIFs (see

Section 12.3.4.)• ➢ Draft key investor information (KII) document for UCITS (see Sections 12.3.2.)• ➢ Information on the members of the governing body (see Chapter 6), and day-to-day managers

(where applicable – see also Chapter 7) including:• ➢ Name and position• ➢ Curriculum vitae (up-to-date, including place and date of birth, dated and signed, CSSF template

optional)• ➢ Declaration of honor (CSSF template required)• ➢ Extract of criminal record (or affidavit only if criminal record extract may not be obtained)

• ➢ Information on:• ➢ Management company (if applicable) • ➢ Structure of the investment company, including a program of activity and human and technical

infrastructure for self-managed investment companies (see also Section 7.4.23.)• ➢ Information on the promoter of 2010 Law Part II UCIs which are not managed by a UCITS (Chapter

15) management company including:• ➢ Contact details• ➢ Description• ➢ Organization chart of the group• ➢ Track record and relevant experience• ➢ List of authorized activities

• ➢ Information on:• ➢ Portfolio manager and investment adviser (see Chapter 8)• ➢ Administration (see Chapter 10)• ➢ Depositary (see Chapter 11)• ➢ Auditor (see Section 12.5.8.)• ➢ Other delegates (see also Sections 3.4.1.6., 3.4.2.4., and 7.4.15.)

• ➢ Certificate from supervisory authority and audited financial reports from last three years (where available) of:• ➢ Promoter for 2010 Law Part II UCIs which are not managed by a UCITS (Chapter 15)

management company• ➢ Portfolio manager and investment adviser

• ➢ Draft contracts:• ➢ Depositary bank• ➢ Central administration• ➢ Domiciliation agent • ➢ Portfolio management• ➢ Investment advisory • ➢ Global distribution• ➢ Auditor (letter of intent or engagement letter)• ➢ Any other relevant contracts


• ➢ Description of investment policy (for each compartment)• ➢ NAV calculation frequency• ➢ Portfolio manager and/or investment adviser• ➢ Investment policy• ➢ Use of financial derivative instruments (FDIs) (see Chapter 5)• ➢ Use of efficient portfolio management (EPM) techniques (see Chapter 5)• ➢ Strategy• ➢ Countries of distribution• ➢ Target investors• ➢ For UCITS:

• ➢ Global exposure calculation method (see Section 9.2.)• ➢ Names of share or unit classes• ➢ Range of synthetic risk and reward indicator (SRRI) (see Section 12.3.2.)• ➢ Information on value-at-risk (VaR) approach (if applicable) (see Section 9.2.)

• ➢ Description of valuation principles (see Section 9.5.) • ➢ Information on marketing or offering of the shares or units including:

• ➢ Provisions on subscriptions and redemptions (see Section 10.3.)• ➢ Marketing strategy, target investors and distribution channels (see Chapter 14)• ➢ Distributors, supervision and compliance with anti-money laundering and counter terrorist

financing requirements (see Section 10.3.5.)• ➢ For UCITS: Information on the risk management process (see Section 9.2.)• ➢ For SIFs:

• ➢ Description of the risk management system (see Section 9.4.5.)• ➢ Confirmation that a conflicts of interest policy has been set up (see Section 3.4.2.3.)

• ➢ Investment companies which have not appointed a management company (self-managed UCITS – see Section 3.4.1.5.; and internally managed AIF - see Section 3.4.3.) should submit information to demonstrate how they will comply with the applicable requirements:• For self-managed UCITS and internally managed AIF subject to the AIFM Law, see Sections

7.4.23. on the applicable requirements and 7.4.1.A. on the authorization process • For simplified AIFM registration regime internally managed AIF, see Section 7.4.25. on the

applicable requirements

The CSSF does not require a promoter (see also Subsection 1.4.2.A.) for:• ➢ UCITS• ➢ 2010 Law UCIs which are managed by a UCITS (Chapter 15) management company• ➢ SIFs

In practice, the application for authorization of a SIF should include: • ➢ Information on the identity of the initiator • ➢ Evidence of authorization/regulation of the initiator (such as a certificate from the supervisory

authority), if any• ➢ Audited financial reports of the initiator (where available); where audited financial statements

are not available, the CSSF will expect information on the track record of the initiator

The CSSF will not perform detailed checks on the status or financial position of the portfolio manager, this being left to the due diligence of the investors.



4.4. Updates to the application for authorization

The granting of authorization by the CSSF implies an obligation, for the members of the governing body of the relevant UCI, to notify the CSSF on its own initiative of any change regarding the substantial information on which the CSSF based its examination of the initial application before implementing the change. Such changes may include:• ➢ Change of constitutional document • ➢ Change of the registered address • ➢ Corporate events (e.g., merger, liquidation, spin off, etc.) • ➢ Change in governance of an investment company (board members, conducting persons, others) • ➢ Closure of a compartment(s) • ➢ Change of denomination of a UCI and/or compartment(s) • ➢ Change of investment policy / investment restrictions of a UCI and/or compartment(s) • ➢ Change of set up of UCI and/or compartment(s) (consolidation currency, compartment currency,

type of share classes, etc.) • ➢ Change of rules in respect of subscriptions or redemptions • ➢ Change of the management company of a UCI• ➢ Change of a service provider (depositary bank, administrator, asset managers, domiciliation agent,

independent valuer, paying agent, distributors, independent auditor, etc.)

4.4.1. Process for amending an existing UCI

The process to amend an existing UCI, or one or several of its compartment(s), can be summarized as follows:• ➢ Initial submission of the request for approval of the amendments, together with the necessary

documents (see Section 4.4.2.) • ➢ Acknowledgement of receipt of the amendment file by the CSSF• ➢ Transmission of comments and possibly further requests of information after initial examination by

the CSSF• ➢ Advice after completion of examination phase of application• ➢ Submission of final version of required documents• ➢ Record of the amendments after entry into force and issuance by the CSSF of an official letter

4.4.2. Required information and documents

The amendment file should contain at least a detailed explanatory letter of the contemplated amendment(s), any CSSF identifier of existing undertaking or compartment(s) subject to amendment, any supporting document of the amendments, any notices to the investors, a new marked-up version of the prospectus, constitutional document, KII (for UCITS) and contracts where applicable. See also Section 12.9.

4.5. Ongoing supervision

The CSSF supervises UCIs on a continuous basis.

2010 Law UCIs are required to electronically transmit their prospectuses, KII (for UCITS) and financial reports to the CSSF. Monthly, quarterly and annual financial information must also be provided (see Sections 12.8.1. and 12.9.).

SIFs are required to electronically transmit their offering document and financial reports to the CSSF. Monthly and annual financial information must also be provided (see Sections 12.8.3. and 12.9.).


A long form report also has to be provided to the CSSF for 2010 Law UCIs (see Section 12.5.8.2.).

The CSSF also has the right, either directly or through an intermediary, to examine the books and records of a UCI.

The depositary is required to provide the CSSF on request with all the information that it has obtained in the exercise of its duties and which is necessary to enable the CSSF to monitor compliance by the UCITS with the Law (see Section 11.4.1.).

4.6. Restructuring UCIs

4.6.1. Conversion of 2010 Law UCIs into SIFs and vice versa

The conversion of a UCI is authorised as long as this conversion is made from a less protective to a more protective type of investment fund in the shareholders’ or unitholders’ perspective. A UCI created under Part II of the 2010 Law may be converted into a SIF and a SIF can be converted into a UCITS or a 2010 Law Part II UCI. However, a UCITS cannot be converted into a 2010 Law Part II UCI or a SIF.

Requirements or considerations to take into account include, for example:

Requirement/consideration

Conversion from a Part II 2010 Law UCI to a SIF

Conversion from a SIF to a 2010 Law UCI

Investment restrictions(see Chapter 5)

Since the investment restrictions applicable to a 2010 Law UCI are more restrictive than those applicable to a SIF, a 2010 Law UCI should not encounter significant issues with respect to the investment restrictions.

Investment restrictions and borrowing rules under the 2010 Law are more restrictive than those applicable to a SIF. UCITS are required to comply with detailed restrictions.

Qualification of shareholders or unitholders

2010 Law UCI investors may not meet the “informed investor” criteria required for SIFs, described in Subsection 3.4.2.1.B.. Action may need to be taken to ensure that all investors qualify as “informed investors”.

No requirement to meet “informed investor” criteria under the 2010 Law.

Investors’ approval of conversion

Constitutional document needs to be adapted to the SIF Law requirements. Shareholders or unitholders need to approve the conversion and must be notified of changes to the prospectus.

Constitutional document needs to be adapted to the 2010 Law requirements. Shareholders or unitholders need to approve the conversion and must be notified of changes to the offering document.

Service provider agreements

Amendments will need to be made to existing agreements.

Amendments will need to be made to existing agreements.

Promoter or initiator(see Section 1.4.2.A.)

The CSSF will have probably sufficient information on the initiator.

The CSSF requires detailed information on the promoter of a 2010 Law Part II UCI which is not managed by a UCITS (Chapter 15) management company.

Cross-border distribution (see Chapter 14)

Individual countries where the UCI is distributed should be contacted on conversion.

Individual countries where the UCI is distributed should be contacted on conversion.

Tax implications(see Chapter 13)

Registration duty of €75.Subscription tax will generally be levied at 0.01% per annum of the net asset value.

Registration duty of €75.Subscription tax may be 0.01% to 0.05% per annum of the net asset value.

NAV production(see Chapter 10)

A SIF must publish its NAV at least annually.

2010 Law UCIs must publish their NAVs at least twice a month (UCITS) or monthly (Part II 2010 Law UCI).



Requirement/consideration

Conversion from a Part II 2010 Law UCI to a SIF

Conversion from a SIF to a 2010 Law UCI

Financial reporting(see Chapter 12)

A SIF is required to produce an audited annual report. No requirement to produce a semi-annual report84 or long form report.

2010 Law UCIs are required to produce non-audited semi-annual reports, audited annual reports and a long form report.

Offering document(see Chapter 12)

A SIF must prepare an offering document.

2010 Law UCIs must prepare a prospectus and, in the case of a UCITS, also a KII.

Risk management(see Chapter 9)

A SIF is required to implement risk management systems.

There are no specific risk management requirements for 2010 Law Part II UCIs. UCITS are required to comply with detailed risk management requirements.

4.6.2. Conversion of UCITS into feeder UCITS and change of master UCITS

An existing UCITS may become a feeder (see also Section 3.3.4.1.). A feeder UCITS may change its master.

In both cases, the feeder must inform its shareholders or unitholders and provide certain information to them including:• ➢ A statement that the competent authority of the feeder UCITS home Member State approved the

investment of the feeder UCITS in shares or units of the master UCITS• ➢ The KII of the master UCITS and the feeder UCITS• ➢ The date when the feeder UCITS is to start to invest in the master UCITS or, if it has already

invested therein, the date when its investment will exceed the applicable limit (see Section 5.2.2.3.E)

• ➢ A statement that the shareholders or unitholders have the right to request, within 30 days, the repurchase or redemption of their shares or units free of charge (except for divestment costs). That right becomes effective from the date the feeder UCITS has provided the information to its shareholders or unitholders

The taxation implications of conversion of a UCITS into a feeder UCITS and changes of master UCITS are covered in Section 13.3.6..

Specific provisions cover the cases of liquidation (see Section 4.10.3.) and merger or division of the master UCITS (see Section 4.7.2.1.).

4.7. Mergers of UCIs

The 2010 Law permits cross-border as well as domestic mergers of UCITS, and lays down detailed requirements to be met. The provisions of the Law of 10 August 1915 on commercial companies, as amended (the 1915 Law) on mergers are not applicable to mergers of UCITS.

The provisions of the 2010 Law on mergers of UCITS are not applicable to mergers of 2010 Law Part II UCIs or SIFs.

The taxation implications of mergers of UCIs are covered in Section 13.3.6..

The remainder of this section focuses on the mergers of UCITS.

84 Unless it is a listed closed-ended UCI (see Section 12.5.4.).


4.7.1. Principle and the common draft terms of mergers

4.7.1.1. Principle

A merger takes place between one or more UCITS or compartment thereof (“merging UCITS”) and a receiving UCITS or compartment thereof (“receiving UCITS”). There are three possible merger scenarios:

The merger or the division of a master UCITS will result in the liquidation of the feeder UCITS unless the CSSF grants approval to the feeder UCITS for one of the following:• ➢ Continuing to be a feeder UCITS of the master UCITS or another UCITS resulting from the merger

or division of the master UCITS• ➢ Investing at least 85% of its assets in shares or units of another master UCITS not resulting from

the merger or the division• ➢ Amending its constitutional document in order to convert into a UCITS which is a non feeder UCITS

For any merging UCITS which ceases to exist, the effective date of the merger must be recorded by notarial deed.

4.7.1.2. Common draft terms of merger

The merging UCITS and the receiving UCITS must draw up common draft terms of merger comprising, inter alia, (i) the type of merger and the name of the UCITS involved, (ii) the rationale for the proposed merger, (iii) the expected impact of the proposed merger on the shareholders or unitholders of both the merging UCITS and the receiving UCITS, (iv) the criteria adopted for valuation of the assets and, where applicable, the liabilities on the planned effective date of the merger, (v) the calculation method of the exchange ratio, (vi) the planned effective date of the merger, (vii) the respective fund rules applicable to the transfer of assets and the exchange of shares or units, and (viii) the instruments of incorporation of the receiving UCITS or in case of a merger described in Scenarios 2 and 3 (if there is the creation of new receiving UCITS), the constitutional document of the newly constituted receiving UCITS.

1. The merging UCITS transfer all of their assets and liabilities to an existing receiving UCITS. In exchange, the receiving UCITS issues shares or units to the shareholders or unitholders of the merging UCITS; it may also make a cash payment. The merging UCITS are dissolved.

2. The merging UCITS transfer all of their assets and liabilities to a receiving UCITS which they form. In exchange, the receiving UCITS issues shares or units to the shareholders or unitholders of the merging UCITS; it may also make a cash payment. The merging UCITS are dissolved.

3. The merging UCITS transfer their net assets to receiving UCITS which may be another compartment of the same UCITS, a UCITS which they form or another existing UCITS. The merging UCITS continue to exist until their liabilities have been fully discharged.

Scenario 1 Scenario 2 Scenario 3

Existing receiving UCITS

New receiving UCITS

New or existing receiving UCITS

Transfer of assets & liabilities

Transfer of assets & liabilities Transfer of net assets

Merging UCITS(direct dissolution)

Merging UCITS(direct dissolution)

Merging UCITS(no direct dissolution –

keep liabilities)



4.7.2. Authorization

4.7.2.1. The merging UCITS established in Luxembourg

Where a merging UCITS is established in Luxembourg, the merger is subject to prior authorization by the CSSF.

The merging UCITS must provide to the CSSF an authorization file including the following information:• ➢ The common draft terms of the proposed merger duly approved by the merging UCITS and the

receiving UCITS• ➢ An up-to-date version of the prospectus and KIIs of the receiving UCITS (if established in another

Member State)• ➢ Statements issued by the depositaries of the merging UCITS and the receiving UCITS, respectively,

confirming compliance with certain elements of the common draft terms of the proposed merger with the constitutional document of the relevant UCITS

• ➢ Information which will be provided by the merging and the receiving UCITS to their respective shareholders or unitholders

This information can be provided to the CSSF in Luxembourgish, French, German or English.

If the authorization file is not complete, the CSSF will request additional information within a maximum of 10 working days.

Where the receiving UCITS is not established in Luxembourg and once the authorization file is complete, the CSSF must transmit immediately copies of the authorization file to the competent authority of the receiving UCITS home Member State.

The CSSF will authorize the merger, providing all relevant conditions have been met, within 20 working days of submission of the complete information. The receiving UCITS authorities do not approve the merger. However, the CSSF and the authorities of the receiving UCITS will assess whether they are satisfied with the proposed information to be provided to the shareholders or unitholders of the merging and receiving UCITS, respectively.

Where approval by the shareholders or unitholders of mergers between UCITS is required, the constitutional document must lay down the quorum and majority requirements applicable. Common draft terms of the merger have to be approved by a simple majority of shareholders or unitholders, without however requiring more than 75% of the votes cast by the shareholders or unitholders present or represented at the meeting.

For any merging UCITS which ceases to exist, the effective date of the merger must be recorded by notarial deed.

4.7.2.2. The merging UCITS established in another Member State and the receiving UCITS established in Luxembourg

The CSSF must receive copies of the authorization file (except the up-to-date version of the prospectus and KII of the receiving UCITS) from the competent authority of the merging UCITS Member State.

The CSSF and the competent authority of the UCITS home Member State will consider the potential impact of the proposed merger on shareholders or unitholders of the merging UCITS and the receiving UCITS to assess whether appropriate information is being provided to shareholders or unitholders.

If the CSSF considers it necessary, it may require, in writing, within 15 working days of receipt of the copies of the complete information, that the receiving UCITS modifies the information to be provided to its shareholders or unitholders. The CSSF will inform the competent authority of the merging UCITS home Member State within 20 working days of being notified thereof whether it is satisfied with the modified information to be provided to the shareholders or unitholders of the receiving UCITS.


4.7.3. Third-party involvement, information and other rights of shareholders or unitholders

The depositaries of the merging UCITS and the receiving UCITS verify the compliance of certain elements of the common draft terms of the proposed merger (including the identification of the type of merger and of the UCITS involved, the planned effective date of the merger and the rules applicable to the transfer of assets and the exchange of units) with the 2010 Law and the constitutional documents of their respective UCITS (see also Section 11.4.6.3.).

An independent auditor must validate (i) the criteria adopted for the valuation of the assets and, if necessary, liabilities, (ii) the calculation method of the exchange ratio and, where applicable, (iii) the cash payment per share or unit. The independent auditor must also validate the actual exchange ratio.

The independent auditor’s report most generally covers the period starting from the beginning of the accounting period of the absorbed UCITS and ending on the agreed merger date.

Investors in the merging and receiving UCITS have the right to redeem their shares or units, or convert them into shares or units of another UCITS with similar investment policies and managed by the same management company or by a related company, free of charge (except for disinvestment costs).

Information on the proposed merger must be provided to shareholders or unitholders of both the merging and the receiving UCITS, only after the CSSF has authorized the proposed merger, and at least 30 days before the deadline for redemption or conversion. This information shall include the following:• ➢ The background to and the rationale for the proposed merger• ➢ The possible impact of the proposed merger on the shareholders or unitholders of both the

merging UCITS and the receiving UCITS (including, inter alia, any material differences in respect of investment policy and strategy, costs, expected outcome, periodic reporting, possible dilution in performance, and, where relevant, their tax treatment)

• ➢ Any specific rights shareholders or unitholders have in relation to the proposed merger (including, inter alia, the right to obtain additional information, the right to obtain a copy of the report of the independent auditor or, if applicable, of the depositary, and the right to request the redemption or, as the case may be, the conversion of their shares or units without charge)

• ➢ The relevant procedural aspects and the planned effective date of the merger• A copy of the KII of the receiving UCITS

4.7.4. Costs and investment limits

The legal, advisory and administrative costs associated with the preparation and the completion of the merger are to be borne by the management company unless the relevant UCITS are self-managed.

While ensuring observance of the principle of risk-spreading, the receiving UCITS may derogate from concentration rules (see Sections 5.2.2.8.1.I.(1) to (7), II., III. and IV.) for a period of six months starting from the effective date of the merger.

4.8. Authorization of a side pocket

The CSSF has implemented a fast-track authorization procedure for the creation of side pockets for non-UCITS. Side pockets are described in Section 3.3.6.

The fast-track procedure can be used when the assets to be side pocketed represent less than 20% of the total net assets of the UCI or compartment, and where the fees are charged to the side pocket at a reduced level. Where the assets represent more than 20%, the CSSF will treat each application on a case-by-case basis; this will imply an assessment of whether suspension or liquidation are not more appropriate than the creation of the side pocket.



To create a side pocket, the following requirements must be met:• ➢ The management company of the common fund or the governing body of the investment company

must confirm that the proposed side pocketing is not contrary to the constitutional document of the UCI

• ➢ The illiquidity of the assets to be side pocketed must be fully established• ➢ The administration must be technically capable of servicing the side pocket• ➢ The assets must be realized as soon as they become liquid

The following information must be submitted to the CSSF with the application for authorization to create a side pocket:• ➢ Description of the illiquid assets: the percentage of the assets to be side pocketed and the reasons

for side pocketing the assets• ➢ Side pocketing option: the choice of creation of a new share class or unit class or compartment,

and the reasons leading to this choice• ➢ Description of the fees to be charged to the side-pocket: fees are normally expected to be at a

reduced level and described in the prospectus (except legal expenses to preserve the rights and value in relation to the illiquid assets)

• ➢ Communication to investors: this includes communication on the implementation of the side pocketing option, information on any charges related to the side pocket or the assets therein, and a holdings report at a frequency similar to that of the compartment initiating the side pocket

• ➢ Communication to other authorities, if applicable • ➢ Confirmation that periodic reports will describe the side pockets existing at the time of their issue

The CSSF will generally provide its authorization or submit comments and observations to the applicant within one week of reception of the application. Once the side pocket application is approved, the CSSF requires at least quarterly information on the state and the evolution of the side-pocket. The CSSF must be informed immediately when a side pocket is paid out or terminated.

For UCIs whose manager is subject to the AIFM Law, side pockets may be one element of the special liquidity management arrangements implemented by AIFM; this is covered in Section 9.3.6.C..

4.9. Transfer of foreign UCIs to Luxembourg

4.9.1. Transfer options

The main options to transfer a foreign UCI to Luxembourg can be summarized as follows:• ➢ Re-domiciliation by transfer of the registered office of the foreign UCI to Luxembourg otherwise

known as transfer of registered office• ➢ Contribution of the assets and liabilities of the foreign UCI to an existing or newly created

Luxembourg UCI, or one or more compartments thereof• ➢ Cross-border merger between the foreign UCI and a Luxembourg UCI, or one or more

compartments thereof

When transferring a foreign UCI, there are a number of factors to consider, such as eligibility of the assets and compliance with investment limits, qualification of investors, investor approval, compliance with anti-money laundering and counter terrorist financing requirements, and taxation.

4.9.2. Re-domiciliation by transfer of the registered office to Luxembourg

The transfer of the registered office consists of the relocation of the registered office of the foreign UCI to Luxembourg.

The Law of 10 August 1915 on commercial companies, as amended (the 1915 Law) provides the concept of the continuity of legal entities, thereby permitting a foreign UCI to transfer its registered office to Luxembourg. The transfer of registered office is, therefore, permitted for investment companies. However, it is not permitted for common funds.


To transfer the registered office, the following process would normally be followed:• ➢ A corporate decision is made by the shareholders and/or governing body of the foreign UCI to

relocate the registered office• ➢ If applicable, a notification is sent to the foreign regulator• ➢ The fund documentation of the foreign UCI is amended to comply with Luxembourg law• ➢ Prior approval of the CSSF is obtained before the transfer (see section 4.3. and 4.4.)• ➢ Local service providers are appointed• ➢ An extraordinary general meeting (EGM) of shareholders, in front of a Luxembourg notary, is

required to ratify the transfer

In practice, it is advisable to obtain a formal legal opinion confirming that the laws of the country of origin allow such continuation of the legal personality of the foreign UCI after the transfer of its registered office in a foreign country. In general, the constitutional document and offering documents of the foreign UCI should permit relocation of the registered office.

4.9.3. Contribution of the assets and liabilities to a Luxembourg UCI

The principle of the contribution in kind is that the foreign UCI contributes all of its assets and liabilities to an existing or newly incorporated Luxembourg UCI, or a compartment thereof. In exchange, the receiving UCI issues shares or units to the shareholders or unitholders of the foreign UCI.

To contribute the assets and liabilities of a foreign UCI to a Luxembourg UCI, the following process would normally be followed:• ➢ The constitutional document and offering documents of the Luxembourg UCI would need to permit

contributions in kind• ➢ Prior approval of the CSSF would be obtained before the contribution in kind (see Section 4.3.)• ➢ Contributed assets would need to be eligible assets for the receiving Luxembourg UCI (see

Chapter 5)• ➢ Investors of the foreign UCI would need to be eligible in accordance with the applicable

requirements (see Section 3.4.)• ➢ The shareholders and/or governing body of the Luxembourg UCI would need to approve the

contribution in kind before it takes effect• ➢ A report would be issued by an independent auditor to confirm, inter alia, that the value of the

contribution in kind corresponds at least to the number and to the value of the shares or units to be issued

4.9.4. Cross-border merger with a Luxembourg UCI

The principle of the cross-border merger is that the foreign UCI transfers all of its assets and liabilities to an existing or newly incorporated Luxembourg UCI, or a compartment thereof. In exchange, the receiving Luxembourg UCI issues shares or units to the shareholders or unitholders of the foreign UCI.

To merge a foreign UCI with a Luxembourg UCI, the requirements on mergers of Luxembourg UCIs have to be met (see in Section 4.7.).



4.10. Liquidation of UCIs and compartments

4.10.1. Liquidation of a UCIThe liquidation procedure for a UCI depends on the reason (voluntary or judicial) and on the legal structure. It is mainly governed by the 1915 Law, the 2010 Law and the SIF Law. Taxation on dissolution is covered in Section 13.3.2.3..

4.10.1.1. Voluntary liquidation

4.10.1.1.1. Investment companies

A. Liquidation scenariosThere are three possible voluntary liquidation scenarios for investment companies:• ➢ According to the 1915 Law, the shareholders of a UCI set up as an investment company can

voluntarily decide to dissolve the company and put it into liquidation at an extraordinary general meeting (EGM)

• ➢ If the capital falls below two-thirds of the minimum capital of €1,250,000, the governing body of the UCI must submit the question of the dissolution to the shareholders at an EGM. No quorum is prescribed; the decision is made by a simple majority of the shares represented at the EGM

• ➢ If the capital falls below one-fourth of the minimum capital of €1,250,000, the dissolution may be resolved by shareholders holding one-fourth of the shares at an EGM

In the second and third types of voluntary liquidation, the EGM must be held within 40 days of the date of ascertainment that the net assets have fallen below two-thirds or one-fourth of the minimum capital, as the case may be.

B. Liquidation processUCIs which have only one (remaining) ultimate shareholder may be dissolved if the shareholder decides to dissolve the UCI, without the appointment of a liquidator. In such cases, the UCI’s auditor is required to issue an independent report on the financial statements of the UCI covering the period from the beginning of the accounting period to the beginning of the liquidation period (i.e., until the date that the UCI is removed from the official list of the CSSF). The dissolution of the UCI is formalized by a notary deed.

In all other cases (including cases where the one (remaining) shareholder decides not to apply the simplified process referred to in the preceding paragraph), the liquidation process involves a liquidator. The liquidator’s main responsibility is to realize the assets and to settle the liabilities.

The key phases of voluntary liquidation are summarized as follows: • ➢ An EGM is convened before a public notary in order to, inter alia:

• ➢ Resolve the dissolution and the liquidation of the investment company• ➢ Appoint a liquidator and determine his responsibilities. The liquidator has to obtain prior

approval from the CSSF before being appointed by the shareholders• ➢ The UCI’s auditor is required to issue an independent report on the financial statements of the

UCI covering the period from the beginning of the accounting period to the beginning of the liquidation period (i.e., until the date that the UCI is removed from the official list of the CSSF)

Additional EGMs may be held to authorize certain actions, such as contribution of the investment company’s assets to other companies, or to inform shareholders of the progress of the liquidation.

• ➢ The liquidator issues its liquidation report• ➢ The independent auditor of the UCI issues a report on the liquidator’s report and the liquidation

accounts for the period from the beginning of the liquidation to the end of the liquidation


• ➢ A final EGM is convened (generally by private deed) in order to, inter alia:• ➢ Present the liquidator’s report• ➢ Present and approve the independent auditor’s report on the liquidator’s report• ➢ Approve the liquidator’s report• ➢ Grant discharge to the liquidator and the independent auditor• ➢ Indicate the place where the corporate books and records are to be kept for a period of at

least five years after the publication of the closing in the Official Gazette (Mémorial)

4.10.1.1.2. Common funds

A. Liquidation scenariosThe management company of a common fund can define the possible liquidation scenarios in the management regulations. The management company is entitled, or obliged, to liquidate the common fund if one of these defined scenarios occurs.

B. Liquidation processThe voluntary liquidation process for a common fund is not subject to specific legal provisions. The liquidation process for a common fund is generally described in the management regulations. The appointment of a liquidator is not mandatory. Where a liquidator is appointed, the liquidation of the common fund follows, by analogy, the provisions applicable to investment companies:• ➢ The liquidator – generally the management company itself, or any other liquidator approved by

the CSSF – realizes the assets, settles the liabilities and divides the remaining net asset value between the unitholders in proportion to the number of units held by them

• ➢ The auditor is required to issue an independent report on the financial statements of the UCI covering the period from the beginning of the accounting period to the beginning of the liquidation period (i.e., until the date that the UCI is removed from the official list of the CSSF)

• ➢ If a liquidator’s report is requested, the independent auditor of the UCI may be requested to issue a report on the liquidator’s report and the liquidation accounts for the period from the beginning of the liquidation to the end of the liquidation

4.10.1.2. Required liquidation

4.10.1.2.1. Investment companies

A UCI is judicially liquidated when its authorization is withdrawn.

4.10.1.2.2. Common funds

A common fund is judicially liquidated or legally required to be liquidated in the following cases:• ➢ Upon the expiry of a period which may be fixed by or foreseen in the management regulations• ➢ In case of bankruptcy of the management company• ➢ In case of cessation of duties by the management company or by the depositary, if they have not

been replaced within two months (until it is replaced, the depositary must continue to act in the interests of the unitholders)

• ➢ Where the net assets of the common fund have fallen, for more than six months, below one fourth of the legal minimum

• ➢ If authorization of the common fund is withdrawn

If the net assets fall below two thirds of the legal minimum of €1,250,000, the management company must immediately inform the CSSF which may require the common fund to be put into liquidation.

4.10.2. Liquidation of a compartment

Compartments of UCIs can be liquidated separately as if they were separate entities.

For a UCI incorporated as an investment company, the articles of incorporation state whether the decision to liquidate a compartment should be taken by the governing body or by the shareholders. In the latter case, the articles of incorporation should clarify whether all the shareholders of the UCI should take part in the vote, or only the shareholders of the compartment.



For a common fund, the governing body of the management company is entitled to decide to liquidate a compartment. The management regulations can require the management company to submit the decision to liquidate the compartment to the unitholders; in this case, they should clarify whether all the unitholders of the UCI should take part in the vote, or only the unitholders of the compartment.

The liquidation of the last compartment of a UCI implies, as a consequence, the liquidation of the UCI.

CSSF Circular 12/540 of July 2012 covers, inter alia, compartments in liquidation: a compartment needs to be removed from the prospectus or offering document at its next update and at the latest within six months of the date of the decision by the Board of Directors to either:• ➢ Liquidate the compartment • ➢ Close the compartment by realizing and distributing all assets to the investors

No specific auditor’s report is required on the liquidation of a compartment at the liquidation date. The liquidation is covered by the audit of the annual financial statements. However, the auditor may, at the request of the UCI, perform agreed-upon procedures on the liquidation NAV and report the results of such procedures.

4.10.3. Liquidation of feeder or master UCITS

The liquidation of a master UCITS requires the liquidation of the feeder UCITS unless the CSSF approves either of the following:• ➢ The investment of at least 85% of the assets of the feeder UCITS in shares or units of another

master UCITS − i.e., change of master UCITS (see Section 4.6.2.)• ➢ The amendments of the constitutional document of the feeder UCITS in order to allow it to convert

into an ordinary, non-feeder UCITS

In case of voluntary liquidation, the liquidation of the master UCITS cannot take place in the three-month period following the date on which the master UCITS informed all of its shareholders or unitholders and the CSSF of the binding decision to liquidate.

The merger or the division of a master UCITS implies as a consequence the liquidation of the feeder UCITS unless the CSSF approves specific provisions (see Section 4.7.1.1.).

4.11. Dormant compartments

CSSF Circular 12/540 of July 2012 on non-launched compartments, compartments awaiting reactivation and compartments in liquidation covers both compartments under the 2010 Law and the SIF Law. Share or unit classes within compartments are not covered by this Circular.

The Circular lays down that: • ➢ Non-launched compartments: new compartments approved by the CSSF, but which have not issued

shares or units, have a period of 18 months following the date of the CSSF authorization letter to be launched

• ➢ Compartments awaiting reactivation: compartments which become inactive after the redemption of all of the shares or units can remain inactive for up to 18 months following the date on which they became inactive

Non-launched compartments and compartments which have not been reactivated within the 18 month period must be removed from the prospectus or offering document at its next update and at the latest within an additional six month period. Marketing materials must also be adapted. If the compartment does not appear in the prospectus or offering document, the CSSF considers the proposed launch of the compartment as having been abandoned.

The 18 month period is also granted to non-launched compartments and compartments awaiting reactivation at the date of publication of the Circular.

108 | 5. Investment rules

5.1. Introduction

This chapter summarizes investment and borrowing rules applicable to UCITS, 2010 Law Part II UCIs, SIFs, AIF, EuVECA and EuSEF.

UCITS are subject to detailed investment and borrowing rules.

2010 Law Part II UCIs are subject to less detailed investment and borrowing rules which are specific to the type of UCI: UCIs investing in transferable securities, hedge funds, venture capital funds, futures contracts and options funds, and real estate funds.

SIFs are subject to general diversification requirements.

AIF managed by authorized AIFM, and internally managed AIF which are subject to the AIFM Law (“Full AIFM regime AIF”) are subject to specific requirements in relation to their investments in securitization positions, and major holdings and control of non-listed companies.

The managers of qualifying European Venture Capital Funds (EuVECA) and of qualifying European Social Entrepreneurship Funds (EuSEF) are required to comply with specific investment restrictions in order to benefit from the passport for the marketing of their EuVECA and EuSEF.

5. Investment rules


5. Investment rules | 109

Investment rules 5

5.2. UCIs under the 2010 Law

5.2.1. Introduction

5.2.1.1. UCITS and Part II UCIs

The investment and borrowing rules for UCITS (Part I UCIs) are set out in Section 5.2.2..

The investment and borrowing rules for Part II UCIs are set out in Section 5.2.3..

Disclosure requirements for 2010 Law UCIs (e.g., prospectus and financial statement disclosures) are covered in Chapter 12.

5.2.1.2. Multiple compartment UCIs

In the case of multiple compartment UCIs, the investment and borrowing restrictions must be complied with by all compartments, except those relating to significant influence over an issuer (see Sections 5.2.2.8.2. and 5.2.3.1.C.), which apply to all compartments collectively (Article 48 (1) of the 2010 Law and Chapter J of Circular 91/75).

5.2.2. UCITS

This section introduces the concepts of “core” and “non-core” eligible assets and the regulations setting down the investment and borrowing rules applicable to UCITS. It then outlines the investment and borrowing rules, which can be classified as follows:• ► Eligible assets (see Section 5.2.2.3. for a summary, and Section 5.2.2.7. for further details)• ► Diversification requirements (see Section 5.2.2.4. for a summary, and Section 5.2.2.8. for further

details)• ► Borrowing requirements, rules relating to the granting of loans and short selling (see Section

5.2.2.5. for a summary, and Section 5.2.2.9. for further details)• ► Techniques and instruments relating to transferable securities and MMIs (see Section 5.2.2.6. for a

summary, and Section 5.2.2.10. for further details)

5.2.2.1. Core and non-core eligible assets

A UCITS must invest in “eligible assets”. There are two types of eligible assets which are, for the purposes of this Chapter of the Technical Guide, defined as “core” and “non-core”. “Core” and “non-core” eligible assets are not terms used in the regulations.

Core eligible assets are assets which are eligible for investment by UCITS under Article 41 (1) of the 2010 Law. They include:

A. Transferable securities admitted to or dealt in on a regulated market, including:

• ► Structured financial instruments (SFIs) • ► Transferable securities or money market instruments embedding derivatives• ► Recently issued transferable securities or money market instruments

B. Money market instruments (MMIs)C. DepositsD. Closed-ended UCIsE. Open-ended UCIsF. Financial derivative instruments (FDIs), including FDIs on financial indicesG. Ancillary assets


Non-core eligible assets are assets which are eligible for investment by UCITS under Article 41 (2) a) of the 2010 Law, sometimes referred to as the “trash ratio”.

No more than 10% of net assets may be invested as non-core investments. Where assets are only eligible as non-core investments, this is indicated in this Section.

Precious metals and certificates representing them are assets specifically prohibited by the 2010 Law.

5.2.2.2. Regulations applicable

The basic investment and borrowing rules for UCITS are set out in the 2010 Law. The 2010 Law replicated the investment and borrowing rules for UCITS of the 2002 Law. These rules have been clarified by a Grand-Ducal Regulation, CSSF Circulars and the European Securities and Markets Authority (ESMA85) guidelines. Such clarifications remain applicable under the 2010 Law.

The investment and borrowing rules of the 2010 Law transpose the requirements of the UCITS Directive. To further clarify the definition of eligible investments (“eligible assets”) for a UCITS and to ensure consistent interpretation and implementation of the UCITS Directives across all EU Member States, the European Commission issued a Directive clarifying certain definitions (Directive 2007/16/EC of 19 March 2007 – the Eligible Assets Directive).

ESMA has issued two sets of additional guidelines clarifying certain parts of this Directive:• ► Eligible assets for investment by UCITS of March 2007, as amended. ESMA guidelines concerning

eligible assets for investment by UCITS were amended in September 2008• Eligible assets for investment by UCITS – The classification of hedge fund indices as financial indices

of July 2007

The Grand-Ducal Regulation of 8 February 2008 (the “Grand-Ducal Regulation”), concerning certain definitions of the 2010 Law, transposes the Eligible Assets Directive into national regulation.

CSSF Circular 08/339 of 19 February 2008, as amended by CSSF Circular 08/380 of 26 November 2008, reproduces ESMA’s two sets of Guidelines of the Committee of European Securities Regulators (CESR) concerning eligible assets for investment by UCITS.

CSSF Circulars 11/512, 08/356 and 91/75 also provide some clarifications relevant to the investment and borrowing rules of UCITS.

ESMA published its Guidelines on ETFs and other UCITS issues on 18 December 2012. The guidelines impact UCITS using efficient portfolio management (EPM) techniques such as securities lending, sale and repurchase agreements (repos) and purchase and resale agreements (reverse repos) as well as specific categories of UCITS: ETFs, index-tracking UCITS (including leveraged index-tracking UCITS), UCITS entering into total return swaps (TRS) and UCITS investing in financial indices. ESMA also updates UCITS rules in relation to management of collateral for OTC financial derivative instrument (FDI) transactions and EPM techniques.

The guidelines became effective on 18 February 2013; they were enacted in Luxembourg by CSSF Circular 13/559 which reproduces ESMA’s Guidelines on ETFs and other UCITS issues. UCITS existing at that time benefit from transitional provisions giving them, in certain cases, up to 12 additional months (from 18 February 2013) to comply. UCITS, or compartments of existing UCITS, established after that date are required to comply with the guidelines immediately.

5.2.2.3. Eligible assets — summary

This Section provides a high level overview of the eligible assets for investment by UCITS.

A. Transferable securities — for example, ordinary shares and bondsTransferable securities which are listed on or dealt in on a regulated market are eligible as core investments. Transferable securities which are not listed on or dealt in on a regulated market are eligible as non-core investments only.



Investment rules 5

To be transferable, the following criteria must be met:• ► The potential loss on the investment is limited to the amount paid to acquire it• ► The liquidity of the instrument must not compromise the ability of the UCITS to meet its

repurchase obligations• ► A reliable valuation must be available for the investment• ► Appropriate information on the investment must be available• ► The instrument must be negotiable – i.e., there are no limitations on its transferability• ► The acquisition of the investment must be consistent with the investment policy of the UCITS• ► The risks associated with the investment must be adequately captured by the risk management

process of the UCITS

Detailed requirements are outlined in Section 5.2.2.7.1..

Structured financial instruments (SFIs) – for example, certificates on stock indices, commodities or real estate

Provided they meet the transferable securities criteria, financial instruments backed by or linked to the performance of other assets (which may not be eligible assets) are included within the definition of transferable securities.


Transferable securities or money market instruments (MMIs) embedding derivatives – for example, convertible bonds

A transferable security or MMI may embed a derivative, i.e., it is an instrument which contains a component fulfilling the following criteria:• ► Some or all of the cash flows of the transferable security or the MMI (host contract) can be

modified according to a variable, and therefore vary in a way similar to a stand-alone derivative• ► Its economic characteristics and risks are not closely related to the economic characteristics

and risks of the host contract• ► It has a significant impact on the risk profile and pricing of the transferable security or MMI

For those transferable securities or MMIs embedding a derivative, the underlying of the embedded derivative instrument must consist of eligible assets for a UCITS. Detailed requirements are outlined in Section 5.2.2.7.3..

Recently issued transferable securities or money market instruments (MMIs)

Recently issued transferable securities and MMIs not yet listed or dealt in on a regulated market are permitted provided that the terms of issue include an undertaking that an application will be made for admission to a regulated market and that such admission is secured within one year of issue.


B. Money market instruments (MMIs) — for example, commercial papersMMIs are eligible as core investments if they meet the following criteria:• ► They are normally dealt in on the money market • ► They are liquid• ► They have a value that can be accurately determined at any time• ► Either:

• ► They are listed on an official stock exchange or traded on a regulated market• ► Their issue or issuer is regulated for the purpose of protecting investors and savings and one

of the following criteria is met:• ► They are issued or guaranteed by a state or local authority, or supranational issuer• ► They are issued by an undertaking that has securities which are dealt in on a regulated

market


• ► They are issued or guaranteed by an establishment subject to sufficient prudential supervision

• ► They are issued by a securitization vehicle which benefits from a secured banking liquidity line


C. Deposits with credit institutionsDeposits are eligible as core investments if they meet the following criteria:• ► They are with a credit institution that has its registered office in an EU Member State or, if

located in a non-Member State, it is subject to equivalent prudential rules• ► They are repayable on demand or have the right to be withdrawn• ► They have a maturity of up to 12 months

D. Closed-ended UCIsClosed-ended undertakings for collective investment (UCIs) are eligible as core investments if they are listed on or dealt in on a regulated market, meet the transferable securities criteria (see Point A.) and if:• ► They are subject to corporate governance mechanisms equivalent to those applied to companies

ESMA guidance on investment in closed-ended UCIs in contractual form:

In assessing whether the corporate governance mechanisms for funds in contractual form are equivalent, the following factors are indicators which can be used as guidance:

a) Unitholders’ rights. The contract on which the fund is based should provide for:• ► Right to vote of the unitholders in the essential decision making processes of the fund

(including appointment and removal of asset management company, amendment to the contract which set up the fund, modification of investment policy, merger, liquidation)

• ► Right to control the investment policy of the fund through appropriate mechanisms

b) It is understood that the assets of the fund should be separate and distinct from those of the asset manager and the fund will be subject to liquidation rules adequately protecting the unitholders.

• ► They are managed by an entity subject to national regulation for the purpose of investor protection

Listed closed-ended hedge funds may, therefore, be eligible as core investments provided these criteria are met.

Unlisted closed-ended UCIs may be eligible as non-core investments if the aforementioned criteria are met (including the transferable securities criteria).

Fund of fund structures are, however, not eligible as core investments.

UCITS may not invest in closed-ended funds for the purpose of circumventing the investment limits.

The CSSF clarified that it is not necessary to analyze the eligibility of the underlying assets of the closed-ended fund providing that the fund itself meets the transferable securities criteria and as long as it does not contain embedded derivatives.

E. Open-ended UCIsShares or units of open-ended UCITS and other UCIs, including Exchange Traded Funds (ETFs), are eligible as core investments if:• ► Their sole object consists of collective investment in transferable securities or in other liquid

financial assets which are eligible assets for UCITS, they raise capital from the public and they operate on the principle of risk-spreading

• ► Their shares or units are, at the request of holders, repurchased or redeemed, directly or indirectly, out of their assets


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• ► They are subject to supervision considered by the CSSF to be equivalent to that laid down in EU Law and the cooperation between authorities is sufficiently ensured

ESMA guidance:

In assessing whether a UCI is subject to equivalent supervision, the following factors can be used to guide a decision on equivalence:• ► Memoranda of Understanding (bilateral or multilateral), membership of an international

organization of regulators, or other cooperative arrangements (such as an exchange of letters) to ensure satisfactory cooperation between the authorities

• ► The management company of the target UCI, its rules and choice of depositary have been approved by its regulator

• ► Authorization of the UCI in an Organisation for Economic Co-operation and Development (OECD) Member State

• ► The level of protection for shareholders or unitholders in the other UCIs is equivalent to that provided for shareholders or unitholders of a UCITS (asset segregation, borrowings, lending, etc.)

ESMA guidance:

In assessing whether the level of protection is equivalent, the following factors can be used to guide a decision on equivalence:• ► Rules guaranteeing the autonomy of the management of the UCI, and management in the

exclusive interest of the unitholders • ► The existence of an independent trustee/custodian with similar duties and responsibilities

in relation to both safekeeping and supervision. Where an independent trustee/custodian is not a requirement of local law as regards collective investment schemes, robust governance structures may provide a suitable alternative

• ► Availability of pricing information and reporting requirements• ► Redemption facilities and frequency• ► Restrictions in relation to dealings by related parties• ► The extent of asset segregation• ► The local requirements for borrowing, lending and uncovered sales of transferable

securities and money market instruments regarding the portfolio of the UCI

• ► They produce semi-annual and annual reports• ► They do not invest, according to their constitutional document, more than 10% of their net

assets in other UCITS or UCIs

F. Financial derivative instruments (FDIs)For FDIs to be eligible, the underlying asset of the FDI must be a core eligible asset – a transferable security, deposit, MMI, closed and open-ended fund or a financial index, interest rates, foreign exchange rates or currency.

If the acquisition or use of an FDI could result in the delivery or the transfer of non-eligible assets, the FDI, regardless of its nature, is not eligible.

“Over-the-counter” (OTC) FDIs must meet the following criteria:• ► The counterparties must be subject to prudential supervision, approved by the CSSF• ► They must be subject to daily, reliable and verifiable valuation • ► They must be able to be sold, liquidated or closed by an offsetting transaction at any time at

their fair value at the UCITS’ initiative

Eligible FDIs include, but are not limited to, futures, options, swaps (interest rate swaps, currency swaps, total return swaps, credit default swaps, etc.), forwards, and contracts for differences.


FDIs on financial indices

To be eligible as the underlying of an FDI, financial indices must meet the following criteria:• ► Be sufficiently diversified• ► Represent an adequate benchmark for the market it refers to• ► Be published in an appropriate manner


Based on these eligibility criteria, eligible indices may, amongst others, consist of commodity and metal indices, real estate indices, and private equity indices.

Hedge fund indices may also be eligible provided that the following additional criteria are met:• ► There exist pre-determined rules and objective criteria for selection and rebalancing of the

components of the index• ► No payments are accepted by the index provider from potential index components • ► The methodology relating to the index may not allow retrospective changes to previously

published index values

Exposure to hedge fund indices may also be obtained through the use of performance swaps or total return swaps.


G. Ancillary assetsMovable and immovable property may be acquired by an investment company if it is essential for its business.

Ancillary liquid assets may be held.

5.2.2.4. Diversification requirements — summary

This Section provides a high level overview of the diversification requirements for UCITS.

As well as meeting the eligible assets criteria, the investments of UCITS must meet the following diversification requirements:• ► No more than 10% of net assets may be invested in transferable securities or MMIs issued by the

same body. In certain cases, a higher limit may be applied (where the issuer or issuance meet specific criteria, and in the case of index replicating UCITS)

• ► No more than 20% of net assets may be invested in deposits with the same body• ► The risk exposure to a counterparty in an OTC FDI transaction may not exceed 10% of net assets in

the case of a credit institution and 5% in other cases• ► The total value of transferable securities and MMIs held in issuing bodies in each of which is

invested more than 5% of net assets must not exceed 40% of net assets• ► No more than 20% of net assets may be invested in any combination of the following with a single

body:• Transferable securities or MMIs• Deposits• OTC FDIs• Techniques and instruments relating to transferable securities and MMIs

• ► No more than 20% of net assets may be invested in a single UCITS or other UCI (for the purposes of applying this limit, each compartment of a target multiple compartment UCI is considered as a separate issuer)

• ► No more than 30% of net assets may be invested in aggregate in shares or units of other UCIs (excluding UCITS)

• ► A UCITS (or its management company in the case of a common fund) may not acquire any shares carrying voting rights which would enable it to exercise significant influence over the management of an issuing body

• A UCITS may acquire no more than: • 10% of the non-voting shares of the same issuer• 10% of the debt securities of the same issuer• 25% of the shares or units of the same UCI• 10% of the MMIs issued by the same issuer

Detailed requirements are outlined in Section 5.2.2.8..


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5.2.2.5. Borrowing requirements, and rules relating to the granting of loans and short selling — summary

This Section provides a high level overview of the borrowing requirements, and rules relating to the granting of loans and short selling for UCITS.

Neither an investment company, a management company nor a depositary acting on behalf of a common fund, may borrow. However, there are certain exceptions to this rule, including:• ► Up to 10% of net assets may be borrowed on a temporary basis only• ► Back-to-back loans may be acquired and are not considered as borrowings for the purposes of

these limits

Granting of loans or acting as guarantor on behalf of third parties is not permitted.

Selling securities short is not permitted.


5.2.2.6. Techniques and instruments relating to transferable securities and MMIs — summary

This Section provides a high level overview of the techniques and instruments relating to transferable securities and MMIs that can be used by UCITS.

Techniques and instruments relating to transferable securities and MMIs may be employed provided they are used for the purpose of efficient portfolio management (EPM) and do not result in the UCITS diverging from its investment objectives or a risk profile higher than that described in its sales documents.

Such techniques and instruments may include:• ► Securities lending transactions• ► Sale with the right of repurchase transactions• ► Reverse repurchase and repurchase agreement transactions• ► Currency hedging transactions• ► Transferable securities and MMIs embedding FDIs

Physical short selling of borrowed securities is not a permitted activity. It may be possible to use FDIs to create synthetic short positions.

Permitted techniques and instruments should meet the following criteria:• ► Be economically appropriate and realized in a cost-effective manner• ► Be entered into for at least one of the following reasons:

• Risk reduction• Cost reduction• Generation of additional capital or income for the UCITS, providing that risk levels and

diversification remain consistent• ► Be captured by the risk management process


5.2.2.7. Detailed rules regarding eligible assets

5.2.2.7.1. Transferable securities – definitions and requirements

Transferable securities which are admitted to an official listing on a regulated market or dealt in on another regulated market which operates regularly and is recognized and open to the public are eligible as core investments. Stock exchanges or other regulated markets used which are outside the EU should be specified in the constitutional document.


Transferable securities are defined in Article 1 of the 2010 Law as:• ► Shares and other securities equivalent to shares (“shares”)• ► Bonds and other forms of securitized debt (“debt securities”)• ► Any other negotiable securities which carry the right to acquire such transferable securities by

subscription or exchange, excluding techniques and instruments (see Section 5.2.2.10.(1)).

I. The Grand-Ducal Regulation clarifies that transferable securities should meet the following criteria:

(1) The potential loss which the UCITS may incur as a result of holding the securities should be limited to the amount paid for them.

ESMA clarification: a partly paid security must not expose the UCITS to a loss beyond the amount to be paid for it.

(2) The liquidity of the securities must not compromise the ability of the UCITS to repurchase or redeem its shares or units at the request of the shareholders or unitholders.

ESMA clarification: in determining liquidity, the following may need to be taken into account:

• ► Volume and turnover in the security• ► If the price is determined by supply and demand in the market, the issue size, and

the portion of the issue that the asset manager plans to buy; and evaluation of the opportunity and timeframe to buy or sell

• ► Where necessary, an independent analysis of bid and offer prices over a period of time may indicate the relative liquidity and marketability of the instrument, as may the comparability of the available prices

• ► In assessing the quality of secondary market activity in a transferable security, analysis of the quality and number of intermediaries and market makers dealing in the transferable security concerned should be considered

The CSSF clarified that, in determining liquidity, the entire portfolio must be taken into consideration and not only transferable securities considered individually.

Financial instruments which are admitted or dealt in on a regulated market (see Point II.(1)) are presumed not to compromise the ability of the UCITS to repurchase or redeem its shares or units at the request of the shareholders or unitholders.

(3) A reliable valuation is available for them:(i) In the case of securities admitted to or dealt in on a regulated market, in the form of

accurate, reliable and regular prices which are either market prices or prices made available by valuation systems independent from issuers

(ii) In the case of other securities, in the form of a valuation on a periodic basis which is derived from information from the issuer of the security or from competent investment research

(4) Appropriate information is available for them:(i) In the case of securities admitted to or dealt in on a regulated market, in the form of

regular, accurate and comprehensive information to the market on the security or, where relevant, on the portfolio of the security

(ii) In the case of other securities, in the form of regular and accurate information to the UCITS on the security or, where relevant, on the portfolio of the security


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(5) They are negotiable – i.e., there are no limitations on their transferability

ESMA clarification: There is a presumption, but not a guarantee, that transferable securities admitted to trading on a regulated market are negotiable. The presumption does not apply if the UCITS knows or ought reasonably to know that any particular security is not negotiable.

(6) Their acquisition is consistent with the investment objectives or the investment policy, or both

(7) Their risks are adequately captured by the risk management process of the UCITS (see Section 9.2.)

ESMA clarification: the security’s risk and its contribution to the overall risk profile of the portfolio must be assessed on an ongoing basis.

II. Regulated Market

(1) “Regulated market”

A “regulated market” within the context of the 2010 Law is a regulated market in the sense of the Markets in Financial Instruments Directive (MiFID)86. European Economic Area (EEA)87 regulated markets appear on the relevant European Commission list.

(2) “Regulated market which operates regularly and is recognized and open to the public”

Circular 91/75 defines a regulated market which operates regularly and is recognized and open to the public as follows:• ► “Regulated”: the essential characteristic of a regulated market is the clearing which

presupposes the existence of a central market organization for the processing of orders. Such a market may also be distinguished by multilateral order matching (general matching of bid and offers enabling the setting of a single price), transparency (maximum information distribution amongst buyers and sellers giving them the possibility to follow the evolution of the market so that they may ensure that their orders have been carried out at current conditions) and the neutrality of its organizer (the organizer’s role must be limited to recording and supervision)

• ► “Recognized”: the market must be recognized by a state or by a public authority which has been delegated by that state or by another entity which is recognized by the state or by that public authority, such as a professional association

• ► “Operating regularly”: securities admitted to this market must be dealt in at a certain fixed frequency (no sporadic dealings)

• ► “Open to the public”: the securities dealt in thereon must be accessible to the public

5.2.2.7.2. Structured financial instruments — for example, certificates

Provided they meet the transferable securities criteria, financial instruments backed by or linked to the performance of other assets (which may not be eligible assets) are included within the definition of transferable securities.

CSSF clarification provided in its Annual Report 2009:

The eligibility analysis of structured financial instruments, i.e., transferable securities linked to the performance of other underlying assets through an FDI, comprises different steps.

In order to qualify as eligible assets in accordance with Sections 5.2.2.7.1. or 5.2.2.7.4. (Article 41 (1) a) - d) of the 2010 Law), and in order to qualify as transferable securities, the instruments in question must first of all meet the transferable securities criteria (see Subsection 5.2.2.7.1.I.).

86 Markets in Financial Instruments Directive (MiFID), Directive 2004/39/EC, as amended87 The European Economic Area (EEA) Member States are the European Union (EU) Member States plus Iceland,

Liechtenstein and Norway.


Secondly, the security should be analyzed to determine if there is an embedded FDI (see Section 5.2.2.7.3. for criteria). There are two possible situations:

(a) Transferable securities embedding an FDI

In this case, the investment manager must apply the “look through” principle and verify the eligibility of the underlying assets in accordance with eligibility criteria for FDIs (see Section 5.2.2.7.6.I. for criteria):• ► If the underlying assets of the FDIs qualify as eligible assets (in accordance with

Sections 5.2.2.7.1. and 5.2.2.7.4. and Subsections 5.2.2.7.5.II. and III., 5.2.2.3.C., D and E − Article 41 (1) of the 2010 Law), the transferable securities are eligible as core investments for the UCITS

• ► If the underlying assets of the FDIs do not qualify as eligible assets, the transferable securities are not eligible investments for the UCITS in accordance with Sections 5.2.2.7.1. or 5.2.2.7.4.

Nevertheless, if the underlying assets of the FDIs qualify as non-core investments, the transferable securities are eligible as non-core investments.

When a transferable security embeds an FDI, the risk management process requirements apply to this FDI (see Section 9.2.).

(b) Transferable securities not embedding an FDI

In principle, in this case, the investment manager is not required to apply the “look through” principle and does not have to verify the eligibility of the underlying assets in accordance with eligibility criteria for FDIs.

Nevertheless, a UCITS must always be managed in accordance with the principle of risk diversification − i.e., it is not acceptable for a UCITS to exclusively invest in different transferable securities which are all linked to the performance of the same underlying asset.

As a consequence, the principle of risk diversification applies to each transferable security as well as to its underlying assets independently of the fact that the transferable security embeds or does not embed an FDI.

The investment manager and the officers responsible for the UCITS must provide for means to satisfy the principle of risk diversification.

5.2.2.7.3. Transferable securities and MMIs embedding FDIs

(1) Such financial instruments must meet the criteria for transferable securities (see Section 5.2.2.7.1.) or MMIs (see Section 5.2.2.7.5.) and must contain a component which fulfills the following criteria:• ► Some or all of the cash flows that otherwise would be required by the transferable security

which functions as a host contract can be modified according to a specific interest rate, financial instrument price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, and therefore vary in a way similar to a stand-alone FDI

• ► Its economic characteristics and risks are not closely related to the economic characteristics and risks of the host contract

• ► It has a significant impact on the risk profile and pricing of the transferable security

(2) A transferable security or MMI shall not be regarded as embedding an FDI where it contains a component which is contractually transferable independently of the transferable security or the MMI.

ESMA states that collateralized debt obligations (CDOs) or asset backed securities using FDIs will generally not qualify as structured financial instruments (SFIs) embedding FDIs, except if they are:• ► Leveraged• ► Not sufficiently diversified

Where a product is structured as an alternative to an OTC FDI, its treatment should be similar to that of an OTC FDI.


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ESMA has indicated that the following instruments may embed FDIs:• ► Credit linked notes• ► Convertible bonds• ► Exchangeable bonds• ► SFIs whose performance is linked to the performance of a bond index• ► SFIs whose performance is linked to a basket of shares • ► SFIs with a fully guaranteed nominal value whose performance is linked to the

performance of a basket of shares

UCITS using SFIs embedding FDIs must respect the principles of the 2010 Law regarding FDIs.

For those transferable securities or MMIs embedding an FDI, the underlying of the embedded FDI must consist of eligible assets for a UCITS.

For example, catastrophe bonds and delta one certificates may be eligible provided the transferable securities criteria are met (see Section 5.2.2.7.1.I.). However, leverage loans will not be eligible as they do not qualify as transferable securities.

5.2.2.7.4. Recently issued transferable securities or MMIs

Recently issued transferable securities and MMIs not yet listed or dealt in on a regulated market are permitted as core investments provided that the terms of issue include an undertaking that application will be made for admission to a regulated market (see Point 5.2.2.7.1.II.(1)) or another regulated market which operates regularly and is recognized and open to the public (see Point 5.2.2.7.1.II.(2)) and that such admission is secured within one year of issue.

5.2.2.7.5. Money market instruments (MMIs) – for example commercial papers

I. MMIs

(1) Article 1 of the 2010 Law defines MMIs as instruments meeting all of the following criteria:• ► Normally negotiated on a money market (see Point (2)) • ► Which are liquid (see Point (3))• ► Whose value can be determined with precision at any time (see Point (4))

The Grand-Ducal Regulation clarifies that MMIs should be understood to mean those which are either admitted to trading or dealt in on a regulated market, or are not admitted to trading.

ESMA clarifications:

Gaining exposure to precious metals through investment in MMIs is forbidden.

Short selling of MMIs is prohibited.

(2) MMIs normally dealt in on the money market should be understood to mean those which meet one of the following conditions:(a) Have a maturity at issuance not exceeding 397 days(b) Have a residual maturity of not exceeding 397 days(c) Undergo regular yield adjustments at least every 397 days(d) Have a risk profile, including credit and interest rate risks, that corresponds to that of

financial instruments which have a maturity of not exceeding 397 days or are subject to a yield adjustment at least every 397 days

ESMA clarification:

Treasury and local authority bills, certificates of deposit, commercial paper, and banker’s acceptances will usually comply with the criterion “normally dealt in on the money market”.


(3) Liquid MMIs are those that can be sold at limited cost in an adequately short timeframe, taking into account the UCITS’ obligations to repurchase or redeem its shares or units at the request of the shareholders or unitholders.

ESMA advises that when assessing the liquidity of MMIs, the following should be considered:• ► Frequency of trades and quotes for the MMI• ► Number of dealers willing to buy and sell the MMI, time needed to sell the MMI, method

of soliciting offers and method of transfer• ► Size of the issuance/program• ► Possibility to repurchase, redeem or sell the MMI in a short period, at limited cost, and

with short settlement delay

When assessing the liquidity of the UCITS, ESMA advises that the following factors should be taken into consideration to ensure that any single MMI does not affect the liquidity of the UCITS:• ► Shareholder or unitholder structure and concentration of shareholders or unitholders of

the UCITS• ► Purpose of funding of shareholders or unitholders• ► Quality of information on the UCITS’ cashflow• ► Prospectus guidelines on limiting withdrawals

(4) MMIs which have a value which can be accurately determined at any time means:• ► They allow the UCITS to calculate its NAV in accordance with the value at which the

financial instrument held in the portfolio could be exchanged between knowledgeable willing parties in an arm’s length transaction

• ► They are based either on market data or on valuation models including systems based on amortized cost

ESMA is of the view that if an amortization method is used to assess the value of an MMI, the UCITS must ensure that this will not result in a material discrepancy between the value of the MMI and the value calculated according to the amortization method. ESMA is of the view that this would generally be the case in either of the following cases:• ► MMI with a residual maturity of less than 3 months and with no specific sensitivity to

market parameters, including credit risk• ► UCITS investing solely in high-quality instruments with, as a general rule, a maturity, or

residual maturity, of at most 397 days, or regular yield adjustments in line with such maturities and with a weighted average maturity of 60 days. The high quality of the instruments should be adequately monitored, taking into account both the credit risk and the final maturity of the instrument

The aforementioned principle, along with adequate procedures defined by the UCITS, should avoid situations where discrepancies between the value of the MMI as defined in (4) and the value calculated according to the amortization method would become material, either at the individual MMI level or at the UCITS level. The UCITS’ procedures might include updating the credit spread of the issuer or selling the MMI.

ALFI’s recommendations on the use of amortized cost as the valuation basis for sub-three month paper are outlined in Subsection 9.5.1.A..

II. MMIs dealt in on a regulated market

(1) MMIs normally dealt in on the money market or admitted to, or dealt in on, a regulated market are presumed to be liquid and to have a value which can be accurately determined at any time. As such they are eligible as core investments.


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III. MMIs not dealt in on a regulated market

(1) MMIs not dealt in on a regulated market are also permitted as core investments if the issue or issuer is regulated for the purpose of protecting investors and savings (see Point (2)) and one of the following criteria is met: • ► They are issued or guaranteed by a central, regional or local authority or central bank of

an EU Member State, the European Central Bank, the EU, a non-EU Member State, in the case of a Federal State, by one of the members making up the federation, or by a public international body to which at least one EU Member State belongs

• ► They are issued by an undertaking, any securities of which are dealt in on regulated markets

• ► They are issued or guaranteed by an establishment subject to prudential supervision in accordance with criteria defined by EU law or by an establishment which is subject to and complies with prudential rules considered by the CSSF to be at least as stringent as those of EU law (see Point (3))

• ► They are issued by other bodies belonging to categories approved by the CSSF under various specific conditions

(2) Instruments of which the issue or issuer is regulated for the purpose of protecting investors and savings(a) For MMIs which are themselves not dealt in on a regulated market but the issuer is

regulated, the following criteria must be met:• ► Fulfill one of the criteria for MMIs normally dealt in on the money market and all of the

criteria for MMIs which are liquid and MMIs which have a value which can be accurately determined at any time

• ► Appropriate information must be available for them, including information which allows an appropriate assessment of the credit risks related to the investment in such instruments

• ► Freely transferable

(b) For MMIs described in (a), and issued by an undertaking, the securities of which are dealt in on a regulated market (second bullet of Point (1)), or issued by other bodies belonging to the categories approved by the UCITS’ competent authority (fourth bullet of Point (1)) or issued by a local or regional authority of a Member State or by a public international body but are not guaranteed by a Member State or, in the case of a Federal State which is a Member State, by one of the members of the federation, appropriate information as mentioned in (a) second bullet, should consist of:• ► Information on both the issue or the issuance program and the legal and financial

situation of the issuer prior to the issuance of the MMI• ► Updates of this information on a regular basis and whenever a significant event occurs• ► Verification of this information by qualified third parties not subject to instructions

from the issuer• ► Available and reliable statistics on the issue or the issuance program

ESMA’s view is that regular updates should normally occur on an annual basis and that third parties should specialize in the verification of legal or financial documentation and be composed of persons meeting professional standards of integrity.

(c) For MMIs described in (a) and issued or guaranteed by an establishment subject to prudential supervision (third bullet of Point (1)), appropriate information as mentioned in (a) second bullet, should consist of:• ► Information on the issue or the issuance program or on the legal and financial

situation of the issuer prior to the issue of the MMI• ► Updates of this information on a regular basis and whenever a significant event occurs• ► Available and reliable statistics on the issue or the issuance program or other data

enabling an appropriate assessment of the credit risks related to the investment in such instruments


(d) For MMIs referred to in the third bullet of Point (1), except those referred to in (b) and those issued by the European Central Bank or by a central bank from a Member State, appropriate information as mentioned in (a), should consist of information on the issue or the issuance program or on the legal and financial situation of the issuer prior to the issue of the MMI.

(3) Establishment which is subject to and complies with prudential rules considered by the CSSF to be at least as stringent as those of EU law

The reference to an establishment which is subject to and complies with prudential rules considered by the CSSF to be at least as stringent as those laid down by EU law should be understood as a reference to an issuer which is subject to and complies with prudential rules and fulfils one of the following criteria:• ► It is located in the European Economic Area (EEA)• ► It is located in an OECD Member State belonging to the Group of Ten• ► It has at least investment grade rating• ► It can be demonstrated on the basis of an in-depth analysis of the issuer that the prudential

rules applicable to that issuer are at least as stringent as those laid down by EU law

5.2.2.7.6. Financial derivative instruments (FDIs)

Eligible financial derivative instruments include, but are not limited to, futures, options, swaps (interest rate swaps, currency swaps, total return swaps, credit default swaps, etc.), forwards, and contracts for differences.

(1) FDIs (including equivalent cash-settled instruments) which are dealt in on a regulated market or over-the-counter (OTC) are permitted as core investments provided that:

• ► The underlying consists of instruments permitted for a UCITS (see Sections 5.2.2.7.1. and 5.2.2.7.4. and Subsections 5.2.2.7.5.II. and III., 5.2.2.3.C., D. and E.), financial indices (see Section 5.2.2.7.7.), interest rates, foreign exchange rates or currencies, in which the UCITS may invest according to its constitutional document

• ► The counterparties to OTC FDIs are institutions subject to prudential supervision, approved by the CSSF

• ► In the case of OTC FDIs, the counterparties are institutions subject to prudential supervision and belonging to the categories approved by the UCITS’ competent authority and the OTC FDIs are subject to a reliable and verifiable valuation (see Point (3)) on a daily basis and can be sold, liquidated or closed by an offsetting transaction at any time at their fair value at the UCITS’ initiative

FDIs should meet the following criteria:• ► They allow the transfer of the credit risk of an asset independently from the other risks

associated with that asset• ► They do not result in the delivery or in the transfer of assets other than eligible assets of

UCITS• ► They comply with the criteria for OTC FDIs • ► Their risks are adequately captured by the risk management process of the UCITS

FDIs on commodities (including non-financial indices) are not considered to be eligible assets.

CSSF clarification: Credit default swaps on “loans” are considered to be eligible assets provided that they are cash settled. The “loan” is considered as an eligible underlying asset as long as it meets the requirements in the first bullet of Point (1).

(2) The global exposure relating to FDIs must not exceed the total net asset value (NAV) of the UCITS (see also Chapter 9).


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(3) “Reliable and verifiable valuation”The requirements for a “reliable and verifiable valuation” are outlined in Subsection 9.5.1.B..

(4) Total return swaps or similarWhere a UCITS enters into a total return swap or invests in other financial derivative instruments with similar characteristics:• ► The assets held by the UCITS should comply with the investment limits set out in Sections

5.2.2.8.1. I.- IV. and 5.2.2.8.2.. For example, when a UCITS enters into an unfunded swap, the UCITS’ investment portfolio that is swapped out should comply with the aforementioned investment limits

• ► The underlying exposures of the financial derivative instruments must be taken into account to calculate the investment limits laid down in Section 5.2.2.8.1. I.-II.

Where the counterparty has discretion over the composition or management of the UCITS’ investment portfolio or of the underlying of the financial derivative instrument, the agreement between the UCITS and the counterparty should be considered as an investment management delegation arrangement and should comply with the UCITS requirements on delegation.

5.2.2.7.7. FDI on financial indices

Financial indices are defined as those meeting the following criteria:

(a) They are “sufficiently diversified”To be sufficiently diversified, the following criteria must be fulfilled:• ► The index must be composed in such a way that price movements or trading activities

regarding one component do not unduly influence the performance of the whole index• ► Independent of whether the index is composed of core or non-core eligible assets, the index

must be composed in such a way that the diversification limit of 20% (or, if justified, 35%) must be respected in relation to:• Investment in either shares or debt securities, or both, issued by the same body• Other components of the index (e.g., a commodity)

(b) They “represent an adequate benchmark for the market to which they refer”To represent an adequate benchmark for the market to which they refer, the following criteria must be fulfilled:• ► The index measures the performance of a representative group of underlying components in a

relevant and appropriate way• ► The index is revised or rebalanced periodically to ensure that it continues to reflect the

markets to which it refers following criteria which are publicly available• ► The underlying components are sufficiently liquid, which allows users to replicate the index, if

necessary

(c) They “are published in an appropriate manner”To be published in an appropriate manner, the following criteria must be fulfilled:• ► Their publication process relies on sound procedures to collect prices and to calculate and to

subsequently publish the index value, including pricing procedures for components where a market price is not available

• ► Material information on matters such as index calculation, rebalancing methodologies, index changes or any operational difficulties in providing timely or accurate information is provided on a wide and timely basis


ESMA’s guidelines state that indices based on FDIs on commodities or indices on property may be eligible provided they comply with the criteria set down for financial indices.

If the composition of the index is not sufficiently diversified, its underlying assets have to be combined with the other assets of the UCITS (see Sections 5.2.2.8.1.I.(1) to (7), 5.2.2.8.1.II.(1) and 5.2.2.8.1.IV.(1)).

If FDIs on indices are used for risk diversification purposes, provided that the exposure of the UCITS to the individual indices complies with the 5/10/40% ratios, there is no need to look at the underlying components of the individual indices to ensure that they are sufficiently diversified.

In its guidelines dated July 2007 entitled The classification of hedge fund indices as financial indices, ESMA clarified that a hedge fund index may be considered to be a “financial index” as long as it complies with (a) – (c) above. However, a hedge fund index will not be classified as a financial index if one of the following criteria is met:• ► If the methodology of the index does not provide for the selection and the rebalancing of

components on the basis of pre-determined rules and objective criteria• ► If the index provider accepts payments from potential index components for the purpose of

being included in the index• ► If the methodology of the index allows retrospective changes to previously published index

values

ESMA also stated that when gaining exposure to a hedge fund index by means of an OTC FDI, a UCITS must comply with the relevant UCITS provisions, including:• ► Counterparty requirements• ► Requirements on valuation and the ability to close a position• ► Requirements on risk management and valuation processes• ► Requirements on risk exposure

In addition, when gaining exposure to a hedge fund index, a UCITS must carry out appropriate due diligence, including consideration by the UCITS of the quality of the index.

CSSF clarification: the governing body of a UCITS should have a methodology for the use of financial derivative instruments with financial indices as underlying assets. This detailed methodology should describe how the investment policy is impacted by its exposure to financial indices.

CSSF clarification regarding single commodity indices (SCI):

The use of FDIs, the underlying of which consists of SCI, for diversification purposes is subject to the following conditions:

• ► The FDIs on different SCIs can only be used for risk diversification purposes and the exposure to each of the SCI may not exceed 5%, and 10% respectively of the net assets of the UCITS (5/10/40% ratio)

• ► As a general rule at the level of the portfolio of the UCITS, the use of these FDIs on SCIs may not lead to a breach of the investment limits of 5% and 10% of the net assets of the UCITS at the level of each of the single commodities (5/10/40% - see Section 5.2.2.8.), in order to ensure adequate risk diversification of the underlying commodities; high correlation between the different commodities must be taken into account

• ► The financial index must constitute a representative benchmark for the market to which it refers and must be published in an appropriate manner

• ► The use of FDIs the underlying of which consists of SCI must be clearly indicated in the prospectus and must be in line with the investment policy of the UCITS

However, the ESMA Guidelines on ETFs and other UCITS issues issued in December 2012 clarified that UCITS should not invest in a financial index which has a single component that has an impact on the overall index return which exceeds the relevant diversification requirements i.e., 20%/35%. In the case of a leveraged index, the impact of one component on the overall return of the index, after having taken into account the leverage, should respect the same limits.


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A UCITS should not invest in commodity indices that do not consist of different commodities. Sub-categories of the same commodity (for instance, from different regions or markets or derived from the same primary products by an industrialized process) should be considered as being the same commodity for the calculation of the diversification limits. For example, WTI Crude Oil, Brent Crude Oil, Gasoline or Heating Oil contracts should be considered as being all sub-categories of the same commodity (i.e., oil). Sub-categories of a commodity should not be considered as being the same commodity if they are not highly correlated. With respect to the correlation factor, two components of a commodity index that are sub-categories of the same commodity should not be considered as highly correlated if 75% of the correlation observations are below 0.8. For that purpose, the correlation observations should be calculated (i) on the basis of equally-weighted daily returns of the corresponding commodity prices and (ii) from a 250-day rolling time window over a five year period.

A UCITS should be able to demonstrate that an index satisfies the index criteria in Sections 5.2.2.8.1.IV. and 5.2.2.7.7.(a)-(c), including that of being a benchmark for the market to which it refers. For that purpose:• ► An index should have a clear, single objective in order to represent an adequate benchmark for the

market• ► The universe of the index components and the basis on which these components are selected for

the strategy should be clear to investors and competent authorities• ► If cash management is included as part of the index strategy, the UCITS should be able to

demonstrate that this does not affect the objective nature of the index calculation methodology

An index should not be considered as being an adequate benchmark of a market if it has been created and calculated on the request of one, or a very limited number of, market participants and according to the specifications of those market participants.

UCITS should not invest in financial indices:• ► Whose rebalancing frequency prevents investors from being able to replicate the financial index.

Indices which rebalance on an intra-day or daily basis do not satisfy this criterion. For the purpose of these guidelines, technical adjustments made to financial indices (such as leveraged indices or volatility target indices) according to publicly available criteria should not be considered as rebalancing in the context of this paragraph

• ► For which the full calculation methodology to, inter alia, enables investors to replicate the financial index is not disclosed by the index provider. This includes providing detailed information on index constituents, index calculation (including effect of leverage within the index), rebalancing methodologies, index changes and information on any operational difficulties in providing timely or accurate information. Calculation methodologies should not omit important parameters or elements to be taken into account by investors to replicate the financial index. This information should be easily accessible, free of charge, by investors and prospective investors, for example, via the internet. Information on the performance of the index should be freely available to investors

• ► That do not publish their constituents together with their respective weightings. This information should be easily accessible, free of charge, by investors and prospective investors, for example, via the internet. Weightings may be published after each rebalancing on a retrospective basis. This information should cover the previous period since the last rebalancing and include all levels of the index

• ► Whose methodology for the selection and the rebalancing of the components is not based on a set of pre-determined rules and objective criteria

• ► Whose index provider accepts payments from potential index components for inclusion in the index• ► Whose methodology permits retrospective changes to previously published index values

(“backfilling”)

The UCITS should carry out and appropriately document due diligence on the quality of the index. This due diligence should take into account whether the index methodology contains an adequate explanation of the weightings and classification of the components on the basis of the investment strategy and whether the index represents an adequate benchmark. The due diligence should also cover matters relating to the index components. The UCITS should also assess the availability of information on the index including:• ► Whether there is a clear narrative description of the benchmark• ► Whether there is an independent audit and the scope of such an audit• ► The frequency of index publication and whether this will affect the ability of the UCITS to calculate

its NAV


The UCITS should ensure that the financial index is subject to independent valuation.

The aforementioned provisions of the guidelines are effective since 18 February 2013. Any new UCITS, or compartments of existing UCITS, created after that date should comply with the aforementioned provisions of the guidelines immediately. UCITS existing before 18 February 2013 have twelve additional months to comply.

5.2.2.8. Detailed rules regarding diversification

5.2.2.8.1. Concentration rules

I. General rules

(1) No more than 10% of net assets may be invested in transferable securities or MMIs issued by the same body.

(2) The total value of transferable securities and MMIs held in issuing bodies in each of which is invested more than 5% of net assets must not exceed 40% of net assets. This limit does not apply to:• ► Deposits and OTC FDIs made with financial institutions subject to prudential supervision• ► Transferable securities and MMIs referred to in Points (3) and II.(1)• ► Investments in other UCITS or UCIs

(3) The limit of 10% in Point (1) is increased to 25% for certain debt securities if they are issued by a credit institution whose registered office is situated in an EU Member State and which is subject to public supervision designed to protect the holders of debt securities (in the case of bankruptcy). In addition, the total value of such debt securities held in such issuing bodies in each of which is invested more than 5% of net assets must not exceed 80% of net assets.

(4) No more than 20% of net assets may be invested in deposits with the same body.

(5) The risk exposure to a counterparty in an OTC FDI transaction may not exceed 10% of net assets in the case of a credit institution and 5% in other cases.

The risk exposures to a counterparty arising from OTC financial derivative transactions and EPM techniques should be combined when calculating the counterparty risk limits.

ESMA’s Guidelines on risk measurement and the calculation of global exposure and counterparty risk for UCITS and CSSF Circular 11/512 clarifications:

The types of collateral which are eligible for the purpose of limiting the counterparty risk linked to efficient portfolio management transactions (EPM) also apply in the framework of OTC FDI transactions (see Section 5.2.2.10.(6)(b)).

The UCITS needs to define and apply appropriate and prudent discounts.

Collateral received by the UCITS, other than cash, cannot be sold, reinvested or pledged. Cash collateral can only be reinvested in risk-free assets which are eligible under the 2010 Law, i.e., eligible assets which do not provide a yield greater than the risk-free rate.

Reinvestment of cash collateral should be taken into account within the diversification limits applicable.

(6) No more than 20% of net assets may be invested in any combination of the following with a single body:• ► Transferable securities or MMIs• ► Deposits• ► OTC FDIs• ► Techniques and instruments relating to transferable securities and MMIs

(7) The limits set out in Points (1) − (6) and II.(1) may not be combined; thus investments in transferable securities or MMIs issued by the same body, in deposits or FDIs made with this body shall under no circumstances exceed in total 35% of the net assets.


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(8) Companies which are included in the same group for the purposes of consolidated accounts, as defined in Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings88, or in accordance with recognized international accounting rules are regarded as a single body for the purpose of calculating the limits.

II. Exception for securities issued by governments

(1) The limit of 10% in Point I.(1) is increased to 35% if the transferable securities are issued or guaranteed by an EU Member State or its local authorities, by a non-Member State of the EU or by public international bodies of which one or more EU Member States are members.

(2) The CSSF may authorize investment of up to 100% of net assets in at least six different transferable securities, issued or guaranteed by an EU Member State, its local authorities, a non-Member State of the EU or public international bodies of which one or more EU Member States are members, of which one issue may not account for more than 30% of the total. The CSSF will only grant such an authorization if it considers that unitholders in the UCITS have protection equivalent to that of unitholders in UCITS complying with the concentration limits laid down in Section I. and Point II.(1) above.

Such UCITS must indicate the States, the local public authorities or public international bodies issuing or guaranteeing securities in which they intend to invest more than 35% of their net assets in:• ► Their constitutional document• ► Their prospectus or marketing communications, drawing attention to such authorization

III. Exception for investments in other open-ended UCIs

(1) No more than 20% of net assets may be invested in a single UCITS or other UCI (for the purposes of applying this limit, each compartment of a multiple compartment UCI is considered as a separate issuer).

(2) No more than 30% of net assets may be invested in aggregate in shares or units of other UCIs (excluding UCITS).

(3) Where investments are made in other UCITS and/or other UCIs which are linked to the investing UCITS (i.e., the same management company or a company linked to the management company), subscription or redemption fees may not be charged to the investing UCITS.

Where a “substantial proportion” of net assets are invested in other UCIs which are linked to the investing UCITS, the prospectus must disclose the maximum level of management fees that may be charged both to the UCITS itself and to the other UCIs in which it intends to invest. In its annual report, it must indicate the “maximum percentage” of management fees charged both to the UCITS itself and to the other UCIs in which it invests.

CSSF clarification: • ► “Substantial portion” is considered to be more than 50% of the net assets of the UCITS• ► The “maximum percentage” of management fees which must be disclosed in the annual

report should exclude commission that has been retroceded

IV. Exception for index replicating UCITS

(1) Index replicating UCITS are those which replicate the composition of the underlying assets of the index, including the use of FDIs and other techniques and instruments.

The limit of 10% mentioned in I.(1) is raised to 20% (or, if justified, 35%) for investment in either shares or debt securities, or both, issued by the same body where the investment policy is to replicate an index which is recognized by the CSSF.

88 Directive 2013/34/EU repeals Directive 83/349/EEC.


The CSSF bases its recognition on the following criteria:• ► Composition of the index is sufficiently diversified (see Point (2))• ► Index represents an adequate benchmark (see Point (3)) for the particular market• ► Index is published in an appropriate manner (see Point (4))

(2) Sufficiently diversifiedAn index whose composition is sufficiently diversified is an index which complies with the risk diversification rules of the second sub-paragraph of Point (1).

(3) Represents an adequate benchmarkAn index which represents an adequate benchmark is an index whose provider uses a recognized methodology which generally does not result in the exclusion of a major issuer to the market to which it refers.

(4) Published in an appropriate mannerAn index which is published in an appropriate manner is an index that is accessible to the public and the provider of which is independent from the index-replicating UCITS.

V. Provisional derogations from investment restrictions

(1) The aforementioned investment restrictions need not be complied with when exercising subscription rights; however the UCITS must remedy the situation as a priority objective. In addition, recently formed UCITS may derogate from Points I.(1) to (7), II., III. and IV. during the first six months.

CSSF clarification: The six months begins from the date of inscription of the UCITS on the CSSF official list.

(2) Following mergers, the receiving UCITS may derogate from Points I.(1) to (7), II., III. and IV. during the first six months following the effective date of the merger (see Section 4.7.4.).

VI. Investment in other compartments

(1) A compartment of a UCITS may, subject to the conditions provided in the constitutional document as well as in the prospectus, subscribe, acquire and/or hold securities to be issued or issued by one or more compartments of the same UCITS without that UCITS being subject to the requirements of the Law of 10 August 1915 on commercial companies, as amended, when the UCITS is an investment company, with respect to the subscription, acquisition and/or the holding by the company of its own shares, provided all the following conditions are met:• ► The target compartment does not, in turn, invest in the compartment invested in this target

compartment• ► Not more than 10% of the assets of the target compartment must be invested in other

compartments of the same UCI/UCITS• ► Voting rights, if any, attaching to the relevant securities are suspended for as long as

they are held by the compartment concerned and without prejudice to the appropriate processing in the accounts and the periodic reports

• ► In the event for as long as these securities are held by the UCI/UCITS, their value will not be taken into consideration for the calculation of the net assets of the UCI for the purposes of verifying the minimum threshold of the net assets imposed by the 2010 Law

• ► There is no duplication of management/subscription or repurchase fees between those at the level of the compartment of the UCI/UCITS having invested in the target compartment, and this compartment

VII. Rules regarding master-feeder structures

(1) A feeder UCITS or a compartment of a feeder UCITS must invest at least 85% of its assets in shares or units of another UCITS or compartment thereof (the master UCITS)


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(2) A feeder UCITS may hold up to 15% of its assets in one or more of the following:• ► Ancillary liquid assets• ► Financial derivative instruments, which may be used only for hedging purposes• ► Movable and immovable property which is essential for the direct pursuit of its business, if

the feeder UCITS is an investment company

(3) A master UCITS or a compartment thereof:• ► Must have, among its shareholders or unitholders, at least one feeder UCITS• ► Must not be itself a feeder UCITS• ► Must not hold units of a feeder UCITS

5.2.2.8.2. Rules regarding significant influence over an issuer

(1) An investment company or a management company acting in connection with all of the common funds which it manages and which fall within the scope of Part I of the 2010 Law, may not acquire any shares carrying voting rights which would enable it to exercise significant influence over the management of an issuing body.

(2) A UCITS may acquire no more than: • ► 10% of the non-voting shares of the same issuer• ► 10% of the debt securities of the same issuer• ► 25% of the shares or units of the same UCI• ► 10% of the MMIs issued by the same issuer

CSSF clarification:The 25% rule applies to the investing UCITS taken as a whole, and not to individual compartments. In other words, a multiple compartment UCITS taken as a whole may not acquire more than 25% of the units issued by the investee UCI taken as a whole.

(3) The restrictions of Points (1) and (2) are not applicable to: • ► Transferable securities and MMIs issued or guaranteed by an EU Member State or its local

authorities or by a non-Member State of the EU• ► Transferable securities and MMIs issued by public international bodies of which one or more

EU Member States are members• ► Shares held in an intermediary incorporated in a non-Member State of the EU which invests

mainly in securities issued by that State and where such holding is the only way in which the UCITS can hold these securities

• ► Shares held by an investment company in the capital of subsidiaries carrying on only the business of management, advice or marketing in the country where the subsidiary is located, in regard to the repurchase of shares or units at the request of shareholders or unitholders

(4) In the case of a multiple compartment UCITS, the restrictions in (2) limiting the holding of securities of one issuer also apply to all compartments taken together.

5.2.2.9. Detailed borrowing rules, and rules relating to granting of loans and short selling

The following section includes a detailed analysis of borrowing rules, and rules relating to the granting of loans and short selling applicable to UCITS.

(1) In general, neither an investment company nor the management company nor depositary acting on behalf of a common fund may borrow. However, there are three exceptions to this rule:• ► Up to 10% of net assets may be borrowed on a temporary basis only• ► Up to 10% of net assets in the case of an investment company may be borrowed to acquire

property essential for the businessThe combined amount of such borrowings may not in total exceed 15% of net assets

• ► Back-to-back loans may be acquired and are not considered as borrowings for the purposes of these limits


CSSF clarifications:• ► A UCITS cannot use its borrowing entitlement to finance additional investments or for

investment purposes, except if the requirements of the next bullet point are met• ► A UCITS may borrow up to 10% of its NAV on a temporary basis (i.e., on a non-revolving

basis) either to:• ► Meet redemptions • ► For investment purposes under certain conditions: borrowing must be temporary

in the sense that it must mature in a reasonable period of time, taking into account the conditions under which it was concluded, and that such borrowing must not be permanently part of the investment policy of the UCITS − i.e., borrowings for investment purposes must not be performed on a recurring basis

• ► Anticipate subscriptions provided that the subscriber is obliged to pay within a reasonable delay (two to three days) and that his commitment is formal

• ► The balances of the current accounts held with the same legal counterparty, whatever the currency, may be netted in the fund currency for the calculation of the 10% limit referred to in the previous bullet provided all of the following conditions are met:• ► The UCITS’ current accounts are free of pledge• ► The contracts signed by the UCITS and the counterparty governing these current

accounts foresee such netting• ► The law which governs aforementioned contracts allows such netting

• ► Compensation of debit and credit balances with different legal entities is not permitted• ► The management of the UCITS remains responsible for ensuring that any borrowing is

reimbursed within a reasonable delay taking into account the conditions under which it has been granted

(2) Granting of loans or acting as guarantor on behalf of third parties is not permitted (acquiring transferable securities which are not fully paid is allowed).

(3) Selling securities short is not permitted. However, it may be possible to use FDIs to create synthetic short positions.

5.2.2.10. Detailed rules regarding techniques and instruments relating to transferable securities and MMIs

(1) Techniques and instruments relating to transferable securities and to MMIs may be employed provided they are used for the purpose of efficient portfolio management (EPM) and do not result in the UCITS diverging from its investment objectives or a risk profile higher than that described in its sales documents.

Such techniques and instruments may include:• ► Securities lending transactions• ► Sale with the right of repurchase transactions• ► Reverse repurchase and repurchase agreement transactions• ► Currency hedging transactions• ► Transferable securities and MMIs embedding derivatives

In September 2008, ESMA removed securities borrowing from the list of techniques and instruments relating to transferable securities and MMIs permitted for use for the purpose of EPM. Therefore, the physical short selling of borrowed securities is not a permitted activity (neither is short selling in general).

In line with this amendment to ESMA’s guidelines, CSSF Circular 08/380 updates CSSF Circular 08/339.

The risk exposures to a counterparty arising from OTC financial derivative transactions and EPM techniques should be combined when calculating the counterparty risk limits.


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Permitted techniques and instruments should meet the following criteria:• ► Be economically appropriate and realized in a cost-effective manner• ► Be entered into for at least one of the following reasons:

• Risk reduction• Cost reduction• Generation of additional capital or income for the UCITS, providing that risk levels and

diversification remain consistent• ► Be captured by the risk management process

According to ESMA’s Guidelines on ETFs and other UCITS issues, all the revenues arising from EPM techniques, net of direct and indirect operational costs, should be returned to the UCITS.

The aforementioned provisions of the guidelines are effective since 18 February 2013. Any new UCITS, or compartments of existing UCITS, created after that date should comply with the aforementioned provisions of the guidelines immediately. However, UCITS existing before 18 February 2013 that entered into revenue sharing arrangements have twelve additional months to comply.

(2) Certain techniques and instruments relating to transferable securities and MMIs

CSSF Circular 08/356 of 4 June 2008 (as modified by CSSF Circular 11/512 of 30 May 2011) outlines rules applicable to UCIs when they employ certain techniques and instruments relating to transferable securities and MMIs.

The techniques and instruments covered by the Circular are:• ► Securities lending transactions (see Point (3))• ► Sale with the right of repurchase transactions (see Point (4))• ► Reverse repurchase and repurchase agreement transactions (see Point (5))

The corporate governance principles of the UCI should address the case of securities lending operations taking place when a general assembly of the issuer of the securities is to be held.

(3) Securities lending transactions

A UCITS may lend its securities:• ► Directly• ► Via a standardized lending system organized by a recognized securities clearing institution• ► Via a lending system organized by a financial institution subject to prudential supervision

rules considered by the CSSF as equivalent to those prescribed by EU law and specialized in these types of transactions

A UCITS’ involvement in such transactions is subject to the following rules:• ► A UCITS may enter into a securities lending transaction only if the counterparty meets the

following criteria:• It is subject to prudential supervision rules, considered by the CSSF as equivalent to those

laid down in EU law. In case the financial institution acts on its own account, it is to be considered as the counterparty in the securities lending agreement

• If the counterparty is a related party to the UCITS, attention must be paid to conflicts of interest which might result therefrom

• ► The UCITS must receive, at the same time or prior to the transfer of securities lent, collateral which meets the requirements set out in Point (6)(b). If, however, the securities lending transaction takes place via a lending system then securities lent may be transferred before the receipt of the collateral if the intermediary concerned ensures proper completion of the transaction and if the intermediary concerned provides the UCITS with eligible collateral assets in lieu of the borrower

• ► The UCITS should ensure, at all times, that the level of such transactions entered into at any one time permits the UCITS to meet its redemption obligations

• ► The UCITS should ensure that it is able at any time to recall any security that has been lent out or terminate any securities lending agreement into which it has entered


(4) Sale with the right of repurchase transactions

(a) Purchase of securities with a repurchase option

A UCITS is permitted to purchase securities with the seller retaining the right to repurchase the securities from the UCITS at a price and date agreed between the two parties, on entering into the contract.

Such transactions are subject to the following rules:• ► The counterparties to these transactions must be subject to prudential supervision rules

considered by the CSSF as equivalent to that prescribed by EU law• ► Throughout the duration of the transaction, a UCITS is not permitted to sell the securities

it acquired as part of the transaction, before the counterparty has exercised its option or until the deadline for repurchase has passed, unless the UCITS has other means of coverage

• ► The UCITS should ensure, at all times, that the level of such transactions entered into at any one time permits it to meet its redemption obligations

• ► Securities that are the subject of a purchase with repurchase option transaction are limited to:• ► Short-term bank certificates or MMIs (as defined in 5.2.2.7.5.I.)• ► Bonds issued or guaranteed by an OECD Member State, by their local public authorities

or by supranational institutions and undertakings with EU, regional or worldwide scope• ► Shares or units issued by money market UCIs calculating a daily net asset value and

being assigned a rating of AAA or its equivalent

CSSF clarification:Only credit ratings issued or backed by credit rating agencies registered or certified in the EU may be used for regulatory purposes. An updated list is available on the ESMA website.

• ► Bonds issued by non-governmental issuers offering adequate liquidity• ► Shares quoted or negotiated on a regulated market of an EU Member State or on a

stock exchange of an OECD Member State, on the condition that these shares are included in a main index

• ► Securities purchased as part of a purchase with option to repurchase transaction, when combined with the rest of the UCITS’ portfolio, comply with the UCITS’ investment policies and restrictions

(b) Sale of securities with a repurchase option

Conversely, the UCITS is also permitted to sell securities with a repurchase option. In a similar manner to the transaction described in Point (a), the contract entered into with the buyer would allow the UCITS the right to repurchase the securities from the buyer at a price and date agreed between the two parties on entering into the contract.

UCITS entering into sales of securities with repurchase option transactions must, however, adhere to the following rules:• ► The counterparties to these transactions must be subject to prudential supervision rules

considered by the CSSF as equivalent to that prescribed by EU law• ► On maturity of the repurchase option, the UCITS must have sufficient assets available to

be able to pay, if applicable, the amount agreed to buy back the securities, and continue to comply with the investment policy and restrictions

(5) Reverse repurchase and repurchase agreement transactions

(a) Reverse repurchase transactions

Such transactions involve the UCITS entering into a forward transaction at the maturity of which the counterparty (seller) has the obligation to repurchase the assets sold and the UCITS has the obligation to return the assets received under the transaction.


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A UCITS can only enter into such transactions if the following rules are complied with:• ► The counterparties to these transactions must be subject to prudential supervision rules

considered by the CSSF to be equivalent to those prescribed by EU law• ► The UCITS may not sell or pledge/give as security, the securities purchased as part of the

contract, throughout the life of the contract, unless it has other means of coverage• ► The value of the reverse repurchase transactions is kept at a level which allows the UCITS

to meet its redemption obligations at all times• ► Securities that may be purchased in a reverse repurchase agreement must be:

• ► Short-term bank certificates or MMIs (as defined in Section 5.2.2.7.5.I.)• ► Bonds issued or guaranteed by an OECD Member State, by their local public authorities

or by supranational institutions and undertakings with EU, regional or worldwide scope• ► Shares or units issued by money market UCIs calculating a daily NAV and being

assigned a rating of AAA or its equivalent


• ► Bonds issued by non-governmental issuers offering adequate liquidity• ► Shares quoted or negotiated on a regulated market of an EU Member State or on a

stock exchange of an OECD Member State, on the condition that these shares are included in a main index

• ► Securities purchased through a reverse repurchase transaction must, when combined with the rest of the UCITS’ portfolio, comply with the UCITS’ investment policies and restrictions

(b) Repurchase agreement transactions

A UCITS may enter into repurchase agreement transactions, being forward transactions at the maturity of which the UCITS has the obligation to repurchase the assets sold and the buyer has the obligation to return the assets received under the transaction.

Such transactions are subject to the following rules:• ► The counterparty must be subject to prudential supervision rules considered by the CSSF

to be equivalent to those prescribed by EU law• ► At the maturity of the agreement, the UCITS must have sufficient assets to enable it

to settle the amount agreed with the counterparty, and continue to comply with the investment policy and restrictions

• ► The UCITS must ensure that the level of repurchase agreement transactions is kept at a level to enable it to meet all redemption obligations

(6) Limitation of counterparty risk and receipt of appropriate collateral

(a) Limitation of counterparty risk

To ensure that the counterparty risk linked to securities lending transactions is covered at all times, the UCITS must receive eligible collateral assets.

Such assets must, throughout the duration of the agreement, amount to at least 90% of the value of the global valuation of the securities lent (all rights included, i.e., interest, dividends).

UCITS may take into account collateral received in order to reduce the counterparty risk in sale with right of repurchase transactions and/or reverse repurchase and repurchase transactions.

The net exposures (i.e., the exposures of the UCITS less the collateral received by the UCITS) to a counterparty arising from securities lending transactions, reverse repurchase transactions or repurchase agreement transactions must be taken into account in the calculation of the 20% limit within a single body (see also Section 5.2.2.8.1.I.(6)).


(b) Receipt of eligible assets as collateral

The following assets are considered as eligible collateral:• ► Liquid assets, including:

• ► Cash and short-term bank deposits• ► MMIs as defined in 5.2.2.7.5.I. (issued by an issuer not affiliated to the counterparty)• ► Letters of credit or guarantees on first demand issued by first class credit institutions

not affiliated to the counterparty• ► Bonds issued or guaranteed by:

• ► An OECD Member State, by their local authorities or by supranational bodies and organizations with community, regional or worldwide character

• ► First class issuers offering adequate liquidity• ► Shares or units issued by any of the following:

• ► Daily valued money market UCIs assigned a rating of AAA or equivalent• ► UCITS investing in bonds issued or guaranteed by first class issuers offering adequate

liquidity which is not affiliated to the counterparty• ► UCITS investing in shares (providing that these shares are included in a main index)

admitted to or dealt in on a regulated market of an EU Member State or listed on a stock exchange of an OECD Member State

• ► Shares (providing that these shares are included in a main index) which are either:• ► Admitted to or dealt in on a regulated market of an EU Member State• ► Listed on a stock exchange of an OECD Member State

If collateral is given in any form other than cash or shares or units of a UCITS or other UCI, it must be issued by an entity not affiliated to the counterparty.

On receipt of collateral, the UCITS must value the assets received on a daily basis. In addition, the lending agreement must include provisions which require the counterparty to give the UCITS additional collateral, at very short notice, if the value of the collateral initially given is insufficient in comparison with the amount to be covered. In addition, provisions should also provide for margins to take into consideration exchange risks or market risks inherent to the assets accepted as collateral.

The following considerations must be taken into account with respect to collateral:• If cash has been received as collateral, the UCITS may be exposed to credit risk vis-à-vis

the custodian of the collateral. If this risk exists, the UCITS must take the collateral into consideration for the purpose of the limits on deposits (Article 43 (1) of the 2010 Law – see Point 5.2.2.8.1.I.(4))

• Cash collateral must not be safekept by the counterparty except if the assets are legally protected from consequences of default of the counterparty

• Non-cash collateral must not be safekept by the counterparty except if it is adequately segregated from the counterparty’s assets

• The collateral must, at all times, be available either:• ► Directly• ► Via a first class financial institution or a wholly-owned subsidiary thereof to enable the

UCITS to seize or realize the collateral assets if the counterparty does not comply with its obligation to return the securities lent

• ► In case of a reorganization or liquidation, or similar, the UCITS must ensure (via its contractual terms) that it is able to discharge its obligation to return assets received as collateral if the securities cannot be returned under the initially agreed terms

Furthermore, the collateral:• ► Must be received before, or at the same time as the transfer of securities lent (see also

(3) )• ► May not be sold or given as security or pledged by the UCITS, subject to the latter being

otherwise covered• ► May be returned at the same time, or subsequent, to the lent securities being returned


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According to ESMA’s Guidelines on ETFs and other UCITS issues issued in December 2012, all assets received by UCITS in the context of EPM techniques should be considered as collateral.

Where a UCITS enters into OTC financial derivative transactions and EPM techniques, all collateral used to reduce counterparty risk exposure should comply with the following criteria at all times:• ► Liquidity – any collateral received other than cash should be highly liquid and traded on a

regulated market or multilateral trading facility with transparent pricing so that it can be sold quickly at a price that is close to pre-sale valuation. Collateral received should also comply with the requirements of Section 5.2.2.8.2.

• ► Valuation – collateral received should be valued on at least a daily basis and assets that exhibit high price volatility should not be accepted as collateral unless suitably conservative haircuts are in place

• ► Issuer credit quality – collateral received should be of high quality• ► Correlation – the collateral received by the UCITS should be issued by an entity that is

independent from the counterparty and is expected not to display a high correlation with the performance of the counterparty

• ► Collateral diversification (asset concentration) – collateral should be sufficiently diversified in terms of country, markets and issuers. The criterion of sufficient diversification with respect to issuer concentration is considered to be respected if the UCITS receives from a counterparty of EPM and OTC financial derivative transactions a basket of collateral with a maximum exposure to a given issuer of 20% of its NAV. When UCITS are exposed to different counterparties, the different baskets of collateral should be aggregated to calculate the 20% limit of exposure to a single issuer

• ► Risks linked to the management of collateral, such as operational and legal risks, should be identified, managed and mitigated by the risk management process

• ► Where there is a title transfer, the collateral received should be held by the depositary of the UCITS. For other types of collateral arrangement, the collateral can be held by a third party custodian which is subject to prudential supervision, and which is unrelated to the provider of the collateral

• ► Collateral received should be capable of being fully enforced by the UCITS at any time without reference to or approval from the counterparty

The aforementioned provisions of the guidelines are effective since 18 February 2013. Any new UCITS, or compartments of existing UCITS, created after that date should comply with the aforementioned provisions of the guidelines immediately. UCITS existing before 18 February 2013 have twelve additional months to comply.

(7) Reinvestment of collateral

If collateral is received in the form of cash, then the cash may be reinvested by the UCITS, in the following:• ► Shares or units of daily valued money market UCIs assigned a rating of AAA or equivalent


• ► Short-term bank deposits• ► MMIs as defined in Section 5.2.2.7.5.I.• ► Short-term bonds issued or guaranteed by an EU Member State, Switzerland, Canada,

Japan or the United States or by their local authorities or by supranational institutions and undertakings of a community, regional or worldwide nature

• ► Bonds issued or guaranteed by first class issuers offering adequate liquidity• ► Reverse repurchase agreements eligible under CSSF Circular 08/356


If financial assets are purchased through the reinvestment of cash received as collateral, then the reinvested financial assets:• ► If other than bank deposits and shares or units of UCIs, must be issued by an entity not

affiliated to the counterparty• ► If other than bank deposits, must not be safekept by the counterparty, except if they are

segregated in an appropriate manner from the latter’s own assets• ► If bank deposits, must not be safekept by the counterparty unless they are legally protected

from consequences of default of the counterparty• ► May not be pledged or given as a guarantee except if the UCITS has sufficient liquidity to

return the received collateral in the form of cash• ► If short-term bank deposits, MMIs and bonds, must be core eligible investments, in accordance

with the 2010 Law

Exposures arising from the reinvestment of collateral received by the UCITS within securities lending transactions, sale with right of repurchase transactions, reverse repurchase agreement transactions and repurchase agreement transactions must be taken into account within the diversification limits applicable under the 2010 Law (see Section 5.2.2.8.). The UCITS must also ensure that:• ► If short-term bank assets are likely to expose the UCITS to credit risk vis-à-vis the custodian,

the UCITS must take this into account when computing the deposit limits set out in Article 43(1) of the 2010 Law – see Section 5.2.2.8.1.I.(4)

• ► The reinvestment must be taken into account for the calculation of the global exposure of the UCITS in particular if it creates a leverage effect. Any reinvestment of collateral provided in the form of cash in financial assets providing a return in excess of the risk free rate, is subject to this requirement

• ► Any collateral assets which have been reinvested must be specifically mentioned, with their values given, in an appendix to the financial reports of the UCITS

According to ESMA Guidelines on ETFs and other UCITS issues issued in December 2012:• ► Non-cash collateral received should not be sold, reinvested or pledged• ► Cash collateral received should only be:

• ► Placed on deposit with a credit institution that has its registered office in an EU Member State or, if located in a non-Member State, subject to equivalent prudential rules

• ► Invested in high-quality government bonds• ► Used for the purpose of reverse repo transactions provided the transactions are with credit

institutions subject to prudential supervision and the UCITS is able to recall at any time the full amount of cash on an accrued basis

• ► Invested in short-term money market funds as defined in the Guidelines on a Common Definition of European Money Market Funds (see Section 3.6.1.)

• ► Reinvested cash collateral should be diversified in accordance with the diversification requirements applicable to non-cash collateral

The aforementioned provisions of the guidelines are effective since 18 February 2013. Any new UCITS, or compartments of existing UCITS, created after that date should comply with the aforementioned provisions of the guidelines immediately. UCITS existing before 18 February 2013 have twelve additional months to comply. However any reinvestment of cash collateral after 18 February 2013 should comply with the guidelines immediately.

5.2.3. Part II UCIs

Part II of the 2010 Law contains no provisions regarding investment or borrowing rules for such UCIs. Such rules are specified in CSSF circulars or determined on a case-by-case basis by the CSSF.

The CSSF has to date also issued rules or guidelines for Part II UCIs investing in the following activities:• ► Transferable securities (see Section 5.2.3.1.)• ► Alternative investments (i.e., hedge funds) (see Section 5.2.3.2.)


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• ► Venture capital (see Section 5.2.3.3.); see also Section 5.5 on the investment restrictions applicable to qualifying European Venture Capital Funds (EuVECA)

• ► Futures contracts and options (see Section 5.2.3.4.)• ► Real estate (see Section 5.2.3.5.)

In addition to the general annual reporting requirements, specific requirements apply to these types of Part II UCIs (see Section 12.5.1.).

In addition, full AIFM regime Part II UCIs which:• ► Invest in securitization positions are subject to the requirements outlined in Section 5.4.1.• ► Acquire major holdings or control over non-listed companies are subject to the requirements

outlined in Section 5.4.2.

5.2.3.1. Part II UCIs investing in transferable securities

The following summarizes investment and borrowing restrictions as set out in Chapter G of Circular 91/75. Certain of these limits will not apply if they are not compatible with the investment policy of the UCI (e.g., UCI of which the investment policy provides for investment of 20% or more of their net assets in venture capital, UCI of which the investment policy provides for the permanent borrowing for investment purposes of at least 25% of their net assets).

The rules applicable for UCIs employing certain techniques and instruments relating to transferable securities set out in CSSF Circular 08/356 are also, in principle, applicable to Part II UCIs (see Points 5.2.2.10.(2) to (7)); however, the requirements of ESMA’s Guidelines on ETFs and other UCITS issues are, in principle, not applicable to Part II UCIs.

A. Unlisted securities

(1) No more than 10% of net assets may be invested in securities not quoted on a stock exchange or dealt in on another regulated market (see, however, Point D.(1)).

B. Investment in any one security or issuer

(1) No more than 10% of net assets may be invested in securities issued by any one issuer (see, however, Point D.(1)).

C. Significant influence over an issuer

(1) No more than 10% of securities issued by any one issuer may be acquired (see, however, Point D.(1)).

(2) In the case of a multiple compartment UCITS, the restriction in Point C.(1) limiting the holding of securities of one issuer also applies to all compartments taken together.

D. Derogation

(1) Restrictions in Points A.(1) to C.(1) are not applicable to securities issued or guaranteed by OECD Member States or their local authorities or public international bodies with EU, regional or worldwide scope.

E. Investment in other UCIs

(1) Restrictions in Points A.(1) to C.(1) are applicable to the investment in other UCIs of the open-ended type where those UCIs are not subject to risk diversification requirements comparable to those in Points A.(1) to D.(1). Investment in closed-ended UCIs is permitted and subject to the restrictions applicable to transferable securities. If investment is to be made in other UCIs (fund of funds), this must be expressly stated in the prospectus and, if such investment is to be in other UCIs of the same promoter, the prospectus must specify the nature of fees and expenses arising.


F. Investment in other compartments

(1) A compartment of a UCI may, subject to the conditions provided in the constitutional document as well as in the prospectus, subscribe, acquire and/or hold securities to be issued or issued by one or more compartments of the same UCI without that UCI being subject to the requirements of the Law of 10 August 1915 on commercial companies, as amended, when the UCI is an investment company, with respect to the subscription, acquisition and/or the holding by the company of its own shares, provided all the following conditions are met:• ► The target compartment does not, in turn, invest in the compartment invested in this target

compartment• ► No more than 10% of the net assets of the target compartments, whose acquisition is

contemplated, may be invested, pursuant to their constitutional document, in shares or units of other target compartments of the same UCI

• ► Voting rights, if any, attaching to the relevant securities are suspended for as long as they are held by the compartment concerned and without prejudice to the appropriate processing in the accounts and the periodic reports

• ► In any event, as long as these securities are held by the UCI, their value will not be taken into consideration for the calculation of the net assets of the UCI for the purposes of verifying the minimum threshold of the net assets imposed by the 2010 Law

• ► There is no duplication of management/subscription or repurchase fees between those at the level of the compartment of the UCI having invested in the target compartment, and this compartment

G. Borrowings

(1) Borrowings of up to 25% of net assets without any restriction are allowed. Leveraged UCIs are not subject to this restriction.

5.2.3.2. Alternative investments (i.e., hedge funds)

A. Introduction

CSSF Circular 02/80 concerns UCIs whose investment objective is to adopt so-called alternative investment strategies (i.e., hedge funds).

The overall objective of the Circular is to clarify the legal and regulatory framework applicable to such products.

The Circular’s purpose is to provide a formal framework for establishing regulated hedge fund products which had previously been approved on a case-by-case basis.

The CSSF may allow departures from the provisions set out in the Circular, where justified, or impose additional investment restrictions, where appropriate. This may include cases where the Circular is more restrictive than subsequent regulations.

B. Short sellingShort selling may be carried out subject to the following rules:• ► Aggregate commitment (i.e., unrealized losses) in terms of short selling may not exceed 50% of

assets• ► The short sales of transferable securities for which the UCI holds adequate coverage are not

to be considered in the calculation of the total commitments referred to above. The granting by the UCI of a security, of whatever nature, on its assets to third parties in order to secure its obligations towards such third parties, is not to be considered as adequate coverage of the UCI’s commitments

• ► In connection with short sales on transferable securities, UCIs are authorized to enter, as borrower, into securities lending transactions with first class professionals specialized in this type of transaction. The counterparty risk (i.e., the difference between the value of the securities pledged and the value of the securities borrowed) per lender may not exceed 20% of assets

• ► Up to 10% of assets may be invested in short positions of unlisted securities, provided such securities are liquid


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• ► Not more than 10% of the same type of securities issued by the same issuer may be sold short• ► Short positions on securities issued by the same body may not exceed 10% of assets and/or the

commitment on such securities may not exceed 5% of assets• ► If the UCI enters into short sales transactions, it must hold sufficient assets enabling it at any

time to close the open positions resulting from such short sales

C. BorrowingBorrowing for investment purposes on a permanent basis from first class credit institutions who specialize in this type of transaction is permitted subject to the following:• ► Borrowings may not exceed 200% of the net assets. Consequently, the value of the total assets

may not exceed 300% of the value of net assets• ► In cases where there is a high degree of correlation between long and short positions

borrowings may rise to 400% of net assets

Counterparty risk (defined under “short selling”) cannot represent more than 20% of the UCI’s assets per lender.

D. Investments in other UCIs (fund of funds)Investments in other UCIs are subject to the following provisions:• ► Up to 20% of net assets may be invested in the securities of the same UCI. However, in applying

this limit each compartment of a multiple compartment UCI will be considered as a separate UCI, provided that no cross-liability exists between the compartments

• ► Up to 100% of the shares issued by a multiple compartment UCI may be held, provided that the total investment in the UCI does not exceed 50% of net assets

These limits are not applicable to investments in open-ended regulated UCIs which apply a diversified investment policy. This derogation may not result in an excessive concentration of the investments of the UCI in one single target UCI provided that for the purpose of this limitation, each compartment of a target UCI with multiple compartments is to be considered as a distinct target UCI, provided that no cross-liability exists between the compartments.

UCIs which principally invest in other UCIs must make sure that their portfolio of target UCIs presents appropriate liquidity features to enable the UCIs to meet their obligation to redeem its shares. Their investment policy must comprise an appropriate description in that respect.

E. Long positionsLong positions must meet the following criteria:• ► No more than 10% of its assets may be invested in unlisted securities• ► No more than 10% of the same type of securities issued by the same entity may be acquired• ► Exposure to a single issuer may not exceed 20% of assets

These restrictions do not apply to investments in other UCIs and to securities issued or guaranteed by an OECD Member State or by its local authorities or by supranational bodies or organizations of an EU, regional or worldwide nature.

F. Securities lendingIn general, such UCIs may lend through a standard system organized by a recognized clearing institution or through a first class financial institution subject to the following provisions:• ► Collateral (in the case of a first class institution only) received must be at least equal to the

value of securities lent• ► Securities lent may not exceed 50% of the value of the UCI’s portfolio unless the UCI has the

right to cancel the contract at any time• ► Lending contracts may not exceed 30 days unless the UCI has the right to cancel the contract at

any time


G. Financial derivative instruments (FDIs)Such UCIs are authorized to use all types of exchange traded/OTC FDIs such as options, forward or futures contracts as well as swap contracts, provided that the following conditions are met:• ► The UCI’s total commitments arising from such instruments (exchange traded and OTC) and

short selling cannot exceed the value of the assets• ► Total margin deposits (exchange traded), commitments arising from FDIs (i.e., unrealized losses

for OTC instruments) and premiums paid for the acquisition of options outstanding may not exceed 50% of the assets

• ► Sufficient liquid assets (for example, term deposits, Treasury bills, Treasury bonds and MMIs) to finance margin calls must be maintained

• ► Borrowings may not be used to finance margin deposits• ► Margin requirements or commitments on a single contract may not exceed 5% of the assets• ► Premiums paid on options with identical characteristics may not exceed 5% of the assets• ► It may not invest directly in commodities, although it may hold commodities futures and hold

precious metals dealt in on an organized market• ► The UCI must ensure an adequate spread of investment risks by sufficient diversification• ► The UCI margin requirements/commitments in respect of a single commodity/class of financial

futures may not exceed 20% of the assets

UCIs that use such techniques and instruments must include in their prospectus the maximum total leverage and a description of the risks inherent in such transactions.

H. Repurchase and reverse repurchase agreementsThe UCI may enter into sale with right of repurchase transactions which consist in the purchase and sale of securities where the terms reserve the right to the seller to repurchase the securities from the buyer at a price and at a time agreed between the two parties at the time when the contract is entered into. The UCI can also enter into repurchase transactions which consist of transactions where, at maturity, the seller has the obligation to take back the asset sold whereas the original buyer either has a right or an obligation to return the asset sold.

The UCI can either act as buyer or as seller in the context of the aforementioned transactions.

The UCIs may enter into such transactions provided that the following conditions are met:• ► The transactions must be carried out with first class institutions• ► During the duration of a sale with right of repurchase agreement where the UCI acts as

purchaser, it may not sell the securities which are the subject of the contract before the counterparty has exercised its right to repurchase the securities or until the deadline for the repurchase has expired, unless the UCI has other means of coverage

• If the UCI is open for redemption, it must ensure that the value of such transactions is kept at a level such that it is at all times able to meet its redemption obligations. The same conditions are applicable in the case of a repurchase transaction on the basis of a purchase and firm resale agreement where the UCI acts as purchaser (transferee)

• ► Where the UCI acts as seller (transferor) in a repurchase transaction, the UCI may not, during the whole duration of the repo, transfer the title to the security under the repo or pledge them to a third party, or repo them a second time, in whatever form. The UCI must at the maturity of the repurchase transactions hold sufficient assets to pay, if appropriate, the agreed upon repurchase price payable to the transferee

I. Minimum entry investmentThere is no minimum level of initial investment by investors.

J. Breach of investment limitsWhere an investment limit is breached due to passive reasons (market movements, redemptions), the UCI must take corrective action in the best interests of the shareholders or unitholders.

K. Prime brokerThe use of a prime broker is subject to the counterparty risk limitation mentioned under Subsection C. and the requirements outlined in Section 11.8..


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5.2.3.3. Venture capital UCIs

Investment in venture capital is defined as “investment in securities of unlisted companies because either these companies are recently formed, or they are still in the course of development and therefore have not yet obtained the stage of maturity required to have access to stock markets”. Venture capital UCIs invest in these higher risk companies with the intention of achieving a higher rate of return.

The principal regulations applicable to venture capital UCIs are stated in Chapter I.I. of Circular 91/75. The managers and investment advisers must be able to demonstrate their specific experience in venture capital.

A. Investment restrictionsInvestment must be diversified in order to spread the risk and, in particular, no more than 20% of net assets may be invested in any one company.

5.2.3.4. Futures contracts and/or options UCIs

The principal regulations applicable to UCIs investing in one or more of commodity futures, financial futures and options are stated in Chapter I.II. of Circular 91/75. The managers and investment advisers must be able to demonstrate their expertise in this field.

A. Investment restrictions(1) Margin deposits related to commitments on purchase and sale of futures contracts and call

and put options may not exceed 70% of net assets, the balance of 30% representing a liquidity reserve.

(2) Futures contracts, including those underlying options, must be dealt in on an organized market.

(3) Contracts concerning commodities, other than commodity futures contracts, are not allowed. The acquisition of precious metals for cash, negotiable on an organized market, is permitted.

(4) Only call and put options dealt in on an organized market are permitted. Premiums paid for such options are included in the 70% limit in Point (1).

(5) Investments must be sufficiently diversified in order to spread risk.

(6) An open forward position may not be held in any one contract for which the margin requirement represents 5% or more of net assets. This also applies to open positions resulting from the sale of options.

(7) Premiums paid to acquire options having identical characteristics may not exceed 5% of net assets.

(8) Open positions in futures contracts concerning a single commodity or a single category of financial futures must be less than 20% of net assets. This also applies to open positions resulting from the sale of options.

B. Borrowings(1) Borrowings of up to 10% of net assets are permitted but not for investment purposes.

5.2.3.5. Real estate UCIs

The CSSF defines real estate for the purposes of Circular 91/75 as being:• ► Property consisting of land and/or buildings registered in the name of the UCI• ► Participations in real estate companies (as well as loans to such companies) the exclusive purpose

and objects of which are the acquisition, development and sale together with the letting and tenanting of real estate, assuming that such participations are at least as realizable as those real estate interests held directly by the UCI

• ► Various long-term real estate related interests such as rights to ground rents, long-term leases and option rights over real estate investments

The principal regulations applicable to real estate UCIs are stated in Chapter I.III. of Circular 91/75. The managers and investment advisers must have experience in real estate investment.


A. Investment restrictions(1) Investment in property must be sufficiently diversified in order to spread risk, and in any case

no more than 20% of net assets may be invested in any one property. Property which has an economic life dependent on another property is not considered as a separate property. This 20% rule does not apply during a start up period not exceeding four years.

B. Borrowings(1) Total borrowings may not exceed 50% of the value of all properties.

C. Valuations of properties(1) One or more experienced independent property valuers must be appointed.

(2) At the year end, all properties owned by the UCI or its affiliated real estate companies must be valued by the property valuers.

(3) Properties may not be acquired or sold without a valuation by the property valuers, although a new valuation is not required if the sale of a property occurs within six months of the last valuation.

(4) The purchase or sale price may not be appreciably higher or lower than the valuation, except under justifiable circumstances which must be explained in the next financial report.

5.3. SIF Law UCIs

SIFs are required to comply with general diversification and risk management requirements, but are not subject to detailed investment or borrowing rules. This section covers the diversification requirements; risk management requirements are covered in Section 9.4..

In addition, full AIFM regime SIFs which:• ► Invest in securitization positions are subject to the requirements outlined in Section 5.4.1.• ► Acquire major holdings or control over non-listed companies are subject to the requirements

outlined in Section 5.4.2.

5.3.1. Diversification

The SIF Law states that a SIF should apply the principle of risk diversification. CSSF Circular 07/309 on risk spreading in the context of specialized investment funds, complemented the SIF Law and provided clarification on the investment restrictions that must be adhered to in order to ensure adequate risk diversification:

(1) A SIF cannot, in principle, invest more than 30% of its assets or its commitments to subscribe to securities of the same nature issued by the same issuer. This restriction is not, however, applicable to investments in:• ► Securities issued, or guaranteed, by an OECD Member State or by its local authorities or by

supranational bodies or organizations of an EU, regional or worldwide nature• ► Target UCIs which are subject to risk diversification principles that are at least comparable

to those relevant to SIFs (e.g., a feeder SIF investing in a master UCI). Each compartment of a target multiple compartment UCI may be considered as a distinct issuer providing that the segregation of assets and liabilities on a compartment by compartment basis is implemented

(2) Short selling cannot, in principle, result in the SIF holding uncovered securities of the same nature issued by the same issuer representing more than 30% of its assets.

(3) When using financial derivative instruments (FDIs), the SIF must ensure comparable risk diversification through appropriate diversification of the underlying assets. Counterparty risk of OTC operations must be limited according to the quality and qualification of the counterparty.


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The risk diversification requirements, should, in practice, be complied with by each compartment of a multiple compartment SIF.

The CSSF may provide exemptions from the restrictions laid out in Circular 07/309 on a case-by-case basis – for example, exemptions may be granted, for a limited period, to real estate and private equity SIFs making their first investments. However, the CSSF may also request that additional restrictions are adhered to, in cases of funds with specific investment policies.

A compartment of a SIF may, subject to the conditions set out in the offering document, subscribe, acquire and/or hold securities to be issued or already issued by one or several other compartments of the same SIF, without this SIF, when it is a legal entity, being subject to the requirements regarding the subscription, acquisition and/or holding by a company of its own shares set out in the law of 10 August 1915 on commercial companies, subject to the following conditions:• ► The target compartment does not, in turn, invest in the compartment invested in this target

compartment• ► The voting rights, if any, which might be attached to the securities concerned will be suspended

for as long as they are held by the relevant compartment and without prejudice to an appropriate treatment in accounting and in the periodical reports

• ► In any case, as long as these securities are held by the SIF, their value must not be taken into account for the calculation of the SIF’s net assets for the control of the minimum threshold of net assets imposed by the 2007 Law

Sufficient information and documentation must be provided to the CSSF to enable it to determine compliance with the investment restrictions.

Details of how the principle of risk diversification will be implemented, including quantifiable investment limits, must be disclosed in the offering document (see Section 12.3.4.).

5.4. AIF

Full AIFM regime AIF are subject to specific requirements regarding:• ► Investments in securitization vehicles (see Section 5.4.1.)• ► Major holdings and control over portfolio companies (see Section 5.4.2.)

Risk management requirements, including leverage requirements, are covered in Section 9.3..

5.4.1. Investments in securitization vehicles

When an AIFM acting on behalf of an AIF invests in a securitization position:• ► The originator, sponsor, or original lender must retain a net economic interest • ► Qualitative must be met by the originator and sponsor• ► The AIFM is required to meet qualitative requirements in relation to the risks inherent in the

position

Where the requirements are not met, the AIFM must take corrective action in the best interests of the investors in the AIF.

I. Requirement for retained interest:Full AIFM regime AIF may only assume exposure to credit risk of a securitization vehicle on behalf of one or more AIF it manages if the originator, the sponsor or the original lender of the securitization vehicle to be acquired retains, on an ongoing basis, a material net economic interest of not less than 5%.


However, AIFM are exempt from this requirement where the securitized exposures are claims or contingent claims on or fully, unconditionally and irrevocably guaranteed by:• ► Central governments or central banks• ► Regional governments, local authorities and public sector entities of Member States• ► Medium to low risk credit institutions or investment firms (institutions to which a 50 % risk

weight or less is assigned under the “standardized approach”)• ► Multilateral development banks

Retention of a material net economic interest of not less than 5% means any of the following:• ► Retention of no less than 5% of the nominal value of each of the tranches sold or transferred to

the investors• ► In the case of securitization vehicles of revolving exposures, retention of the originator’s

interest of not less than 5% of the nominal value of the securitized exposures• ► Retention of randomly selected exposures, equivalent to not less than 5% of the nominal value

of the securitized exposures, where such exposures would otherwise have been securitized in the securitization vehicle, provided that the number of potentially securitized exposures is not less than 100 at origination

• ► Retention of the first loss tranche, and, if necessary, other tranches having the same or a more severe risk profile than those transferred or sold to investors and not maturing any earlier than those transferred or sold to investors, so that the retention equals in total not less than 5% of the nominal value of the securitized exposures

• ► Retention of a first loss exposure of not less than 5% of every securitized exposure in the securitization vehicle

Net economic interest must be measured at the origination and must be maintained on an ongoing basis. The net economic interest must not be subject to any credit risk mitigation or any short positions or any other hedge and must not be sold. It must be determined by the notional value for off-balance sheet items.

There are no multiple applications of the retention requirements for any given securitization vehicle.

II. Qualitative requirements concerning sponsors and originators:Before assuming exposure to the credit risk of a securitization on behalf of one or more AIF, an AIFM must ensure that the originator and the sponsor:• ► Grant credit based on sound and well-defined criteria and clearly establish the process for

approving, amending, renewing and re-financing loans to exposures to be securitized as they apply to exposures they hold

• ► Have in place and operate effective systems to manage the ongoing administration and monitoring of their credit risk-bearing portfolios and exposures, including for identifying and managing problem loans and for making adequate value adjustments and provisions

• ► Adequately diversify each credit portfolio based on the target market and overall credit strategy• ► Have a written policy on credit risk that includes their risk tolerance limits and provisioning

policy and describes how it measures, monitors and controls that risk• ► Make available all material relevant data on the credit quality and performance of the individual

underlying exposures, cash flows and collateral supporting a securitization exposure and such information that is necessary to conduct comprehensive and well informed stress tests on the cash flows and collateral values supporting the underlying exposures. For that purpose, materially relevant data must be determined as at the date of the securitization and where appropriate due to the nature of the securitization thereafter

• ► Make available all other relevant data necessary for the AIFM to comply with the requirements regarding securitization vehicles as detailed in Section III below

• ► Disclose the level of their retained net economic interest as referred to Subsection I above, as well as any matters that could undermine the maintenance of the minimum required net economic interest


Investment rules 5

III. Qualitative requirements concerning AIFMs exposed to securitization vehicles:Before being exposed to the credit risk of a securitization vehicle on behalf of one or more AIF, and as appropriate thereafter, AIFMs must be able to demonstrate to the competent authorities for each of their individual securitization positions that they have a comprehensive and thorough understanding of these positions and have implemented formal policies and procedures appropriate to the risk profile of the relevant AIF investments in securitization vehicles for analyzing and recording: • ► Information referred to in Section I above, by originators or sponsors to specify the net

economic interests that they maintain on an ongoing basis in the securitization vehicle• ► The risk characteristics of the individual securitization vehicles • ► The risk characteristics of the exposures underlying the securitization vehicles • ► The reputation and loss experience in earlier securitization vehicles of the originators or

sponsors in the relevant exposure classes underlying the securitization vehicles • ► The statements and disclosures made by the originators or sponsors, or their agents or

advisors, about their due diligence on the securitized exposure and where applicable on the quality of the collateral supporting the securitized exposure

• ► Where applicable, the methodologies and concepts on which the valuation of collateral supporting the securitized exposures is based and the policies adopted by the originators or sponsor to ensure the independence of the valuer

• ► All the structural features of the securitization vehicle that can materially impact the performance of the institution securitization vehicles, such as the contractual waterfall and waterfall related triggers, credit enhancements, liquidity enhancements, market values triggers, and deal-specific definitions of default

Where an AIFM has assumed exposure to a material value of the credit risk of a securitization vehicle on behalf of one or more AIF, it must regularly perform stress tests appropriate to such securitization vehicles (see Section 9.3.). The stress test must be commensurate with the nature, scale and complexity of the risk inherent in the securitization vehicle.

AIFM are required to establish formal monitoring procedures in line with the principles laid down the risk management requirements applicable to AIFM (see Section 9.3.) commensurate with the risk profile of the relevant AIF in relation to the credit risk of the exposure to securitization vehicles in order to monitor on an ongoing basis and in a timely manner performance information on the exposures underlying such securitization vehicles.

AIFM are required to apply the same standards of analysis to participations or underwritings in securitization vehicle issues purchased from third parties.

For the purposes of appropriate risk and liquidity management, AIFM assuming exposure to the credit risk of a securitization vehicle on behalf of one or more AIF must properly identify, measure, monitor, manage, control and report the risks that arise because of mismatches between the assets and liabilities of the relevant AIF, concentration risk or investment risk arising from these instruments. The AIFM must ensure that the risk profile of such exposure to securitization vehicles corresponds to the size, overall portfolio structure, investment strategies and objectives of the relevant AIF as laid down in the AIF rules or instruments of incorporation, prospectus and offering documents.

AIFMs must ensure that there is an adequate degree of internal reporting to the senior management so that senior management is fully aware of any material assumption of exposure to securitization vehicles and that the risks arising from those exposures are adequately managed.

AIFMs are required to include appropriate information on their exposures to the credit risk of securitization vehicles and their risk management procedures in this area in the reports and disclosures (see Sections 12.3.3., 12.5.2. and 7.4.21.).

IV. Corrective action:AIFM are required to take such corrective action as is in the best interest of the investors in the relevant AIF where:• ► They discover, after the assumption of an exposure to a securitization vehicle, that the

determination and disclosure of the retained interest did not meet the applicable requirements• ► The retained interest becomes less than 5 % at a given moment after the assumption of the

exposure and this is not due to the natural payment mechanism of the transaction


V. Grandfathering clause:Sections I to IV apply in relation to new securitization vehicles issued on or after 1 January 2011. After 31 December 2014, Section I to IV apply in relation to existing securitization vehicles where new underlying exposures are added or substituted after that date.

5.4.2. Major holdings and control over portfolio companies

The AIFM Law sets down requirements on the acquisition of major holdings or control of non-listed companies and issuers by AIF.

The provisions on acquisition of control apply to AIFM acting individually, or cooperating with one or more other AIFM on the basis of an agreement, managing one or more AIF which either individually or jointly on the basis of an agreement aimed at acquiring control, acquire control of a non-listed company, and, for certain limited provisions, to issuers. Control is defined as more than 50% of the voting rights for non-listed companies and by reference to Art 5(3) of the Takeover Bids Directive89 for issuers.

The provisions are neither applicable to EU small and medium-sized enterprises (SMEs90) nor special purpose vehicles (SPVs) with the purpose of purchasing, holding or administering real estate.

When an AIF acquires, disposes or holds shares of a non-listed company, the AIFM must notify the competent authority of its home Member State of the proportion of voting rights of the non-listed company held by the AIF whenever the proportion reaches, exceeds or falls below any of the following thresholds: 10%, 20%, 30%, 50% and 75%.

When an AIF acquires, individually or jointly, control over a non-listed company, the AIFM is required to:• ► Notify, within ten working days, the non-listed company, its shareholders and its competent

authority of the resulting situation in terms of voting rights and the conditions under which control has been reached, including information about the identity of the different shareholders involved

• ► Disclose to the non-listed company, its shareholders and its competent authority:• ► The identity of the AIFM which either individually or in agreement with other AIFM manage(s) the

AIF that has/have reached control• ► The policy for preventing and managing conflicts of interests• ► The policy for external and internal communication relating to the company, in particular as

regards employees

These provisions also apply to issuers.

In addition, the AIFM must disclose:• ► To the non-listed company and its shareholders: its intentions regarding the future business of the

non-listed company and the likely repercussion on employment• ► To its competent authority, and the investors of the AIF: information on the financing of the

acquisition

In the notification and disclosure to the non-listed company, the AIFM must request the Board of Directors of the company to inform the representatives of employees or the employees themselves of the acquisition of control by the AIF managed by the AIFM and provide the information notified and disclosed. This also applies to issuers.

89 Directive 2004/25/EC on takeover bids90 Micro, small and medium-sized enterprises (SMEs) are enterprises which employ fewer than 250 persons and which

have an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding €43 million.


Investment rules 5

The AIFM is required to ensure that information on the development of the non-listed company’s business is disclosed to the investors in the AIF, and make its best efforts to ensure that the information is made available to employees to the company. The AIFM may either: • ► Request and use its best efforts to ensure that the annual report of the non-listed company is made

available by the Board of Directors of the company to the employees’ representatives or, where there are none, to the employees themselves within the period such annual report has to be drawn up in accordance with the national applicable law, and also make the information available to the investors of each such AIF at the latest when the annual report of the non-listed company is made available

• ► Include in the annual report of each such AIF (see also Section 12.5.2.) information relating to the relevant non-listed company, and also request and use its best efforts to ensure that the Board of Directors of the non-listed company makes available this information to the employees’ representatives of the company concerned or, where there are none, to the employees themselves at the latest when the annual report of the AIF is made available

The information to be included in the annual report of the non-listed company or the AIF must include at least a fair review of the development of the company’s business representing the situation at the end of the period covered by the annual report and give an indication of: • ► Any important events that have occurred since the end of the financial year• ► The company’s likely future development• ► The information concerning acquisitions of own shares

In the case of acquisition of control of a non-listed company or issuer by one or more AIF, the AIFM cannot, within 24 months of the acquisition of control of the company by the AIF facilitate, support or instruct any distribution, capital reduction, share redemption and/or acquisition of own shares by the company or vote in favor of a distribution, capital reduction, share redemption and/or acquisition of own shares by the company where:• ► The portfolio company’s net assets are lowered below the subscribed capital plus legally non-

distributable reserves • ► Distribution would exceed the amount of available profit

The AIFM is required to make its best efforts to prevent distributions, capital reductions, share redemptions and/or the acquisition of own shares by the company.

91 After deduction of all relevant costs. Cash and cash equivalents are excluded from the calculation.

5.5. EuVECA and EuSEF

The managers of qualifying European Venture Capital Funds (EuVECA) and of qualifying European Social Entrepreneurship Funds (EuSEF) are required to comply with regulatory requirements which include investment restrictions.

The EuVECA and EuSEF regimes are introduced in Section 3.4.3.3.; the applicable investment restrictions and leverage provisions are outlined in this section.

5.5.1. Qualifying EuVECA

Qualifying EuVECA are UCIs which invest no more than 30% of their aggregate capital contributions and uncalled committed capital91 in assets other than “qualifying investments”.


“Qualifying investments” include:• Equity and quasi-equity instruments92 that are issued by:

• A qualifying portfolio undertaking and acquired directly by the EuVECA from the qualifying portfolio undertaking

• A qualifying portfolio undertaking in exchange for an equity security issued by a qualifying portfolio undertaking

• An undertaking of which the qualifying portfolio undertaking is a majority-owned subsidiary and which is acquired by the EuVECA in exchange for an equity instrument issued by the qualifying portfolio undertaking

• Secured or unsecured loans granted by the EuVECA to a qualifying portfolio undertaking in which the EuVECA already holds qualifying investments, provided that no more than 30 % of the aggregate capital contributions and uncalled committed capital in the qualifying venture capital fund is used for such loans

• Shares of a qualifying portfolio undertaking acquired from existing shareholders of that undertaking

• Units or shares of one or several other qualifying EuVECA, provided that those qualifying EuVECA have not themselves invested more than 10 % of their aggregate capital contributions and uncalled committed capital in qualifying EuVECA

A “qualifying portfolio undertaking” must:• Meet the criteria applicable to a small and medium-sized enterprise (SME) – i.e., have less than 250

employees and must have either a turnover not exceeding €50 million or an annual balance sheet not exceeding €43 million

• Be established in an EEA Member State or a third country which:• Is not listed as a non-cooperative country and territory (NCCT) by the Financial Action Task Force

(FATF)93 • Has signed an Organisation for Economic Co-operation and Development (OECD) Article 26

Model compliant tax convention94 with the home Member State of the manager of the EuVECA and each other Member State in which the units or shares of the EuVECA are intended to be marketed

• Not be listed at the time of investment

5.5.2. Qualifying EuSEF

Qualifying EuSEF are UCIs which invest no more than 30% of their aggregate capital contributions and uncalled committed capital in assets other than “qualifying investments”.

“Qualifying investments” include:• Equity and quasi-equity instruments that are issued by:

• A qualifying portfolio undertaking and acquired directly by the EuSEF from the qualifying portfolio undertaking

• A qualifying portfolio undertaking in exchange for an equity security issued by a qualifying portfolio undertaking

• An undertaking of which the qualifying portfolio undertaking is a majority-owned subsidiary and which is acquired by the EuSEF in exchange for an equity instrument issued by the qualifying portfolio undertaking

• Securitized or unsecuritized debt instruments issued by a qualifying portfolio undertaking

92 Quasi-equity means any type of financing instrument which is a combination of equity and debt, where the return on the instrument is linked to the profit or loss of the qualifying portfolio undertaking and where the repayment of the instrument in the event of default is not fully secured


94 Article 26 of the OECD Model Tax Convention creates an obligation to exchange information that is foreseeably relevant to the correct application of a tax convention as well as for purposes of the administration and enforcement of domestic tax laws of the contracting states.


Investment rules 5

• Units or shares of one or several other qualifying EuSEF, provided that those qualifying EuSEF have not themselves invested more than 10 % of their aggregate capital contributions and uncalled committed capital in qualifying EuSEF

• Secured or unsecured loans granted by the EuSEF to a qualifying portfolio undertaking• Any other type of participation in a qualifying portfolio undertaking

A “qualifying portfolio undertaking” must:• Have the achievement of measurable, positive social impacts as a primary objective in accordance

with its constitutional document, where the undertaking meets one of the following criteria:• Provides services or goods to vulnerable, marginalized, disadvantaged or excluded persons• Employs a method of production of goods or services that embodies its social objective• Provides financial support exclusively to such social undertakings

• Use its profits primarily to achieve its primary social objective • Be managed in an accountable and transparent way, in particular by involving workers, customers

and stakeholders affected by its business activities• Be established in an EEA Member State or a third country which:

• Is not listed as a non-cooperative country and territory (NCCT) by the Financial Action Task Force (FATF)

• Has signed an Organisation for Economic Co-operation and Development (OECD) Article 26 Model compliant tax convention with the home Member State of the manager of the EuSEF and each other Member State in which the units or shares of the EuSEF are intended to be marketed

• Not be listed at the time of investment

EuSEF managers must employ, for each EuSEF that they manage, clear and transparent procedures to measure the extent to which the qualifying portfolio undertakings in which the EuSEF invests achieve the positive social impact to which they are committed. Indicators may cover one or more of the following subjects:• Employment and labor markets• Standards and rights related to job quality• Social inclusion and protection of particular groups• Equal treatment, equal opportunities and non-discrimination• Public health and safety• Access to and effects on social protection and on health and educational systems

5.5.3. Use of leverage

The manager of the qualifying European fund must not employ any method to increase the exposure at the level of the qualifying fund beyond the level of its committed capital. It may borrow cash or securities, issue debt obligations or provide guarantees where such borrowings, debt obligations or guarantees are covered by uncalled commitments.

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6.1.1. Introduction

“Governance involves a set of relationships between a company’s management, its Board, its shareholders and other stakeholders.”95

The impact of the basic structure of a UCI on its governance is covered in Section 6.1.2.. Governance models in Luxembourg are covered in Section 6.1.3..

In the context of UCIs, there are many types of direct and indirect relationships with stakeholders.They may be illustrated as follows:

Illustration of stakeholders in the context of UCIs96

The relationships between UCIs, their management entities (management companies and/or AIFM) and other stakeholders are recurring themes throughout this chapter.

“Governance is the role of persons entrusted with the supervision, control and direction of an entity.”

In the context of UCIs, a number of regulatory requirements cover:• ► The role and responsibilities of governing bodies and senior management • ► The qualifications of governing bodies and senior management• ► Internal organization• ► Delegation

Governance roles in the context of UCIs are covered in Section 6.1.4..

UCIs and management companies are required to comply with rules of conduct. Furthermore, UCIs and their management entities may voluntarily apply corporate governance principles including general corporate governance principles, such as the OECD’s Principles of Corporate Governance, as well as principles specific to UCIs, such as ALFI’s Code of Conduct for the Boards of Luxembourg funds. Governance principles and rules of conduct are covered in Section 6.1.5..

6.1. Governance

Sponsor/Shareholders

UCITS

Delegates & Service providers

Investments

UCITS AIF

Investors

Management company

Group/Third-party

Financial markets

Shareholders

AIF

Delegates & Service providers

Investments

Investors

Managemententity

Group/Third-party

Financial markets

Initiator

95 Preamble to Principles of Corporate Governance, Organisation for Economic Co-operation and Development (OECD), 2004.

96 In these illustrations, the UCI is managed by a management company or an AIFM. For a UCI which has not appointed a management company or AIFM, the illustration would be slightly different – see also Section 1.4..


“Governance provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”97 Governance from a strategic perspective is covered in Section 6.1.6..

The oversight of UCIs is covered in Section 6.1.7.. The specific topics of investors, investments and financial markets are covered in Section 6.1.8..

6.1.2. The impact of the basic structure of a UCI on its governance

The governance of a UCI is driven by its basic structure. The basic structures of UCIs are described in more detail in Section 3.3.1.. The possible fund management models are illustrated in Subsection 7.1.E..

A. Common fundsA common fund (FCP) has no legal personality and must be managed by an authorized management company.

A common fund is controlled by the management company, and ultimately the governing body of the management company, in conjunction with the depositary.

Unitholders of a common fund generally have no control over the fund. There is no requirement to hold unitholder meetings.

B. Investment companiesAn investment company (SICAV or SICAF) has a legal personality. An investment company is controlled by its governing body (generally a Board of Directors). The shareholders of an investment company have ultimate control over the fund. The governing body of the investment company is required to convene annual shareholder meetings.

An investment company may either:• ► Appoint an authorized management entity (a management company or AIFM)• ► Manage itself (a self-managed UCITS, or an internally managed alternative investment fund

(AIF)). In this case, the governing body of the UCI plays the role of the management entity

Where investment companies delegate management to a management entity, two governing bodies are involved:• ► The governing body of the UCI• ► The governing body of the management company or AIFM

Where multiple governing bodies are involved, a clear governance model is required to ensure that there are no overlaps or gaps. Cross-border management creates an additional level of complexity.

C. Role of the management entityThe management company or AIFM is generally responsible for the key functions of:• ► Portfolio management (see also Chapter 8)• ► Risk management (see also Chapter 9)• ► Administration (see also Chapter 10)• ► Marketing (see also Chapter 14)

The entity is permitted to delegate some of its functions. Section 6.1.4. covers delegation from a governance perspective.

97 Preamble to Principles of Corporate Governance, Organisation for Economic Co-operation and Development (OECD), 2004.



Responsibility for the appointment and oversight of other service providers, such as the depositary and auditor, also depends on the basic structure. In general responsibility for the appointment and oversight of other service providers lies with:• ► In the case of a common fund, the management company • ► In the case of an investment company, the governing body of the UCI

The responsibilities of governing bodies in relation to the appointment of delegates and service providers are illustrated in Subsection 7.1.F..

D. Management companies managing AIFManagement companies of AIF have the following options:• ► Manage the AIF itself, where the management company also has an AIFM authorization (see

Subsection 7.1.C.), or where the AIF under management fall below the de minimis thresholds (see Section 7.2.2.D.)

• ► Designate another authorized AIFM

The models are illustrated in Subsection 7.1.E..

Where the management company of a common fund in turn appoints an AIFM, two Boards are involved:• ► The governing body of the management company• ► The governing body of the AIFM

In this case, the governing body of the management company of a common fund plays a role comparable to that of the governing body of an investment company.

Where an investment company delegates management to a management entity, which in turn appoints an AIFM, three Boards are involved:• ► The governing body of the UCI• ► The governing body of the management company• ► The governing body of the AIFM

6.1.3. Governance models in Luxembourg

Luxembourg companies have the choice between two possible governance models:• ► One tier• ► Two tier

In a one tier governance model, the governing body (generally, the Board of Directors) plays the dual roles of ultimate decision making body and the supervisory function.

In practice, day to day decisions are generally made by senior management.

In a two tier model, these roles are separated. The Management Board has the power to execute all activities necessary to achieve the company’s objectives. The Supervisory Board, on the other hand, is in charge of the control and supervision of the company and cannot in any way play a role in the management of the company.

The following table illustrates how these two roles or governing bodies may typically be implemented in a one and two tier governance structure:

Typical implementation of roles of governing in one tier and two tier governance models

One tier Two tier

Ultimate decision making body

Board of Directors Management Board

Supervisory function Members of the Board of Directors responsible for the supervision of senior management

Supervisory Board

The one tier governance model is the most common in Luxembourg.97 Preamble to Principles of Corporate Governance, Organisation for Economic Co-operation and Development (OECD), 2004.


6.1.4. Governance roles in the context of UCIs

Governance is primarily the responsibility of the management company’s governing body (in the case of common funds) or the UCI’s governing body (in the case of investment companies), as described in Section 6.1.2..

The governance structure of a UCI or its management entity may be considered to be composed of:• ► Board of Directors• ► Senior Management• ► Internal organization

A key role of the governing body is overseeing internal and external delegates.

A. Governing bodyThe governing body is generally a Board of Directors, but may also be the Board of Managers or a General Partner, depending, as the case may be, on the corporate form of the UCI and of the management company. Directors can be categorized as:• ► Related to the promoter, initiator or sponsor• ► Related to the UCI’s management company, related parties or service providers • ► Independent

In practice, the governing body must have at least three members.

Both the 2010 and SIF Laws require that Directors98 be of sufficiently good repute and be sufficiently experienced in relation to the type of business carried out by the UCI.

The Board should have good professional standing and appropriate experience and use best efforts to ensure that it is collectively competent to fulfill its responsibilities:• The composition of the Board should be balanced so it can make well-informed decisions.

Members of the Board should therefore have appropriate experience, with complementary knowledge and skills, relative to the size, complexity and activities of the UCI

• The Board should ensure that it keeps abreast of relevant laws and regulations and that it remains vigilant about evolving risks and market developments

• The Board may call upon expert assistance and/or create special committees for the proper fulfillment of its duties. The establishment of special committees should not affect the collective responsibility of the Board

• The members of the Board are expected to understand the activities of the fund and devote sufficient time to their role

The governing body is responsible for managing the business of the UCI in good faith, with reasonable care, in a competent, prudent and active manner for the benefit of the UCI and its shareholders or unitholders.

The tasks of the governing body include, inter alia:• ► Conducting the UCI in accordance with its strategy and objectives (investment strategy, realization

of objectives in compliance with the applicable law, regulations, CSSF Circulars and prospectus)• ► Convening annual and extraordinary general meetings• ► Preparing management reports and financial statements

The roles of the governing body of a UCI or a management entity are laid down in regulations in relation, inter alia, to: • ► Compliance with regulatory requirements• ► Oversight • ► Internal controls• ► Risk management • ► Conflicts of interest • ► Remuneration

98 “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.



The roles and qualifications of a governing body of the management entity of a UCI, or of a UCI which has not appointed a management entity, are covered in more detail in Section 7.4.6..

B. Internal and external delegation In practice, the governing body generally delegates, wholly or partially, the performance of certain:• ► Management activities to conducting officers (also known as senior management)• ► Activities to service providers

Delegation must always be reasonable, justified, in the interest of the UCI and its shareholders or unitholders, and under the supervision of the governing body. The governing body retains overall responsibility, including responsibility for performing due diligence on the delegate, making the decision to delegate and monitoring the delegate.

Delegation of functions by the governing body

Internal delegation External delegation

Delegate Conducting officers (also known as senior management), who can be Directors, managers or officers who are external to the governing body

Service providers

Key requirements for delegation

Senior management must:• Be appropriately qualified• Have sufficient resources

available and monitor its activity

The management entity and/or governing body of a UCI must:• Perform initial and ongoing due

diligence on service providers to ensure that they are qualified and capable

• Monitor the performance of delegated activities

• Be able to withdraw the mandate at any time

Sub-delegation by delegate

Conducting officers delegate to heads of departments who delegate to employees

Delegates can delegate to sub-service providers, under the same conditions as those applicable to delegation

Formalization Internal organizational structure and reporting lines, allocation of tasks, definitions of roles and responsibilities, procedures manual

Written contract Service level agreements covering information exchange

Liability Delegation does not change the liability of the governing body. Formalization, however, permits the governing body to hold delegates responsible for the delegated tasks

Information to be provided to CSSF

Information must be provided to the CSSF on all key function holders

CSSF must be informed of delegation and sub-delegation

CSSF must be informed of any material changes to the conditions for initial organization, before implementation

Delegation to external entities is covered in more detail in Section 7.4.15..

C. Senior managementSenior management (i.e., the conducting officers), and the supervisory function (if any), have responsibility for ensuring compliance with legal and regulatory obligations. This role includes, inter alia:• ► The implementation of the general investment policy of the UCI • ► Overseeing the approval of investment strategies• ► Ensuring and regularly verifying effective implementation and compliance with the general

investment policy, investment strategies and risk limits, even if the risk management function is delegated

• ► Approving and regularly reviewing the internal procedures for undertaking investment decisions so as to ensure that they are consistent with the approved investment strategies


• ► Approving and regularly reviewing the risk management policy and its implementation• ► Assessing and regularly reviewing the effectiveness of policies, arrangements and procedures

put in place to comply with the requirements of the Law, and taking any appropriate corrective measures

• ► Ensuring that the management company has a permanent and effective compliance function, even if this function is delegated

• ► Reviewing on a regular basis (at least once a year) reports on compliance matters, internal audit and risk management, and any remedial measures taken

• ► Ensuring that proper valuation policies and procedures are implemented in line with the regulatory requirements

• ► Establishing and applying a remuneration policy

The management entity should ensure that senior management and the supervisory function are responsible for:• ► Complying with its obligations under the 2010 Law/AIFM Law• ► Assessing and periodically reviewing the effectiveness of policies, arrangements and procedures

put in place to comply with its obligations under the 2010 Law/AIFM Law• ► Receiving on a frequent basis, and at least annually, written reports on matters of compliance,

internal audit and risk management indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies

The roles and qualifications of senior management of the management entity of a UCI, or of a UCI which has not appointed a management entity, are covered in more detail in Section 7.4.7..

D. Internal organizationManagement companies and AIFM are required to comply with general organizational requirements including the following:• ► Establish, implement and maintain decision-making procedures and an organizational structure

which specifies reporting lines and allocates functions and responsibilities clearly and in a documented manner

• ► Ensure that the staff are aware of the procedures to be followed for the proper discharge of their responsibilities

• ► Establish, implement and maintain adequate internal control mechanisms designed to secure compliance with decisions and procedures at all levels of the management entity

• ► Establish, implement and maintain effective internal reporting and communication of information at all relevant levels of the management entity and effective information flows with any third party involved

• ► Monitor and, on a regular basis, evaluate the adequacy and effectiveness of their systems, internal control mechanisms and arrangements, and take appropriate measures to address any deficiencies

The principle of proportionality applies: management companies and AIFM should take into account the nature, scale and complexity of their business, and the nature and range of services and activities undertaken.

The general organizational requirements applicable to management entities are covered in more detail in Section 7.4.5..

6.1.5. Governance principles in the context of UCIs

Management entities and UCIs which have not appointed a management entity are required to comply with rules of conduct, requiring them, inter alia, to:• ► Act honestly, with due skill, care and diligence, and fairly in conducting their activities• ► Act in the best interests of the UCIs or the investors of the UCIs they manage and the integrity of

the market• ► Have and employ effectively the resources and procedures that are necessary for the proper

performance of their business activities



• ► Take all reasonable steps to avoid conflicts of interest and, when they cannot be avoided, identify, manage and monitor and, where applicable, disclose those conflicts of interest in order to prevent them from adversely affecting the interests of the UCIs and their investors and to ensure that the UCIs they manage are fairly treated

• ► Comply with all regulatory requirements applicable to the conduct of their business activities so as to promote the best interests of the UCIs or the investors of the UCIs they manage, and the integrity of the market

• ► Treat all UCI investors fairly

The rules of conduct applicable to management entities and UCIs which have not appointed a management entity are covered in detail in Section 7.4.14..

In addition, there are a number of governance principles which may be applied in the context of UCIs.

General governance principles include the OECD’s Principles of Corporate Governance and the Luxembourg Stock Exchange’s Ten Principles of Corporate Governance.

UCIs may also apply principles specific to UCIs. A key reference governance code in the context of Luxembourg UCIs is the Association of the Luxembourg Fund Industry’s (ALFI) Code of Conduct for Luxembourg Investment Funds updated in 2013. The objective of the Code of Conduct is to provide Boards of Directors with a framework of high-level principles and best practice recommendations for the governance of Luxembourg investment funds and of management companies, where appropriate.

ALFI recommends that it is appropriate to apply the Code of Conduct to all UCIs – listed and unlisted – and to management companies in order to have a uniform and consistent approach in the marketplace.

Under the Code of Conduct, the Boards of Luxembourg funds should:I. Ensure that high standards of corporate governance are applied at all timesII. Have good professional standing and appropriate experience and use best efforts to ensure

that it is collectively competent to fulfill its responsibilitiesIII. Act fairly and independently in the best interests of the investorsIV. Act with due care and diligence in the performance of its dutiesV. Ensure compliance with all applicable laws, regulations and with the fund’s constitutional

documentsVI. Ensure that investors are properly informed, are fairly and equitably treated, and receive the

benefits and services to which they are entitledVII. Ensure that an effective risk management process and appropriate internal controls are in

placeVIII. Identify and manage fairly and effectively, to the best of its ability, any actual, potential or

apparent conflict of interest and ensure appropriate disclosureIX. Ensure that shareholder rights are exercised in a considered way and in the best interests of

the fundX. Ensure that the remuneration of the Board members is reasonable and fair and adequately

disclosed

6.1.6. Governance from a strategic perspective

The role of the governing body of a management company or a UCI can also be seen from a strategic perspective. It may be argued that the governing body is responsible for:• ► Establishing and maintaining the vision, mission and values• ► Deciding the strategy• ► Overseeing execution and delegation • ► Accountability to shareholders and responsibility to stakeholders

A. Establish and maintain vision, mission and valuesA key role of the governing body is to establish and maintain the vision, mission and values:• ► Vision indicates a view of the future• ► Mission statement outlines what needs to be done to achieve the envisaged state• ►Values are a set of principles and standards that drive decision making


B. Decide the strategyThe vision, mission and values should be implemented by a strategy which is approved by the governing body. This may include:• ► Choice of organizational model for the UCI, its management and service providers. Some of the

organizational model choices are outlined in Section 1.4.• ► Drawing up program of activities: management entities and UCIs which have not appointed a

management entity are required to provide the CSSF with a program of activities, setting out, inter alia, the organizational structure of the entity, in the application for authorization, as described in Section 7.4.1.

• ► Deciding on the strategy to meet the investment policy of the UCI

C. Overseeing implementation of the strategyOverseeing the implementation of the strategy includes, inter alia:• ► Implementing the investment policy of the UCI, in compliance with investor disclosures and fund

documentation and the law• ► Maintaining an appropriate governance structure and internal organization• ► Complying with applicable values statement, governance principles and rules of conduct• ► Appointing and overseeing of delegates and other service providers • ► Complying with contractual obligations with related parties

These topics have been touched on in the preceding sections.

D. Accountability to investors and supervisory authorityUCIs are required to demonstrate accountability to investors, making available:• ► Initial disclosures: prospectus, KII, or issuing document• ► Annual reports • ► Specific disclosures, inter alia, on:

• Conflicts of interest • Policy and practice on exercise of voting rights• Any preferential treatment of certain investors• Remuneration policy, and amounts of remuneration• Fees and inducements• Prime brokerage arrangements

The governing body, or governing bodies, are ultimately responsible for these disclosures, and will in some cases approve them. In many cases, these disclosures will be made public. They are covered in more detail in Chapter 12.

In the case of UCIs in corporate form, such as investment companies, the governing body will be responsible for convening shareholder meetings, including the annual general meeting (see Section 12.6.).

UCIs and their management entities are subject to the ongoing supervision of the CSSF. They are required, inter alia, to:• ► Provide the CSSF with updates to any information submitted in their application for

authorization, as outlined in Section 4.4. for UCIs and Section 7.4.1.D. for management entities• ► Submit to the CSSF information on their activities on a regular basis, as outlined in Section 4.5.

for UCIs and Section 7.4.21. for management entities• ► Promptly provide information requested by the CSSF

6.1.7. The oversight of UCIs

The governing body plays a key role in the oversight of UCIs. Other entities playing important roles in the ongoing oversight of UCIs include:• ► The management company, and delegates thereof: the senior management and control functions

play key roles, but also all heads of units and each member of staff plays a role (see Chapter 7)• ► The depositary in the context of its oversight duties (see Chapter 11)• ► The auditor (see Section 12.5.8.)• ► The supervisory authorities (see Section 4.5.)



6.1.8. Governance in the wider context of UCIs

The remainder of this section focuses on roles and responsibilities of the UCI and management entity in relation to stakeholders not covered in the previous sections.

A. Investors The UCI or its management company has a direct responsibility to investors, for example in terms of implementing the investment policy with a view to generating returns, acting in the best interests of the UCI and its investors, and accountability.

However, it may also have an indirect responsibility to many more investors. Institutional investors, such as pension funds, funds of funds, and nominee accounts may, in turn, represent thousands of individuals.

B. InvestmentsAs an investor, the UCI directly or indirectly plays a role in society. The role of the UCI as an investor will depend on the type of investments. For example:• ► An equity UCI may be a minority shareholder in a listed company; it should exercise its voting

rights in line with its policy on the exercise of voting rights, and may exercise influence on the company in concert with other shareholders

• ► A fixed income UCI may play an important role in financing public bodies and companies• ► Private equity UCIs will generally control non-listed companies, either acting individually

or jointly. The relationship of the private equity UCI with the company may range from an incubation role to a pure investor role. The UCI can exert significant influence over the governing body and the management of a company

• ► A real estate UCI may invest in assets of significant importance for a community, such as residential property, offices or shopping centers

• ► An infrastructure UCI may play an important role in developing and managing infrastructure in areas such as environment, energy, healthcare, urban infrastructure, public and local utility facilities, telecommunications and transport

UCIs and their management entities are required to define and implement a policy on the exercise of voting rights in the portfolio of assets of the UCI (see Subsection 8.2.1.G.).

C. MarketsUCIs and their management entities are required to act to promote the integrity of the market. They are covered by securities laws, such as those on market abuse (see Section 8.2.3.).

6.2. Criminal and civil liability

This section provides a brief overview of criminal and civil liability of entities and individuals in the context of Luxembourg UCIs.

6.2.1. Criminal liability

Both legal entities (including Luxembourg UCIs set up as investment companies and management companies) and physical persons (including the Directors and managers of such legal entities) can be held criminally liable for misdemeanors (minor offences) and crimes (serious offences).

While the criminal liability of Directors and managers of Luxembourg UCIs as individual physical persons has always existed, criminal liability of UCIs as corporate entities was only implemented in Luxembourg law in 2010.


6.2.1.1. Criminal liability of Directors and managers

Luxembourg law subjects all individuals holding a “de jure” or “de facto” management function with respect to a management company or investment company to criminal liability.

The criminal liability of physical persons prevents individuals from hiding behind a “corporate veil”.

Delegation by the governing body of a Luxembourg management company or investment company to conducting officers and the chain of sub-delegation increases the number of individuals who can potentially incur the criminal liability of a management company or investment company, and who can be held liable as physical persons.

6.2.1.2. Criminal liability of Luxembourg legal entities

Any Luxembourg legal entity can be held criminally liable for misdemeanors and crimes, and may therefore be subject to the same criminal penalties as physical persons. Therefore, investment companies and management companies may be held criminally liable. Furthermore, criminal proceedings may also be brought against a foreign entity which has breached Luxembourg criminal law.

In order for a legal entity to be held criminally liable in Luxembourg, the misdemeanor or crime must meet all of the following conditions:• ► Be the result of one or more of the actions/omissions of the de jure or de facto Directors or

managers• ► Have been committed both:

• ► In the name of the company• ► For the benefit of the company (such benefit not necessarily being of financial nature)

Under Luxembourg law, the disappearance of the legal personality (e.g., through a dissolution or merger) results in the end of any pending criminal proceedings but does not remove its obligation to execute any penalty which it was sentenced to, prior to dissolution or merger. Public prosecution and investigating judges may also delay or prohibit dissolution or any transaction which could lead to it.

6.2.1.3. Punishable misdemeanors and crimes, and applicable penalties

Legal entities and physical persons may be held criminally responsible for all types of misdemeanors and crimes covered by the Luxembourg criminal code, as well as for those covered by specific laws, such as the 2010 Law and the SIF Law.

The most serious types of “general” crimes for which they may be held criminally liable include money laundering and concealment, acts of terrorism and financing of terrorism, misappropriation of public funds, embezzlement, active and passive corruption as well as private corruption.

In addition, the 2010 Law and the SIF Law provide for specific offences including, inter alia:• ► Where a person makes use of designations or descriptions giving the impression that the activities

are subject to the 2010 Law or SIF Law without having obtained the relevant authorization from the CSSF

• ► Where a person carries out, or directs the carrying out of, operations involving receipt of funds from investors if the relevant UCI is not duly authorized

• ► Where a person has made loans or advances on units of a common fund using assets of the common fund, or who has by any means at the expense of the common fund, made payments in order to pay up units or acknowledged payments to have been made which have not actually been so made

• ► When the assets of the UCI fall below the minimum thresholds required by Law (see Sections 3.5. and 4.10.1.) and:• ► In the case of a common fund, the CSSF is not informed without delay• ► In the case of an investment company, a general meeting is not convened

• ► Where the issuance and redemption price of the shares or units of the UCI is not determined at the required specified intervals, where the share or unit issuance and redemption price is not determined, or net asset value (NAV) is not calculated, in accordance with the requirements of the law, or where, in the case of UCITS, such price is not made public (see also Sections 12.1.1. and 10.3.3.)



While the main sanctions applicable to physical persons are fines (up to €50,000) and imprisonment (up to two years), the main penalties for legal entities are fines (up to €750,000 for crimes, and twice the amount of the fine applicable to individuals under the relevant law for misdemeanors) and dissolution (where the entity was created for the sole purpose of committing the crime). Additional penalties for legal entities also include, for example, the seizure of assets.

6.2.2. Civil liability

The civil liability of the governing or managing body of a UCI, and its members, is mainly established by Luxembourg corporate and contractual laws. Neither the 2010 Law nor the SIF Law regulate the civil liability of the governing or managing body of a UCI, or its members. The civil liability of a management company of a common fund is mainly established by the Luxembourg Civil Code.

6.2.2.1. Civil liability of Directors and managers of Luxembourg investment companies

Directors and managers who commit a management fault (e.g., providing misleading financial information) may be held individually or collectively liable to the UCI99. Liability for a management fault can only be established if the management fault has caused damage suffered by the plaintiff.

The UCI, its shareholders and any other interested third parties may also invoke the joint and several liability of the Directors or managers in case of infringement of the provisions of the 1915 Law (e.g., failure to convene an annual general meeting), or breach of the articles of incorporation of the UCI (e.g., failure to respect the corporate objective).

Directors or managers who are not directly involved in the decision leading to the breach and who reported it at the first general meeting of shareholders of the UCI after they had acquired knowledge thereof may, however, escape their liability. Furthermore, a UCI is considered to have waived its right to bring court action if its shareholders have validly discharged the Directors or managers for the relevant period at the general meeting.

Neither individual shareholders, nor the UCI’s creditors, can be held liable for a management fault.

6.2.2.2. Civil liability of a Luxembourg management company

As an entity acting in the name and on behalf of a UCI, a management company of a common fund is liable to the unitholders for any loss resulting from the non-fulfillment or improper fulfillment of its obligations100. The management company is subject to civil law provisions governing its mandate, and remains fully liable with respect to any delegated functions.

Directors and managers of the management company of a common fund are subject to the provisions of the 1915 Law and the Luxembourg Civil Code, and may only be held liable if a fault can be attributed to them.

The management company of an investment company, or a management company providing services to an investment company, is contractually liable towards the UCI. In such cases, individual shareholders of the investment company are not permitted to sue the management company. Unlike the Directors or managers of a UCI, the Directors of the management company cannot be discharged of their liability by the general meeting of shareholders of the UCI it manages or services.

99 Article 59 of the 1915 Law100 Article 15 of the 2010 Law

162 | 7. Management of UCIs: management companies and AIFM

7. Management of UCIs: management companies and AIFM


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7.1. Introduction

A management company or alternative investment fund manager (AIFM) is a legal entity which manages one or more UCIs. For the purposes of this Chapter, these entities are collectively referred to as “management entities”.

The AIFM Directive, and Luxembourg’s AIFM Law, entered into force in July 2013. At the time of writing this Technical Guide, many practical AIFM Directive implementation issues remained subject to interpretation. On some, clarification may be expected from regulatory and supervisory authorities.

A common fund (FCP) must always be managed by a management company. An investment company (SICAV or SICAF) must either appoint a management company or manage itself.

This Chapter:• Outlines the scope of activities of management entities• Lists the key regulations applicable to Luxembourg management entities• Summarizes requirements applicable to the setting up and operation of Luxembourg management

entities and self-managed investment companies • Outlines the management passports • Summarizes the expenses and taxation of management entities

In much of this Chapter, we outline the regulatory requirements applicable to management entities – in particular UCITS management companies and AIFM. We generally indicate the type of entity to which the regulatory requirements apply. In certain cases, in the absence of existing clarification, the provisions applicable to one type of entity may provide an indication of the supervisory expectations of the CSSF in relation to another type of entity.

The remainder of the introduction to this Chapter provides a brief summary of:• The scope of activities of management entities• The European Economic Area (EEA101) “management” and “product” passports available to

management entities • Dual authorization of management entities • The concept of “sponsor” of a management company• The basic fund management models• The responsibilities of management entities in relation to the appointment and oversight of service

providers• Key limitations on delegation by management entities• Services which management entities may provide as delegates• The relationship between management entities and other regulated entities

A. Scope of activities of management entities“Management” includes, in general, investment management, administration and marketing. In practice, many management entities delegate some of these functions. The management entity remains responsible for overseeing and supervising these delegated functions.



There are three types of authorized management entity in Luxembourg:• Chapter 15 (UCITS) management company: the regular business of a UCITS management

company is managing UCITS. A UCITS must either be managed by a UCITS management company, or designate itself as self-managed. Only investment companies can be self-managed UCITS. Self-managed UCITS are subject to most of the requirements applicable to management companies (see Section 7.4.23.). A UCITS management company may also obtain authorization to engage in certain other activities, including managing other UCIs, and providing discretionary portfolio management services and investment advice in relation to financial instruments.

• AIFM: the regular business of an AIFM is managing alternative investment funds (AIF, as defined in Subsection 7.2.2.C.). AIFM authorization is required where the AIF assets it manages are above the AIFM Law de minimis thresholds (see Subsection 7.2.2.D.). The AIFM may be an external entity or the AIF itself, in the case of an internally managed AIF. Only AIF in corporate form, such as investment companies, can be internally managed. Internally managed AIF are subject to almost all of the same requirements as AIFM (see Section 7.4.23.). An external AIFM may also obtain authorization to perform certain other activities, including providing discretionary portfolio management services and investment advice.

It is necessary to distinguish between authorized AIFM, which are required to comply fully with the AIFM Law or AIFM Directive requirements, and “simplified registration regime AIFM”, whose assets under management are below the de minimis thresholds.102

In this Chapter, “AIFM” means “authorized AIFM”, unless otherwise specified.

• Chapter 16 (non-UCITS) management company: the regular business of a Chapter 16 management company is managing non-UCITS (almost all non-UCITS are AIF). Where the AIF assets under management of the management company are below the AIFM Law de minimis thresholds (see Subsections 7.2.2.D. and F.), the AIF may be managed by a Chapter 16 management company without an AIFM authorization. Where the AIF assets under management of the management company are above the AIFM Law de minimis thresholds, the management company must either obtain authorization as an AIFM or designate another management entity as AIFM. A Chapter 16 management company may also manage investment vehicles other than AIF.

The following table provides a brief summary of the activities which management entities may perform:

Brief summary of scope of activities of management entities

UCITS management company

AIFM authorized entity

Chapter 16 management company (not authorized

as an AIFM)

Regular business

Managing UCITS Managing alternative investment funds (AIF)

Managing non-UCITS

Other possible activities

• Managing other UCIs• Discretionary portfolio

management• Investment advice

• Activities related to the assets of AIF

• Discretionary portfolio management

• Investment advice

• Managing investment vehicles other than AIF

Management entities may combine authorizations as summarized in Subsection C.

B. PassportsUCITS management companies and AIFM have two types of “passports”:• A “Management” passport, permitting them to perform activities for which they have been

authorized in other EU/EEA Member States without obtaining prior authorization in the host Member State. Management entities may manage UCIs cross-border either through free provision of services or the establishment of a branch (see Section 7.5.)

102 “Simplified registration regime AIFM” are covered in Subsection 7.2.2.E..

Example: A Luxembourg UCITS management company may, in addition to managing Luxembourg UCITS, manage:• A UCITS in Italy through a branch • A feeder UCITS in Sweden directly through free provision of services


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• A “Product” passport, permitting the marketing the UCITS or AIF they manage in other EU/EEA Member States, following a notification (see Chapter 14)

Example: A Luxembourg authorized AIFM may, following notification sent to the CSSF, market its SIFs in Italy, Luxembourg and Sweden, either directly or through an intermediary acting on its behalf. National private placement rules applicable to the marketing of AIF in these countries do not apply.

The scope of the “Management” passport depends on the management entity:• A UCITS management company can perform the activities for which it has been authorized in

other EU/EEA Member States• An AIFM can manage AIF in other EU/EEA Member States, but not perform the other activities

for which it has been authorized.• A Chapter 16 management company which is not authorized as an AIFM does not benefit from a

passport to perform the activities for which it has been authorized outside Luxembourg

The functioning of the “Product” passport depends on the regime:• Authorized UCITS benefit from a passport enabling the marketing of their shares or units to

retail and professional investors in EU/EEA Member States. A notification procedure must be followed to market each UCITS in each Member State, apart from Luxembourg

• An AIFM benefits from a passport enabling it to market the AIF it manages to professional investors in EU/EEA Member States. A notification procedure must be followed to market each AIF in each Member State, including Luxembourg

• A Chapter 16 management company which is not also authorized as an AIFM does not benefit from a product passport. However, the shares or units of the non-UCITS managed by a Chapter 16 management company may be marketed in Luxembourg and in other Member States under national private placement requirements

The following table summarizes the scope of the passports of management entities:

Brief summary of scope of passports of management entities

UCITS management company AIFM

Chapter 16 management company (not authorized as

an AIFM)

Scope of EU/EEA cross-border “management” passport

Managing UCIs √UCITS

√AIF

X

Other activities (e.g., discretionary portfolio management)

√ X X

Scope of EU/EEA cross-border “product” passport

√UCITS marketing

passport

√AIF marketing

passport

XPrivate placement only

C. Dual authorizationManagement entities may combine authorizations as follows:• Chapter 15 management company / AIFM. With this “dual” authorization, a management entity

is authorized both to manage UCITS and AIF, and benefits from the “management” passport to perform the activities for which it has been authorized in other EU/EEA Member States, and “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

• Chapter 16 management company / AIFM. With this “dual” authorization, a management entity is authorized to manage AIF – both AIF common funds (for which a Luxembourg management company is required – see Subsection F.) and investment companies – and benefits from the “management” passport to manage AIF in other EU/EEA Member States, and “product” passports to market the AIF products it manages to professional investors, in all EU/EEA Member States


The following management entity authorizations may be combined:

Combined authorizations of management entities

Chapter 15 management company AIFM

AIFM √ N/A

Chapter 16 management company X √

D. SponsorFor Chapter 15 management companies, the CSSF may ask the “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, in particular in relation to the own funds of the management company. In practice, the “sponsor” will generally be the main shareholder of the management company, or a group entity to which the main shareholder belongs, at incorporation (see also Section 7.4.3.).

The role of “sponsor” of a Chapter 15 management company replaces the role of “promoter” of a UCI managed by a Chapter 15 management company (see Section 1.4.2.A.).

The CSSF was, at the time of writing, expected to reconsider the subject of “promotership” in relation to UCIs not managed by a Chapter 15 management company.

E. Fund management modelsThe following figure illustrates the typical management models for UCIs:

Illustrative fund management models

UCI 1

Management company and/or AIFM

Mod

el A

man

aged

mod

elM

odel

Bse

lf-m

anag

ed m

odel

Mod

el C

man

aged

mod

el w

ith

AIF

M

One or more UCIs are managed directly by a management company or AIFM.

An investment company manages itself – i.e., a self-managed UCITS or internally managed AIF. The UCI itself must meet the applicable requirements.

One or more AIFs are managed by a management company. The management company is not itself authorized as an AIFM but appoints another entity as AIFM. In this case, the management company itself plays the key role of the governing body of appointment and oversight of the AIFM. For common funds, the management company may therefore play a role similar to that of the governing body of an investment company.

UCI 2 UCI (n)...

Self-managed investment company

AIF 2

Management company

AIF (n)...Other

investment vehicle

AIF 1

AIFM

Group management models are covered in Section 1.4.3.4..


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F. Appointment and oversight of service providersThe responsibilities of the management entity depend on the basic structure of the investment fund:• A common fund has no legal personality; it is created and managed by a management company.

The management company may delegate certain of its collective management functions; it must monitor the activities of its delegates. It must also appoint the other required service providers

• An investment company is a legal entity, with a governing body; it must appoint a management entity or manage itself:• Investment company managed by a management entity: one of the main responsibilities

of the governing body is the appointment and monitoring of the management entity. The management entity may, itself, delegate certain of its collective management functions; it must monitor the activities of its delegates. The governing body is also responsible for the appointment and oversight of other service providers

• Investment company manages itself: the governing body is also responsible for the appointment and oversight of all of the service providers

Collective management delegates may include, for example portfolio management, risk management and marketing. Delegation is summarized in Subsection G.

The other service providers include, inter alia, the depositary (see Chapter 11), paying agent (see Section 1.4.2.M.), and auditor (see Section 12.5.8.).

The following illustrates the typical responsibilities in relation to the appointment and monitoring of service providers:

Who usually appoints and monitors the service providers?

Management entity Collective management delegates

(e.g., portfolio manager, administrator or

distributor)

Other service providers(e.g., depositary, auditor,

legal advisor)

Common fund n.a.

Management company creates the common fund – it is not appointed

Management company Management company

Investment company:

• Managed Governing body of investment company

Management company Governing body of investment company

• Self-managed or internally managed

n.a. Governing body of investment company

Governing body of investment company

The appointment of service providers and delegation is also illustrated in Section 1.4..


G. Delegation by management entitiesA management entity is permitted to delegate some of its tasks, generally in order to achieve more efficient conduct of its business. However, a management entity should not delegate its tasks to the extent that it becomes a letter box entity. The following table provides a summary of some of the key limitations on delegation:

Overview of key limitations on delegation of activities by management entities

Activities which may be delegated103 Activities which cannot be delegated

Chapter 15 management companies

• The management functions of collective portfolio management:• Portfolio management• Administration• Marketing

• Risk management• Complaints handling• Compliance function• Internal audit function• Operation of the IT system

• Definition of the general investment policy of a common fund

• Definition of the risk profile of each UCITS• Interpretation of the risk management

analysis, including any corrective measures

• Implementing the conflicts of interest policy, and its monitoring

• Implementing the best execution policy, and its monitoring

• Where a representative price is not available, ensuring that the senior management has taken a decision on the determination of a probable fair value or have all of the necessary supporting orders to take such a decision

• Choice of service provider• Monitoring and control of delegated

functions

AIFM The AIFM is not permitted to delegate activities to the extent that the AIFM:• No longer retains the necessary expertise and resources to supervise the delegated

tasks effectively and manage the risks associated with the delegation• No longer has the power to take decisions in key areas which fall under the

responsibility of the senior management or no longer has the power to perform senior management functions in particular in relation to the implementation of the general investment policy and investment strategies

• Loses its contractual rights to inquire, inspect, have access or give instructions to its delegates or the exercise of such rights becomes impossible in practice

If portfolio management and, in the case of AIFM, risk management, are delegated, they should be delegated to regulated entities. These include:• AIFM• UCITS management companies • Investment firms authorized to perform portfolio management• Credit institutions authorized to perform portfolio management• Third country entities authorized or registered for the purpose of asset management and

effectively supervised by a competent authority in those countries, and subject to the existence of cooperation agreements between the CSSF and the third country supervisory authority

In the case of AIFM and Chapter 16 management companies, the CSSF may also, on a case-by-case basis, permit delegation to unregulated entities.

AIFM are not permitted to delegate the performance of investment management functions (i.e., portfolio management and risk management) to an extent that exceeds by a substantial margin the investment management functions performed by the AIFM itself.

Delegation is covered in more detail in Section 7.4.15..

103 Subject to the applicable requirements


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H. Management entities as delegatesWhere authorized to do so, a UCITS management company or an AIFM may provide services as a delegate to other UCITS, or their management companies, or other AIF, or their AIFM. In such cases, the delegate management company or AIFM is not appointed as management company or AIFM of the UCITS or AIF.

For example, a UCITS management company may provide portfolio management or administration services to an AIF, or an AIFM, as a delegate.

In such cases, a UCITS management company will not need to seek additional authorization as an AIFM, or an AIFM as a UCITS management company.

Management services which may be provided by management entities as delegates

Services provided to UCITS management company AIFM

A UCITS, or its management company

√ √

An AIF, or its AIFM √ √

I. Relationship between management entities and other regulated entitiesManagement entities are not permitted to obtain authorization as another type of financial sector entity, such as a credit institution, an investment firm or another type of professional of the financial sector (PSF).

Other financial sector entities are not permitted to obtain authorization as a management entity.

Management entities, credit institutions and investment firms may delegate certain activities to each other, such as portfolio management or investment advice.

There is some overlap between the permitted activities of management entities, credit institutions and investment firms. Certain services may be offered by both types of entity:

Areas of overlap between services which may be offered by management entities and MiFID104 firms

Services offered by credit institutions and investment firms


Investment services and activities

• Portfolio management• Investment advice

• Portfolio management• Investment advice• Reception and transmission of

orders in relation to one or more financial instruments

Ancillary services • In relation to shares or units of UCIs: Safekeeping and administration

• In relation to shares or units of UCIs: Safekeeping and administration

• In relation to the assets of AIF: advice to undertakings on capital structure, industrial strategy and related matters, and advice and services relating to mergers and the purchase of undertakings

104 Markets in Financial Instruments Directive (MiFID), Directive 2004/39/EC, as amended


7.2.1. Permitted activitiesThe following table outlines the permitted activities of management entities:

7.2. Scope of activities

Scope of activities of management entities

Chapter 15 management company

AIFM Chapter 16 management company not authorized as

AIFM

Scope of UCIs which may be managed

UCITS and other UCIs for which the management company is subject to prudential supervision

AIF Non-UCITS

Scope of management activity

Management of UCITS includes:• Portfolio management

(see Chapter 8)• Administration (see Chapter 10)• Marketing (see Chapter 14)

Managing AIF means performing, for one or more AIF, at least the investment management services of: • Portfolio management (see

Chapter 8)• Risk management (see

Chapter 9)

AIFM may also provide the services of:• Administration (see Chapter 10)• Marketing (see Chapter 14)• Activities related to the assets

of AIF105

Either of the following:• Management company which

designates an AIFM for the AIF it manages

• Managing AIF itself, where assets of the AIF under management do not exceed the threshold above which authorization as AIFM is required

Passport for management activity

Yes, for management of UCITS Yes, for management of AIF None

Additional activities

• Discretionary portfolio management: management of portfolios of investments, including those owned by pension funds, on a discretionary client-by-client basis, where such portfolios include one or more of the financial instruments106 (see also Chapter 8)

• As non-core services:• Investment advice

concerning one or more financial instruments (see also Chapter 8)

• Safe-keeping and administration in relation to shares or units of UCIs

• Discretionary portfolio management: management of portfolios of investments, including those of pension funds and institutions for occupational retirement provision, on a discretionary, client-by-client basis (see also Chapter 8)

• As non-core services:• Investment advice (see also

Chapter 8)• Safekeeping and

administration in relation to shares or units of UCIs

• Reception and transmission of orders in relation to one or more financial instruments

Managing investment vehicles other than AIF, as defined by the AIFM Directive107.

Such entities may, for example, include holding companies and joint ventures.

Passport for additional activities

Yes No No

Specific requirements applicable to the provision of additional services

Neither Chapter 15 management companies nor AIFM can be authorized to provide only discretionary portfolio management services and non-core services, or to provide non-core services without being authorized to provide discretionary portfolio management services.

The provision of such additional services is subject to conduct of business obligations and organizational requirements (see Section 7.4.24.).

This activity cannot be the sole activity of the management company.


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105 Such activities include:• Services necessary to meet the fiduciary duties of the AIFM• Facilities management• Real estate administration activities• Advice to undertakings on capital structure• Advice to undertakings on industrial strategy and related matters• Advice and services relating to mergers and the purchase of undertakings• Other services connected to the management of the AIF and the companies and other assets it has invested in

106 Financial instruments are listed in Section B of Annex II to the Law of 5 April 1993 on the financial sector, as amended (the 1993 Law). They include:• Transferable securities• Money market instruments• Units in collective investment undertakings• Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities,

currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash

• Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event)

• Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market or a multilateral trading facility (MTF)

• Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in the previous bullet point, and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognized clearing houses or are subject to regular margin calls

• Derivative instruments for the transfer of credit risk• Financial contracts for differences• Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables,

freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognized clearing houses or are subject to regular margin calls

107 The law explicitly states that a Chapter 16 management company may perform the administration of its own assets as an ancillary activity.

7.2.2. Requirement for authorization as a management entity

This Section provides an overview of key factors to be taken into account when determining whether an authorized management entity is required. The choice of organizational model is covered in Section 1.4.3..

A. Basic structure of the UCIA common fund must always be managed by a management company. An investment company must either appoint a management company or manage itself.

B. Managing UCITSA UCITS must either be managed by a UCITS management company, or designate itself as self-managed. Only investment companies can be self-managed. Self-managed UCITS are subject to most of the requirements applicable to management companies (see Section 7.4.23.).

C. Managing AIFEach alternative investment fund (AIF) is required to have a single AIFM, which is responsible for ensuring compliance with the requirements of the AIFM Directive, which is implemented in Luxembourg by the AIFM Law. The regular business of an AIFM is managing AIF.

An AIFM is any legal person whose regular business is managing one or more AIF. The AIFM may be an external manager, or the AIF itself (internally managed AIF) where the AIF’s governing body chooses not to appoint an external AIFM and where permitted by the corporate structure of the AIF.

Managing AIF means performing, for one or more AIF, at least the investment management services of: • Portfolio management • Risk management


In order to be considered the AIFM of an AIF, the AIFM must be appointed to perform the portfolio management and risk management of the AIF (although it may wholly or partially delegate at least one of these functions – see Subsection 7.4.15.C.); i.e., the AIFM must be responsible for both portfolio management and risk management.

The AIFM may also be appointed to perform activities including administration and marketing, but this is not required.

An AIF is any UCI108, including investment compartments thereof, which raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and which is not a UCITS.

An undertaking as a whole should be considered an AIF where a compartment of the undertaking exhibits all the elements in the definition of an AIF.

An undertaking which exhibits all of the following characteristics should be considered as a UCI:• It does not have a general commercial or industrial purpose• It pools together capital raised from its investors for the purpose of investment with a view to

generating a pooled return for those investors from investments• The unitholders or shareholders of the undertaking, as a collective group, have no day-to-

day discretion or control over operational matters relating to the daily management of the undertakings’ assets extending beyond those normally exercised through shareholder meetings

“Raising capital” means taking direct or indirect steps by the undertaking, the AIFM or another entity acting on its behalf, to procure the transfer or commitment of capital by one or more investors to the undertaking for the purpose of investment in accordance with a defined investment policy. Such activity may:• Take place once, on several occasions or on an ongoing basis• Be in the form of subscriptions or redemptions in kind

When capital is raised from a pre-existing group for the investment of whose wealth the undertaking has been exclusively established, this is not likely to be within the scope of raising capital. A pre-existing group is a group of family members whose existence pre-dates the establishment of the undertaking.

A family office vehicle which invests the private wealth of investors without raising external capital should not be considered to be an AIF.

Where a collective investment undertaking is not prevented by national law, the constitutional document or a provision or arrangement with binding effect from raising capital from more than one investor, it should be considered as a collective investment undertaking which raises capital from a “number of investors” even if it has:• Only one investor• A sole investor which invests funds raised from more than one legal or natural person for the

benefit of those persons or consists of an arrangement or structure which in total has more than one investor (e.g., feeder structures or fund of fund structures and certain nominee arrangements)

A “defined investment policy” is a policy about how the pooled capital in the undertaking is to be managed to generate a pooled return for the investors. The factors which may indicate the existence of such a policy include:• The investment policy is determined and fixed, at the latest by the time that investors’

commitments to the undertaking become binding on them• The investment policy is set out in a document which becomes part of, or is referenced in, the

constitutional document of the undertaking

108 The AIFM Directive refers to “collective investment undertakings” (CIUs).


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• The undertaking, or the entity managing it, has an obligation to investors, which is legally enforceable by them, to follow the investment policy

• The investment policy specifies investment guidelines in relation to pursuit of certain strategies, investment in certain categories of asset or geographical regions, or conformity to restrictions, for example, on leverage, holding periods or risk diversification

All AIF are covered by the AIFM Directive, independent of their open-ended or closed-ended nature (see also Section 7.2.2.D.), legal form and structure.

D. AIFM authorizationAn AIFM may be either an:• ► External AIFM: External AIFM are separate legal entities which can manage one or more AIF• ► The AIF itself – an internally managed AIF: the activities of internally managed AIF are limited

to the management of the assets of the AIF itself. Only AIF in corporate form can be internally managed. Internally managed AIF are subject to almost all of the same requirements as AIFM (see Section 7.4.24.)

An AIFM authorization is required where the alternative investment fund (AIF) assets managed by the management entity (see Subsection C.) are above the AIFM Law de minimis thresholds:• AIFM which manage portfolios of AIF whose assets under management, including any assets

acquired through use of leverage, in total, do not exceed a threshold of €100 million • AIFM which manage portfolios of AIF whose assets under management, in total, do not exceed

a threshold of €500 million 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

AIFM of closed-ended AIF may benefit from certain grandfathering provisions (see Subsection 7.2.2.G.) or certain exemptions in relation to liquidity management (see Section 9.3.6.).109

AIFM existing on 22 July 2013 are required to take all necessary measures to comply with the AIFM Law, and must submit their application for authorization within one year of that date.

E. Simplified registration regime AIFMAIFM which are below the de minimis thresholds (e.g., Chapter 16 management companies, internally managed 2010 Law Part II investment companies and internally managed SIF investment companies, whose assets, in each case, fall below the de minimis thresholds) are required to monitor their assets under management, and are subject to certain registration and regulatory reporting requirements (see Section 7.4.25.).

Such AIFM may 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 AIFM Law.

A specific European regime exists for the managers of qualifying European Venture Capital Funds (EuVECA) and of qualifying European Social Entrepreneurship Funds (EuSEF). The EuVECA and EuSEF regimes are initially applicable to managers who manage portfolios of AIF whose assets under management, in total, do not exceed a threshold of €500 million 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 (see Section 7.4.26.).

F. Management companies managing AIFManagement companies which manage AIF have the following options:• ► To become fully AIFM compliant:

• 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

109 The regulatory technical standards (RTS) clarifying the types of AIFM (in principle, distinguishing between the AIFM of open-ended AIF and AIFM of closed-ended AIF) had not been issued by the European Commission at the time of writing.


• ► Not to become fully AIFM compliant: both Chapter 15 and Chapter 16 management companies may also continue to perform management company functions for AIF, without obtaining authorization as AIFM. In this case, the following restrictions apply to the activities they can perform:• Where AIF assets under management of the management company do not exceed the

threshold above which authorization as AIFM is required, they may manage the AIF themselves as simplified registration regime AIFM (see Subsection E.)

• Where AIF assets under management of the management company exceed the threshold above 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 EU/EEA Member State. It must perform at least the portfolio management and the risk management of the AIF. The management company has the choice between performing the functions of administration and/or marketing itself, delegating one or both of the functions to the AIFM and/or delegating one or both of the functions to another third party

• Non-AIFM compliant Chapter 16 management companies are also permitted to manage investment 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

G. Grandfathering and exemptionsManagers of some closed-ended AIF existing at the final date of transposition may benefit from grandfathering clauses, namely:• 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 Directive• Managers of fully subscribed closed-ended AIF which had their final close prior to mid-2011

and are constituted with a maximum life that requires them to be liquidated by mid-2016 at the latest may continue to manage such AIF without complying with most of the requirements of the AIFM Directive

The AIFM Law provides for several exemptions from the Directive’s provisions. Full exemptions apply to holding companies as defined in the Directive 110, securitization special purpose entities, institutions for occupational retirement provision (IORP) and their managers insofar as they do not manage AIF, and to certain group AIFM entities111.

110 Under the Directive, a “holding company” is a company with shareholdings in one or more other companies, the commercial purpose of which is to carry out a business strategy or strategies through its subsidiaries, associated companies or participations in order to contribute to their long-term value, and which is either:• A company operating on its own account and whose shares are admitted to trading on a regulated market in the

European Union• A company not established for the main purpose of generating returns for its investors by means of divestment of its

subsidiaries or associated companies, as evidenced in its annual report or other official documents111 AIFM insofar as they manage one or more AIF whose only investors are the AIFM or the parent undertakings or the

subsidiaries of the AIFM or other subsidiaries of those parent undertakings, provided that none of those investors itself is an AIF.


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The following table summarizes the main regulations applicable to Luxembourg management entities, at the time of writing:

7.3. Main applicable regulations

Main regulations applicable to management entities


AIFM Chapter 16 management company

Level 1:Law

• Chapter 15 of the 2010 Law • AIFM Law • Chapter 16 of the 2010 Law

Level 2: Regulations

• CSSF Regulation 10-4 on organizational, conflicts of interest, conduct of business, risk management requirements applicable to Chapter 15 management companies and content of the agreement between a depositary and a management company

• European Commission Delegated Regulation (EU) No 231/2013 supplementing Directive 2011/61/EU with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision

• Commission Delegated Regulation (EU) No 0/5 supplementing Directive 2011/61/EU with regard to regulatory technical standards determining types of alternative investment fund managers112

• Commission Implementing Regulation (EU) No 447/2013 establishing the procedure for AIFMDs which choose to opt in under Directive 2011/61/EU of the European Parliament and of the Council

• Commission Implementing Regulation (EU) No 448/2013 establishing a procedure for determining the Member State of reference of a non-EU AIFM pursuant to Directive 2011/61/EU of the European Parliament and of the Council

• None

Level 3:Circulars and Guidelines

• CSSF Circular 12/546 on the authorization and organization of Chapter 15 management companies and UCITS investment companies which have not designated a management company

• CSSF Circular 11/512 providing further clarifications from the CSSF on risk management rules and defining the content and format of the risk management process to be communicated to the CSSF

• CSSF Circular 04/155 on the compliance function

• CSSF Circular 98/143 on internal control, as amended

• ESMA Guidelines on key concepts of the AIFMD (2013/600)

• ESMA Guidelines on sound remuneration policies under the AIFMD (2013/201)

• ESMA Guidelines on reporting obligations under Article 3 and Article 24 of the AIFMD (consultation paper at the time of writing)

• None

Requirements applicable to all entities

• The Law of 10 August 1915 on commercial companies, as amended (the 1915 Law), insofar as the Law which the management entity is under does not derogate from it

• CSSF Circular 10/437 on the remuneration policy• Prevention of money-laundering and terrorist financing requirements (AML/CFT) – see Section 10.3.5.• Protection against late trading and market timing requirements – see Section 10.3.6.• Errors, materiality and compensation to investor requirements – see Section 10.4.

112 The final regulatory technical standards had not been issued by the European Commission at the time of writing.


This section summarizes the requirements applicable to the set up and operation of a management entity covering:

7.4. Setting up and operating a management entity

Scope of applicability of provisions covered in this Section

Chapter 15 management company and self-managed UCITS113

AIFM and internally managed AIF


Authorization √ √ √

Legal form and office √ √

Shareholders, sponsor, and related parties √ √ √

Own funds and professional liability cover √ √ √

General organizational requirements √ √

Governing bodies √ √

Senior management √ √

Internal control framework √ √

Internal control functions √ √

Central administration √ √

Accounting function √

Human resources √ √

Technical resources √ √

Rules of conduct √ √

Delegation √ √ √

Depositary appointment √ √

Prime brokers and counterparties √

Conflicts of interest √ √ √

Complaints handling √

Remuneration policy √ √ √

Reporting to the CSSF √ √

Annual accounts √ √ √

Requirements applicable to management entities providing additional services (where relevant)

√ √

Requirements applicable to Simplified registration regime AIFM (where relevant) √ √

Requirements applicable to managers of EuVECA and EuSEF (where relevant) √

Liquidation and insolvency √ √ √

The “proportionality” principle may be invoked by management entities in relation to the application of certain provisions114. In general, this means that the CSSF will take into account the nature, scale and complexity of the activities of the management entity when considering whether the management entity complies with certain requirements.

For Chapter 15 management companies, the CSSF has clarified that, in its assessment of proportionality, it will take into account, inter alia, the following factors: the number of UCITS and other UCIs managed by the management company, the total assets under management, investment into assets which are considered to be riskier, the extent of the delegated functions and specific intra-group expertise.

113 Where applicable. The provisions applicable to self-managed UCITS investment companies are listed in Section 7.4.23..114 We have, in general, indicated where the proportionality principle applies.


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7.4.1. Authorization Management entities must obtain authorization from the CSSF prior to incorporation and commencing business.

A. Application for authorization The main objective of the application for authorization is to demonstrate to the CSSF how the management entity will comply with the applicable legal requirements.

In summary, the application for authorization must contain, inter alia, the information on:• The applicant• Shareholding structure• Governing bodies and senior management• Program of activities• Own funds, professional liability cover and budget forecast• Organization and infrastructure• Internal control and risk management• Delegation and service providers• Rules of conduct, conflicts of interest and remuneration• Additional information for management entities providing additional services

The CSSF may request additional information which is necessary to complete the assessment of the application for authorization.

The detailed list of information to be included in the application for authorization of a management company or AIFM is available on the CSSF website.

The following pages provide more details on the information to be provided in the application for authorization.

Information to be provided in the application for authorization



Info

rmat

ion

on t

he a

pplic

ant

• Presentation of the management company (denomination, legal form, initial capital)

• Contact person in Luxembourg• Draft constitutional document• Reasons for establishing business in

Luxembourg

• Name, registered office, head office and legal form

• Contact person in Luxembourg• Draft constitutional document or updated

constitutional document• For existing regulated entities: confirmation,

where applicable, that there have not been any changes since the last filing with the CSSF in relation to:• Governing bodies and senior management• Shareholding structure• Program of activity• Organizational requirements• For existing unregulated entities:

• Information on any branches

• Presentation of the management company (denomination, legal form, initial capital)

• Reasons for establishing business in Luxembourg

• Draft constitutional document





Shar

ehol

ding

str

uctu

re(d

irect

or

indi

rect

qua

lifyi

ng s

hare

hold

ers

– se

e al

so S

ubse

ctio

n G)

• Legal entities:• Description of the group• Organization chart of the direct

and indirect shareholding structure, highlighting entities subject to prudential supervision and their respective regulatory authorities

• Identification of the beneficial owners

• Denomination of the shareholders, with an indication of the number of shares held

• Audited financial reports for the last three years

• The constitutional document• Information on any consolidated

supervision of the group to which the shareholder belongs

• Confirmation that the initial capital has not been sourced from a loan or other cash advance, and that the shares of the management company are unsecured

• Any additional information listed in the Appendix to the Guidelines for the prudential assessment of acquisitions and increase of holdings in the financial sector required by Directive 2007/44/EC (see Subsection 7.4.3.A..), in order for the CSSF to be able to evaluate the quality and financial strength of the proposed shareholders

• Natural persons:• Curriculum vitae, extract of criminal

record or affidavit, declaration of honor and copy of their identity card or passport

• Evidence that the shareholder has sufficient financial resources to ensure the sound and prudent management of the management company

• Confirmation that the initial capital has not been sourced from a loan or other cash advance, and that the shares of the management company are unsecured

• Confirmation that the shareholder holds the shares for their own account

• Indication of beneficial owners

• Organization chart of the direct and indirect ownership structure

• Identification of all direct and indirect shareholders or members, including nationality, supervisory authority (if applicable), direct or indirect nature of holding and amount of holding

• Qualifying holdings: information listed in the Appendix to the Guidelines for the prudential assessment of acquisitions and increase of holdings in the financial sector required by Directive 2007/44/EC (see Subsection 7.4.3.A..), in order for the CSSF to be able to evaluate the sound and prudent management of the proposed shareholders

• Relationship with other financial institutions (AIFM, UCITS management company, investment firm or credit institution): name and supervisory authority of:• Any financial institution of which the AIFM

is a subsidiary• Any parent entity which controls another

financial institution• Information on any consolidated supervision

of the group to which the shareholder belongs• Information on any “close links” (see

Subsection 7.4.3.D.)

• Information on the shareholding structure (direct or indirect), and where applicable, organization chart of the group

• Indication of whether the shareholder is subject to regulation by a supervisory authority

• Qualifying holdings: Any additional information listed in the Appendix to the Guidelines for the prudential assessment of acquisitions and increase of holdings in the financial sector required by Directive 2007/44/EC (see Subsection 7.4.3.A.), in order for the CSSF to be able to evaluate the sound and prudent management of the proposed shareholders


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Gov

erni

ng b

odie

s an

d se

nior

man

agem

ent

(see

als

o Se

ctio

ns 7

.4.6

. and

7.4

.7)

• Governing bodies (including Board of Directors, supervisory bodies (if any)), and senior management: curriculum vitae, extract of criminal record, or affidavit and declaration of honor and copy of identity card or passport

• Senior management (often referred to as conducting officers):• Areas of responsibility, and relevant

experience in these areas• Employment contract, or convention

regulating the availability of senior management

• In case the members of senior management work for several companies, evidence that they are able to fulfill at all times the tasks for which they are responsible

• Any request for derogation from the requirement that at least two conducting officers permanently reside in Luxembourg, or a country permitting them to come to Luxembourg on a daily basis

• Description of the method of operation of the Board of Management

• Governing bodies and senior management: • Curriculum vitae, extract of criminal

record, declaration of honor and copy of identity card or passport

• Any “close links” (see also Subsection 7.4.3.D.)

• Governing bodies:• Justification of adequate collective

knowledge, skills and experience • Demonstration that each member can

dedicate the required time and attention• Types of training foreseen

• Senior management:• Contact details• Nature and date of contractual agreement• Justification of experience in relation to

the AIF investment strategies• List of other mandates with other AIFM,

and demonstration of sufficient time and resources to fulfill duties

• Any request for derogation from the requirement that at least two conducting officers permanently work in Luxembourg

• Information on senior management: Curriculum vitae, extract of criminal record, declaration of honor and copy of their identity card or passport

Pro

gram

of a

ctiv

itie

s

• Scope of activities and services for which authorization is sought (see also Section 7.2.1.)

• Information on the UCIs to be managed directly or as a delegate for the next three financial years, including, number, net assets, covering UCIs are created at the initiative of the group to which the management company belongs, and those created at the initiative of other groups

• The investment policies of the UCIs, and financial instruments and markets in which they are to invest

• Additional information in relation to UCIs managed:• Information on the promoters or

initiators of the UCIs managed by the management company

• Where the management company intends to manage UCIs under foreign law, the country of origin of the UCIs, their investment policies and services offered

• Scope of activities and services for which authorization is sought (see also Section 7.2.1.)

• Information on the AIF it intends to manage, including:• Information about the investment

strategies, including the types of underlying funds if the AIF is a fund of funds, the AIFM’s policy as regards the use of leverage, risk profiles and other characteristics of the AIF it manages or intends to manage

• The EU or third country domiciles, and countries where the AIF is marketed

• Information on where the master AIF is established if the AIF is a feeder AIF

• The constitutional documents of each AIF it intends to manage*

• Evidence of how the AIFM will ensure that a depositary will be appointed for each AIF the AIFM intends to manage and details of the depositary for each AIF (see Section 7.4.16.)

• Where a prime broker is appointed, name and details of the interactions between the prime broker, the AIFM and related parties, and draft agreement (see Section 7.4.17.)

• Program of activity, including information on the UCIs to be managed for the next three financial years

* Information marked with an asterisk (*) may be provided up to one month before commencing business





Ow

n fu

nds,

pro

fess

iona

l lia

bilit

y co

ver

(see

Sec

tion

7.4.

4.)

and

budg

et fo

reca

st

• Own funds:• Initial capital• Details of the investment policy

in relation to the initial capital, indicating where applicable, the name of the financial institution at which the initial capital is deposited

• Where relevant, the draft guarantee agreement provided by a credit institution or insurance undertaking in relation to any additional amount of own funds

• Provisional three year budget forecast

• Own funds:• Initial capital• Value of portfolios of AIF managed• Amount of own funds• Where relevant, information on any

guarantee agreement provided by a credit institution or insurance undertaking in relation to any additional amount of own funds

• Type of assets in which own funds will be invested

• Professional liability cover:• Own funds, indicating which professional

liability risks are covered by insurance and, where relevant, justifying any reduction in the amount of additional own funds

• Details of professional indemnity insurance, including persons covered and risks covered, and, where relevant, any reduction in the minimum cover

• Evolution of the business, covering the AIF managed or intended to be managed, total assets under management, and forecast financial statements for a three year period

Org

aniz

atio

n an

d in

fras

truc

ture

• Functional organization chart, number of persons working for the management company, and, where possible, their names (see also Section 7.4.12.)

• Confirmation of the existence of a procedures manual which details its internal functioning, the allocation of tasks to staff, reporting lines and, where relevant, the information exchange procedures with, and the controls performed on, delegates (see Sections 7.4.10. and 7.4.12.)

• Description of the administrative, accounting, and IT infrastructure (including hardware, software and information sources) (see Section 7.4.13.)

• Functional organization chart, number of employees, details of any secondments from other companies (see Section 7.4.12.)

• Evidence that the AIFM complies with the organizational requirements (see Section 7.4.5.)

• Evidence that the AIFM has:• Sound administrative and accounting

procedures (see Section 7.4.10.)• Control and safeguard arrangements for

electronic data processing (see Section 7.4.13.)

• Details of the AIFM’s technical infrastructure, including business continuity plan and back-up solutions (see Section 7.4.13.)

• Description of the organizational structure (human and technical resources)


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Inte

rnal

con

trol

(see

Sec

tion

7.4.

9.)

and

risk

man

agem

ent

(see

Cha

pter

9)

• Information, including curriculum vitae, on the persons in charge of:• Compliance• Internal audit• Risk management

• Risk management process (see Section 9.2.)

• Name and brief description of relevant professional experience of:• Compliance officer• Internal auditor• Risk manager

• Risk management (see Section 9.3.):• Risk management process including

description of delegates, and a description of the investment due diligence procedure (see Subsection 8.2.1.B.)

• Qualitative and quantitative risk limits for each AIF, for at least market, credit, liquidity, counterparty and operational risk

• Comprehensive description of permanent risk management function, and evidence that the function is functionally and hierarchically independent from the operating units, including portfolio management (see Section 7.4.9.)

• Leverage and re-use of collateral: for each AIF, maximum leverage calculated according to gross and commitment methods, and right of re-use of collateral or guarantee granted under a leveraging arrangement (see Section 9.3.)

• Description of the liquidity management system (see Section 9.3.)

Del

egat

ion

(see

als

o Se

ctio

n 7.

4.15

.)

and

serv

ice

prov

ider

s

• Detailed description of insourced and delegated activities, including information on delegates

• Draft contracts with delegates • Detailed description of due diligence

carried out by the management company on delegates

• Information on the person or company responsible for the accounting of the management company, and, where relevant, the company responsible for maintaining the management company’s accounting records (see Section 7.4.11.)

• Information on the person responsible for accounting administration of the UCIs at the management company (see also Chapter 10)

• In case the management company intends to act as administrator, additional information which is required (see also Section 10.2.1.)

• Name of auditor (see Subsection 7.4.22.)

• Information on the distribution network, including countries of distribution, intermediaries and target clients (see also Chapter 14)

• Information on arrangements made for full or partial delegation and sub-delegation to third parties covering:• Delegated functions: portfolio

management, risk management, administration, marketing and activities related to the assets of AIF

• Name of the delegate, country, authorization(s), issuing authorities, full or partial delegation (indicating activities delegated vs those retained)

• Delegation to group vs other entities• Copy of each delegation agreement• Objective reasons for delegation• Evidence that AIFM effectively supervises

the delegate• Initial and ongoing due diligence on

delegate• Delegation of compliance and internal

audit: information on the entity to which the function is delegated, and the name of the person within the AIFM responsible for monitoring the delegated function

• Valuation (see Section 9.5.2.), including information on:• Function: external valuer (indicating

professional registration and supervisory authority), AIFM itself (including evidence of functional independence and conflicts of interest mitigation) or depositary (including evidence of functional and hierarchical separation, conflicts of interest management, and due diligence)

• Valuation models and validation thereof• Policies and procedures

• Person in charge of the accounting function of the AIFM (see Section 7.4.11.)

• Name of the auditor (see Subsection 7.4.22.)

• Detailed description of insourced and delegated activities, including information on delegates

• Draft contracts with delegates

• Detailed description of due diligence carried out by the management company on delegates

• In case the management company intends to act as an administrator, additional information required (see also Section 10.2.1.)

• Name of auditor (see Section 7.4.22.) and accountant, if applicable

• Information on the distribution network, including countries of distribution, intermediaries and target clients (see also Chapter 14)





Rul

es o

f con

duct

(see

Sec

tion

7.4.

14.)

, co

nflic

ts o

f int

eres

t (s

ee S

ectio

n 7.

4.18

.) a

nd r

emun

erat

ion

(see

Sec

tion

7.4.

20.) • Confirmation regarding compliance

with the requirements on rules of conduct and conflicts of interest policy

• Description of the remuneration policy • Information on the person responsible

for complaints handling, and a description of the complaint handling procedures (see Subsection 7.4.19.)

• Draft anti-money laundering and counter-terrorist financing procedures (see Section 10.3.5.)

• Evidence that the AIFM has procedures:• To ensure that the assets of the AIF

are invested in accordance with the applicable requirements, and on the basis of appropriate due diligence (see Section 8.2.1.B. and C.)

• On order handling, best execution (see Section 8.2.1.D.) and recording or transactions (see Section 10.2.4.)

• On recording and reporting of subscription and redemption orders (see Section 10.2.4.)

• On fair treatment of investors, inducements, personal transactions by its employees (see Section 7.4.14.)

• On the selection and appointment of counterparties and prime brokers (see Section 7.4.17.)

• Where the AIF invest in securitization positions, basis of such exposures (e.g., main investment strategy, ancillary basis) and associated risk mitigation (see Section 5.4.1.)

• Confirmation that the AIFM has established an adequate and effective strategy for the exercise of voting rights (see Section 8.2.1.G.)

• Confirmation that the AIFM has established and maintains an effective conflicts of interest policy, covering, inter alia, the investments on its own account

• Description of the remuneration policy, demonstrating compliance with remuneration requirements

• Description of management of potential conflicts of interest

• Description of the remuneration policy

Add

itio

nal i

nfor

mat

ion

for

man

agem

ent

enti

ties

pr

ovid

ing

addi

tion

al s

ervi

ces

(see

Sec

tion

7.4.

24.)

• Additional information to be included in the program of activities:• Discretionary portfolio

management: number of private, institutional and pension fund clients, assets under management by client type, financial instruments and markets

• The credit institutions at which the client assets will be deposited

• The risk management policy applied in relation to discretionary portfolio management

• Where relevant, the non-core services offered

• Template of the discretionary management contracts and, if relevant, investment advisory services contracts, which the management company intends to request its clients to sign

• Confirmation of Deposit Guarantee Association, Luxembourg (AGDL) membership

• Confirmation of compliance with the additional requirements of the MiFID Directive115

• Additional information to be included in the program of activities:• Discretionary portfolio management:

number of private, institutional and pension fund clients, assets under management by client type, financial instruments and markets

• The credit institutions at which the client assets will be deposited

• The risk management policy applied in relation to discretionary portfolio management

• Staff involved in the provision of additional services

• Technical infrastructure to provide additional services

• Template of the discretionary management contracts and, if relevant, investment advisory services contracts, which the management company intends to request its clients to sign

• For AIFM intending to provide discretionary portfolio management services, confirmation of commitment to adhere to investor compensation scheme

• Confirmation of compliance with the additional requirements of the MiFID Directive



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B. Granting authorization Following submission of a complete application, the CSSF will inform the management entity whether or not authorization has been granted within a period of six months in the case of a management company and three months (extendable) in the case of an AIFM. The management entity may commence business following approval of the application.

Time to approval of a management entity



Time to approval

Six months Three months

The CSSF may prolong this period for up to three additional months, where they consider it necessary due to the specific circumstances of the case and after having notified the AIFM accordingly.

Six months

If the CSSF refuses the application, the CSSF will outline the reasons for the refusal. See also Subsection E..

Authorized management companies are entered by the CSSF on a list which it publishes. Entry onto the list is equivalent to authorization and is notified by the CSSF to the concerned management company. This list and any modifications made thereto are also published in the Official Gazette (the Mémorial).

C. Restrictions on activities The CSSF may restrict the scope of the authorization of a management entity, in relation to:• The types of UCITS that a Chapter 15 management company is authorized to manage• The investment strategies of AIF an AIFM is allowed to manage

D. Updates to authorization The management entity must, on its own initiative, inform the CSSF of any material changes to the conditions for initial authorization, before implementation.

E. Withdrawal of authorization The CSSF can withdraw authorization of the management entity. Reasons for withdrawal include:• Does not make use of the authorization within 12 months, expressly renounces the

authorization or has ceased the activity covered by the authorization for the preceding six months

• No longer meets the conditions under which authorization was granted• Has seriously or systematically infringed the provisions adopted pursuant to the Law• Has obtained the authorization by making false statements

7.4.2. Legal form and office

Management companies may be set up under any of the following forms:• Public limited company (société anonyme – S.A.)• Private limited company (société à responsabilité limitée – S.à r.l.)• Cooperative company (société cooperative)• Cooperative company organized as a public limited company (société coopérative organisée sous

forme de société anonyme)• Corporate limited partnership (société en commandite par actions)

Both the head office and registered office of a management entity must be in Luxembourg.


7.4.3. Shareholders, sponsor, and related parties

A. Shareholders and their suitability The CSSF must be informed of the identity of the direct and indirect shareholders (or members) of the management entity that have qualifying holdings, and the amounts of those holdings. The shareholders may be individuals or legal persons.

The CSSF will need to be satisfied as to the suitability of such shareholders or members.

The ownership structure of the management entity must be transparent, and organized in a way that permits prudential supervision to be exercised effectively (see also Subsection D.).

The CSSF has outlined in more detail the requirements applicable in relation to the shareholders or members of a Chapter 15 management company and AIFM. The CSSF requires that:• Each individual acquiring, directly or indirectly, a qualifying holding in a Chapter 15

management company or AIFM must be suitable to ensure sound and prudent management of the company. The criteria for evaluating the suitability include:• Reputation of the proposed acquirer • Reputation and experience of those who will direct the business• Financial soundness of the proposed acquirer• Compliance with the prudential requirements at group level• Anti-money laundering and counter-terrorist financing (see also Section 10.3.5.)

• The capital of each company acquiring a direct or indirect holding in a Chapter 15 management company must itself meet the minimum capital requirement applicable to the management company, following any deductions for any other holdings (see also Section 7.4.4.B.)

Qualifying holdings are deemed to be holdings of 10% or more of the capital or of the voting rights, whether direct or indirect, or where it is possible to exercise significant influence.

B. SponsorFor Chapter 15 management companies, the CSSF may request a letter of assurance from a “sponsor”. In the letter of sponsorship, the sponsor makes a commitment to the CSSF that the management company respects/will respect the applicable prudential requirements in particular in relation to the own funds of the management company. Such a letter may be requested:• At the time of authorization• When there is a change of shareholders• At a time where the financial capacity of one or more of the shareholders of the management

company is no longer certain

CSSF Circular 12/546 does not explicitly state which entity should issue the letter of sponsorship. However, it is expected that the CSSF will require it to be issued by a shareholder, or an entity of the group controlling one or more of the shareholders.

C. Consultation with other Member StatesThe authorities of other Member States will be consulted prior to authorization where the management company is: • A subsidiary of an entity authorized in another Member State• A subsidiary of the parent undertaking of another entity authorized in another Member State• Controlled by the same persons/entity which control other entities authorized in another

Member State

D. Close links The CSSF will refuse authorization of the management entity where the effective exercise of its supervisory functions is prevented by any of the following:• “Close links” between the management entity and other natural or legal persons• The laws, regulations or administrative provisions of a third country governing natural or legal

persons with which the management entity has close links• Difficulties involved in the enforcement of those laws, regulations and administrative provisions


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“Close links” means a situation in which two or more individuals or legal persons are linked by ownership, directly or by way of “control”, of 20% or more of the voting rights or capital of an undertaking. “Control” refers to the relationship between a parent undertaking and a subsidiary, or a similar relationship.

7.4.4. Own funds and professional liability cover

A. Summary Chapter 15 management companies and AIFM are covered, respectively, by the 2010 Law and AIFM Law “own funds” requirements for their collective portfolio management activities (covering the portfolios of common funds and investment companies, but excluding portfolios managed under delegation).

They are also covered by capital adequacy requirements in the same way as investment firms under MiFID when they perform discretionary portfolio management services. These requirements only cover the individual discretionary portfolio management activities of management companies, not collective portfolio management.

B. Minimum initial capital and own funds

Capital requirements of a management entity



Initial capital €125,000 €125,000116 €125,000

Additional own funds

Additional own funds of 0.02% of the amount of the portfolios117 which exceeds €250 million.

Maximum total required capital, however, is €10 million.

Up to 50% of the additional own funds may be provided by means of a guarantee given by a credit institution or an insurance undertaking established in the EU or in a non-EU country subject to prudential rules considered by the CSSF as equivalent to those laid down in EU law.

n.a.

Minimum amount of “own funds” (floor)

One quarter of their preceding year’s fixed overheads118 (the amount prescribed in Article 21 of Directive 2006/49/EC).

n.a.

An AIFM is required to maintain financial resources adequate to its assessed risk profile (see also Subsection 9.3.6.B.).

Self-managed UCITS and internally managed AIF are subject to initial capital requirements of €300,000 (see also Sections 7.4.23. and 3.5.).

C. Requirements in relation to “own funds”119 The capital of the management entity must be represented by registered shares.

116 The minimum capital for an internally managed AIFM is €300,000; see also Section 7.4.23..117 For capital requirements purposes, portfolios are deemed to be UCIs managed by the management entity, including

portfolios for which it has delegated the management function, but excluding portfolios that it is managing under delegation.

118 Overheads include the costs for staff and administrative bodies, as well as operating costs.119 This Subsection consolidates and summarizes the CSSF’s expectations in relation to own funds. The reference sources

include:• The 2010 Law and the AIFM Law• CSSF Circular 12/546• The CSSF’s explanations concerning the authorization procedure of Chapter 15 and Chapter 16 management

companies (available on the CSSF website)


The own funds must consist of liquid assets. The CSSF does not, in principle, accept contributions in kind, such as debt contributions, either at the time of incorporation, or in case of a capital increase.

The legally required minimum amount of own funds must be permanently available to the management entity, and invested in its own interests. Subject to the principle of prudence, the own funds may be invested to finance the management company’s operating costs.

The own funds cannot be invested in the shareholder or loaned to the shareholder. The own funds can be invested in liquid assets, or assets readily convertible into cash in the short term, but must not contain speculative positions.

Every holding of the management entity in another company must be notified to the CSSF, financed exclusively by a surplus own funds above the legally required minimum amount. The activity of a subsidiary must be aligned with the activities of the management entity.

D. Professional liability cover To cover potential professional liability risks, AIFM must either have additional own funds or hold professional indemnity insurance.

The amount of additional own funds or professional indemnity insurance depends on the value of the “portfolios of AIF managed”. The “portfolios of AIFs managed” is defined as the sum of the absolute value of all assets of all AIF managed by the AIFM, including assets acquired through the use of leverage, whereby derivative instruments are valued at their market value.

Methods to cover professional liability

Additional own funds Professional indemnity insurance

The additional own funds should be at least equal to 0.01% of the value of the portfolios of AIFs managed. However, the CSSF may, on the basis of a three year historical loss assessment, authorize the AIFM to hold a lower amount of additional own funds of not less than 0.008% of the value of the portfolios of AIF managed by the AIFM.

These additional own funds requirement must be recalculated at the end of each financial year, or where the value of the portfolios of AIF managed increases significantly, and the amount of additional own funds adjusted accordingly.

The coverage of the insurance for an individual claim must be equal to at least 0.7% of the value of the portfolios of AIFs managed by the AIFM.

The coverage of the insurance for claims in aggregate per year must be equal to at least 0.9% of the value of the portfolios of AIFs managed by the AIFM.

The professional liability insurance must:• Have an initial term of no less than one year• Have a notice period for cancellation of at least

90 days• Cover professional liability risks• Be taken out from an EU or non-EU undertaking

authorized to provide professional indemnity insurance, in accordance with EU law or national law

• Be provided by a third party entity

Operational management requirements, including the scope of professional liability risks and the requirement to set up a historical loss database, are covered in Subsection 9.3.6.B..

E. Additional requirements in case of discretionary portfolio management Where a Chapter 15 management company or an AIFM is also engaged in the management of portfolios of investments (see Section 7.2.1), it must, furthermore, respect the requirements on own funds laid down in Articles 13–16 of Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions, and Luxembourg regulations implementing these requirements. However, if it only provides non-core services, it will not be subject to capital adequacy requirements.

CSSF Circular 07/290, as amended, covers the definition of capital ratios pursuant to Article 56 of the Law of 5 April 1993 on the financial sector, as amended (the 1993 Law). This CSSF Circular transposes provisions of Directive 2006/49/EC. It defines a capital adequacy ratio designed to ensure that investment undertakings such as management companies set aside sufficient own funds to cover their exposures to credit risk, dilution risk, operational risk, foreign exchange risk, commodity risk and market risks. The capital adequacy ratio compares eligible own funds to the overall capital requirement for the risks concerned. Investment undertakings are required at all times to possess sufficient own funds to meet their overall capital requirement on an individual basis and, where applicable, on a consolidated basis.


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7.4.5. General organizational requirements

Management companies and AIFM are required to comply with general organizational requirements including the following:• Establish, implement and maintain decision-making procedures and an organizational structure

which specifies reporting lines and allocates functions and responsibilities clearly and in a documented manner (see Sections 7.4.10. and 7.4.12.)

• Ensure that the staff is aware of the procedures to be followed for the proper discharge of their responsibilities (see Section 7.4.12.)

• Establish, implement and maintain adequate internal control mechanisms designed to secure compliance with decisions and procedures at all levels of the management entity (see Section 7.4.9.)

• Establish, implement and maintain effective internal reporting and communication of information at all relevant levels of the management entity (see Section 7.4.10.) and effective information flows with any third party involved (see Section 7.4.15.)

• Maintain adequate and orderly records of their business and internal organization (see Section 7.4.10.)

• Establish, implement and maintain systems and procedures that are adequate to safeguard the security, integrity and confidentiality of information, taking into account the nature of the information in question (see Section 7.4.13.)

• Establish, implement and maintain an adequate business continuity policy aimed at ensuring, in the event of an interruption to their systems and procedures, the preservation of essential data and functions, and the maintenance of services and activities, or, where that is not possible, the timely recovery of such data and functions and the timely resumption of their services and activities (see Section 7.4.13.)

• Establish, implement and maintain accounting policies and procedures and valuation rules that enable them, at the request of the CSSF, to deliver in a timely manner to the CSSF financial reports which reflect a true and fair view of their financial position and which comply with all applicable accounting standards and rules (see also Section 7.4.11., 7.4.21. and 7.4.22.)

• Monitor and, on a regular basis, evaluate the adequacy and effectiveness of their systems, internal control mechanisms and arrangements, and take appropriate measures to address any deficiencies (see also Section 7.4.6., 7.4.7. and 7.4.9.)

7.4.6. Governing bodies

A. DefinitionsA distinction is made between two roles of governing bodies of Chapter 15 management companies and AIFM:• The ultimate decision making body of the management entity• The supervisory function of the management entity

The following table illustrates how these two roles of governing bodies may typically be implemented in a one and two tier governance structure:

Typical implementation of roles of governing in one tier and two tier governance models

One tier Two tier


Board of Directors Management Board

Supervisory function

Members of the Board of Directors responsible for the supervision of senior management

Supervisory Board


The following table provides more precise definitions of governing bodies used in relation to Chapter 15 management companies and AIFM:

Definitions of governing bodies of Chapter 15 management companies and AIFM



“Board of Directors” means the Board of Directors of the management company

The term “Board of Directors” does not comprise the Supervisory Board where management companies have a dual structure composed of a Board of Directors and a Supervisory Board.

“Governing body” means the body with ultimate decision making authority in an AIFM, comprising the supervisory and the managerial functions, or only the managerial function if the two functions are separated

Supervisory function

“Supervisory function” means the relevant persons or body or bodies responsible for the supervision of the senior management and for the assessment and periodical review of the adequacy and effectiveness of the risk management process and of the policies, arrangements and procedures put in place to comply with the obligations under 2010 Law

“Supervisory function” means the relevant persons or body or bodies responsible for the supervision of the AIFM’s senior management and for the assessment and periodical review of the adequacy and effectiveness of the risk management process and of the policies, arrangements and procedures put in place to comply with the obligations under the AIFMD120

B. RolesThe roles of governing bodies of Chapter 15 management companies and AIFM, as laid down in the regulations, include the following:

Roles of governing bodies of Chapter 15 management companies and AIFM


Oversight over management entity’s activities

The Board of Management (the body composed of senior management – see Section 7.4.7.) must regularly provide the Board of Directors of the management company in writing with complete information on the activities of the management company and the UCIs which it manages.

Compliance Senior management and, where it exists, the supervisory function, are responsible for the management company’s compliance with its obligations under the 2010 Law.

Senior management and, where appropriate, its governing body or supervisory function must:• Assess and periodically review

the effectiveness of the policies, arrangements and procedures put in place to comply with the obligations laid down in the 2010 Law

• Take appropriate measures to address any deficiencies

The governing body, the senior management and, where it exists, the supervisory function, are responsible for the AIFM’s compliance with its obligations under the AIFM Directive.


the effectiveness of the policies, arrangements and procedures put in place to comply with the obligations laid down in the AIFM Directive


120 ESMA Guidelines on sound remuneration policies under the AIFMD, February 2013


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Roles of governing bodies of Chapter 15 management companies and AIFM


Internal controls (see also Section 7.4.8. and 7.4.9.)

The supervisory function, if any, must receive written reports on matters of compliance, internal audit and risk management indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies.

The governing body or the supervisory function, if any, must receive on a regular basis written reports on matters of compliance, internal audit and risk management indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies.

Risk management (see also Chapter 9)

The management company’s Board of Directors receives advice from the permanent risk management function as regards the identification of the risk profile of each managed UCITS.

The management company’s Board of Directors and, where it exists, its supervisory function, receives regular reports from the permanent risk management function on:• The consistency between the current

levels of risk incurred by each managed UCITS and the risk profile agreed for that UCITS

• The compliance of each managed UCITS with relevant risk limit systems

• The adequacy and effectiveness of the risk management process, indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies

The risk management function must be represented in the governing body or the supervisory function, where it has been established, at least with the same authority as the portfolio management function.

The risk management policy must state the terms, contents and frequency of reporting of the risk management function to the Board of Directors and to senior management and, where appropriate, to the supervisory function

The AIFM’s governing body and, where it exists, its supervisory function:

• Must be notified in a timely manner by the permanent risk management function when it considers the AIF’s risk profile inconsistent with the risk limits or sees a material risk that the risk profile will become inconsistent with these limits

• Receives regular updates from the permanent risk management function on:• The consistency between and

compliance with the risk limits and the risk profile of the AIF as disclosed to investors

• The adequacy and effectiveness of the risk management process, indicating in particular whether appropriate remedial measures have been or will be taken in the event of any actual or anticipated deficiencies

• Reviews the functional and hierarchical separation of the risk management function (see Section 9.3.5.)

Conflicts of interest (see also Section 7.4.18.)

The governing body should approve the conflicts of interest policy and monitor its implementation.

The governing body of the AIFM and, where it exists, the supervisory function must establish the safeguards against conflicts of interest, regularly review their effectiveness and take timely remedial action to address any deficiencies.

Remuneration (see also Section 7.4.20.)

The management body of the AIFM, in its supervisory function, must adopt and periodically review the general principles of the remuneration policy and is responsible for its implementation.

The Board of Directors must establish the general principles of the remuneration policy and is responsible for its implementation.

The Board of Directors must fix the remuneration of the members of the governing and management bodies.121

121 CSSF Circular 10/437


C. QualificationsThe following table outlines the required minimum qualifications of governing bodies of management entities:

Minimum qualifications of governing bodies of management entities


Knowledge, skills and experience

Every member of the Board of Directors, or representative, if a legal person has been appointed as Director, must be sufficiently experienced in relation to the type of UCIs concerned. Adequate professional experience must have been gained through having already performed similar activities to a high level of responsibility and autonomy.

The governing body of the AIFM must possess adequate collective knowledge, skills and experience to be able to understand the AIFM’s activities, in particular the main risks involved in those activities and the assets in which the AIF is invested.

Sufficient time Every member of the Board of Directors must dedicate sufficient time and attention to his duties. He is required to limit the number of other professional engagements, in particular the mandates held in other companies, to the extent necessary in order to be able to perform his tasks correctly.

The members of the governing body must commit sufficient time to properly perform their functions in the AIFM, and must therefore limit the number of other professional engagements and mandates accordingly.

Reputation122, integrity and independence

Every member of the Board of Directors, or representative, if a legal person has been appointed as Director, must be of sufficiently good repute.

The composition must not compromise the independence of the Board of Directors; for example:• Where a depositary is a shareholder

of the management company and also appointed as depositary of the UCIs managed by the management company, the Board of Directors of the management company must not be predominately composed of representatives of the depositary

• Where a management company is appointed by an investment company, the Board of Directors of the two entities should not be predominately composed of the same people

Each member of the governing body must act with honesty, integrity and independence of mind.

Training The AIFM must devote adequate resources to the induction and training of members of the governing body.

122 The concept of good repute of members of the Board of Directors or of senior management does not seem to be clarified in the regulations in relation to management entities. However, the AIFM Directive Level 2 does provide some clarifications with respect to the “good repute” of persons who effectively conduct the business of a delegate.

They shall not be deemed of sufficiently good repute if they have any negative records relevant both for the assessment of good repute and for the proper performance of the delegated tasks or if there is other relevant information which affects their good reputation. Such negative records shall include but shall not be limited to criminal offences, judicial proceedings or administrative sanctions relevant for the performance of the delegated tasks. Special attention shall be given to any offences related to financial activities, including but not limited to obligations relating to the prevention of money laundering, dishonesty, fraud or financial crime, bankruptcy or insolvency. Other relevant information shall include information such as that indicating that the person is not trustworthy or honest.

Furthermore, where the delegate is regulated in respect of its professional services within the EU, the persons who conduct the business may be deemed to be of “good repute” when the relevant supervisory authority has reviewed the criterion of “good repute” within the authorization procedure, unless there is evidence to the contrary.


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7.4.7. Senior management

A. Introduction and definitionsThe persons who effectively conduct the business of a Chapter 15 management company or an AIFM are referred to as “senior management” or, in Luxembourg, “conducting officers”. There must be at least two conducting officers who, in general, should be Luxembourg residents.

The conducting officers of a Chapter 15 management company collectively form a “Board of Management”.

“Senior management” is defined slightly differently for Chapter 15 management companies and AIFM:

Definitions of “senior management” of Chapter 15 management companies and AIFM


“Senior management” means the persons who effectively conduct the business of a management company.

“Senior management” means the person or persons who effectively conduct the business of an AIFM and, as the case may be, the executive member or members of the governing body

B. RolesThe roles of senior management of Chapter 15 management companies and AIFM, as laid down in the regulations, include the following:

Roles of senior management of Chapter 15 management companies and AIFM


Providing Board of Directors with overview of management entity’s activities

The Board of Management must regularly provide the Board of Directors of the management company in writing with complete information on the activities of the management company and the UCIs which it manages.

Compliance Senior management and, where it exists, the supervisory function, are responsible for the management company’s compliance with its obligations under the 2010 Law.


the effectiveness of the policies, arrangements and procedures put in place to comply with the obligations laid down in the 2010 Law


The governing body, the senior management and, where it exists, the supervisory function, are responsible for the AIFM’s compliance with its obligations under the AIFM Law.


the effectiveness of the policies, arrangements and procedures put in place to comply with the obligations laid down in the AIFM Law


Central administration (see also Section 7.4.10.)

Senior management is responsible for the implementation of strategies and guiding principles for central administration and internal governance through specific policies and procedures. The concept of “central administration” covers the management functions, the operational and control functions, which should enable the management company to control all of its activities.




Internal controls (see also Section 7.4.8. and 7.4.9.)

Senior management is responsible for the implementation of adequate internal control mechanisms (permanent compliance, permanent risk management and permanent internal audit functions).

Senior management is responsible for ensuring that the management company has a permanent and effective compliance function, even if this function is performed by a third party.

Senior management must receive on a frequent basis, and at least annually, written reports on matters of compliance, internal audit and risk management indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies.

Senior management is responsible for ensuring that the AIFM has a permanent and effective compliance function, even if this function is performed by a third party.

Senior management must receive on a frequent basis, and at least annually, written reports on matters of compliance, internal audit and risk management indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies.

Risk management (see also Chapter 9)

Senior management must:• Approve and review on a periodic

basis the risk management policy and arrangements, processes and techniques for implementing that policy, including the risk limit system for each managed UCITS, and filing these for review

• Ensure and verify on a periodic basis that the risk limits of each managed UCITS are properly and effectively implemented and complied with, even if the risk management function is performed by third parties

• Receive, from the permanent risk management function, regular report outlining the current level of risk incurred by each managed UCITS and any actual or foreseeable breaches to their limits, to ensure that prompt and appropriate action can be taken

Senior management must:• Approve and review on a periodic

basis the risk management policy and the arrangements, processes and techniques for implementing that policy, including the risk limit system for each AIF it manages

• Ensure and verify on a periodic basis that the risk limits of each managed AIF are properly and effectively implemented and complied with, even if the risk management function is performed by third parties

• Receive, from the permanent risk management function, regular updates outlining the current level of risk incurred by each managed AIF and any actual or foreseeable breaches of any risk limits, to ensure that prompt and appropriate action can be taken

Portfolio management (see Chapter 8)

Senior management:• Is responsible for the implementation

of the general investment policy for each managed UCITS, as defined, where relevant, in the prospectus and the constitutional document

• Must oversee the approval of investment strategies for each managed UCITS

• Must ensure and verify on a periodic basis that the general investment policy and the investment strategies are properly and effectively implemented and complied with

• Must approve and review on a periodic basis the adequacy of the internal procedures for undertaking investment decisions for each managed UCITS, to ensure that such decisions are consistent with the approved investment strategies

Senior management:• Is responsible for the implementation

of the general investment policy for each managed AIF, as defined, where relevant, in the constitutional document, the prospectus or the offering documents

• Must oversee the approval of the investment strategies for each managed AIF

• Must ensure and verify on a periodic basis that the general investment policy and the investment strategies are properly and effectively implemented and complied with

• Must approve and review on a periodic basis the adequacy of the internal procedures for undertaking investment decisions for each managed AIF, to ensure that such decisions are consistent with the approved investment strategies


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Valuation (see also Section 9.5.)

Senior management should ensure that valuation policies and procedures are established and implemented.

Senior management is responsible for ensuring that the valuation policies and procedures are established and implemented, and approving any changes thereto. Senior management must also approve any model used to value the assets of the AIF.

Conflicts of interest (see also Section 7.4.18.)

Where the organizational or administrative arrangements made by the management company for the management of conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of UCITS or of its investors will be prevented, the senior management or other competent internal body of the management company must be promptly informed in order for them to take any necessary decision to ensure that in any case the management company acts in the best interests of the UCITS and of its shareholders or unitholders.

Senior management must receive on a frequent basis, and at least annually, written reports on conflicts of interest monitoring.

Where the organizational or administrative arrangements made by the AIFM for the management of conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of the AIF or investors in the AIF are prevented, the senior management or other competent internal body of the AIFM must be promptly informed in order to take any necessary decision or action to ensure that the AIFM acts in the best interests of the AIF or the investors in that AIF.

Distribution(see also Chapter 14)

Senior management is responsible for implementing and monitoring the marketing and the distribution network of the UCIs under management.

Prime brokers (see Section 7.4.17.)

Senior management must approve the list of selected prime brokers.

Remuneration (see also Section 7.4.20.)

Senior management is responsible for establishing and applying a remuneration policy meeting the AIFM Law requirements.

Authorized management123 is responsible for implementing the remuneration policy. It must elaborate procedures to this effect and submit them to the Board of Directors for approval. It must also inform the relevant personnel of the policies and procedures.

C. Functioning The conducting officers of a Chapter 15 management company are required to cooperate closely and act collectively in the execution their duties, as the Board of Management.

The Board of Management must be in regular contact and hold periodic meetings. Minutes of these meetings must be available in the premises of the management company in Luxembourg.

At its meetings, the Board of Management must, inter alia, discuss “management information” (see also Section 7.4.10.); management information must be a permanent item on its agenda.

The Board of Management must regularly provide the Board of Directors of the management company in writing with complete information on the activities of the management company and the UCIs which it manages.

Each conducting officer must be assigned specific areas of responsibility in relation to collective portfolio management activities, including risk management. The allocation of tasks must be performed in a manner which avoids conflicts of interest.

123 This term is used in CSSF Circular 10/437


The functional and hierarchical separation of portfolio management and risk management at the level of senior management is required for both Chapter 15 management companies and AIFM:

Functional and hierarchical separation of portfolio management and risk management at senior management levels


The permanent risk management function must be hierarchically and functionally independent from the operating units.

A conducting officer cannot be responsible for both investment management and risk management (see also Section 9.2.5.).

The functional and hierarchical separation of the risk management function from the operating units, including the portfolio management function, must be ensured throughout the whole hierarchical structure of the AIFM, up to its governing body (see also Section 9.3.5.).

The conducting officers of a Chapter 15 management company may also, on the basis of a service level agreement, make use of the expertise and/or technical means of other units within the group to which the management company belongs or a third party which has the competencies, quality and authorizations necessary to provide the required support in a professional manner.

Conducting officers may direct the activities of more than one management company where it is demonstrated to the CSSF that the exercise of multiple functions does not prevent the execution of each function in an appropriate, honest and professional manner. Such conducting officers must be supported by a sufficient number of qualified staff working in Luxembourg.

The CSSF must be able to contact the members of senior management directly. They must be able to provide the CSSF with any information which it requires in the framework of its supervisory tasks.

D. Qualifications and employment

Qualifications of senior management of management entities



Knowledge, skills and experience

The persons who effectively conduct the business of a management company must be sufficiently experienced also in relation to the type of UCITS managed by the management company.

Members of senior management must have already acquired an adequate level of professional experience through the performance of similar activities at a senior level in terms of responsibility and independence.

The persons who effectively conduct the business of the AIFM must be sufficiently experienced also in relation to the investment strategies pursued by the AIF managed by the AIFM.

The persons who effectively conduct the business must have already acquired an adequate level of professional experience through the performance of similar activities at a senior level in terms of responsibility and independence.

Availability The CSSF must be able to contact the members of senior management directly.

Reputation124, integrity and independence of mind

The persons who effectively conduct the business of a management company must be of sufficiently good repute.

The principle of independence of the management company from the depositary of the UCIs under management implies that the conducting officers cannot be employees of the depositary.

The persons who effectively conduct the business must prove their good repute.

The persons who effectively conduct the business of the AIFM must be of sufficiently good repute.

The principle of independence of the management company from the depositary of the UCIs under management implies that the conducting officers cannot be employees of the depositary.

124 See also Subsection 7.4.6.C.


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Qualifications of senior management of management entities



Residence The members of senior management should, in principle, be permanently present in Luxembourg in order to execute their functions. They may, however, live in a location from where they are able, in principle, to come to Luxembourg each day. By derogation, the CSSF may, however, upon duly supported request, permit that only one conducting officer is permanently present in Luxembourg.

At least two of the senior managers should, in principle, permanently work during normal business hours in Luxembourg. Having regard to the nature, scale and complexity of the activities of the AIFM, the CSSF may nevertheless accept, on request, that only one of the conducting officers of the AIFM permanently work in Luxembourg.

Employer Conducting officers do not have to be employees of the management company as long as there is an agreement precisely defining their rights and duties and, where applicable, their reporting lines (e.g., to the Board of Directors and any other group entity).

7.4.8. Internal control framework The following diagram illustrates a possible internal control framework of a management entity:

Schematic of possible internal control structure

Board of Directors

Senior management

Independent functions

Risk management Internal audit

• Implementation of the general investment policy• Ensuring compliance with the Law• Oversight of the risk management policy and its implementation• Effective supervision of the delegated functions

• Establish, implement and maintain adequate compliance policies and procedures

• Ensure compliance with applicable laws

• Advise on compliance matters• Provision of reports to Senior

Management and Board

• Implement risk management policies and procedures

• Ensure risk profile is consistent with risk limits and monitor compliance with risk limits

• Provision of reports to Senior Management and Board

• Establish, implement and maintain audit plan

• Issue recommendations based on results of work

• Provision of reports to Senior Management and Board

• Ensuring compliance with the Law

Compliance


7.4.9. Internal control functions

The three internal control functions of a management entity are compliance, risk management and internal audit.

Chapter 15 management companies and AIFM are required to establish and maintain operational permanent compliance, risk management and, where subject to proportionality considerations, internal audit functions.

Senior management must receive on a frequent basis, and at least annually, written reports on matters of compliance, risk management and internal audit indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies.

The CSSF has clarified that, in a Chapter 15 management company, the risk management function cannot be combined with the internal audit function, but it may be combined with the compliance function. Neither the compliance officer, the head of risk management, nor the internal auditor can be a member of the Board of Directors of the management company. A conducting officer may be responsible for the permanent risk management function provided the officer has the relevant qualifications, knowledge and experience. Where the compliance and internal audit functions have been delegated, the monitoring of these functions cannot be carried out by the same individual.

A Chapter 15 management company must promote an internal culture of control and of risk which aims to ensure that all members of staff actively participate in the detection, declaration and control of risks incurred by the management company.

Anti-money laundering and counter terrorist financing internal control requirements are covered in Section 10.3.5..

A. ComplianceChapter 15 management companies and AIFM are required to establish, implement and maintain adequate policies and procedures designed to detect any risk of failure to comply with its obligations under the Law, and the associated risks, and put in place adequate measures and procedures designed to minimize such risk. The management entity should take into account the nature, scale and complexity of its business, and the nature and range of services and activities undertaken in the course of that business.

Chapter 15 management companies and AIFM are required to establish and maintain a permanent and effective compliance function, responsible for: • Monitoring of adequacy and effectiveness of measures, policies and procedures put in place

to detect any risk of failure by the management entity to comply with its obligations under the Law, as well as the associated risks, and the actions taken to address any deficiencies in the management entity’s compliance with its obligations

• Advising and assisting relevant persons responsible for carrying out services and activities on matters of compliance with the law

The management entity must ensure that:• The compliance function must have the necessary authority, resources, expertise and access to

all relevant information• A compliance officer is appointed. The compliance officer is responsible for:

• The compliance function • Reporting on a frequent basis, and at least annually, to the senior management on matters of

compliance, indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies

• Persons in the compliance function are not involved in the performance of services or activities they monitor

• The method of determining the remuneration of a compliance officer and other persons in the compliance function do not affect their objectivity and are not likely to do so (see also Section 7.4.20.)


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A management entity is not required to comply with either of the last two bullet points where it is able to demonstrate that, in view of the nature, scale and complexity of its business, and the nature and range of its services, those requirements are not proportionate and that its compliance function continues to be effective.

Chapter 15 management companies should comply with the requirements of CSSF Circular 04/155 on the compliance function, with the exception of the prohibition on delegation of the function to third parties. However, a management company providing additional services (see Section 7.2.1.) is not permitted to delegate the compliance function.

ESMA’s Guidelines on certain aspects of the MiFID compliance function requirements published in July 2012 provide additional insight into the responsibilities and organization of the compliance function in the MiFID context. The guidelines are not applicable to most management entities.

On the responsibilities of the compliance function, the guidelines cover:• ► Compliance risk assessment: risk-based approach • ► Monitoring obligations: compliance monitoring program, the priorities of which should be

determined by the compliance risk assessment• ► Reporting obligations: regular reporting to senior management and where there are

significant findings• ► Advisory obligations including: support for staff training, day-to-day assistance for staff

and participating in the establishment of new policies and procedures within the investment firm

On the organizational requirements for the compliance function, the guidelines cover:• ► Effectiveness: appropriate human and other resources, authority, information, and

knowledge, experience and expertise of the compliance officer • ► Permanence: performance of the responsibilities of the compliance function on an ongoing

basis• ► Independence: ensuring that the compliance staff act independently when performing their

tasks, and appointment • ► Exemptions: remuneration where the compliance function may be involved in the

performance of services or activities it monitors• ► Combining compliance with other functions• ► Outsourcing of the compliance function

The guidelines are applicable to investment firms, including credit institutions which provide investment services, and UCITS management companies which provide the investment services of individual portfolio management or investment advice.

B. Risk managementThe risk management function is covered in Chapter 9.

C. Internal auditChapter 15 management companies and AIFM are required to establish and maintain an internal audit function, where this is appropriate in view of the nature, scale and complexity of the business as well as the nature and range of collective portfolio management activities undertaken.

The internal audit function is responsible for: • Establishing, implementing and maintaining an internal audit plan to examine and evaluate the

adequacy of the management entity’s systems, internal control mechanisms and arrangements• Issuing recommendations based on the work carried out • Verifying compliance with the recommendations issued• Issuing internal audit reports, at least annually

Management companies should comply with the requirements of CSSF Circular 98/143 on internal control. The internal audit function may, in general, be delegated to an external expert specialized in internal audit, such as, the group internal audit function.


7.4.10. Central administration

Chapter 15 management companies and AIFM are required to have and employ the human and technical resources and procedures that are necessary for the proper performance of their business activities.

For Chapter 15 management companies, the CSSF has clarified the concept of “central administration”, which must be at the head office of the management company. The “central administration” consists of two key elements:• A decision center: senior management and the heads of the administrative and control functions,

or the different departments or professionals existing within the management company• An administrative center: human and technical resources including a sound administrative and

accounting organization permitting adequate execution of operations, correct and complete recording of operations, the timely production of reliable management information, the oversight over delegated activities, the management of conflicts of interest and the respect of the applicable rules of conduct

A Chapter 15 management company must establish a precise and clear procedures manual describing its internal functioning, the allocation of tasks amongst its staff, hierarchical lines and, where applicable, the procedures for exchanging information with, and controls undertaken on, delegates. The manual has to be available at the registered office of the management company, accessible to its staff and kept up to date, taking into account the evolution of the management company’s activity.

The management company is required to elaborate a number of procedures, and regularly update them. The management company must confirm the existence of such procedures to the CSSF in its application for authorization. The CSSF may request a copy of the relevant procedure at any time. The procedures should include, inter alia:• Personal transactions (see Section 7.4.14.F.)• Conflicts of interest (see Section 7.4.18.)• Rules of conduct (see Section 7.4.14.)• Strategy for the exercise of voting rights (see Section 8.2.1.G.)• Remuneration (see Section 7.4.20.)

A Chapter 15 management company should generate “management information” on its activities, and those of its delegates. The management information should cover, inter alia:• The results of controls performed on the activities of delegates• The risk management analysis• Incidents related to collective management (e.g., NAV calculation errors, breaches of investment

limits, valuation issues, reconciliation issues, situations giving rise to conflicts of interest)• The best execution policy• Complaints • The minutes of previous meetings

Chapter 15 management companies and AIFM should maintain adequate and orderly records of its business and internal organization.

Chapter 15 management companies and AIFM must at all times have the necessary expertise and resources to effectively monitor the activities carried out by delegates on the basis of an arrangement with the management company, especially with regard to the management of the risk associated with the delegation. Chapter 15 management companies and AIFM should ensure that they receive all the information they require from delegates in order to effectively oversee their activities and, in the case of Chapter 15 management companies, in order to be able to generate management information (see also Section 7.4.15.).

Management information must be available in Luxembourg, and preferably saved in a central database available at any time in Luxembourg.

The administration function is covered in Chapter 10.


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7.4.11. Accounting function

A Chapter 15 management company can either put in place its own accounting function, or use, under its responsibility, the expertise of a third party in the area of accounting.

Every Chapter 15 management company must communicate to the CSSF the name of the person responsible within the management company who can provide information on the financial information of the management company. Every use of a third party must be notified to the CSSF in advance.

Independently of the organization of the accounting function (see Section 7.4.11.), the accounting records relating to the activity of a Chapter 15 management company must be available at, or electronically accessible from, the headquarters of the management company in Luxembourg.


7.4.12. Human resources

Management companies and AIFM are required to establish, implement and maintain decision-making procedures and an organizational structure which specifies reporting lines and allocates functions and responsibilities clearly and in a documented manner.

Chapter 15 management companies and AIFM are required to employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them, taking into account the nature, scale and complexity of their business and the nature and range of services and activities undertaken in the course of that business.

For Chapter 15 management companies, the CSSF may, however, grant a derogation from this requirement and allow some or all of the personnel to be seconded or temporarily assigned from an entity belonging to the same group or from a third party entity. In such cases, the agreement covering such arrangement must be submitted to the CSSF. In addition, this agreement must deal with the conflicts of interest between the personnel concerned and the entity, if it belongs to the same group. The staff seconded or assigned must be available in Luxembourg during normal business hours.

Chapter 15 management companies must ensure that the performance of multiple functions by relevant persons does not and is not likely to prevent those relevant persons from discharging any particular function soundly, honestly and professionally.

Long-term absences or resignations must not prevent the well-functioning of the Chapter 15 management company.

In its application for authorization, an AIFM must provide:• A detailed organization chart of the applicant AIFM, showing the names and positions of all

managers, and the names of the departments for which they are responsible• Indicate the number of employees and give details of any employees which are seconded from

other companies

Chapter 15 management companies and AIFM are required to ensure that the staff is aware of the procedures to be followed for the proper discharge their responsibilities.

7.4.13. Technical resources

The CSSF has clarified that a Chapter 15 management company has the following options in relation to its IT infrastructure:• Implement its own IT infrastructure, including its own computers and duly documented programs

at its premises in Luxembourg. This IT infrastructure should be supported by the management company’s own IT department, organized and surrounded by an internal control system determined by the management authority. The management company may use the services of a third party, including advice, programming and maintenance, under a formalized agreement


• Be connected via a link to a data processing center at its parent company or a subsidiary thereof. In this case, the management company must verify that the parent company or subsidiary is qualified and capable of providing the service in question. It must have rapid and unlimited access to its data. The system must ensure security of communication and confidentially of client information

The electronic data systems, accounting, recording of portfolio transactions and of subscription and redemption orders, and record-keeping requirements are covered in Section 10.2.4..

Chapter 15 management companies and AIFM are required to establish, implement and maintain systems and procedures that are adequate to safeguard the security, integrity and confidentiality of information, taking into account the nature of the information in question.

Chapter 15 management companies and AIFM are required to monitor and, on a regular basis, evaluate the adequacy and effectiveness of their systems and take appropriate measures to address any deficiencies.

Chapter 15 management companies and AIFM are required to establish, implement and maintain an adequate business continuity policy aimed at ensuring, in the event of an interruption to their systems and procedures, the preservation of essential data and functions, and the maintenance of services and activities, or, where that is not possible, the timely recovery of such data and functions and the timely resumption of their services and activities. For Chapter 15 management companies, the CSSF has clarified that the management company must establish, implement and maintain a business continuity plan permitting it to re-establish its activity after a disaster, and foreseeing regular verification of the backup capacity. Where the management company delegates, in whole or in part, one or more of its collective portfolio management activities, risk management included, it must ensure that the service provider has implemented an adequate business continuity plan.

7.4.14. Rules of conduct

A. General rulesChapter 15 management companies and AIFM must at all times comply with similar rules of conduct.

General rules of conduct applicable to management entities


• Act honestly and fairly in conducting its business activities in the best interests of the UCITS it manages and the integrity of the market

• Act with due skill, care and diligence, in the best interests of the UCITS it manages and the integrity of the market

• Have and employ effectively the resources and procedures that are necessary for the proper performance of its business activities

• Try to avoid conflicts of interests and, when they cannot be avoided, ensure that the UCITS it manages are fairly treated

• Comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of its investors and the integrity of the market

• Act honestly, with due skill, care and diligence and fairly in conducting their activities

• Act in the best interests of the AIF or the investors of the AIF they manage and the integrity of the market

• Have and employ effectively the resources and procedures that are necessary for the proper performance of their business activities

• Take all reasonable steps to avoid conflicts of interest and, when they cannot be avoided, identify, manage and monitor and, where applicable, disclose, those conflicts of interest in order to prevent them from adversely affecting the interests of the AIF and their investors and to ensure that the AIF they manage are fairly treated

• Comply with all regulatory requirements applicable to the conduct of their business activities so as to promote the best interests of the AIF or the investors of the AIF they manage and the integrity of the market

• Treat all AIF investors fairly


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B. Acting in the best interests of the UCI and its investorsThe following table outlines the main requirements in relation to the duty to act in the best interests of the UCI and investors:

Best interests of UCIs and their investors provisions to management entities


Treating investors fairly

Management companies must ensure that shareholders or unitholders of managed UCITS are treated fairly. Management companies cannot place the interests of any group of shareholders or unitholders above the interests of any other group of shareholders or unitholders.

AIFM must treat all AIF investors fairly. A description of how the AIFM ensures a fair treatment of investors must be provided to them before they invest.

Any preferential treatment accorded by an AIFM to one or more investors125 must not result in an overall material disadvantage to the other investors.

Where investors obtain preferential treatment, this must be disclosed in the relevant AIF’s constitutional document.

Whenever an investor obtains preferential treatment or the right to obtain preferential treatment, the AIFM must provide to investors before they invest a description of that preferential treatment, the type of investors who obtain such preferential treatment as well as, where relevant, their legal or economic links with the AIF or AIFM.

Market malpractices

Management entities must apply appropriate policies and procedures for preventing malpractices that might reasonably be expected to affect the stability and integrity of the market.

Valuation (see also Section 9.5.)

Without prejudice to any other provisions of Luxembourg law, management companies are required to ensure that fair, correct and transparent pricing models and valuation systems are used for the UCITS they manage, in order to comply with the duty to act in the best interests of the shareholders or unitholders. Management companies must be able to demonstrate that the UCITS’ portfolios have been accurately valued.

Costs Management entities must ensure that the UCIs they manage and their investors are not charged undue costs.

C. Fees and inducementsManagement companies and AIFM will not be regarded as acting fairly, honestly and professionally in the best interests of the UCIs they manage and their investors if, in relation to the management of UCIs126, they pay, or are paid, any fee or commission, or provide or are provided with any non-monetary benefit other than:• A fee, commission or non-monetary benefit paid or provided to or by the UCI or a person on

behalf of the UCI

125 Such as side letters.126 The inducements provisions applicable to UCITS management companies specifically cover the activities of investment

management and administration, whereas inducements provisions applicable to AIFM cover all management activities (i.e., including marketing). See also Section 7.2.1.


• A fee, commission or non-monetary benefit paid or provided to or by a third party or a person acting on behalf of a third party where:• The existence, nature and amount of the fee, commission or non-monetary benefit is clearly

disclosed to the investors in the UCI in a comprehensive, accurate and understandable manner prior to provision of the relevant service. The management entity is permitted to disclose the essential terms where it undertakes to disclose further details at the request of the investor, and fulfills that commitment

• The payment of the fee or commission, or provision of the non-monetary benefit, is designed to enhance the quality of the service and not impair compliance with the management entity’s duty to act in the best interests of the UCI or the investors in the UCI

• Proper fees which enable or are necessary for the provision of the relevant service (such as custody costs, settlement and exchange fees, regulatory levies or legal fees) and which by their nature do not give rise to conflicts with the management entity’s duties to act honestly, fairly and in accordance with the best interests of the UCI it manages or the investors in the UCI

In practice, any new monetary or non-monetary benefit paid or received by the management company (or its outsourced service providers) should be identified, and classified as proper fees or inducements. Management entities should determine whether benefits identified as inducements comply with these criteria, and terminate non-compliant agreements. Such classification and assessment should be sufficiently documented.

See also Sections 7.4.15., 7.4.18. and 7.4.20.

D. Portfolio managementUCITS management companies and AIFM are required to comply with rules of conduct related to their portfolio management activities including on:• Investment due diligence in the selection and ongoing monitoring of investments • Best execution of decisions to deal on behalf of the UCITS • Placing of orders: acting in the best interest of the UCI when placing orders to deal on behalf of

UCI with other entities for execution • Handing of orders: ensuring prompt, fair and expeditious execution of portfolio transactions on

behalf of the UCI

For further information, see Section 8.2.1..

E. Subscriptions and redemptionsUCITS management companies and AIFM are required to comply with reporting and recordkeeping requirements in respect of execution of subscription and redemption orders (see Section 10.2.4.3.).

F. Personal transactionsUCITS management companies and AIFM are required to establish, implement and maintain adequate arrangements designed to prevent any relevant person from:• Entering into a personal transaction that is prohibited by the Market Abuse Directive or the

Market Abuse Law (see Subsection 8.2.3.D.) and/or implies the misuse or improper disclosure of confidential information

• Outside the normal scope of its employment, advising any person to enter into a transaction that would constitute misuse of information relating to pending orders

• Outside the normal scope of its employment, disclosing to any person information or opinion that may lead any person to enter into a transaction which fulfills these conditions

Any relevant person must be aware of the restrictions on personal transactions, and the measures established by the management entity in connection with personal transactions and disclosure.

The management company must be informed promptly of any personal transaction entered into by a relevant person (by means of notification or by other measures), and the transaction must be recorded, including any authorization or prohibition of the transaction.


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Exemptions are granted for:• Personal transactions carried out in the context of discretionary portfolio management, if there

is no prior communication between the relevant person and the manager• Personal transactions on UCITS and other European regulated funds, if the relevant person is

not involved in their management

See also Section 7.4.18.

7.4.15. Delegation

A. IntroductionManagement entities and investment companies are permitted to delegate, or partially delegate, to third parties the power to carry out one or more of their functions on their behalf. The management entity remains responsible for the delegated activities.

The requirements to be met vary between management entities. Generally, they include the following:

Summary of delegation requirements applicable to management entities

All types of delegation Specific to the investment management function

• The CSSF must be adequately informed of the delegation

• There must be an objective reason for the delegation, such as the efficient conduct of business

• The management entity must perform initial and ongoing due diligence on the delegate

• The delegation should be formalized in a written agreement

• The delegate should be qualified and capable of undertaking the delegated functions

• The management entity must effectively supervise the delegated functions

• The mandate must not prevent effective supervision of the management company or prevent it from acting, or the UCI from being managed, in the best interests of its investors

• Investment management should be delegated to authorized and supervised undertakings

• Where the investment management related mandate is given to a third-country undertaking, there should be appropriate cooperation arrangements in place between the CSSF and the supervisory authority of such country

• A mandate with regard to the core function of investment management cannot be given to the depositary

The delegate may sub-delegate, providing the management entity is properly informed. The same requirements apply to sub-delegation as those applicable to delegation.

In view of the differences between the requirements applicable to delegation by management entities, in the following sections, we summarize the requirements entity by entity. Delegation of the portfolio management function, and cooperation arrangements, is covered in Section 8.2.2., and delegation of the risk management function is covered in Chapter 9.

Investment companies which have not appointed a management entity are also subject to the delegation requirements of the respective fund Laws:• Self-managed UCITS are required to comply with requirements on delegation applicable to

Chapter 15 management companies (see Subsection B.)• Investment companies under Part II of the 2010 Law are required to comply with requirements

on delegation similar to those applicable to Chapter 16 management companies (see Subsection D.)

SIFs, or their management companies, which delegate one or more of their own functions to third parties are subject to SIF Law delegation requirements (see Section 3.4.2.4.).


B. Chapter 15 management companiesChapter 15 management companies may wholly or partially delegate one or more of their functions for the purpose of ensuring more efficient conduct of their business. The delegate may, in turn, sub-delegate. The delegation in no way affects the responsibilities of the management company or the depositary. The management company must not delegate its functions to the extent that it becomes a letter box entity.

The following general conditions must be complied with: • The management company must inform the CSSF and submit, for each UCITS it manages, all

the information it needs in order to verify that the requirements applicable to the delegation are met, including a detailed description of the duties it is proposing to delegate, the entities to which the duties are to be delegated and the procedures in place to monitor the activities of the mandated entities

• A written contract must be concluded between the management company and the delegate• The mandate must not prevent effective supervision of the management company or prevent

it from acting, or the UCITS from being managed, in the best interests of its investors. The delegation must be structured in a manner which guarantees compliance with the rules of conduct applicable to management companies (see also Section 7.4.14.)

• The delegate entity must be qualified and capable of undertaking the delegated functions. In addition to having any required authorizations, it must demonstrate that it has the adequate human and technical resources with regard to the delegated functions

• Where the management company delegates, wholly or partially, one or several of its collective portfolio management functions, it must verify that the delegate has taken suitable measures to comply with the organizational requirements, conflicts of interest requirements and rules of conduct applicable to management companies (see Sections 7.4.5., 7.4.14. and 7.4.18.). The management company must monitor the compliance with these requirements on an ongoing basis

• The management company must at all times have the necessary expertise and resources to effectively monitor the activities carried out by delegates on the basis of an arrangement with the management company, especially with regard to the management of the risk associated with the delegation

• The mandated entity must have an internal organization and internal procedures which enable access to all the information allowing efficient control by the management company over such delegate, inter alia:• Before a management company delegates to a third party, it must perform written “due

diligence” on the service provider. The due diligence must permit, inter alia, the management company to identify the operational risks entailed by the delegation. The “due diligence” must be made available to the CSSF upon request

• Measures must be implemented which enable the conducting officers of the management company to monitor effectively at any time the activity of the delegate. This requires the implementation of control arrangements permitting the conducting officers and staff to access data evidencing the work performed by the delegate on behalf of the management company and the UCITS it manages. The management company’s control arrangements must cover, inter alia monitoring:• The activities of the investment manager, covering, for example, ensuring that assets of

the UCITS are invested in accordance with the constitutional documents and the applicable requirements, and the best execution policy is respected (see also Section 8.2.1.D.)

• The risk exposures of the UCITS (see also Section 9.2.)• The activities of the administrator, including the transfer agent. This includes verifying the

existence of a second level monitoring system, covering, for example, the NAV calculation (see also Section 10.3.3.), or implementation of such a system itself

• The implementation of the marketing policy, covering, for example, registration in new countries and reimbursement of distribution fees (see also Section 7.4.14. and Chapter 14)

The conducting officers must regularly receive detailed reports on these control arrangements, in respect of each UCITS it manages.

The delegation must not prevent the conducting officers from accessing, either on-line or on request, the data relating to the UCITS.


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Where the delegate respects an internal control framework, such as ISAE 3402127, or the requirements of MiFID, the management company may take this into account in the organization of its control. The management company may also take into account the transversal or specific competencies existing within its group.

• The management company and the delegate must establish, implement and maintain a business continuity plan permitting the re-establishment of the activity after a disaster, and foreseeing regular verification of the backup capacity, where this is deemed necessary in view of the nature of the delegated activity

• The delegation mandate must not prevent the conducting officers of the management company from issuing at any time additional instructions to the delegate or withdrawing the mandate with immediate effect when this is in the interest of investors (see also Section 7.4.7.). This must be covered by the contract

• The UCITS’ prospectuses must list the delegated functions

In the case of the partial delegation of one or more functions, or the partial or whole sub-delegation, the CSSF must be informed and all the delegation requirements complied with in relation to the partial delegation or the sub-delegation.

The specific additional requirements applicable to delegation of the portfolio management function are outlined in Section 8.2.2. and the risk management function in Section 9.2.7..

The specific additional requirements applicable to delegation of the administration function are outlined in Section 10.2..

The CSSF has provided a non-exhaustive list of activities which may be delegated by a Chapter 15 management company, and also listed the activities which a management company cannot delegate under any circumstances.

Delegation by a Chapter 15 management company

Activities which may be delegated128 Activities which cannot be delegated

• The management functions of collective portfolio management:• Portfolio management (see also Section

8.2.2.)• Administration (see also Section 10.2.)• Marketing (see also Chapter 14.)

• Risk management (see also Section 9.2.7.)• Complaints handling (see also Section 7.4.19.)• Compliance function (see also Section

7.4.9.A.)• Internal audit function (see also Section

7.4.9.C.)• Operation of the IT system (see also Section

7.4.13.)

• Definition of the general investment policy of a common fund

• Definition of the risk profile of each UCITS• Interpretation of the risk management analysis,

including any corrective measures • Implementing the conflicts of interest policy,

and its monitoring• Implementing the best execution policy, and its

monitoring• Where a representative price is not available,

ensuring that the senior management has taken a decision on the determination of a probable fair value or have all of the necessary supporting orders to take such a decision

• Choice of service provider• Monitoring and control of delegated functions

C. AIFMAIFM may delegate, or partially delegate, to third parties the task of carrying out functions on their behalf. The delegate may, in turn, sub-delegate. The obligations of the AIFM towards the AIF and its investors are not altered as a result of the delegation.

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 provision of advice and the performance of certain preparatory tasks, which may not be subject to the AIFM delegation provisions.

127 International Standards on Assurance Engagements (ISAE) 3402, Assurance Reports on Controls at Third Party Service Organization issued by the International Auditing and Assurance Standards Board.

128 Subject to the applicable requirements.


The following conditions must be met: • The AIFM must notify the CSSF before the delegation arrangements become effective• The AIFM must be able to justify its entire delegation structure on objective reasons, which may

include:• Optimizing business functions and processes• Cost saving• Expertise of the delegate in administration or in specific markets or investments• Access of the delegate to global trading capabilities

• The delegation structure must not allow for the circumvention of the AIFM’s responsibilities or liability

• The delegation arrangement must take the form of a written agreement concluded between the AIFM and the delegate setting out the respective rights and obligations of the AIFM and the delegate. The AIFM must ensure that the agreement sets out its right of information, inspection, admittance and access, and its instruction, monitoring and termination rights. The agreement must ensure that sub-delegation can take place only with the consent of the AIFM

• The delegation must not prevent the effectiveness of supervision of the AIFM, and, in particular, must not prevent the AIFM from acting, or the AIF from being managed, in the best interests of its investors. To this end, the AIFM and its auditors and the competent authorities must have effective access to data related to the delegated functions and to the business premises of the delegate, the competent authorities must be able to exercise those rights of access and the delegate must cooperate with the competent authorities of the AIFM in connection with the delegated functions

• The AIFM must be able to demonstrate that the delegate is qualified and capable of undertaking the functions in question, that it was selected with all due care and that the AIFM is in a position to monitor effectively at any time the delegated activity, to give at any time further instructions to the delegate and to withdraw the delegation with immediate effect when this is in the interest of investors

• The AIFM must supervise effectively the delegated functions and manage the risk associated with the delegation. For this purpose the AIFM must have at all times the necessary expertise and resources to supervise the delegated functions. The AIFM must also ensure that the delegate properly supervises the performance of the delegated functions, and adequately manages the risks associated with the delegation

• The delegate must have sufficient resources and employ sufficient personnel with the skills, knowledge and expertise necessary for the proper discharge of the tasks delegated to it and have an appropriate organizational structure supporting the performance of the delegated tasks

• The persons who effectively conduct the business of the delegate must be of sufficiently good repute. Where the delegate is regulated in the EU and the relevant supervisory authority has reviewed the criterion of “good repute” within the authorization procedure, this criterion is deemed to be met

• Persons who effectively conduct the activities delegated by the AIFM must have sufficient experience, appropriate theoretical knowledge and appropriate practical experience in the relevant functions. Their professional training and the nature of the functions they have performed in the past must be appropriate for the conduct of the business

• The AIFM must ensure that the delegate carries out the delegated functions effectively and in compliance with applicable law and regulatory requirements and must establish methods and procedures for reviewing on an ongoing basis the services provided by the delegate. The AIFM must take appropriate action if it appears that the delegate cannot carry out the functions effectively or in compliance with applicable laws and regulatory requirements

• The AIFM must ensure that the continuity and quality of the delegated functions or of the delegated task of carrying out functions are maintained also in the event of termination of the delegation either by transferring the delegated functions or the delegated task of carrying out functions to another third party or by performing them itself

• The AIFM must ensure that the delegate discloses to the AIFM any development that may have a material impact on the delegate’s ability to carry out the delegated functions effectively and in compliance with applicable laws and regulatory requirements

• The AIFM must ensure that the delegate protects any confidential information relating to the AIFM, the AIF affected by the delegation and the investors in that AIF

• The AIFM must ensure that the delegate establishes, implements and maintains a contingency plan for disaster recovery and periodic testing of backup facilities while taking into account the types of delegated functions


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The delegate may sub-delegate any of the functions delegated to it provided that:• The AIFM consented in writing prior to the sub-delegation• The AIFM notified the CSSF before the sub-delegation arrangements become effective. The

notification must contain details of the delegate, the name of the competent authority where the sub-delegate is authorized or registered, the delegated functions, the AIF affected by the sub-delegation, a copy of the written consent by the AIFM and the intended effective date of the sub-delegation

• All the delegation requirements must be complied with in relation to the sub-delegation

Any further sub-delegation is subject to the same requirements.

An AIFM cannot delegate its functions to the extent that, in essence, it can no longer be considered to be the manager of the AIF and to the extent that it becomes a letter box entity. An AIFM is no longer considered to be the manager of the AIF and is deemed a letter box entity in any of the following situations:• The AIFM no longer retains the necessary expertise and resources to effectively supervise the

delegated tasks and manage the risks associated with the delegation• The AIFM no longer has the power to take decisions in key areas which fall under the

responsibility of the senior management or no longer has the power to perform senior management functions

• The AIFM loses its contractual rights to inquire, inspect, have access or give instructions to its delegates or the exercise of such rights becomes impossible in practice

• The AIFM 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. When assessing the extent of delegation, the CSSF is required to assess the entire delegation structure taking into account not only the assets managed under delegation but also the following qualitative criteria:• The types of assets the AIF or the AIFM acting on behalf of the AIF is invested in, and the

importance of the assets managed under delegation for the risk and return profile of the AIF• The importance of the assets under delegation for the achievement of the investment goals of

the AIF• The geographical and sectoral spread of the AIF’s investments• The risk profile of the AIF• The type of investment strategies pursued by the AIF or the AIFM acting on behalf of the AIF• The types of tasks delegated in relation to those retained• The configuration of delegates and their sub-delegates, their geographical sphere of

operation and their corporate structure, including whether the delegation is conferred on an entity belonging to the same corporate group as the AIFM

The CSSF may also, where relevant, take into account the delegation provisions applicable to UCITS management companies (see Section 7.4.15.B.).

Both portfolio management and risk management are multi-faceted functions, each of which may be delegated in part or in whole. The multi-faceted nature of portfolio management is covered in Section 8.2.1.. The multi-faceted nature of risk management is covered in Chapter 9, and, in the specific context of AIF, in Section 9.3..

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.

Furthermore, 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.

Delegation of the investment management functions is covered in Section 8.2.2..

AIFM must provide a description of any delegated management function to investors before they invest (see Section 12.3.3.).


D. Chapter 16 management companiesThe permitted activities of a Chapter 16 management company and the delegation options open to it are outlined in Section 7.2.2.F..

A Chapter 16 management company which is also authorized as an AIFM is subject to AIFM delegation requirements (see Subsection C.).

A Chapter 16 management company which is not also authorized as an AIFM may also designate another entity as AIFM; in this case, the AIFM will be subject to delegation requirements. However, as an AIFM is only required to perform the key functions of portfolio management and risk management, a Chapter 16 management company is permitted to delegate to another third party, for the purposes of more efficient conduct of business, the power to carry out on its behalf one or more of the functions of administration or marketing.

Those Chapter 16 management companies which manage AIF and other investment vehicles themselves are permitted to delegate to third parties, for the purposes of more efficient conduct of business, the power to carry out on their behalf one or more of their functions.

The following general requirements must be met in case of delegation:• The CSSF must be adequately informed of the delegation including:

• Description of the activities delegated and of the activities performed internally by the management company

• Draft contracts concluded with the delegates• Description of the controls performed by the management company on the delegates

• The mandate must not prevent effective supervision of the management company or prevent it from acting, or the UCI from being managed, in the best interests of its investors

Specific requirements in relation to the delegation of the investment management function by Chapter 16 management companies are covered in Section 8.2.2..

7.4.16. Depositary appointment

For each Luxembourg UCI, a depositary must be appointed. Furthermore, an AIFM is required to ensure that, for each AIF it manages, a single depositary is appointed.

The required qualifications and role of the depositary are outlined in Chapter 11.

The appointment of the depositary should be evidenced by a written contract. The minimum content of the written agreement/contract between the depositary and the management entity and/or the UCI (UCITS or AIF) is laid down in respect of:• UCITS which are managed cross-border (see also Section 7.5.)• All full AIFM regime AIF

The contract has to cover at least the following elements:

Summary of particulars of the depositary agreement

UCITS managed cross-border Full AIFM regime AIF

Safekeeping duties

Description of procedures to be adopted for each type of asset of the UCITS entrusted to the depositary, including those related to the safe-keeping

Description of the services to be provided by the depositary, and the procedures to be adopted for each type of asset in which the AIF may invest and therefore entrust to the depositary. This must cover the way in which the safe-keeping and oversight function is to be performed by type of asset and by geographical region, and, with respect to custody, the procedure for adding or withdrawing countries from the list of countries.


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Information to be provided by the depositary to the management entity

Description of the means and procedures by which the depositary will transmit to the management company the information it needs to perform its duties, including in relation to the exercise of any rights attached to financial instruments, and to allow the management company and the UCITS to have timely and accurate access to information relating to the accounts of the UCITS129

The means and procedures by which the depositary transmits to the AIFM or the AIF all relevant information that it needs to perform its duties including the exercise of any rights attached to assets, and in order to allow the AIFM and the AIF to have a timely and accurate overview of the accounts of the AIF

Information to be provided to the depositary

Description of the means and procedures by which the depositary will have access to all relevant information it needs to perform its duties130

The means and procedures by which the AIFM or the AIF transmits all relevant information or ensures the depositary has access to all the information it needs to fulfill its duties, including the procedures ensuring that the depositary will receive information from other parties appointed by the AIF or the AIFM

Information on cash accounts

Information on all cash accounts opened in the name of the AIF or in the name of the AIFM acting on behalf of the AIF and the procedures ensuring that the depositary will be informed when any new account is opened

Subscriptions and redemptions

Information that needs to be exchanged between the UCITS, its management company and the depositary relating to subscriptions and redemptions

Information that needs to be exchanged between the AIF, the AIFM, a third party acting on behalf of the AIF or the AIFM, on the one hand, and the depositary, on the other hand, related to subscriptions and redemptions

Prevention of money laundering and the financing of terrorism (see Section 10.3.5.)

Tasks and responsibilities of the parties in respect of obligations relating to the prevention of money laundering and the financing of terrorism

Tasks and responsibilities of the parties in respect of obligations relating to the prevention of money laundering and the financing of terrorism, where applicable

Modification of UCI documentation

Description of procedures to be followed where the management company envisages a modification of the constitutional document or prospectus of the UCITS, identifying when the depositary should be informed and where the depositary’s prior agreement is necessary

The procedures to be followed when an amendment to the constitutional document or offering documents is being considered, detailing the situations in which the depositary is to be informed, when the depositary should be informed and where the depositary’s prior agreement is necessary

Depositary monitoring of management entity

Description of procedures by which the depositary has the ability to enquire into the conduct of the management company and to assess the quality of information transmitted, including on-site visits

The procedures ensuring that the depositary, in respect of its duties, has the ability to enquire into the conduct of the AIFM and, as the case may be, the AIF, and to assess the quality of information transmitted including by way of having access to the books of the AIF and/or the AIFM or by way of on-site visits

Management entity monitoring of depositary

Description of procedures by which the management company can review the performance of the depositary in respect of the depositary’s contractual obligations

The procedures ensuring that the AIFM and/or the AIF can review the performance of the depositary in respect of the depositary’s contractual obligations

129 The details may be included in a service level agreement or a separate written agreement.130 Idem.




Depositary escalation procedures

Details regarding the depositary’s escalation procedures, including the identification of the persons to be contacted within the AIF and/or the AIFM when the depositary launches such a procedure

Segregation by sub-custodian issue notification

A commitment by the depositary to notify the AIFM when it becomes aware that the segregation of assets is insufficient to ensure protection from insolvency of sub-custodian

Appointment of third parties by either party (management entity or depositary)

Undertaking to provide details of any third parties appointed to carry out their respective duties and, upon request, information on criteria used for selecting the third party and steps taken to monitor its activities

Commitment to provide details of any third party appointed to carry out parts of their respective duties, and, upon request, information on the criteria used to select the third party and the steps envisaged to monitor the activities carried out by the selected third party

Asset re-use Information on whether or not the depositary, or a third party to whom safe-keeping functions are delegated may re-use the assets it has been entrusted with and, if any, the conditions attached to any such re-use

Liability in case of delegation of custody

A statement that a depositary’s liability is not affected by the fact that it has entrusted to a third party all or some the assets in its safe-keeping

A statement that the depositary’s liability is not affected by any delegation of its custody functions, unless the depositary has discharged itself of its liability in accordance with the relevant requirements. In case of discharge of liability, the contract must expressly permit the discharge of the depositary’s liability and establish the objective reason to contract such a discharge.

Confidentiality Confidentiality obligations applicable to the parties, which must not impair the ability to have access to relevant documents and information

Confidentiality obligations applicable to the parties, which must not impair the ability to have access to relevant documents and information

Amendments and termination of the agreement

Period of validity, conditions under which the contract may be amended or terminated, and transition arrangements in case of change of depositary

Period of validity, conditions under which the contract may be amended or terminated, and transition arrangements in case of change of depositary

Applicable law The law of the UCITS home Member State Applicable law must be specified

Scope of agreement

List of all UCITS covered by the agreement

List of all AIF covered by the agreement

In addition to meeting the requirements laid down in the depositary contract, the AIFM is required, inter alia, to:• Ensure that all instructions and relevant information related to the AIF’s assets and operations are

sent to the depositary (see Subsections 11.4.2.2.B. and 11.4.5.1.)• Provide the depositary, upon commencement of its duties and on an on-going basis, with all

relevant information it needs in order to perform the oversight duties including information to be provided to the depositary by third parties (see Section 11.4.5.1.)

• Provide the depositary with all information relating to any reservations on the AIF’s financial statements expressed by the auditor (see Section 11.4.5.6.)


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7.4.17. Prime brokers and counterparties

AIFM must exercise due skill, care and diligence when selecting prime brokers and counterparties before appointing them, and thereafter, on an ongoing basis, taking into account the full range and quality of their services. When selecting prime brokers or counterparties of an AIFM or an AIF in an over-the-counter (OTC) derivatives transaction, in a securities lending or in a repurchase agreement, AIFM must ensure that those prime brokers and counterparties:• Are subject to ongoing supervision by a public authority• Are financially sound, taking into account the applicable prudential regulation, including capital

requirements and effective supervision• Have the necessary organizational structure and resources for performing the services which are

to be provided by them to the AIFM or the AIF

The list of selected prime brokers must be approved by the AIFM’s senior management.

Where an AIFM uses a prime broker, the arrangement must be set out in a written contract, which must cover the terms under which the prime broker may transfer and re-use AIF assets. The contract must also provide that the depositary, if separate from the prime broker, be informed of the contract.

In its application for authorization, the AIFM is required to provide details of the workflows of the processes and interactions between the prime broker, the AIFM and other related parties.

AIFM must ensure that from the date of the appointment of a prime broker, an agreement is in place pursuant to which the prime broker is required to make available to the depositary daily statements providing detailed information on the assets of the AIF. The relationship between the prime broker and the depositary is covered in Section 11.8..

Information which must be disclosed to investors before they invest is covered in Section 12.3.3..

7.4.18. Conflicts of interest

A. IntroductionManagement entities should take all reasonable steps designed to identify, prevent, manage and monitor conflicts of interest in order to prevent them from adversely affecting the interests of the UCIs and their investors. Where the arrangements made by the management entity to identify, prevent, manage and monitor conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to investors’ interests will be prevented, the management entity must disclose the general nature or sources of conflicts of interest to the investors.131

Specific conflicts of interest requirements apply to SIFs (see Section 3.4.2.3.).

B. Applicable general rulesThe wording of the general requirements on conflicts of interest differs between UCITS management companies and AIFM:

General requirements on conflicts of interest applicable to management entities


A UCITS management company is required to try to avoid conflicts of interests and, when they cannot be avoided, to ensure that the UCITS it manages are fairly treated.

An AIFM is required to take all reasonable steps to avoid conflicts of interest and, when they cannot be avoided, to identify, manage and monitor and, where applicable, disclose those conflicts of interest in order to prevent them from adversely affecting the interests of the AIF and their investors and to ensure that the AIF they manage are fairly treated.

131 The wording of this summary is based on the requirements applicable to AIFM.


General requirements on conflicts of interest applicable to management entities


A UCITS management company is structured and organized in such a way as to minimize the risk of UCITS’ or clients’ interests being prejudiced by conflicts of interest between the management company and its clients, between two of its clients, between one of its clients and a UCITS or between two UCITS.

AIFM are required to maintain and operate effective organizational and administrative arrangements with a view to taking all reasonable steps designed to identify, prevent, manage and monitor conflicts of interest in order to prevent them from adversely affecting the interests of the AIF and their investors.

AIFM are required to segregate, within their own operating environment, tasks and responsibilities which may be regarded as incompatible with each other or which may potentially generate systematic conflicts of interest. AIFM must assess whether their operating conditions may involve any other material conflicts of interest and disclose them to the investors of the AIF.

Where organizational arrangements made by the AIFM to identify, prevent, manage and monitor conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to investors’ interests will be prevented, the AIFM must clearly disclose the general nature or sources of conflicts of interest to the investors before undertaking business on their behalf, and develop appropriate policies and procedures.

Chapter 16 management companies are required to submit a description of how they manage potential conflicts of interest in their application for authorization.

C. Types of conflicts of interestFor the purpose of identifying the types of conflicts of interest that arise in the course of their business, UCITS management companies and AIFM must take into account, in particular, whether the management entity, a relevant person or a person directly or indirectly linked by way of control is in any of the following situations: • Is likely to make a financial gain, or avoid a financial loss, at the expense of the UCI or its

investors• Has an interest in the outcome of a service or an activity provided to the UCI or its investors or

to a client or of a transaction carried out on behalf of the UCI or a client, which is distinct from the UCI’s interest in that outcome

• Has a financial or other incentive to favor the interest of a UCITS, a client or group of clients or another UCI over the interest of the UCI, or, in the case of AIFM, the interest of one investor over the interest of another investor or group of investors in the same AIF

• Carries out the same activities for the UCI and for another UCI or other client• Receives or will receive from a person other than the UCI or its investors an inducement in

relation to collective portfolio management activities provided to the UCI, in the form of monies, goods or services other than the standard commission or fee for that service (see also Subsection 7.4.14.C.)

Conflicts of interest identification requirements applicable to management entities


UCITS management companies, when identifying the types of conflicts of interest, must take into account the following:• The interests of the management company,

including, if relevant, those deriving from its belonging to a group or from its services and activities and those of other group members

• The interests of investors• The duties of the management company

towards the UCITS• The interests of two or more UCITS its

manages

An AIFM is required to take all reasonable steps to identify conflicts of interest that arise in the course of managing AIF between: • The AIFM, including its managers, employees or any

person directly or indirectly linked to the AIFM by control, and the AIF managed by the AIFM or the investors in that AIF

• The AIF or the investors in that AIF, and another AIF or the investors in that AIF

• The AIF or the investors in that AIF, and another client of the AIFM

• The AIF or the investors in that AIF, and a UCITS managed by the AIFM or the investors in that UCITS

• Two clients of the AIFM


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Potential conflicts of interest may exist between, for example:• ► Risk management and operations: the functional and hierarchical separation of the

functions of risk management and the operating units, including portfolio management, is covered in Chapter 9. The functional and hierarchical separation requirements are set out in more detail for AIFM in Section 9.3.5.

• ► Internal audit function and risk management function: the roles of internal control functions are covered in Section 7.4.9.. The role of the internal audit function of an AIFM in reviewing the performance of the risk management function is covered in Section 9.3.5.

• ► Internal audit function and compliance function: the roles of internal control functions are covered in Section 7.4.9.

• ► Valuation and portfolio management: the functional independence of the valuation function from the portfolio management function is covered in Section 9.5.

• ► Depositary and portfolio management or risk management functions: requirements to be met in case of delegation of portfolio management or risk management to an entity which is part of the group of the depositary, or of a delegate of the depositary, is covered in Section 8.2.2.

Delegates may be subject to conflicts of interest requirements, as described in Section 7.4.15.. Transparency requirements in relation to conflicts of interest that may arise from delegation are covered in Chapter 12. Conflicts of interest requirements in relation to the delegation of portfolio management or risk management are covered in Section 8.2.2..

D. Conflicts of interest policyManagement companies and AIFM must establish, implement and apply an effective conflicts of interest policy. The policy must be set out in writing and be appropriate to the size and organization of the management entity and the nature, scale and complexity of its business.

Where the management entity is a member of a group, the policy must also take into account any circumstances of which the AIFM is or should be aware which may give rise to a conflict of interest resulting from the structure and business activities of other members of the group.

The conflicts of interest policy must cover the following:• With reference to the activities carried out by or on behalf of the management entity,

including activities carried out by or on behalf of the management entity, identification of the circumstances which constitute or may give rise to a conflict of interest entailing a material risk of damage to the interests of the UCI or its investors or one or more other clients

• Procedures to be followed and measures to be adopted in order to prevent, manage and monitor such conflicts

E. Procedures and measures preventing or managing conflicts of interestThe procedures and measures established for the prevention or management of conflicts of interest must be designed to ensure that the relevant persons engaged in different business activities involving a risk of conflict of interest carry out these activities having a degree of independence which is appropriate to the size and activities of the UCITS management company or AIFM and of the group to which it belongs, and to the materiality of the risk of damage to the interests of the UCI, its investors or other clients.

F. Monitoring conflicts of interestThe UCITS management company or AIFM must keep and regularly update a record of the types of activities undertaken by or on behalf of the management entity in which a conflict of interest entailing a material risk of damage to the interests of one or more UCIs or its investors has arisen or, in the case of an ongoing activity, may arise.

In the case of AIFM, senior management must receive on a frequent basis, and at least annually, written reports on such activities.

G. Managing conflicts of interestWhere the organizational or administrative arrangements made by the UCITS management company or AIFM are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of the UCI or investors in the UCI are prevented, the senior management or other competent internal body of the management entity must be promptly informed in order to take any necessary decision or action to ensure that the management entity acts in the best interests of the UCIs or its investors.


H. Disclosure of conflicts of interestManagement entities are required to disclose to investors information on conflicts of interest which cannot, with reasonable confidence, be prevented (see Section 12.4.).

I. Investor liquidityAn AIFM that manages open-ended AIF must identify, manage and monitor conflicts of interest arising between investors wishing to redeem their investments and investors wishing to maintain their investments in the AIF, and any conflicts between the AIFM’s incentive to invest in illiquid assets and the AIF’s redemption policy.

J. Voting rightsUCITS management companies and AIFM must develop measures and procedures to prevent or manage conflicts of interest arising from the exercise of voting rights linked to instruments held in the portfolio (see Section 8.2.1.).

7.4.19. Complaints handling

UCITS management companies are required to establish, implement and maintain effective and transparent procedures for the reasonable and prompt handling of complaints received from investors.

The management company must ensure that each complaint and the measures taken for its resolution are recorded.

Investors must be able to file complaints free of charge. The information regarding complaints handling procedures must be made available to investors free of charge.

The management company must designate among its staff one person responsible for the handling, centralization and follow-up of complaints. A specific mandate for the handling of complaints can be given to a specialized third party.

A description of the complaints handling procedures, and the name of the person responsible, must be communicated to the CSSF in the application for authorization. The management company must also communicate a list of third parties authorized to handle complaints.

The management company is required to submit to the CSSF, within one month of the annual general meeting of the management company, annual information on the investor complaints, the reasons for the complaints, and the status of their handling.

7.4.20. Remuneration policy

CSSF Circular 10/437 entitled Guidelines concerning the remuneration policies in the financial sector applies to all entities under the supervision of the CSSF (“financial undertakings”), including management entities and, in some cases, investment companies. The Circular implements European Commission Recommendation 2009/384/EC on remuneration policies in the financial services sector.

The AIFM Law requires AIFM to implement remuneration policies. The AIFM Law provisions are complemented by ESMA’s Guidelines on sound remuneration policies under the AIFMD (2013/201).

There may be differences in the application and interpretation of ESMA’s guidelines between EU Member State authorities.

The European Commission’s proposed “UCITS V” amendments to the UCITS Directive implement specific provisions on remuneration applicable to management companies. Overall, the proposed UCITS V remuneration provisions are similar to the AIFM Directive provisions.


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Key provisions on remuneration

CSSF Circular AIFM

Key principles The Circular requires financial undertakings to establish, implement and maintain a remuneration policy which is consistent with and promotes sound and effective risk management and which does not induce excessive risk-taking. The policy must be in line with the business strategy, objectives, values and long-term interests of the financial undertaking, and be consistent with the principles relating to the protection of clients and investors when providing services.

The AIFM Law requires AIFM to have remuneration policies that:• Are consistent with, and promote, sound

and effective risk management• Do not encourage risk-taking which is

inconsistent with the risk profiles, or constitutional documents of the AIF it manages

• Are in line with the business strategy, objectives, values and interests of the AIFM and the AIF it manages or the investors of such AIF, and includes measures to avoid conflicts of interest

Staff in scope CSSF Circular 10/437 applies to the variable element of the remuneration of members of the Board and management bodies of financial undertakings, as well as those categories of staff whose professional activities have a material impact on the risk profile of the financial undertaking. However, where the remuneration of these individuals is fixed, the financial undertaking is exempted from applying the Circular.

An AIFM’s remuneration policies and practices must cover those categories of staff whose professional activities have a material impact on the risk profiles of the AIFM or of the AIF it manages including:• Senior management• Risk takers, including those taking

investment decisions• Control functions• Any employee receiving total

remuneration that takes them into the same remuneration bracket as senior management and risk takers

Applicability to delegates

The Circular is applicable to entities under the supervision of the CSSF. It does not apply to fees and commissions received by intermediaries and external service providers in case of outsourced activities.

The provisions apply to categories of staff of the entity or entities to which portfolio management or risk management activities have been delegated by the AIFM, whose professional activities have a material impact on the risk profiles of the AIF that the AIFM manages.

When delegating portfolio management or risk management activities, AIFM should ensure that either of the following criteria are met:• The entities to which portfolio

management or risk management activities have been delegated are subject to regulatory requirements on remuneration that are equally as effective as those applicable under ESMA’s guidelines

• Appropriate contractual arrangements are put in place with entities to which portfolio management or risk management activities have been delegated in order to ensure that there is no circumvention of the remuneration rules set out in ESMA’s guidelines. These contractual arrangements should cover any payments made to the delegates’ identified staff as compensation for the performance of portfolio or risk management activities on behalf of the AIFM



CSSF Circular AIFM

Group remuneration policy

AIFM which are subsidiaries of a financial group with a group remuneration policy are not exempt from the sector-specific remuneration principles set out in the AIFM Law.

Compliance with these sectoral remuneration principles by AIFM which belong to banking, insurance, investment groups or financial conglomerates should be considered as ensuring the respect by such a group of the remuneration principles applicable to the group with specific regard to the AIFM.

Key requirements on remuneration

Where remuneration includes a variable component or a bonus, the remuneration policy should be structured with an appropriate balance of fixed and variable remuneration components. The remuneration policy must set a maximum limit on the variable component.

The fixed component of the remuneration should represent a sufficiently high proportion of the total remuneration allowing the financial undertaking to operate a fully flexible bonus policy.

In particular, the financial undertaking should be able to withhold bonuses entirely or partly when performance criteria are not met by the individual concerned, the business unit concerned or the financial undertaking in its entirety.

Where a significant bonus is awarded, the major part of the bonus should be deferred with a minimum period of deferral. The deferred element of the bonus should take into account the outstanding risks associated with the performance to which the bonus relates.

Where remuneration is performance related, its total amount should be based on a combination of the assessment of the performance of the individual, of the business unit concerned and of the overall results of the financial undertaking. The assessment of performance should be set in a multi-year framework (e.g., three to five years) in order to ensure that the assessment process is based on longer term performance and that the actual payment of bonuses is spread over the business cycle of the company.

AIFM are required to comply with a series of principles set out in the AIFM Law in a way that is appropriate to their size, internal organization and the nature, scope and complexity of their activities. For example:• Where remuneration is performance

related, the total amount of remuneration must be based on a combination of the assessment of the performance of the individual, and of the business unit or AIF concerned and of the overall results of the AIFM. When assessing individual performance, financial as well as non-financial criteria must be taken into account

• The assessment of performance must be set in a multi-year framework appropriate to the life-cycle of the AIF managed by the AIFM

• Fixed and variable components of total remuneration must be appropriately balanced and the fixed component must represent a sufficiently high proportion of the total remuneration

• In general, at least 50% of any variable remuneration must consist of shares or units of the AIF concerned, or equivalent non-cash instruments

• At least 40% of the variable remuneration component must be deferred over a period which is appropriate in view of the life-cycle and redemption policy of the AIF concerned and is correctly aligned with the nature of the risks of the AIF in question (generally three to five years)


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CSSF Circular AIFM

Governance Under the CSSF Circular, the remuneration policy should include measures to avoid conflicts of interest. The procedures for determining remuneration within the financial undertaking should be clear and documented and should be internally transparent.

The Board of Directors is responsible for:• Determining the remuneration of the

members of the Board of Directors and management bodies of the financial undertaking

• Establishing the general principles of the remuneration policy of the financial undertaking and supervising its implementation

A remuneration committee may assist the Board of Directors in its duties.

The implementation of the remuneration policy should be subject to central and independent internal review, at least annually, by control functions, for compliance with policies and procedures defined by the Board. The report of the internal control review must be sent to the Board of Directors and be available to the CSSF.

The management body of the AIFM must adopt and periodically review the general principles of the remuneration policy, and is responsible for its implementation. There must be at least annual, central and independent internal reviews of compliance with remuneration policies and procedures.

Staff engaged in control functions must be compensated in accordance with the achievement of the objectives linked to their functions, independent of the performance of the business areas they control.

AIFM that are significant in terms of their size or the size of the AIF they manage, their internal organization and the nature, the scope and the complexity of their activities, are required to establish a remuneration committee132. The remuneration committee is responsible for the preparation of decisions regarding remuneration. It is required to directly oversee the remuneration of the senior officers in the risk management and compliance functions. The remuneration committee must exercise independent judgment. It must be chaired by, and composed of, non-executive Directors133.

The implementation of the remuneration policy must, at least annually, be subject to central and independent internal review for compliance with policies and procedures for remuneration adopted by the management body in its supervisory function.

Disclosure and internal communication

Relevant information on the remuneration policy, and any updates in case of policy changes, should be disclosed by the financial undertaking in a clear and easily understandable way to relevant stakeholders. Such disclosure may take the form of an independent remuneration policy statement, a periodic disclosure in annual financial statements or any other form (see Section 12.4.3.).

The annual report of the AIF must disclose (see Section 12.5.2.):• The total amount of remuneration for

the financial year, split into fixed and variable, paid by the AIFM, number of beneficiaries and where relevant carried interest paid by the AIF

• The aggregate amount of remuneration broken down by senior management and staff impacting the risk profile of the AIF

The remuneration policy of an AIFM should be accessible to all staff members of that AIFM. The staff members should know in advance the criteria that will be used to determine their remuneration. The appraisal process should be properly documented and should be transparent to the member of staff concerned.

132 The following are examples of AIFM which may not need to establish a remuneration committee:AIFM for which the value of the portfolios of AIF that they manage does not exceed €1.25 billion and not having more than 50 employees, including those dedicated to the management of UCITS and the provision of the services other than the management of AIFAIFM which are part of banking, insurance, investment groups or financial conglomerates within which an entity is obliged to set up a remuneration committee which performs its tasks and duties for the whole group, subject to equivalent rules governing and the existing remuneration committee takes responsibility for checking the compliance of the AIFM with the rules set out in ESMA’s guidelines.

133 ►i.e., Directors who are not members of the management body.


7.4.21. Reporting to the CSSF A. Chapter 15 management companies

UCITS management companies are required to establish, implement and maintain accounting policies and procedures that enable them, at the request of the CSSF, to deliver in a timely manner, financial reports which reflect a true and fair view of their financial position and which comply with all applicable accounting standards and rules.

UCITS management companies and self-managed investment companies are required to send financial information to the CSSF on a quarterly basis in accordance with CSSF Circular 12/546 and CSSF Circular 10/467. They are required to report information on:• The financial situation• The profit and loss account• The management of Luxembourg and foreign UCIs:

• UCIs managed by the management company• UCIs managed under delegation

• Additional activities • Staff

In addition to the tables related to the activities of the registered office, management companies which have one or more branches are required to submit tables regarding activities of each individual branch, as well as global figures, totaling those of the registered office and of the branches (see also Section 7.5.).

The report formats are included as appendices to CSSF Circular 10/467. The Circular also covers the secure transmission requirements and the transmission channels.

Both of the transmission channels commonly used by the CSSF – e-file and SOFIE – include a secure transmission module.

Reports are to be received by the CSSF by the 20th day of the following month.

Management companies are also required to submit, within one month of the general meeting, information which reflects the figures audited by the independent auditor at the end of each financial year.

Management companies are required to communicate their risk management process to the CSSF (see Section 9.2.8.).

Management companies are required to communicate annual information on investor complaints (see Section 7.4.19.).

Reporting in relation to UCIs is covered in Section 12.8..

B. AIFMAIFM are required to establish, implement and maintain accounting policies and procedures and valuation rules that enable them, at the request of the competent authority, to deliver in a timely manner to the CSSF financial reports which reflect a true and fair view of their financial position and which comply with all applicable accounting standards and rules.

AIFM, including simplified registration regime AIFM, are required to report to the CSSF on a regular basis information on its activities and those of the AIF it manages or markets in the EU/EEA.

AIFM, including simplified registration regime AIFM, are required to report to the CSSF information on the AIFM, and the AIF they manage, including:• Principal markets in which it trades on behalf of the AIF it manages• Principal instruments in which it trades on behalf of the AIF it manages• Values of assets under management for all AIF managed• AIF name• Fund manager• Fund identification codes• Inception date


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• Domicile • Identification of the prime broker(s)• Base currency• Jurisdictions of three main funding sources• Predominant AIF type (hedge fund, private equity fund, real estate fund, fund of funds, other)

and breakdown of investment strategies • Main instruments in which the AIF is trading (type of instrument, value, long/short position)• Geographical focus (by region) as a percentage of the NAV• 10 principal exposures of the AIF at reporting date• 5 most important portfolio concentrations• Typical deal/position size• Principal markets in which the AIF trades• Investor concentration (percentage of AIF shares or units held by five largest beneficial owners,

implementing look-through where possible, breakdown by MiFID status: professional and retail)

For each of the EEA AIF they manage and for each of the AIF they market in the EEA, AIFM (not including simplified registration regime AIFM) must provide the CSSF with: • Detailed list of all AIF which it manages • Identification of the AIF:

• AIF name• Fund manager• Fund identification codes• Inception date • Domicile • Identification of the prime broker(s)• Base currency• Jurisdictions of three main funding sources

• Instruments traded and individual exposures:• Individual exposures in which it is trading and the main categories of assets in which the AIF

invested as at the reporting date (securities by category and sub-category, derivatives by category and sub-category, physical assets by category and sub-category, UCIs by category and sub-category, other asset classes)

• Value of turnover in each asset class over the reporting months (securities by category, derivatives by category, physical assets by category, UCIs by category, other asset classes)

• Total long and short value of exposures (before currency hedging) by currency group• Private equity funds:

• Typical deal/position size • Dominant influence for each company over which the AIF has a dominant influence

(including name, percentage of voting rights and transaction type)• Risk profile of the AIF:

• Market risk profile:• Expected annual investment return/IRR in normal market conditions (in percent) (Net

Equity Delta, Net DV01, Net CS01)• Counterparty risk profile:

• Estimated percentage (in terms of market value) of securities and derivatives traded (on a regulated exchange and OTC) and derivatives transactions cleared (by a central clearing counterparty (CCP) and bilaterally)

• Value of collateral and other credit support that the AIF has posted to all counterparties (in the form of cash and cash equivalents, securities, letters of credit and similar)

• Percentage of the amount of collateral and other credit support that the reporting fund has posted to counterparties which has been re-hypothecated by counterparties

• Identity of top five counterparties:• To which the AIF has the greatest mark-to-market net counterparty credit exposure,

measured as a percentage of the NAV of the AIF• That have the greatest mark-to-market net counterparty credit exposure to the AIF,

measured as a percentage of the NAV of the AIF• Direct clearing through central clearing counterparties (CCPs), including, where relevant

identity of the top three CCPs in terms of net credit exposure


• Liquidity Profile:• Portfolio liquidity profile:

• Percentage of portfolio capable of being liquidated within specified periods• Value of unencumbered cash

• Investor liquidity profile:• Percentage of investor equity that can be redeemed within specified periods (as a

percentage of the NAV of the AIF)• Investor redemptions:

• Whether AIF provide investors with withdrawal/redemption rights in the ordinary course of business

• Frequency of investor redemptions (if multiple classes of shares or units, report for the largest share class by NAV)

• Notice period in days required by investors for redemptions (asset weighted notice period if multiple classes or shares or units)

• Investor lock up period in days (asset weighted notice period if multiple classes or shares or units)

• Special arrangements (percentage of the AIF’s NAV subject to arrangements by category, the percentage of net asset value of AIF’s assets that are currently subject to the special arrangements arising from their illiquid nature)

• Whether any investors preferential treatment, or right to preferential treatment, and, where relevant, type of preferential treatment

• Breakdown of the ownership of units in the AIF by investor group (percentage of the NAV of the AIF; look-through to the beneficial owners where known or possible)

• Financing liquidity:• Aggregate amount of borrowing by and cash financing available to the AIF (including

all drawn and undrawn, committed and uncommitted lines of credit as well as any term financing) and breakdown by length of period for which the creditor is contractually committed to provide such financing

• Borrowing and exposure risk:• Value of borrowings of cash or securities represented by unsecured cash borrowing and

breakdowns of collateralized/secured cash borrowing • Breakdowns of value of borrowing embedded in financial instruments• Value of securities borrowed for short positions• Gross exposure of financial and/or legal structures controlled by the AIF • Leverage of the AIF as calculated under the gross method and the commitment method

• Operational and other risk aspects:• Total number of open positions• Historical risk profile:

• Gross Investment returns or IRR of the AIF over the reporting period (in percent, gross of management and performance fees)

• Net Investment returns or IRR of the AIF over the reporting period (in percent, net of management and performance fees)

• Change in Net Asset Value of the AIF over the reporting period (in percent, including the impact of subscriptions and redemptions)

• Subscriptions over the reporting period• Redemptions over the reported period

• Results of stress tests:• Stress tests on risks associated with each investment position of the AIF and their overall

effect on the AIF’s portfolio • Assessment and monitoring of the liquidity risk of the AIF under normal and exceptional

liquidity conditions• Additional reporting by AIFM managing AIF employing leverage on a substantial basis (i.e.,

above three times the NAV – see Subsection 9.3.6.A.):• Percentage of the amount of collateral and other credit support that the reporting AIF has

posted to counterparties which has been re-hypothecated by counterparties• Borrowing and exposure risk


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• Value of borrowings of cash or securities represented by unsecured cash borrowing and breakdowns of collateralized/secured cash borrowing

• Breakdowns of value of borrowing embedded in financial instruments• Five largest sources of borrowed cash or securities (short positions)• Value of securities borrowed for short positions• Gross exposure of financial and/or legal structures controlled by the AIF • Leverage of the AIF as calculated under the gross method and the commitment method

The minimum frequency of the reporting is as follows: • On a half-yearly basis by AIFM managing portfolios of AIF whose assets under management

calculated in total exceed the applicable €100 million or €500 million threshold (see Section 7.2.2.D.) but do not exceed €1 billion, for each of the EU AIF they manage and for each of the AIF they market in the EEA

• On a quarterly basis by AIFM, for each AIF whose assets under management, including any assets acquired through use of leverage, in total exceed €500 million, in respect of that AIF

• On a quarterly basis by AIFM managing portfolios of AIF whose assets under management in total exceed €1 billion, for each of the EU AIF they manage, and for each of the AIFs they market in the EEA

• On an annual basis by AIFM in respect of each unleveraged AIF under their management which, in accordance with its core investment policy, invests in non-listed companies and issuers in order to acquire control

The information must be provided as soon as possible and not later than one month after the end of the period. Where the AIF is a fund of funds this period may be extended by the AIFM by 15 days.

The deadline for the first reporting by AIFM to the CSSF remains under discussion at the time of writing. ESMA’s consultation paper entitled Guidelines on reporting obligations under Article 3 and Article 24 of the AIFMD proposed that AIFM should submit their first reporting on 31 January 2014, or 15 February for funds of funds, covering the period from 23 July 2013 to 31 December 2013. Compliance with the AIFM reporting requirements may, in practice, be challenging for all AIFM, including simplified registration regime AIFM, and simplified AIFM registration regime internally managed AIF.

7.4.22. Annual accounts Annual accounts of the management entity must be audited by an independent auditor. Any change of independent auditor must be previously approved by the CSSF. The duties and obligations of the independent auditor of a management company are similar to those of the independent auditor to a UCITS outlined in Section 12.5.8..

7.4.23. Investment companies which have not appointed a management entity

A self-managed UCITS investment company is required to comply with prudential requirements. It is required to have sound administrative and accounting procedures, control and safeguard arrangements for electronic data processing and adequate internal control mechanisms.

The self-managed UCITS must have its registered office and decision-making center and administrative center in Luxembourg (see Section 7.4.10.). It may delegate administration to a Luxembourg administrator – i.e., a service provider in Luxembourg which is authorized to provide administration to UCIs (see Chapter 10).

It is required to comply, inter alia, with requirements on:• Capital and business plan (see Subsection 3.4.1.5.)• Sponsor (see Subsection 7.4.3.B.)• Governing bodies and senior management (see Sections 7.4.6. and 7.4.7.)


• The portfolio management function (see Section 8.2.1.) and, where applicable, delegation thereof (see Section 8.2.2.)

• Permanent risk management function and risk management process (see Chapter 9)• Rules of conduct (see Subsection 7.4.14.)• Delegation of functions (see Section 7.4.15.)• Conflicts of interest (see Subsection 7.4.18.)• Complaints handling (see Subsection 7.4.19.)• Remuneration policy (see Section 7.4.20.)• Reporting to the CSSF (see Subsection 7.4.21.)• Securities and instruments regulatory requirements (see Section 8.2.3.)• External audit (see Section 12.5.8.)

A full AIFM regime internally managed AIF is subject to the same requirements as AIFM, except the capital requirements. However, an internally managed AIF is subject to initial capital requirements as a UCI of €300,000 (see also Section 3.5.) and professional liability cover requirements – see Section 7.4.4.D.). An internally managed AIF can only manage assets of its own portfolio. It cannot under any circumstances provide services to third parties.

7.4.24. Management entities providing additional services

The provision of discretionary portfolio management or non-core services by UCITS management companies and AIFM is also subject to:• The conduct of business obligations of Article 37-3 of the 1993 Law when providing investment

services to clients • The organizational requirements of Article 37-1 of the 1993 Law

The provision of such services is also subject to most of the implementing measures laid down in the Grand-Ducal Regulation of 13 July 2007 on the organizational requirements and operating conditions for investment firms and the relevant MiFID rules of conduct in the financial sector laid down in CSSF Circular 07/307, as amended.

Neither management companies nor AIFM which are authorized to provide discretionary portfolio management services may invest on behalf of their discretionary portfolio management clients in shares or units of UCIs they manage without prior general approval of the client.

The risk management policy applied in relation to discretionary portfolio management must be submitted to the CSSF in the application for authorization.

Management companies which are authorized to provide discretionary portfolio management services must join the Deposit Guarantee Association, Luxembourg (Association pour la Garantie des Dépôts, Luxembourg – AGDL).

7.4.25. Simplified registration regime AIFM

Simplified registration regime AIFM are subject to registration with the CSSF. They are required to provide the following information:• Identity • Identity of the AIF that they manage, including the total value of assets under management• For each AIF the offering document or a relevant extract from the offering document or a general

description of the investment strategy, including at least: • The main categories of assets in which the AIF may invest• Any industrial, geographic or other market sectors or specific classes of assets which are the

focus of the investment strategy• A description of the AIF’s borrowing or leverage policy


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Simplified registration regime AIFM are required to monitor their assets under management at least annually. This implies, inter alia:• Identifying all AIF for which it is appointed as the external AIFM or the AIF for which it is the AIFM,

where the legal form of the AIF permits internal management• Identifying for each managed AIF the portfolio of assets and determine the corresponding value of

assets under management, including all assets acquired through use of leverage• Aggregating the determined values of assets under management for all AIF managed. Derivative

instruments must be converted into their equivalent position in the underlying assets (see Subsection 9.3.6.A.)

• Comparing the resulting total value of assets under management to the relevant de minimis threshold (see Section 7.2.2.)

Simplified registration regime AIFM are required to monitor the assets under management on an ongoing basis.

Simplified registration regime AIFM must notify the CSSF in the event that they exceed the AIFM Law de minimis threshold. When the assets under management exceed the relevant de minimis threshold on more than a temporary basis (i.e., it is likely to continue for more than three months), the AIFM has 30 days to apply for AIFM authorization.

Simplified registration regime AIFM must regularly provide the CSSF with information on the main instruments in which they are trading and on the principal exposures and most important concentrations of the AIF that they manage in order to enable the competent authorities to monitor systemic risk effectively (see Subsection 7.4.21.B.).

7.4.26. Managers of EuVECA and EuSEF

The managers of qualifying European Venture Capital Funds (EuVECA) and of qualifying European Social Entrepreneurship Funds (EuSEF) must be legal persons whose regular business includes managing at least one qualifying European fund and they must be established in the EU/EEA. The manager must benefit from the AIFM Directive exemption applicable to managers who manage portfolios of AIF whose assets under management, in total, do not exceed a threshold of €500 million 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. Such managers are subject to certain registration and regulatory reporting requirements under the AIFM Directive. They may also manage other types of UCIs.

Where the total assets under management subsequently exceed the AIFM Directive threshold of €500 million, the manager (who must obtain authorization under the AIFM Directive) may continue to use the qualifying European fund designations provided it continues to meet requirements of the qualifying European fund regime.

The managers of qualifying European funds are required to meet conduct of business requirements including:• Act honestly, fairly and with due skill, care and diligence in conducting their activities• Apply appropriate policies and procedures for preventing malpractices • Conduct their business activities so as to promote:

• The best interests of the qualifying European funds they manage, the investors in those qualifying European funds, and the integrity of the market

• In the case of EuSEF, the positive social impact of the qualifying portfolio undertakings• Apply a high level of diligence in the selection and ongoing monitoring of investments in qualifying

portfolio undertakings, and, in the case of EuSEF, the positive social impact of those undertakings• Possess adequate knowledge and understanding of the qualifying portfolio undertakings in which

they invest • Treat investors fairly• Ensure that no investor obtains preferential treatment, unless such preferential treatment is

disclosed in the constitutional document of the qualifying fund


The manager of a qualifying European fund may delegate functions to third parties. The delegation must not prevent that manager from acting, or the qualifying venture capital fund from being managed, in the best interests of the investors therein. The manager’s liability towards the qualifying European fund or the investors therein is unaffected by the delegation. The manager cannot delegate functions to the extent that it becomes a letter-box entity.

The managers of qualifying European funds are required to identify and avoid conflicts of interest and, where they cannot be avoided, manage, monitor and disclose those conflicts of interest in order to prevent them from adversely affecting the interests of the qualifying European funds and their investors and to ensure that the qualifying European funds they manage are fairly treated.

The manager of a qualifying European fund must have sufficient own funds and employ adequate and appropriate human and technical resources.

The EuVECA and EuSEF regimes are introduced in Section 3.4.3.3..

7.4.27. Liquidation and insolvency

In the event of a voluntary liquidation of a management company, the liquidator(s) must be approved by the CSSF. The liquidator(s) must provide all guarantees of honorability and professional skills.

The assets of the UCIs under management do not form part of the estate in case of insolvency of the management company and cannot be claimed by the creditors of the management company.

7.5. Cross-border management passport

A. IntroductionBoth Chapter 15 management companies and authorized AIFM have a “passport” permitting them to manage UCIs in other EU/EEA Member States134.

The passport allows a management entity to manage UCIs (UCITS and AIF, respectively) in EU/EEA Member States other than their home Member State (“host” Member States) either through the “free provision of services” or the establishment of a branch.

The passport also allows a UCITS management company to perform the other activities for which it has been authorized in its home Member State in other EU/EEA Member States (e.g., providing discretionary portfolio management or investment advice).

The management passport offers asset management groups flexibility at two levels:• ► The management entity appointed to manage the UCIs: The passport is an opportunity

for management companies to manage UCIs cross-border, both intra-group and as a third party

• ► The service providers appointed by the management company (see Section 10.2.1.)

The management company passport does not mean additional flexibility with regard to the choice of depositary, which must be in the home Member State of the UCI.

The host Member State may not make the free provision of services, or the establishment of a branch, subject to any authorization requirement and cannot impose additional requirements on the management entity in relation to the matters covered by the relevant Directive – i.e., UCITS Directive or the AIFM Directive.

134 ►The European Economic Area (EEA) Member States are the European Union (EU) Member States plus Iceland, Liechtenstein and Norway. The reference to the EEA is clarified in 1.3.1.B.


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The host Member State of a UCI which is managed cross-border cannot, for example, require the performance of activities, such as administration, in the host Member State, or the delegation of an activity or function to an entity in the host Member State.

Any management entity is required to comply with its home Member State rules relating to any delegated activities or functions and, where applicable, the rules of the UCI home Member State regarding the constitution and functioning of the UCI.

The CSSF has clarified that a Chapter 15 management company which manages:• ► 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

• ► UCITS domiciled in other Member States is authorized to delegate the administration of the UCITS to an entity established either in Luxembourg or the Member State of domicile of the UCITS which is authorized to provide administration services and has adequate organization in order to perform the administration

A practical challenge for a management entity or a delegate of the management entity (such as an administrator or risk management service provider) operating cross-border is complying with local requirements of the host Member State in relation to the UCIs it manages. For example, administrators serving UCITS in another Member State will need to comply with the accounting requirements of the UCITS home Member State.

The following Subsection provides an overview of the operation of the management passport and the applicable regulatory requirements, focusing on EU/EEA management entities managing EU/EEA UCIs. The taxation implications of cross-border management are covered in Section 7.6.. This section concludes with a brief overview of the EEA – non-EEA situations: EEA AIFM managing non-EEA AIF and non-EEA AIFM managing EEA AIF.

B. The free provision of servicesThe management entity manages UCIs in the host Member States directly.

Under the free provision of services, a management entity can provide its services cross-border without establishing a presence in the host Member State.

For example, a Luxembourg management company will be able to manage a Polish UCITS, a Luxembourg master UCITS and a Portuguese feeder UCITS.

C. The establishment of a branchThe management entity manages UCIs in host Member States by establishing branches. Branches do not themselves benefit from the management company passport

Branches are a way of having a local presence without establishing a full management entity.

For example, the Luxembourg AIFM may also manage French or Italian AIF by establishing branches in those countries.

For existing management companies, cross-border status can be achieved by converting an existing management company into a branch, or by transferring activities via mergers, acquisitions or liquidations.


UCI

Management company/AIFM

Fundadministrator

Luxembourg

The Luxembourg management entity manages Luxembourg UCIs. A Luxembourg administrator is appointed. The management passport is not used for the management of these UCIs.

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UCI

Other EEA Member State

Luxembourg

Fundadministrator

Luxembourg UCIs are managed cross-border by a management entity established in another EU/EEA Member State through the free provision of services. A Luxembourg administrator is appointed.


Luxembourg


A Luxembourg management entity manages UCIs established in another EU/EEA Member State cross-border through the free provision of services. An administrator in the host Member State is appointed.

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Luxembourg

Luxembourg UCIs are managed cross-border by a management entity established in another EU/EEA Member State through the free provision of services. An administrator in the host Member State is appointed.

Luxembourg


A Luxembourg management entity manages UCIs established in another EU/EEA Member State cross-border through the free provision of services. A Luxembourg administrator is appointed.

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Luxembourg UCIs are managed cross-border by a management entity established in another EU/EEA Member State through a Luxembourg branch. A Luxembourg administrator is appointed.

A Luxembourg management entity manages UCIs established in another EU/EEA Member State cross-border through a branch established in the other EU/EEA Member State. An administrator in the host Member State is appointed.

UCI

Fundadministrator

Branch



Luxembourg

UCI

Fundadministrator

Branch


Luxembourg


D. Possible cross-border management scenariosThe following illustrates some of the possible cross-border management scenarios.

Illustration of possible cross-border management scenarios

UCI

Fundadministrator



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7.5.1. Notification of cross-border management

A UCITS management company or AIFM intending to carry out activities in another Member State must notify its intention to its home Member State competent authority and provide it with the following information:• The host Member State in which it intends to operate or establish a branch• The program of operations, including a description of the activities envisaged• In the case of a UCITS management company:

• The risk management process put in place by the management company• The measures put in place to properly deal with investor complaints and the exercise of their

rights• The program of operations should also cover, where applicable, discretionary portfolio

management mandates• In the case of branches:

• The organizational structure of the branch• The address in the host Member State from which documents may be obtained• Address and names of conducting officers

• In the case of management of UCITS through free provision of services: a description of the main marketing techniques which it intends to use (e.g., regular trips to the host Member State, distance marketing)

The notification should be submitted in a language mutually acceptable to the CSSF and the competent authority of the host Member State.

A UCITS management company must also provide the authorities of the host Member State with a copy of the agreement with the depositary (see 7.5.2.) and information on the delegation arrangements regarding the functions of investment management and administration (unless it has already provided such information to the authorities for the same type of UCITS – see also Section 7.4.15.).

The management entity home Member State competent authority will communicate the information received to the host Member State competent authority within one month in the case of free provision of services and two months in the case of branches. In the case of collective portfolio management, the management entity home Member State competent authority will also include an attestation confirming the management entity’s authorization, including a description of the scope of this authorization and, if applicable, any restriction on the types of UCIs the management entity is authorized to manage135.

In the case of cross-border management of UCITS, the management company can start the free provision of services in the host Member State as soon as the required information has been communicated to the host Member State competent authority. Branches may start business on receipt of a communication from the host Member State competent authority, or the expiration of a further two-month period.

In the case of cross-border management of AIF, the AIFM’s home Member State competent authority must immediately notify the AIFM about the communication. Upon receipt of the notification, the AIFM may start to provide services in the host Member State.

7.5.2. Regulatory requirementsA. Introduction

UCITS management companies and AIFM are subject to the requirements applicable to their setting up and operation outlined in Section 7.4..

In addition, the regulations lay down requirements, and provide clarifications, in relation to the cross-border management of UCITS.

135 The communication in relation to any restrictions on the activity of the management entity is explicitly stated in the UCITS Directive and the 2010 Law; however, as the CSSF may restrict the scope of authorization of an AIFM, it seems reasonable to assume that information on any restriction will be provided to the host Member State also in the case of AIFM.


B. Cross-border management of UCITS The management company (and its branches, if applicable) is subject to its home Member State’s organizational requirements, including, inter alia: • Delegation arrangements and risk management• The implementation of sound administrative and accounting processes• Control arrangements for electronic data processing• Internal control requirements to ensure conflicts of interest are minimized• Reporting

It is the responsibility of the home Member State competent authority to ensure compliance with these matters.

Where the management company manages UCITS cross-border, the host Member State competent authority (i.e., the UCITS home Member State competent authority) must approve the choice of management company. Management companies must ensure that each host Member States’ requirements regarding the constitution and functioning of the UCITS are met, as well as the specific requirements of the UCITS’ fund rules or instruments of incorporation, prospectuses and offering documents. The activities relating to the constitution and functioning of a UCITS include:• Set up and authorization• Issuance and redemption of shares or units• Investment policies and limits, including the calculation of the global risk exposure and leverage• Borrowing, lending and short selling restrictions• Valuation of assets and accounting• Calculation of the issue and redemption price, the NAV computation errors and related investors

compensation• Distribution and reinvestment of income• Disclosure and reporting requirements of the UCITS, including the prospectus, KII and periodic

reports• Marketing arrangements• Relationship with shareholders or unitholders• Merging and restructuring of the UCITS• Dissolution and liquidation of the UCITS• Content of the shareholder or unitholder register, where applicable• Authorization and supervision fees of the UCITS• Exercise of the shareholders’ voting rights

In addition, the UCITS home Member State competent authority must approve the fund rules or instruments of incorporation, and the choice of depositary. The depositary must either have its registered office or be established in the UCITS home Member State.

The management company and depositary must enter into a written agreement on the flow of information between them to enable the depositary to carry out its duties. The minimum content of the agreement is covered in Section 7.4.16..

When delegating activities or functions to a third party, the management company must perform due diligence to establish whether the third party is qualified and capable of undertaking the activity or function in question. The delegation is subject to the requirements of the home Member State of the management company. The management company must verify that the third party fulfills all the organizational and conflicts of interest requirements related to the delegated activity or function, and monitor its compliance with these requirements. Such delegation does not affect the management company’s and depositary’s liability with respect to the activity delegated by the management company (see also Section 7.4.15.).

The management company must implement procedures and arrangements to enable the host Member State to monitor the UCITS’ compliance with the rules under its responsibility. The depositary must make available to the UCITS home Member State competent authority, on request, all the information which it has obtained during the exercise of its duties which is necessary for the authority to perform its supervisory duties in relation to the UCITS.


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7.5.3. Third countries

A. IntroductionFurther situations which are relevant from a cross-border management perspective include EEA AIFM managing non-EEA AIF and non-EEA AIFM managing EEA AIF and non-EEA AIFM marketing EEA and non-EEA AIF.

The extension of the “passport” regimes to non-EEA AIF and non- EEA AIFM is dependent on ESMA issuing a positive opinion on the functioning of the passport for EU AIFM marketing EU AIF (which is expected in the first half of 2015) and the European Commission adopting the required delegated act in the light of ESMA’s advice.

Marketing of AIF is covered in Chapter 14.

B. EEA AIFM managing non-EEA AIFIn summary, the provisions of the AIFM Directive apply to the AIFM in relation to the management of non-EU AIF.

EEA AIFM may manage non-EEA AIF which are not marketed in the EEA if the following conditions are fulfilled:• ► The EEA AIFM complies with all of the relevant requirements of the AIFMD except the

requirements on depositary (see Chapter 11) and annual report (see Section 12.5.2.) in respect of those AIF

• ► There must be appropriate cooperation arrangements between the EEA AIFM home Member State competent authority and the supervisory authority of the non-EEA AIF third country, to ensure at least an efficient exchange of information (see Section 8.2.2.C.)

C. Non-EEA AIFM managing EEA AIFNon-EEA AIFM may continue to manage the EEA AIF, subject to national requirements, until the implementation of the management and product “passports” for non-EU AIFM.

Following introduction of the passports for non-EEA AIFM, a non-EEA AIFM wishing to benefit from the passport will have to comply with the requirements of the AIFM Directive and receive prior authorization from the competent authority of an EEA “Member State of reference” if it intends to:• ►Manage EEA AIF (following the phasing in of the passport for non-EEA AIFM). Authorized

non-EEA AIFM may manage AIF in their Member State of reference once they are authorized in that Member State. They may also manage AIF in EEA Member States other than their Member State of reference. The procedures to be followed are similar to those applicable to EEA AIFM intending to manage an AIF established in another Member State

• Market the EEA and/or non-EEA AIF they manage in the EEA with a passport (once the passport has been phased in for non-EEA AIFM – see Section 14.5.3.)

To obtain such authorization in an “EEA Member State of reference”, the AIFM must comply with the requirements of the AIFM Directive or equivalent rules.

The “Member State of reference” is determined in accordance with a complex series of rules. In summary, it is generally the Member State where the applicant AIFM carries out most management or marketing. The non-EEA AIFM cannot select its “Member State of reference”.

The following conditions must also be met:• The non-EEA AIFM must appoint a legal representative in the Member State of reference,

which will, alongside the AIFM itself, have the role of a contact person for investors and EEA authorities. The legal representative must also jointly perform with the AIFM the compliance functions relating to the management and marketing activities of the AIFM under the AIFM Directive


• There must be appropriate cooperation arrangements between the Member State of reference competent authority, EEA AIF competent authority (if relevant) and the non-EEA AIFM supervisory authority at least for efficient exchange of information (see Section 14.5.3.)

• The non-EEA AIFM country must not be listed as a non-cooperative country and territory (NCCT) by the Financial Action Task Force (FATF)136

• The non-EEA AIFM country must have signed an Organisation for Economic Co-operation and Development (OECD) Model Article 26 compliant tax convention137 with the AIFM Member State of reference, and any other Member State in which the non-EU AIF will be marketed

• The effective exercise by the competent authority of its supervisory functions must neither be prevented by laws, regulations or administrative provisions of the third country governing the AIFM, nor by limits on the supervisory and investigatory powers of the third-country regulator

7.6. Expenses and taxation of management entities

7.6.1. Introduction

This Section covers:• The formation and operating expenses incurred by management entities• The taxation of Luxembourg management entities

Advisory companies are also covered in this Section.

Management companies are commercial companies, therefore they are subject to normal corporate taxes in Luxembourg.

Fees which management companies are required to pay to the CSSF in relation to their application for authorization and ongoing supervisory are covered in Section 13.2..

7.6.2. Expenses

Formation expenses of a Luxembourg management entity, or a Luxembourg general partner, excluding own funds and professional liability cover (see Section 7.4.4.), may include the following:• Notary fees• Legal fees• Advisory fees relating to initial structuring and product marketing• CSSF initial management company authorization fee: €5,000 or €10,000 in the case of a UCITS

management company providing discretionary portfolio management services• Formation expenses of UCIs they manage, or a portion thereof (if applicable) (see Section 13.2.1.)

Ongoing expenses of a Luxembourg management entity, or a Luxembourg general partner, may include the following: • Staff costs (e.g., wages, pensions, benefits, social security)• Office-related costs (e.g., rent, furniture)• IT infrastructure costs (e.g., hardware, software, maintenance, internet and telephone)• Legal and audit fees• Directors fees and expenses• Accounting fees


137 Article 26 of the OECD Model Tax Convention creates an obligation to exchange information that is foreseeably relevant to the correct application of a tax convention as well as for purposes of the administration and enforcement of domestic tax laws of the contracting states.


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• Insurance• CSSF annual fees for a management company: €15,000; €20,000 for a UCITS management

company providing discretionary portfolio management services, plus €2,000 for each subsidiary• UCI management-related costs (if applicable) (see Section 13.2.2.)• UCI reorganization costs (if applicable)

7.6.3. Registration duty Luxembourg companies are subject to a registration duty of €75 at incorporation and in case of:• Modification of the articles of incorporation• Transfer of the effective place of management or registered office to Luxembourg

In the case of management companies of single common funds, although the registration duty is payable by the management company, it may be charged to the common fund.

7.6.4. Annual taxation

A. GeneralLuxembourg resident commercial companies are fully taxable entities. The taxable worldwide income is subject to corporate income tax plus an employment fund surcharge and municipal business tax. The aggregate tax rate is currently 29.22% in Luxembourg City. Companies are subject to the annual Luxembourg net worth tax (NWT) at a rate of 0.5% on the adjusted net asset value (the “unitary value”). This net worth tax, however, under certain conditions, can be credited against the corporate income tax due.

All Luxembourg resident entities in corporate form which are subject to Luxembourg corporate income tax and whose net assets do not consist of more than 90% of financial assets, transferable securities, bank deposits, receivables held against related parties/companies in whom the corporation holds participation and shares or units held in a tax transparent entity are subject to a flat annual minimum corporate income tax of €3,000 (plus contribution to employment fund). Luxembourg resident entities in corporate form which do not meet the above conditions are subject to a variable annual minimum corporate income tax which ranges from €500 to €20,000 (plus contribution to employment fund), depending on the balance sheet total as at the financial year end.

It is not possible to reduce the minimum tax by applying certain available domestic tax credits (e.g., tax credits for professional training, hiring of unemployed, or venture capital investments).

B. Management companies of a single common fundThe Luxembourg tax authorities have clarified that all Luxembourg management companies, including management companies managing a single common fund, are considered as fully taxable entities.

C. Tax regime for carried interestThe Luxembourg AIFM law defines “carried interest” as a share in the profits of the AIF accrued to the AIFM as compensation for the management of the AIF (See Section 13.3.5.2.).

D. VATManagement services provided to UCIs, including AIF, are VAT exempt (See Section 13.4.).


7.6.5. Dividends and interest

For commercial companies, withholding tax (WHT) on dividends amounts to 15% of the gross amount138. Under Luxembourg domestic law, a full WHT exemption applies to dividends if they are paid to qualifying entities established in EU/European Economic Area (EEA) Member States, Switzerland or a country with which Luxembourg has entered into a double taxation treaty (DTT) and if certain conditions are met. Management or advisory companies are subject to the normal authorization procedures for paying interim dividends and are also required to create a legal reserve. The interim dividend authorization procedures include specific authorization in the articles of association and the preparation of interim financial statements. The independent auditor must issue a report stating whether the conditions of the 1915 Law139 relating to the payment of interim dividends have been satisfied. The legal reserve requirement is 5% of net profit until the accumulated reserve equals 10% of subscribed capital.

Luxembourg does not levy any WHT on interest payments made by Luxembourg resident companies except in very specific cases (e.g., if interest is paid to Luxembourg resident individuals, if interest is paid on specific profit participating bonds or if the provisions of the Luxembourg legislation implementing the EU Savings Directive apply (See Section 13.3.4.1.)).

7.6.6. Dissolution

Liquidation proceeds distributed by normal taxable companies are not subject to WHT in Luxembourg. Nevertheless, the liquidation triggers the realization of all the assets of the company; consequently the liquidation profit will include all unrealized capital gains and will be subject to corporate income tax.

7.6.7. Management passport

A UCITS management company or AIFM may manage UCIs in other EU/EEA Member States. A UCITS management company may also perform the other activities for which it has been authorized in its home Member State in other EU/EEA Member States (see Section 7.5.). However, a careful evaluation is recommended in order to understand the tax implications before deciding to make use of the management company passport.

The main types of tax implications include:• Transformation: one-off tax cost of the restructuring:

• Taxation related to the transfer of the management entity’s business (client base, etc.) to another management entity (cross-border or within the same country)

• Taxation issues relating to the merger, relocation or liquidation of a management entity, or conversion into a branch

• Transfer pricing including cross-border transfer pricing• Payroll taxes and expatriation

• Ongoing direct and indirect tax impacts for the management entity and group going forward:• Corporate taxation• Access to DTTs • Group tax filing requirements• VAT on services provided to, and by, the management entity (see Section 13.4.)

138 A 17.65% rate applies on the net dividend if the withholding tax is not charged to the recipient.139 Article 72-2 of the Law of 10 August 1915 on commercial companies, as amended


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• The direct and indirect tax impacts on the UCIs and their investors, inter alia including:• Tax residency of UCIs: the management company passport may raise the question of the tax

residency and treatment of a UCI established under the law of an EU/EEA Member State and managed by a management company located in another EU/EEA Member State. In certain cases, this could lead to one or more of the following:• Taxation of the UCI income in the Member State of the management entity• Additional WHT on distribution from the UCI• Taxation of unrealized gains in the hands of the investorThe 2010 Law and the AIFM Law have introduced provisions into Luxembourg tax law whereby UCIs established under foreign law whose place of effective management or central administration is in Luxembourg are exempt from corporate income tax, municipal business tax and net worth tax in Luxembourg. With regard to Luxembourg common funds, and in particular common funds managed cross-border, the 2010 Law clarifies that the management regulations are subject to Luxembourg law (see also Section 13.3.7.).

• Access to DTTs (see also Section 13.3.3.1.)• VAT on services provided to the UCIs by the management entity and the service providers (see

Section 13.4.)

234 | 8. Portfolio management and advice

8. Portfolio management and advice


8. Portfolio management and advice | 235

8.1. Introduction

140 The UCITS Directive refers to “investment management”; although the term is not defined, it is generally considered to refer to portfolio management.The AIFM Law defines “investment management” functions which an AIFM is required to perform when managing alternative investment funds (AIF) as:• Portfolio management• Risk managementThis Chapter focuses solely on portfolio management.For further information, see Section 2.3..

141 The MiFID definitions of “portfolio management” and “investment advice” are covered in Section 8.5.1..142 In this Chapter, we use the term “portfolio manager” rather than “investment manager”.143 Idem.

This chapter focuses on the portfolio management (often referred to as “investment management”140 141) and investment advice provided in relation to Luxembourg UCIs and by Luxembourg management entities. It covers: • The portfolio management function, and the delegation of that function to third parties• The provision of investment advice, and the investment adviser• The entities which may provide the services of portfolio management and investment advice in:

• The EU, including Luxembourg• Third countries

Portfolio management is a key function of the management company, or of the UCI itself in case of a self-managed investment company (see also Section 7.2.). In practice, management companies and self-managed investment companies often delegate portfolio management of the UCI, or a compartment thereof, to a portfolio manager142 in order to ensure more efficient conduct of their business. The portfolio manager of a Luxembourg UCI can be a Luxembourg, EU or non-EU entity; it must be regulated.

The portfolio manager (or the management company, or self-managed investment company where the portfolio management function has not been delegated) may seek investment advice143 from one or more investment advisers in order to benefit from their specialist knowledge. The investment adviser to a Luxembourg UCI can be a Luxembourg, EU or non-EU entity or person; in some cases, it does not have to be regulated (see Section 8.5.).

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UCI with a management company

UCI

Management company


Management company

UCI

Portfolio manager


Portfoliomanager

Management company

UCI

Portfoliomanager


Investmentadviser

Portfoliomanager

Investmentadviser

Management company

UCI

Investmentadviser


Investmentmanager

Mod

el 1

Mod

el 2

Mod

el 3

Mod

el 4

The management company or self-managed investment company has neither delegated portfolio management nor appointed an investment adviser. In practice, this model is rarely implemented.

The management company or self-managed investment company has delegated portfolio management to a portfolio manager. The portfolio manager has not appointed an investment adviser.

The management company or self-managed investment company has delegated portfolio management to a portfolio manager, which in turn has appointed an investment adviser.

The management company or self-managed investment company has not delegated investment management, but has appointed an investment adviser.


The following is an overview of the main possible models:

Models for the provision of portfolio management and investment advice


8.2.1. Portfolio management function

A. Scope of portfolio managementPortfolio management involves managing the investment, divestment and reinvestment of the assets of the UCI, or one or more of its compartments.

There is no single definition of portfolio management, or description of portfolio management activities, in the relevant regulation.

A key element of the portfolio management function is generally decision making in relation to the portfolio of assets of the UCI. Such decisions may relate, for example, to:• ► Buying, selling, subscribing, exchanging, redeeming, holding transactions or the

underwriting of a particular financial instrument or other type of asset• ► Whether or not to exercise any right conferred by a particular financial instrument to buy,

sell, subscribe for, exchange, or redeem a financial instrument

Investment decisions should be made on the basis of appropriate diligence covering the selection and ongoing monitoring of investments.

In making investment decisions, the entity performing the portfolio management function will be required to comply, inter alia, with:• ►The applicable regulatory requirements, including the investment, diversification, borrowing and

concentration rules applicable to the UCIs (see Chapter 5)• ►The prospectus or issuing document including:

• The investment objective (e.g., capital growth or income)• Investment policy (e.g., specialization in geographical or industrial sectors)• Any limitations on the investment policy

• ► The investment strategy – the general indications concerning the strategic asset allocation of the UCI and the investment techniques which are needed to adequately and effectively implement the investment policy which may include, for example:• The main categories of assets in which the UCI may invest• Any industrial, geographic or other market sectors or specific classes of assets which are the

focus of the investment strategy• A description of the UCI’s borrowing or leverage policy (see Chapter 9)

• ► Any specific asset allocation criteria (e.g., diversification) set by the management entity144 • ► The internal procedures for the undertaking of investment decisions• ► The risk limits laid down by the management entity (see Chapter 9)

From a broader perspective, portfolio management may be considered to include, inter alia, the following activities:• ► Setting the investment objectives• ► Defining the investment strategy• ► Executing the investment strategy, including making investment decisions• ► Monitoring the performance of the strategy• ► Developing guidelines or recommendations in relation to the subsequent execution of the

strategy• ► Overseeing and reviewing the implementation of the investment strategy

8.2. Portfolio management

144 In case of an investment company which has not appointed a management entity, the Board of Directors of the UCI itself.

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• ► Defining and implementing any subsequent modification of the internal procedures for the undertaking of investment decisions, the asset allocation criteria or the investment strategy, taking into account, for example, the performance of the strategy, the market environment or investor demand

• ► Defining the roles and responsibilities of the managers of the individual assets of the UCI, and the limits thereto (e.g., property managers who may, within certain limits, make decisions and sign contracts relating to leases, maintenance and repairs)145

The portfolio management function may, for example, consist of one or a combination of:• ► The Board of Directors of the management entity, or of the UCI itself in the case of an

investment company which has not appointed a management entity• ► Investment committees of a management entity. Investment committees may be composed

of members of the Board of Directors, senior management, professionals representing the portfolio management function and external professionals

• ► The portfolio management function of the management entity • ► Delegates (see Section 8.2.2.)

Portfolio managers often use the services of advisors to support them in their role. Outside the formal definition of investment advisors (see Section 8.3.), advisors may, for example:• ► Provide advice in relation to investment decisions on the assets of the UCI• ► Perform due diligence activities in relation to the selection and ongoing monitoring of

investments under the responsibility of the entity performing the portfolio management function

• ► Provide services in relation to the assets of the UCI (e.g., property managers)• ► Formulate forecasts and perform analyses concerning the investment’s contribution to the

UCI’s portfolio composition, liquidity, and risk and reward profile • ► Provide research and analysis in support of the portfolio manager’s compliance with the

applicable requirements, such as those on:• ► Adequate knowledge and understanding of the assets in which the UCI are invested• ► Best execution of decisions to deal• ► Exercise of voting rights

In the case of AIF managed by an authorized AIFM and authorized internally managed AIF, the AIFM cannot invest in a particular type of asset for the first time unless an appropriate valuation methodology or methodologies have been identified for that specific type of asset (see Section 9.5.2.).

The role of senior management of a UCITS management company or AIFM146 in relation to the oversight of portfolio management is outlined in Section 7.4.7.. The functional and hierarchical separation of portfolio management and risk management is outlined in Sections 9.2.5. and 9.3.5..

An AIFM is required to have rules on investment on its own account (see Section 7.4.18.).

Management companies and AIFM are also subject to general rules of conduct (see Section 7.4.14.), as well as specific provisions which are relevant to their portfolio management activity, such as those on due diligence (including, where relevant, business plan), best execution of decisions to deal, placing of order with other entities, handling of orders and exercise of voting rights, which are described in the following sections.

Requirements on recording of portfolio transactions are covered in Section 10.2.4..

145 Those responsible for the management of the individual assets of the UCI, such as property managers, the Boards and management of portfolio companies, are generally considered to fall outside the scope of portfolio management.



B. Due diligenceChapter 15 management companies and AIFM are required to perform appropriate due diligence with respect to the portfolio management activity.

The general due diligence requirements are summarized in the following table:

Due diligence requirements applicable to management entities

UCITS managed company AIFM

Overall due diligence

Management companies must ensure a high level of diligence in the selection and ongoing monitoring of investments, in the best interests of the UCITS and the integrity of the market.

AIFM must apply a high standard of diligence in the selection and ongoing monitoring of investments.

Knowledge Management companies must have adequate knowledge and understanding of the assets in which the UCITS are invested.

AIFM must ensure that they have adequate knowledge and understanding of the assets in which the AIF is invested.

Procedures Management companies must establish written policies and procedures on due diligence and implementing effective arrangements for ensuring that investment decisions on behalf of the UCITS are carried out in compliance with the objectives, investment strategy and risk limits of the UCITS.

They must ensure that investment decisions are taken on the basis of reliable, up-to-date information, and quantitative research.

Where appropriate, taking into account the nature of a foreseen investment, management companies are required to formulate forecasts and perform analyses concerning the investment’s contribution to the UCITS’ portfolio composition, liquidity, and risk and reward profile before carrying out the investment. These analyses must be carried out on the basis of reliable and up-to-date information, both quantitative and qualitative.

AIFM must establish, implement and apply written policies and procedures on due diligence and implement effective arrangements for ensuring that investment decisions on behalf of the AIFs are carried out in compliance with the objectives, the investment strategy, the risk profile and, where applicable, the risk limits of the AIF. These policies and procedures on due diligence must be regularly reviewed and updated.

AIFM must ensure that the risks associated with each investment position of the AIF and their overall effect on the AIF’s portfolio can be properly identified, measured, managed and monitored on an ongoing basis, including through the use of appropriate stress testing procedures (see also Section 9.3.).

C. Business planWhen investing in assets of limited liquidity and where such investment is preceded by a negotiation phase, AIFM are required to:• ► Set out and regularly update a business plan consistent with the duration of the AIF and market

conditions• ► Seek and select possible transactions consistent with the business plan • ► Assess the selected transactions in consideration of opportunities, if any, and overall related

risks, all relevant legal, tax-related, financial or other value affecting factors, human and material resources, and strategies, including exit strategies

• ► Perform due diligence activities related to the transactions prior to arranging execution• ► Monitor the performance of the AIF with respect to the business plan

145 Those responsible for the management of the individual assets of the UCI, such as property managers, the Boards and management of portfolio companies, are generally considered to fall outside the scope of portfolio management.


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D. Best execution of decisions to dealManagement companies and, where best execution is relevant, AIFM should make all efforts to achieve, on a consistent basis, the best possible result when executing investment orders on behalf of the UCI, taking into account price, costs, speed, likelihood of execution and settlement, size and nature of the order, or any other consideration relevant to the execution of the order. The relative importance of such factors should be determined by reference to the following criteria:• ► The objectives, investment policy and risks specific to the UCI• ► Characteristics of the order• ► Characteristics of the instruments involved• ► Characteristics of the execution venues

Management entities are required to establish and implement an execution policy. A UCITS management company’s execution policy should be approved by the Board of Directors of the investment company.

Management entities must monitor the effectiveness of their arrangements and policy for the execution of orders with a view to identifying and, where appropriate, correcting any deficiencies, and review their execution policy on an annual basis or whenever material change occurs that affects best execution.

Management entities must be able to demonstrate that they have executed orders on behalf of the UCIs in accordance with their execution policy.

In practice, a summarized version of the best execution policy is often provided to investors on their initial subscription.

An AIFM which can demonstrate that there is no choice of execution venue is not required to comply with these requirements.

E. Placing of orders to deal with other entitiesManagement companies and AIFM should act in the best interest of the UCIs they manage when placing orders to deal on behalf of the UCIs with other entities for execution.

Management companies must take all reasonable steps to obtain the best possible result for the UCIs, taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order.

They should establish and implement a policy to enable them to comply with these obligations; the policy should be reviewed on an annual basis, or whenever material change occurs.

Management entities must be able to demonstrate that they have placed orders on behalf of the UCIs in accordance with their policy.

An AIFM which can demonstrate that there is no choice of execution venue is not required to comply with these requirements.

F. Handling of ordersManagement entities are required to establish and implement procedures and arrangements which provide for the prompt, fair and expeditious execution of portfolio transactions on behalf of the UCIs.

Procedures and arrangements implemented by management companies must meet the following conditions:• ► Orders executed must be promptly and accurately recorded and allocated• ► Comparable UCI orders must be executed sequentially and promptly unless this is impractical or

the interests of the UCI require otherwise

Management entities can aggregate an order with an order of another UCI, another client or for its own account only if:• ► It must be unlikely that the aggregation of orders will work to the overall disadvantage of any

UCI or client whose order is to be aggregated• ► An order allocation policy must be established and implemented providing for the fair allocation

of aggregated orders


G. Exercise of voting rightsFor the exercise of voting rights held in the portfolio, management entities must:• ► Develop adequate and effective strategies for identifying when and how voting rights held in the

portfolio are exercised, to the exclusive benefit of the UCI and its investors• ► Ensure monitoring of relevant corporate events• ► Ensure voting rights are exercised in accordance with the objectives and investment policy of

the UCI• ► Prevent or manage conflicts of interest resulting from the exercise of voting rights

The CSSF has clarified that in the case of UCITS, the strategy for the exercise of voting rights may be established at the level of the management company, the group to which it belongs or according to international standards.

Information on exercise of voting rights to be made available to investors by management entities

UCITS management company(see Section 12.4.1.2.)

AIFM(see Section 12.4.2.4.)

A summary of the strategies for the exercise of voting rights

In any case On request

Details of the actions taken on the basis of the strategies

On request On request

8.2.2. Delegation of the portfolio management function

A. IntroductionManagement companies and AIFM147 often delegate the portfolio management function of the UCI, or a compartment of the UCI.

The delegate portfolio manager should have experience and knowledge in the area of investment of the UCI (e.g., sectors, asset classes, geographical regions), and often has a track record in the management of UCIs with similar characteristics.

Portfolio management is a multi-faceted function which may be delegated in part or in whole. The multi-faceted nature of portfolio management is covered in Section 8.2.1..

Delegation of the portfolio management function is subject to the general provisions on delegation. For example: the delegation arrangement must take the form of a written agreement between the delegate and the management entity, or the UCI itself in case of a self-managed investment company. A management entity cannot delegate to the extent that it becomes a letter box entity.

The general provisions on delegation are covered:• For management entities (Chapter 15 management companies, AIFM and Chapter 16

management companies) in Section 7.4.15.• For 2010 Law Part II UCI investment companies in Section 3.4.1.7.• For SIFs in Section 3.4.2.4.

A portfolio manager will typically be remunerated in the form of a portfolio management fee paid out of the UCI’s assets (see also Section 13.2.2.).


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As well as the general provisions on delegation, specific provisions apply to the delegation of portfolio management, outlined hereunder.

B. Chapter 15 management companies and self-managed UCITSWhen a UCITS management company148 delegates its portfolio management function with a view to conducting operations in a more efficient manner, the following specific provisions apply:• ► The mandate may only be given to authorized and supervised undertakings. The delegate

must be authorized under its national law and, where relevant, any other law applicable to the services provided. It must be subject to ongoing supervision, the aim of which is to protect investors

• ► Where the portfolio management related mandate is given to a third country undertaking, there must be appropriate cooperation arrangements in place between the CSSF and the supervisory authority of such country

• ► A mandate with regard to the core function of portfolio management may not be given to the depositary, or to any other undertaking which may have interests that conflict with those of the management company or the investors. This provision does not prohibit the delegation of a portfolio management mandate to a company belonging to the same group as the depositary. In such circumstances, the CSSF will only authorize the delegation of duties where it has evidence of the safeguards for protecting the interests of the management company and the investors

• ► The delegate must comply with the investment policy and limits laid down in the prospectus, as well as the investment diversification criteria set by the management company. As a result, the delegation agreement must indicate the investment policy and restrictions applicable to the UCITS (or one or more compartments UCITS thereof), as well as the specific asset allocation criteria. These provisions may be incorporated within the agreement by means of a cross-reference to the relevant section of the prospectus, without prejudice to additional instructions which may be given by the management company. When there are modifications to any of these elements, the delegation agreement must be updated accordingly

• ► The management company must ensure that investment decisions are taken on the basis of reliable, up-to-date information, quantitative and qualitative research and executed according to the investment objectives and strategy and the risk restrictions

• ► The identity of entities to which the investment management function has been delegated must be disclosed in the prospectus of the UCITS concerned

Where a counterparty has discretion over the composition or management of the UCITS’ investment portfolio or of the underlying of a financial derivative instrument (as may be the case when the UCITS enters into a total return swap or other financial derivative instruments with similar characteristics), the agreement between the UCITS and the counterparty should be considered as a portfolio management delegation arrangement and should comply with the UCITS requirements on delegation.149

C. AIFMWhen an AIFM150 enters into a delegation agreement which concerns portfolio management, the delegation must be in accordance with the investment policy of the AIF. The delegate must be instructed by the AIFM how to implement the investment policy, and the AIFM must monitor whether the delegate complies with it on an ongoing basis.

When an AIFM delegates its investment management functions of portfolio management or risk management functions, the following specific provisions apply:• ► The delegates must be undertakings which are authorized or registered for the purpose of asset

management and subject to supervision or, where that condition cannot be met, only subject to prior approval by the CSSF. The following entities are deemed to be authorized or registered for the purpose of asset management and subject to supervision:• AIFM• UCITS management companies• Investment firms authorized under MiFID151 to perform portfolio management• Credit institutions which are authorized to perform portfolio management• Third country entities authorized or registered for the purpose of asset management and

effectively supervised by a competent authority in those countries

148 In case of a self-managed UCITS investment company, the Board of Directors of the UCITS itself.149 ESMA’s Guidelines on ETFs and other UCITS issues, as implemented by CSSF Circular 13/559.150 In case of an internally managed AIF, the Board of Directors of the AIF itself.151 Markets in Financial Instruments Directive (MiFID), Directive 2004/39/EC, as amended.


• ► Where the delegate is a third-country undertaking, cooperation between the CSSF and the supervisory authority of the undertaking must be ensured. The cooperation agreement must, inter alia, allow the CSSF to obtain on request the relevant information and documents necessary to carry out their supervisory tasks and carry out on-site inspections

• ► No delegation of portfolio management or risk management shall be conferred on: • The depositary or a delegate of the depositary• Any other entity whose interests may conflict with those of the AIFM or the investors of the

AIF152, unless such entity has functionally and hierarchically separated the performance of its portfolio management or risk management tasks from its other potentially conflicting tasks153, and the potential conflicts of interest are properly identified, managed, monitored and disclosed to the investors of the AIF154

In July 2013, the CSSF announced that it had signed Memoranda of Understanding (MoU) with supervisory authorities of third countries, meeting the requirements of the AIFM Directive for cooperation agreements, including supervisory authorities of the following countries and territories:

Albania Cayman Islands Kenya Pakistan

Australia Guernsey Macedonia (FYROM) Singapore

Bahamas Hong Kong Malaysia Switzerland

Bermuda India Maldives Tanzania

Bosnia Herzegovina Isle of Man Mauritius Thailand

Brazil Israel Mexico Turkey

British Virgin Islands Japan Montenegro United Arab Emirates

Canada Jersey Morocco United States

The AIFM is not permitted to delegate 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. When assessing the extent of delegation, the CSSF is required to assess the entire delegation structure taking into account not only the assets managed under delegation but also the qualitative criteria; these are outlined in Subsection 7.4.15.D..

148 In case of a self-managed UCITS investment company, the Board of Directors of the UCITS itself.149 ESMA’s Guidelines on ETFs and other UCITS issues, as implemented by CSSF Circular 13/559.150 In case of an internally managed AIF, the Board of Directors of the AIF itself.151 Markets in Financial Instruments Directive (MiFID), Directive 2004/39/EC, as amended.

152 The criteria to assess whether a delegation conflicts with the interests of the AIFM or the investor in the AIF must at least include: • Where the AIFM and the delegate are members of the same group or have any other contractual relationship, the

extent to which the delegate controls the AIFM or has the ability to influence its actions• Where the delegate and an investor in the relevant AIF are members of the same group or have any other

contractual relationship, the extent to which this investor controls the delegate or has the ability to influence its actions

• Criteria similar to those outlined in Subsection 7.4.18.C. applied to the delegate153 ►The portfolio or risk management function may be considered to be functionally and hierarchically separated from

other potentially conflicting tasks only where the following conditions are satisfied:• Persons engaged in portfolio management tasks are not engaged in the performance of potentially conflicting tasks

such as controlling tasks• Persons engaged in risk management tasks are not engaged in the performance of potentially conflicting tasks such

as operating tasks• Persons engaged in risk management functions are not supervised by those responsible for the performance of

operating tasks• The separation is ensured throughout the whole hierarchical structure of the delegate up to its governing body and

is reviewed by the governing body and, where it exists, the supervisory function of the delegateSee also Section 9.3.5..

154 ►Potential conflicts of interest are deemed properly identified, managed, monitored and disclosed to the investors of the AIF only if:• The AIFM ensures that the delegate takes all reasonable steps to identify, manage and monitor potential conflicts of

interest that may arise between itself and the AIFM, the AIF or the investors in the AIF. The AIFM shall ensure that the delegate has procedures in place corresponding to those required of AIFM (see Section 7.4.18.)

• The AIFM ensures that the delegate discloses potential conflicts of interest as well as the procedures and measures to be adopted by it in order to manage such conflicts of interest to the AIFM which shall disclose them to the AIF and the investors in the AIF (see Section 12.4.1.1.).

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D. Chapter 16 management companiesWhen a Chapter 16 management company delegates its portfolio management function with a view to conducting operations in a more efficient manner, the following specific provisions apply:• ► The mandate may only be given to undertakings which are authorized or registered for the

purposes of asset management and subject to prudential supervision• ► In cases of delegation to a third country undertaking subject to prudential supervision, there

must be appropriate cooperation arrangements in place between the CSSF and the supervisory authority of the third country

• ► Where the conditions of the previous bullet points cannot be met, the delegation is subject to the prior approval of the CSSF

• ► A mandate with regard to the core function of investment management cannot be given to the depositary

E. SIFsUnder the SIF Law, as amended, when a SIF or its management company delegates its portfolio management function with a view to conducting operations in a more efficient manner, the following provisions apply:• ► The mandate may only be given to persons or entities which are authorized or registered for the

purpose of asset management and subject to prudential supervision• ► In cases of delegation to a third country undertaking, there must be cooperation arrangements

between the CSSF and the supervisory authority of the third country• ► Where the conditions of the previous bullet points cannot be met, the delegate must be of

sufficiently good repute and sufficiently experienced, and the delegation is subject to the prior approval of the CSSF

• ► Portfolio management functions cannot be delegated to the depositary

8.2.3. Securities and instruments regulatory requirements

A. IntroductionWith respect to investment decisions taken, a management company or AIFM will be required to ensure that regulatory requirements on securities and instruments, where this is relevant to their activity, are complied with, inter alia:• The European Market Infrastructure Regulation (EMIR) requires central counterparty clearing of

standardized derivatives, reporting in relation to all derivatives, and a risk mitigation for non-central counterparty cleared derivatives

• The Short Selling Regulation implements restrictions on uncovered short sales and transparency requirements in relation to significant net short positions

• The Market Abuse Law and the respective implementing measures put in place a harmonized legal framework for the detection and prevention of market abuse, as well as sanctions

• The Takeover Bids Directive and the respective national Laws implementing the Directive cover takeover bids for securities admitted to trading on a regulated market

At the time of writing, transition to EMIR implementation was ongoing; the other requirements were already applicable.

The requirements to be met in relation to stock exchange listing are covered in Chapter 15.

B. European Market Infrastructure Regulation The Regulation on OTC derivatives, central counterparties and trade repositories (also known as the European Markets Infrastructure Regulation – EMIR) applies, inter alia, to all financial counterparties in the EU that enter into derivatives contracts155. It requires central counterparty clearing standardized derivatives, reporting in relation to all derivatives, and a risk mitigation for non-central counterparty cleared derivatives.

155 ►It also applies indirectly to non-EU counterparties trading with EU parties.


The following table outlines key elements of EMIR and indicative deadlines for implementation:

Key elements of EMIR and implementation timetable

Summary of requirements Indicative implementation deadlines

Clearing obligation

Over-the-counter (OTC) derivative contracts that are standardized (i.e., declared subject to a clearing obligation) must be cleared through central counterparties (CCPs)

The first clearing obligation will enter into force after two criteria are met:• At least a CCP is authorized or recognized

under EMIR to clear a certain class of derivatives

• The relevant technical standards for that class of derivatives have been adopted by the European Commission, on the basis of draft standards submitted by ESMA

Existing CCPs have until 15 September 2013 to apply for authorization. Once a CCP has been authorized under EMIR to clear a certain class of OTC derivatives, ESMA will, within six months, determine whether the classes of OTC derivatives that the CCP is able to clear should be subject to the clearing obligation and, if so, will specify the date of entry into force of such obligation, including any phase-in. The first clearing obligation could enter into force very soon after the first authorizations or recognitions of CCPs under EMIR.

Reporting obligation

OTC derivative contracts and any modification or termination, must be reported to trade repositories. Trade repositories are a new type of entity created under EMIR.

The reporting obligation for OTC derivative contracts begins at the earliest on:• 23 September 2013 for credit and

interest rate derivatives (if a trade repository has been registered under EMIR for these classes of derivatives before 25 June 2013)

• 1 January 2014 for other classes of derivatives (if a trade repository has been registered under EMIR for these types of classes of derivatives before 1 October 2013)

The EMIR reporting obligation applies to derivative contracts which were entered into before 16 August 2012 and remained outstanding on that date, and those entered into on or after 16 August 2012.

Risk-mitigation techniques for OTC derivative contracts not cleared by a CCP

Counterparties entering into OTC derivatives which are not cleared by a CCP are required to:• Ensure that there are appropriate

procedures in place to measure, monitor and mitigate operational counterparty credit risk, including at least:• Timely confirmation, where available,

by electronic means, of the terms of the contract

• Formalized processes to reconcile portfolios, manage the associated risks, resolve disputes and monitor outstanding contracts

• Mark-to-market value outstanding contracts on a daily basis

• Have risk management procedures that require the timely, accurate and appropriately segregated exchange of collateral with respect to OTC derivative contracts

• Hold capital to manage the risk not covered by appropriate exchange of collateral

The regulatory technical standards clarifying operational risk mitigation techniques requirements for non-CCP cleared OTC derivatives enter into force as follows:• Exchange of collateral: from 16 August

2012. The requirements to be met by collateral are laid down in the technical standards

• Operational risk mitigation techniques:• Timely confirmation and contract

valuation: 15 March 2013• Portfolio reconciliation, portfolio

compression, and dispute resolution: 15 September 2013

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C. Short Selling RegulationThe Regulation on short selling and certain aspects of credit default swaps implements restrictions on uncovered short sales and transparency requirements in relation to significant net short positions, as well as additional measures which may be applied in case of exceptional situations.

The following table outlines key elements of the short selling regulation:

Key elements of short selling regulation

Key elements Category Summary of requirements

Restrictions on uncovered short sales

Of shares156 or sovereign debt

A natural or legal person can only enter into a short sale of such securities where:• The person has borrowed the securities, or made provisions

arrangements with similar effect• The person has entered into an agreement to borrow the securities,

or has another enforceable claim for the transfer of ownership of a corresponding number of securities so that settlement can be effected when it is due

• The person has an arrangement with a third party for him to have reasonable expectation that settlement can be effected when it is due

In the case of sovereign debt, where the liquidity of debt falls below a pre-defined threshold, competent authorities may temporarily suspend such restrictions.

Credit default swaps (CDS) in sovereign debt:

A natural or legal person can only enter into a CDS transaction relating to an obligation of a sovereign issuer only where the transaction does not lead to an “uncovered position in a CDS”. A position is considered to be an uncovered position in a CDS when the CDS does not serve to hedge against a long position in the sovereign debt of the issuer, or the risk of decline of the value of sovereign debt where the person holds assets or liabilities the value of which is correlated to the value of sovereign debt. Competent authorities may temporarily suspend such restrictions.

Transparency of significant net short positions

In shares157 There are two types of disclosure: private and public:• Private disclosure (notification to competent authorities) when the net

short position held by an EU established or domiciled natural or legal person in the issued share capital of a company reaches or falls below a threshold of 0.2% of the issued share capital, and further disclosure at incremental thresholds of 0.1%

• Public disclosure when the net short position reaches or falls below 0.5% of the issued share capital, and further disclosure at incremental thresholds of 0.1%

In sovereign debt and credit default swaps (CDS)

Notification to competent authorities whenever the position reaches or falls below the relevant notification thresholds of the Member State concerned or the EU.

Exceptional situations

Where there is a serious threat to financial stability or market confidence in one or more Member States

• Notification or disclosure of net short positions: competent authorities may require notification or public disclosure of net short positions in relation to a specific financial instrument or class of financial instruments

• Notification by lenders in relation to fees: competent authorities may require persons engaged in lending a specific financial instrument or class of financial instruments to notify any significant change of fees requested for such lending

• Restrictions on short selling: competent authorities may prohibit, or impose restrictions on short selling or transactions in financial instruments which confer an advantage in the event of a fall in price or value of another financial instrument

• Restrictions on CDS transactions: competent authorities may limit persons entering into sovereign CDS transactions, or the value of sovereign CDS transactions

• Restrictions on short selling on a significant fall in price: competent authorities may temporarily restrict short selling of financial instruments in case of a significant fall in price during a single trading day on a trading venue

156 This measure covers companies:• Whose shares are admitted to trading on an EU trading venue• Where the principal trading venue of the shares is in the EU

157 ►Idem.


D. Market Abuse LawThe Market Abuse Law158 and the respective implementing measures put in place a harmonized legal framework for the detection and prevention of market abuses, as well as sanctions. The Law implements the Market Abuse Directive159. It:• Sets out factors to be taken into consideration as indicative of market manipulation• Lays down rules for the rapid simultaneous dissemination of privileged information in

all countries where an instrument is admitted for trading on a regulated market without discrimination between investors

• Lays down rules for the establishment of a list of insiders• Obliges managers to notify transactions for their own account• Prohibits insider dealing and market manipulation• Establishes detailed provisions covering those offering investment advice• Introduces the obligation to report suspicious transactions• Provides for penalties for those not respecting the law

See also Subsection 7.4.14.F..

E. TakeoversThe Takeover Bids Directive160 sets out minimum requirements for the conduct of takeover bids for securities of companies where all or some of the securities are admitted to trading on a regulated market, inter alia, in order to protect minority shareholders. The Takeover Bids Directive is implemented in national legislation of the EU Member States. In Luxembourg, the Takeover Bids Directive is implemented by the Takeover Bids Law161.

The Takeover Bids Directive also provides for a ”squeeze-out right“ enabling a majority shareholder to require the remaining minority shareholders to sell him their securities. In summary, the majority shareholder can exercise the ”squeeze-out right“ in situations where he holds more than 95% of the capital carrying voting rights. The squeeze-out right is combined with a ”squeeze-out right“ enabling minority shareholders to require a majority shareholder which holds more than 90% of the capital carrying voting rights to buy their securities following a takeover bid. In Luxembourg, squeeze-outs and sell-outs are covered by the specific Law on squeeze-outs and sell-outs.162

158 Law of 9 May 2006 on market abuse.159 Directive 2003/6/EC of 28 January 2003 on insider dealing and market manipulation (market abuse).160 Directive 2004/25/EC of 21 April 2004 on takeover bids.161 The Law of 19 May 2006 on takeover bids.162 Law of 21 July 2012 on mandatory squeeze-out and sell-out of securities of companies currently admitted or

previously admitted to trading on a regulated market or having been offered to the public.

8.3. Investment advice provided to Luxembourg UCIs

The portfolio manager or, where the portfolio management function has not been delegated, the management company or self-managed investment company, may appoint one or more investment advisers.

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. Investment advisers do not make decisions or intervene in any other way in the implementation of the advice; their activity is limited to providing recommendations.

The investment adviser generally has specialist knowledge and experience in the area of investment of the UCI (e.g., sectors, asset classes, geographical region), and often has experience in advising UCIs with similar characteristics.

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Investment advisers may be regulated (i.e., authorized and supervised) or unregulated. However, EU investment advisers, including Luxembourg investment advisers, which provide advice to third parties in respect of one or more transactions relating to financial instruments163 must be regulated (see also Section 8.5.).

The investment adviser signs an investment advisory agreement with its client and is remunerated in the form of an advisory fee paid out of the UCI’s assets or paid by the management company or portfolio manager.

If the investment adviser is remunerated directly by the UCI, this must be mentioned in the fund documentation (see also Chapter 12); if it is not, then such disclosure is not mandatory. Investment advisers may seek advice from sub-advisers, at their own expense, to assist them in specialist areas.

8.4. Luxembourg portfolio managers and advisers

Luxembourg entities performing portfolio management for Luxembourg UCIs and regulated entities providing investment advice in relation to Luxembourg UCIs are subject to EU regulation as implemented in Luxembourg (see Section 8.5.).

Luxembourg regulated entities that may perform portfolio management or provide investment advice include investment firms, credit institutions, management companies and AIFM (see also Chapter 7).

Investment firms and credit institutions are subject to the Law of 5 April 1993 on the financial sector, as amended (the 1993 Law). The 1993 Law and the related Grand-Ducal Regulation implement, inter alia, Markets in Financial Instruments Directive (MiFID) requirements (see Section 8.5.1.) into Luxembourg legislation. The general regulation of investment firms and credit institutions is beyond the scope of this Technical Guide.

Luxembourg credit institutions benefit from a universal license permitting them to provide all investment services and to perform all investment activities listed in Annex to the 1993 Law (the same list as in MiFID).

In this section, we provide a brief overview of the specific requirements applicable to Luxembourg entities which can provide portfolio management and investment advice.

163 Financial instruments include:• Transferable securities• Money market instruments• Units in collective investment undertakings• Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities,



• Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market or an multilateral trading facility (MTF)

• Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in the previous bullet point, and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognized clearing houses or are subject to regular margin calls.


freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Section, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognized clearing houses or are subject to regular margin calls


8.4.1. Portfolio managers

Luxembourg entities which can provide portfolio management services must be regulated as:• ► Investment firms:

• ► Private portfolio managers• ► Professionals acting for their own account

• ► Credit institutions• ► Management companies• ► AIFM

Private portfolio managers are professionals whose activity consists of managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments164. Private portfolio managers act in the name of, and on behalf of, their clients.

In the framework of its activity, the portfolio manager should sign a management agreement with its client. All of the client’s accounts and other assets which are subject to this written agreement must be specified therein. The management agreement should cover, inter alia:• ► The portfolio manager’s aim• ► The nature of the authorized transactions• ► The information which must be communicated to the account owner• ► The manager’s remuneration method• ► The term of the agreement and the cancellation procedure

The private portfolio manager may make decisions regarding the investment of its client’s assets within the limits laid down in the management agreement.

Authorization to act as private portfolio manager may only be granted to legal persons; they must have a capital of at least €125,000.

Private portfolio managers are automatically authorized to act, in addition, as investment adviser and broker in financial instruments.

Professionals acting for their own account are automatically authorized to act, in addition, as private portfolio manager.

8.4.2. Investment advisers

Regulated entities165 which can provide investment advice can be:• ► Investment firms:

• ► Investment advisers• ► Commission agents • ► Private portfolio managers • ► Professionals acting for their own account

• ► Credit institutions • ► Management companies • ► AIFM

Luxembourg Law does not subject regulated investment advisers to the same authorization requirements as portfolio managers, as their activity is limited to providing recommendations.

Investment advisers are professionals whose activity consists of providing “personal recommendations” to a client, either at the initiative of the investment firm, or upon request of the client, in respect of one or more transactions relating to financial instruments.

163 Financial instruments include:• Transferable securities• Money market instruments• Units in collective investment undertakings• Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities,



• Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market or an multilateral trading facility (MTF)

• Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in the previous bullet point, and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognized clearing houses or are subject to regular margin calls.


freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Section, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognized clearing houses or are subject to regular margin calls

164 Idem.165 For clarification on when the investment adviser must be regulated, see Section 8.3..

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The “personal recommendations” are made to a person (e.g., an investment company) in his/its capacity as an investor or potential investor or in his capacity as an agent for an investor or potential investor (in this case, the portfolio manager, the management company or self-managed investment company itself). This recommendation must be presented as suitable for that person or must be based on a consideration of the circumstances of that person.

Investment advisers are not authorized to intervene directly or indirectly in the implementation of the advice provided by them.

Authorized investment advisers must benefit from one of the following: • ► A capital base of not less than €50,000• ► A professional indemnity insurance covering the whole territory of the EU or another comparable

guarantee against liability arising from professional negligence, representing at least €1m applying to each claim and in aggregate €1.5m per year for all claims

• ► A combination of capital base and professional indemnity insurance in a form resulting in an equivalent level of coverage

Commission agents, private portfolio managers and professionals acting for their own account are automatically authorized to act, in addition, as investment adviser.

The following are not considered as investment advice: • ► Recommendations concerning the asset allocation• ► General recommendations relating to financial instruments disseminated via distribution channels

or intended for the public• ► Communication of information published by companies• ► Communication of information published in the press• ► Simple explanation of risks and advantages of one or more specific financial instruments• ► Drawing-up of tables classifying the performance of financial instruments compared to published

reference indicators

The remuneration of the investment advisers may be in the form of a set commission or a lump sum or it may consist of a percentage of the value of the assets subject to advice. It is not prohibited for investment advisers to receive reassignments or other types of remuneration from promoters of financial instruments that the advisers recommended, provided that they observe the MiFID rules166.

Portfolio advisory services benefit from a VAT exemption (see Section 13.4.).

166 The relevant rules are covered in CSSF Circular 07/307, as amended.167 See footnote 163

8.5. EU portfolio managers and advisers

Entities performing portfolio management for Luxembourg UCIs must be regulated, whereas entities providing investment advice in relation to Luxembourg UCIs may be regulated or unregulated.

Where portfolio management or investment advice relates to one or more financial instruments167, an EU delegate must be authorized to perform the activities of: • ► An investment firm• ► A management company• ► An AIFM


8.5.1. Investment firms

EU investment firms are subject to national provisions implementing the Markets in Financial Instruments Directive (MiFID)168 requirements.

MiFID defines an “investment firm” as any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis.

The performance of investment services or activities as a regular occupation or business on a professional basis is subject to prior authorization in accordance with the provisions of the MiFID requirements. The authorization is valid throughout the EU and allows an investment firm to provide the services or perform the activities, for which it has been authorized, throughout the EU, either through the establishment of a branch or the free provision of services.

Investment services and activities include, inter alia:• ► Portfolio management: “portfolio management” means managing portfolios in accordance with

mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments

• ► Investment advice: “investment advice” means the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments

• ► Execution of orders on behalf of clients: “execution of orders on behalf of clients” means acting to conclude agreements to buy or sell one or more financial instruments on behalf of clients

• ► Reception and transmission of orders in relation to one or more financial instruments

A “client” is generally considered to include:• ► A UCI, even if it does not have separate legal personality• ► An entity to which collective portfolio management services are provided

This interpretation of the meaning of “client” implies that:• ► “Portfolio management” includes acting as a third party manager of the assets of a UCI,

where discretion has been delegated to the manager by the management company or investment company and where the assets of the UCI include financial instruments169

• ► “Investment advice” includes acting as a third party adviser in relation to the assets of a UCI where the assets of the UCI include financial instruments

The references to “one or more financial instruments” in the definitions imply that a portfolio manager or investment adviser is likely to be considered as providing investment services or activities, and therefore subject to MiFID requirements, if there is one or more financial instruments in the portfolio of a UCI. For example, if the portfolio of the UCI consists of one swap and the rest of the portfolio consists of other types of assets, such as real estate, a third party portfolio manager and adviser170 should be subject to MiFID requirements.

CSSF Communiqués 13/02 and 13/12 cover the regulation of advisers of UCIs; they indicate that Luxembourg advisors to UCIs must be authorized by the CSSF where they provide advice in relation to financial instruments outside the group of UCIs of which they are part.

168 Markets in Financial Instruments Directive (MiFID), Directive 2004/39/EC, as amended.169 Article 2 of MiFID exempts UCIs and their managers from MiFID requirements.

This provision is generally interpreted to mean that management companies and UCIs (such as investment companies) are exempt from MiFID. This interpretation does not exempt a third party entity that is managing the assets of the UCI – i.e., a third party portfolio manager.

Furthermore, a management company only benefits from the exemption in respect of any investment services or activities it performs in its capacity as manager of UCIs. To the extent that it also provides investment services or performs investment activities in a different capacity (e.g., providing investment advice to, or managing the assets of, an individual third party), these services and activities are subject to MiFID requirements; for Luxembourg provisions, see Section 7.4.24..

170 Which is not a UCITS management company or AIFM.

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Other third party investment advisers or managers are subject to their national Member State legislation, which is beyond the scope of this Technical Guide.

In cases where it is not strictly required, MiFID authorization of portfolio managers and advisers nevertheless facilitates the CSSF authorization process for a UCI.

8.5.2. Management companies and AIFM

EU UCITS management companies and AIFM are subject to requirements similar to Luxembourg management entities (see Chapter 7.).

UCITS management companies and AIFM benefit from a passport enabling them to perform the activities for which they have been authorized in their home Member State and in other EU Member States (see Section 7.5.).

8.6. Non-EU portfolio managers and advisers

Where the portfolio management function is delegated to a third country undertaking, there must be cooperation between the CSSF and the supervisory authority of the third country or, in the case of SIFs, where this condition is not met, the delegate must be of sufficiently good repute and sufficiently experienced, and prior approval from the CSSF must be obtained (see Section 8.2.2.).

Non-EU third parties performing portfolio management for Luxembourg UCIs or providing investment advice in relation to Luxembourg UCIs are subject to their national legislation, which is beyond the scope of this Technical Guide.


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9.1. Introduction

This chapter covers the risk management and valuation requirements applicable to UCIs, management companies and AIFM:• ► UCITS management companies and self-managed UCITS• ► AIFM and internally managed AIF which are subject to the AIFM Directive• ► SIFs

The following sections provide a brief summary of the risk management and valuation requirements, and some practical perspectives thereon.

A. Risk managementThe risk profile of a UCI should be disclosed to investors before they invest. The management entity171 should implement a risk management system to ensure that the UCI complies with the risk profile disclosed to investors, and, where relevant, take remedial action in the best interests of investors.

The remainder of this section provides a brief overview of how these objectives should be achieved.

Management entities should: • ► Ensure that the risk profile of the UCI corresponds to the objectives of the UCI as laid down in

the UCI’s constitutional document, prospectus and offering documents• ► Establish and implement quantitative or qualitative risk limits, or both, for each UCI it manages,

taking into account all relevant risks. The risk limits define the risk appetite of the UCI, and ensure compliance with the risk profile

• ► Implement an adequate risk management system (the “risk management process” for UCITS; the “risk management system” for AIF) in order to identify, measure, manage and monitor appropriately all risks relevant to each UCI’s investment strategy and to which each UCI is or may be exposed. The risk management system should be reviewed at an appropriate frequency and at least once a year and updated where necessary

• ► Establish, implement and maintain an adequate and documented risk management policy which:• Identifies all the relevant risks to which the UCIs it manages is or may be exposed• Describes the procedures necessary to enable the management entity to assess, for each UCI

it manages, the exposure of the UCI to each risk which may be material• ► Ensure that risks are assessed in relation to each investment:

• Implement a documented and regularly updated due diligence process when investing on behalf of the UCI. Such due diligence process should be appropriate to the investment strategy, objectives and risk profile of the UCI (see Section 8.2.1.)

• Ensure that the risks associated with each investment position of the UCI and their overall effect on the UCI’s portfolio can be properly identified, measured, managed and monitored on an ongoing basis

171 In the case of a UCI which has not appointed a management entity, the Board of Directors of a UCI.


• ► Implement a risk management function which should:• Be functionally and hierarchically separate from the operating units, including from the

functions of portfolio management, unless this is not proportional, in which case, the management entity should be able to demonstrate that specific safeguards have been taken against conflicts of interest to allow the independent performance of risk management activities, and that the risk management process is effective

• Implement the risk management policies• Ensure that the risk profile disclosure to investors is consistent with the risk limits• Monitor compliance with the risk limits• Provide regular updates to the governing body on compliance with the risk limits and the

adequacy and effectiveness of the risk management process (see also Section 7.4.6.)• Provide regular updates to senior management on the current levels of risk and any

foreseeable or actual breaches of risk limits (see also Section 7.4.7.)• Test the risk management system by conducting periodic back-tests in order to review the

validity of risk measurement arrangements which include model-based forecasts and estimates• ►Assess the impact of changes in market conditions that might adversely impact the UCI by

conducting periodic appropriate stress tests and scenario analyses, including extreme scenarios• Provide the CSSF with a description of the risk management system• Regularly disclose information on the risk profile of the UCI both to the investors in the UCI and

the CSSF

The definitions of the risks which should be covered by risk management systems, and for which risk limits should be set, may vary according to the asset classes in which the UCI invests. The following are indicative descriptions of selected types of risk:• ► Market risk: the risk of loss for the UCI resulting from fluctuations in the market value of

positions in its portfolio attributable to changes in market variables such as interest rates, exchange rates, equity and commodity prices

• ► Credit risk: the risk of loss that could arise from a credit event, such as a credit downgrade or a counterparty’s inability to repay some or all of a debt

• Counterparty risk: the risk of loss for the UCI resulting from the fact that the counterparty to a transaction may default on its obligations prior to the final settlement of the transaction’s cash flow

• ► Issuer risk: the risk of loss resulting from the default of an issuer of securities• ► Concentration risk: the risk of loss arising from a significant exposure, for example to a

group of issuers and/or counterparties, an asset class, geographic region or market• ► Liquidity risk172: the risk that a position in the portfolio of the UCI cannot be sold, liquidated

or closed at a limited cost in a sufficiently short time frame and that the ability of the UCI to comply at any time with the terms and forms of redemption laid down in the constitutional document of the UCI is thereby compromised

• ► Operational risk: the risk of loss for the UCI resulting from the inadequate internal processes and failures in relation to people and systems, or entailed by delegated activities, or resulting from external events, including legal and documentation risk, and risk resulting from trading, settlement and valuation procedures executed on behalf of the UCI

The risk management function will play a key role in ensuring that the management entity is compliant with these requirements. The risk management function will generally also, inter alia, oversee or perform:• ►Implementation of risk modeling and risk aggregation techniques • Calculation of investment risk exposures (at portfolio and aggregate level), working in

collaboration with the portfolio management function, including:• Calculation of market risk using the commitment approach or advanced risk

measurement techniques (model-based approaches, including stress testing scenarios analysis and back-testing)

• Calculation of counterparty risk/issuer concentration measures (ultimate risk exposure)• Calculation of liquidity risk exposure (at portfolio and investor level)• Monitoring of the leverage levels (at portfolio and aggregate level)• Interaction with the pricing and valuation of over-the-counter (OTC) derivative instruments

(e.g., data sources, illiquid assets)

172 The AIFM Directive exempts unleveraged closed-ended AIF from some of the liquidity risk management requirements.


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The functional and hierarchical separation of the risk management function must be implemented at senior management level to avoid conflicts of interest. The same conducting officer cannot be responsible for both portfolio management and risk management (see Subsection 7.4.7.C.).

For UCITS, the risk management requirements focus in detail on risk measurement, in particular on market risk measurement, whereas the AIFM lays down an overall risk management framework, with a particular focus on liquidity risk management.

For AIFM, the portfolio management and risk management functions are classified together as “investment management” functions. The risk management function is considered to be one of the two essential functions of an AIFM (see also Section 7.2.).

Management entities are permitted to delegate the risk management activity (entirely or a part thereof) to specialist third parties. In this case, they are required to exercise due skill, care and diligence when entering into, managing and terminating any such arrangements. The management entity remains responsible for the delegated risk management activity. The specific requirements on delegation are covered in more detail in the following sections:• ► UCITS and their management companies: Section 9.2.7. • ► AIFM and internally managed AIF: Subsection 9.3.7.• ► SIFs: Section 9.4.4.

The general requirements on delegation are covered in Section 7.4.15..

Management entities are required to implement remuneration policies which cover, inter alia, staff whose professional activities have a material impact on the risk profiles of the UCIs they manage. The policies should promote sound and effective risk management and not encourage risk-taking which is inconsistent with the risk profiles or constitutional documents of the UCIs they manage (see Section 7.4.20.).

Management entities are also required to appropriately mitigate or manage the risks related to conflicts of interest, and, provide disclosures to investors on conflicts of interest (see Section 7.4.18. and 12.4.1.1.).

Management entities are also required to comply with anti-money laundering and counter-terrorist financing (AML/CFT) requirements, inter alia, on documenting their risk management approach in relation to AML/CFT and the AML/CFT risk analysis report to be issued (see Section 10.3.5.).

Risk management activities comprise two levels of responsibilities: the risks of the management entity and the investment risks of the UCIs it manages. The risk management requirements focus primarily on the risks faced by the UCIs themselves, including the operational risks of the management entity.

In practice the risk management function may also play an important role in managing the risk of the management entity as a business.

The risks inherent in the business of the management entity itself are partially covered by the own funds requirements, and, in the case of AIFM, the professional liability cover (see Section 7.4.4.). In addition, the shareholders of the management entity must be appropriately qualified. In the case of a UCITS (Chapter 15) management company, the CSSF may request a letter of sponsorship, in which the sponsor makes a commitment in relation to the management company’s respect of the applicable prudential requirements in particular in relation to the own funds of the management company.


The following table summarizes most of the potential risks faced by UCIs and their management entities:

Risks faced by UCIs and their management entities173

Potential risks impacting UCIs (Investment risks)

Potential risks impacting management entities

• Market risk• Credit risk• Counterparty risk• Issuer risk• Concentration risk• Liquidity risk

• Risks related to own investments• Management entity liquidity risk • Business/product risk

Potential risks impacting both UCIs and management entities

Operational risks:• Technical resources/IT related risks• People risks• Organizational/process risks• Fraud risks• Delegated function and outsourcing risks• Other external factor risks

Other risks:• Legal/regulatory risk• Model risk• Tax risk• Distribution risk• Reputational risk

B. ValuationThe regimes covering the valuation of the assets of a UCI, and the calculation of the net asset value (NAV) vary significantly:• ►For 2010 Law UCIs, management companies are required to establish appropriate procedures

to ensure the proper and accurate valuation of the assets and liabilities of the UCI. The valuation requirements are not set out in detail, but specific requirements cover, for example, the valuation of over-the-counter (OTC) derivatives

• AIFM are required to establish, maintain, implement and review, for each AIF they manage, written policies and procedures that ensure a sound, transparent, comprehensive and appropriately documented valuation process. The valuation requirements are set out in detail

• The rules for the valuation of assets must be disclosed to investors before they invest, in the prospectus of 2010 Law UCIs or in the disclosure to investors before they invest in the case of AIF

• For SIFs, the assets should be valued at fair value• For UCITS, the NAV must be calculated at least twice a month and for 2010 Law Part II UCIs,

at least monthly. For other AIF, the NAV must be calculated on the occasion of each issue or subscription or redemption or cancellation of shares or units, and at least once a year

9.2. Risk management of UCITS

9.2.1. Introduction

A UCITS management company or self-managed UCITS investment company (referred to collectively in this section as the management company) must employ a risk-management process which enables it to monitor and measure at any time the risk of the positions and their contribution to the overall risk profile of the portfolio. It must assess, monitor and periodically review the adequacy and effectiveness of the risk management policy and any measures taken to address any deficiencies in the risk management process.

173 Based on ALFI’s Risk Management Guidelines, March 2012


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9.2.2. Key regulations

The fundamental risk management requirements are laid down in the 2010 Law. CSSF Regulation 10-4 lays down more detailed requirements, inter alia, on:• ► The risk management function• ► The risk management policy, its assessment, monitoring and review• ► The risk management processes including measurement and management of risk and calculation

of global exposure, liquidity risk, counterparty risk exposure and issuer concentration• ► Procedures for the valuation of the OTC FDIs

CSSF Circular 11/512 details the risk management requirements applicable to Luxembourg UCITS management companies and Luxembourg domiciled UCITS (including self-managed UCITS). The Circular provides guidelines for the implementation of a risk management framework. It covers the main regulatory risk management requirements for UCITS, inter alia, covering:• ► The risk management policy• ► The risk management function• ► Risk profile and limits• ► Delegation of risk management• ► The risk measurement techniques (including liquidity and operational risk)• ► Risk management in relation to OTC derivatives and efficient portfolio management (EPM)

transactions• ► Risk-related disclosures in the prospectus and annual accounts• ► The structure of the Risk Management Process (RMP)

CSSF Circular 12/546 on the authorization and organization of Chapter 15 management companies and UCITS investment companies which have not designated a management company also sets out some additional requirements in relation to the governance and implementation of the risk management function.

In addition to Circular 11/512, the following European Securities and Markets Authority (ESMA) guidelines are relevant in the context of the risk management framework:• ► ESMA’s174 Risk management principles for UCITS, February 2009 • ► ESMA’s Guidelines on risk measurement and the calculation of global exposure and counterparty

risk for UCITS, July 2010• ► ESMA’s Guidelines to competent authorities and UCITS management companies on risk

measurement and the calculation of global exposure for certain types of structured UCITS, April 2011, updated in March 2012

• ► ESMA’s Guidelines on ETFs and other UCITS issues issued in December 2012. The final guidelines, comprising both the Guidelines on ETFs and other UCITS issues and the final rules on repurchase (repo) and reverse repurchase (reverse repo) agreements, became effective in February 2013. UCITS existing at that time benefit from transitional provisions giving them, in certain cases, up to 12 additional months to comply. UCITS established after that date are required to comply with the guidelines immediately.

In December 2011, ALFI issued its FAQ on CSSF Circular 11/512. The frequently asked questions (FAQ) covers, inter alia:• Risk disclosures, including leverage• Portfolio risk calculation methods, including stress testing• Content of risk management reporting to conducting officers and the Board of Directors

In July 2012, ESMA published its Questions and Answers on Risk Measurement and Calculation of Global Exposure and Counterparty Risk for UCITS. This paper provides clarification on:• Hedging strategies• Disclosure of leverage by UCITS• Concentration rules• Calculation of global exposure for fund of funds



9.2.3. Risk profile and risk limits

The Board of Directors of the management company must define and approve a risk profile for each UCITS it manages. The risk profile will be defined on the basis of advice from the risk management function and result from the process of risk identification which must take into account all the risks that may be material for the UCITS.

The risk profile of a UCITS could be defined as a measure of the risk aversion relative to the investment strategy (i.e., risk and reward trade-off given the material risks implied by the investment strategy).

The management company must establish, implement and maintain a documented system of internal limits regarding risks which may be material to the UCITS, and ensure compliance with the risk profile of the UCITS. The legal limits on global exposure and counterparty risk must be taken into account in the UCITS risk limit system. Senior management must approve and review on a periodic basis the risk limit system for each managed UCITS.

Internal limits (stricter than regulatory limits) may be defined by the management company.

Management companies must implement appropriate procedures on remedial action to be taken, in the best interests of unitholders, in case of breaches or foreseeable breaches of the limits.

9.2.4. Risk management policy

Management companies are required to establish, implement and maintain an adequate and documented risk management policy which identifies the risks to which the UCITS are or might be exposed, taking into account the nature, scale and complexity of their business and of the UCITS they manage.

The risk management policy must comprise the procedures necessary to enable the management company to assess for each UCITS it manages the exposure of that UCITS to market risks (including global exposure), liquidity and counterparty risks as well as all other risks, including operational risks, which may be material for each UCITS it manages, considering the investment objectives and strategies, the styles or methods of management and the process of assessment.

The risk management policy must cover:• ►The techniques, tools and arrangements to enable the management company to comply with its

obligations regarding the measurement and management of risk• The allocation of risk management responsibilities within the management company

The risk management policy must state the terms, contents and frequency of reporting of the risk management function to the Board of Directors and to senior management and, where appropriate, to the supervisory function.

The risk management policy should detail the risk management process (RMP – see also Section 9.2.8.) implemented by the management company for the identification, measurement, monitoring and reporting of the risks. This includes how the market risks (including global exposure), liquidity, counterparty and all other risks, including operational risks, must be measured, and guidance on the methodologies applied must be documented.

The policy should also detail techniques, tools and resources. The measurement techniques should include both quantitative and qualitative methods and allow an adequate assessment of the concentration and interaction of risks at the level of the portfolios managed by the management company.

The risk management policy may take the form of a manual.

Senior management must approve and review on a periodic basis the risk management policy and arrangements, processes and techniques for implementing that policy.


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Management companies must assess, monitor and periodically review:• The adequacy and effectiveness of the risk management policy and of the arrangements,

processes and techniques implemented for the measurement and management of risk and the calculation of global exposure

• The level of compliance by the management company with the risk management policy and with arrangements, processes and techniques for the measurement and management of risk and the calculation of global exposure

• The adequacy and effectiveness of measures taken to address any deficiencies in the performance of the risk management process

9.2.5. Risk management function

Management companies are required to establish and maintain a permanent risk management function.

The permanent risk management function is responsible for: • ► Implementing the risk management policy and procedures• ► Ensuring compliance with the UCITS risk limit system, including statutory limits concerning global

exposure and counterparty risk • ► Providing advice to the Board of Directors as regards the identification of the risk profile of each

UCITS• ► Providing regular reports to the Board of Directors and, where it exists, the supervisory function,

on:• The consistency between the current levels of risk incurred by each managed UCITS and the risk

profile agreed for that UCITS• The compliance of each managed UCITS with relevant risk limit systems• The adequacy and effectiveness of the risk management process, indicating in particular

whether appropriate remedial measures have been taken in the event of any deficiencies• Providing regular reports to senior management outlining the current level of risk incurred by each

managed UCITS and any actual or foreseeable breaches to their limits to ensure that prompt and appropriate action can be taken

• For UCITS using value-at-risk (VaR) to calculate global exposure, validating and implementing a system of VaR limits consistent with the risk profile approved by senior management and the Board of Directors and monitoring and control of the VaR limits

• Reviewing and supporting, where appropriate, the arrangements and procedures for the valuation of OTC derivatives

The permanent risk management function should be in regular communication with the portfolio management function in order to enable the efficient conduct of risk management activities.

The permanent risk management function should be hierarchically and functionally independent from operating units. However, the CSSF may allow management companies to derogate from this obligation where the derogation is appropriate and proportionate in view of the nature, scale and complexity of the management company’s business and of the UCITS it manages. A management company must, in any case, be able to demonstrate that appropriate safeguards against conflicts of interest have been adopted to allow an independent performance of risk management activities and that its risk management process satisfies the requirements of the 2010 Law.

The permanent risk management function must have the necessary qualifications, knowledge and expertise in this area. The person must perform his mandate under the direct responsibility of the conducting officer who is responsible for the risk management function. By virtue of the principle of proportionality, one of the conducting officers may be directly appointed as a person responsible for the permanent risk management function where he has the necessary qualifications, knowledge and expertise.

The same conducting officer cannot be responsible for both portfolio management and risk management, even if it is delegated to a third party (see Subsection 7.4.7.C.). The relationship between the internal control functions and the Board of Directors, and between internal control functions themselves is covered in Section 7.4.9..


The independence of the risk management function is meant to avoid conflicts of interest and to be able to escalate issues to senior management and/or the Board of Directors.

ALFI issued its Best Practice Proposals for the Organisation of the Risk Function of a UCITS Management Company or UCITS Investment Company, as part of its Risk Management Guidelines of March 2012. They cover, inter alia:• Risk management principles, risk management function and other control functions:

• Risk management function • Risk management and its relationship with other control functions

• Practical implementation of a risk management function:• Governance and organization • Identification of risks• Measurement and management of risks• Reporting

• Role of risk management in the life-cycle of a fund

In practice, the risk management function will also play a key role in the calculation of the synthetic risk and reward indicator (SRRI) for the key investor information (KII) document (see Section 9.2.9.).

9.2.6. Risk measurement and management

A. IntroductionThe techniques and resources dedicated to the measurement of the risks should be commensurate to the nature and scale of the activities of the management company and to the complexity of the investment strategy of the UCITS, including, inter alia, the extent to which derivative instruments are used.

The risk categories listed hereafter are the minimum requirements set by the CSSF in terms of risk measurement. UCITS and their management companies may be exposed to other types of risks (e.g., tax risk, legal risk).

As part of the risk measurement process, management companies are required to use sound and reliable data and when appropriate, undertake periodic stress tests and scenario analysis to ensure the adequacy of the methodologies applied.

ALFI issued guidelines on stress testing practice for UCITS entitled Principles for sound stress testing practices in April 2013. The guidelines are relevant for all types of risk and all types of UCITS products. They focus on:• Use of stress testing, and integration in UCITS risk governance• Stress testing methodologies and scenario selection• Specific areas of focus: specific risks and products• Reporting and management actions• Areas of development and improvement in stress testing practices

B. Global risk exposure (market risk)Management companies are required to self-assess the individual risk profile of each UCITS and to determine, accordingly, the adequate global risk exposure methodology (commitment approach or value-at-risk (VaR)/internal model based approach).

In its Guidelines on risk measurement and the calculation of global exposure, ESMA indicates that the commitment approach should not be applied to UCITS:• Which engage in complex investment strategies which represent more than a negligible

part of the UCITS’ investment policy• Which have more than a negligible exposure to exotic derivatives• For which the commitment approach may not adequately capture the related risks (e.g.,

non-directional risks like volatility risk, gamma risk or basis risk)

UCITS are expected to use a maximum loss approach to assess whether the complex investment strategy or the use of exotic derivatives represent more than negligible exposure.


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Index tracking leveraged UCITS (and UCITS replicating leveraged indices) must comply with the limits and rules on global exposure, using either the commitment approach or the relative VaR approach.

Calculation, measurement and monitoring of the global exposure need to be performed at least on a daily basis.

CSSF Circular 11/512 introduced the intra-day calculation concept, whenever required.

ESMA’s guidelines also provide some clarifications on the extent to which intra-day market risk calculations would need to be performed: in case of exceptional market circumstances (e.g., on a particular day due to increased volatility) or on the basis of complex investment strategies for which the global exposure would change significantly from one day to the next.

(a) Commitment approachThe total commitment is considered to be the sum of the absolute value of the commitment of each individual position, after taking into account netting and hedging.

The management company should convert each financial derivative instrument position into the market value of an equivalent position in the underlying asset of that derivative (standard commitment approach). Management companies may apply other calculation methods which are equivalent to the standard commitment approach.CSSF Circular 11/512 refers to the ESMA guidelines on the calculation methodologies to be adopted for the most common financial derivative instruments:• Futures• Plain vanilla options (bought/sold puts and calls)• Swaps• Forwards• Financial instruments which embed derivatives

Non-standard (exotic) derivatives calculation methodologies are detailed for variance swaps, volatility swaps and barrier (knock-in knock-out) options.

ESMA excludes an FDI from the calculation of the global exposure when it meets all of the following criteria: • It swaps the performance of the assets held in the UCITS portfolio for the

performance of other assets• It totally offsets the market risks of the swapped assets held in the UCITS portfolio• It includes neither additional optional features, nor leverage clauses, nor additional

risks as compared to a direct holding in the reference financial assets

The management company may take account of netting and hedging arrangements when calculating global exposure, where these arrangements do not disregard obvious and material risks and result in a clear reduction in risk exposure.

Where the use of financial derivative instruments does not generate incremental exposure for the UCITS, the underlying exposure need not be included in the commitment calculation.

Temporary borrowing arrangements need not be included in the global exposure calculation.

An optional regime is available to structured UCITS which meet specific criteria. In such cases, based on the pay-off structure of the UCITS and the applicable scenarios for the investor, the commitment approach may be used to calculate the global exposure for each scenario. The global exposure of each individual scenario would need to comply with the limit set for the UCITS.

(b) Value-at-risk (VaR)/internal model approachUCITS using a maximum loss approach should base the calculation of the market risk on an internal model taking into consideration general market risk as well as specific market risk. The most commonly accepted internal model is the VaR model supplemented by stress tests. Other models can be used provided they receive CSSF approval. The choice of the appropriate VaR model (e.g., parametric, historical simulation or Monte Carlo) remains the responsibility of the UCITS.


ESMA considers in particular that the VaR model selected should include all the positions of the UCITS portfolio, and capture all the material risks associated with the portfolio positions.

Models need to be independently validated before using them for the first time and back-tested. The validation should cover the implementation of the VaR model in the overall risk management framework, providing highlights on governance, data management, methodologies, reporting and use.

The validation is expected to be performed by an independent business unit dedicated to internal controls or model validation, or by an external entity (different to the entity providing the VaR model) which would be able to demonstrate sufficient knowledge and expertise on risk management (e.g., internal audit, external auditor).

Should a significant change be made to the model, independent validation must be repeated.

The validation of the VaR model to be undertaken by a party independent from that involved in the development process is intended to ensure the model is conceptually sound and adequately captures all material risks.

CSSF Circular 11/512 introduces two concepts of VaR with different limits:• If a reference portfolio (or “benchmark”) can be determined, the CSSF allows the use of

a relative VaR where the portfolio VaR cannot be more than twice the reference portfolio VaR. The choice of the reference portfolio needs to be duly documented

• Where there is no reference portfolio, an absolute VaR figure must be calculated. Absolute VaR limit cannot exceed 20% of the NAV

ESMA guidelines in relation to the selection of a reference portfolio

Under the relative VaR approach, ESMA detailed the requirements related to the selection of a reference portfolio. The reference portfolio should comply with the following criteria:• It should be unleveraged and not contain any derivatives (or embedded derivatives),

except for UCITS investing in long/short investment strategies and UCITS which intend to have a currency hedged portfolio

• The risk profile of the reference portfolio should be consistent with the UCITS investment objectives

• The risk/return profile of the UCITS should not change frequently• The process relating to the determination and maintenance of the reference portfolio

should be documented

The risk management function must, for each UCITS, validate and implement a system of VaR limits consistent with the risk profile that is to be approved by senior management and the Board of Directors. This may be in the form of a separate document. The monitoring and control of the VaR limits must be undertaken by the risk management function on a daily basis and regular control over the level of leverage generated by the UCITS must be performed. Through regular reports, senior management must be informed of the current VaR measures.

The VaR model parameters to be used are the following:• Confidence interval: 99%• Holding period: equivalent to 1 month (20 days)• Observation period of risk factors: at least 1 year (250 days), unless a shorter period is

justified by a significant increase in price volatility• ►Data update: quarterly (particularly relevant to parametric VaR models)• Calculation frequency: at least daily

A different confidence interval or holding period may be used with prior approval of the CSSF provided a conversion is made to bring the VaR to an equivalent value. Additional details on the rescaling of the VaR limit are provided in ESMA’s guidelines.

The risk management function is responsible for sourcing, testing, maintaining and using internal models (e.g., VaR models) on a day-to-day basis. As part of its responsibility, the risk management function must ensure the model is adapted to the UCITS’ portfolio on a continuous basis and perform regular validations.


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The VaR model should be fully integrated within the risk management function and be part of its daily work. The VaR process should be developed in coordination with the investment process led by the investment managers in order to keep the UCITS risk profile under control and consistent with the investment strategy.

The management company must adequately document the VaR model and the related processes and techniques. The documentation must cover, inter alia, the following:• ► Risks covered by the model• ► Model methodology• ► Mathematical assumptions and foundations• ► Data used• ► Accuracy and completeness of the risk assessment• ► Back testing process• ► Stress testing process• ► Validity range of the model• ► Operational implementation

(c) Additional techniques/measures to be implemented in case of the use of a VaR approach

Back testing

In addition to the daily computation of the VaR, the accuracy and performance of the model (i.e., prediction capacity of risk estimates) needs to be monitored by conducting a back testing program at least on a monthly basis.

ESMA guidelines in relation to back testing:• The back testing program should provide for each business day a comparison of

the one-day VaR measure generated by the UCITS model for the UCITS’ end-of-day positions to the one-day change of the UCITS’ portfolio value by the end of the subsequent business day

• The UCITS should carry out the back testing program at least on a monthly basis, subject to always performing retroactively the comparison for each business day in the previous bullet point

• The UCITS should determine and monitor the “overshootings” on the basis of this back testing program. An ‘overshooting’ is a one-day change in the portfolio’s value that exceeds the related one-day VaR measure calculated by the model

• If the back testing results reveal a percentage of “overshootings” that appears to be too high, the UCITS should review the VaR model and make appropriate adjustments

• The UCITS senior management should be informed at least on a quarterly basis (and where applicable the UCITS competent authority should be informed on a semi-annual basis) if the number of “overshootings” for each UCITS for the most recent 250 business days exceeds four in the case of a 99% confidence interval. This information should contain an analysis and explanation of the sources of “overshootings” and a statement of what measures if any were taken to improve the accuracy of the model. The competent authority may take measures and apply stricter criteria to the use of VaR if the “overshootings” exceed an unacceptable number

Stress testing

CSSF Circular 11/512 requires UCITS using a VaR model to complement the approach with a stress testing program. Stress tests aim at capturing extreme markets events (e.g., 9/11 attacks, Lehman default) with theoretical or historical scenarios. ESMA guidelines provide additional details on stress testing qualitative and quantitative requirements.

The stress testing program should capture the impact of unexpected changes in market parameters and correlation factors on the UCITS portfolio value. Results should be taken into account in the investment management and risk management process.


Quantitative elements require stress tests to capture all the risks not adequately covered by the VaR model and those risks which, though not significant in normal circumstances, are likely to be significant in stress situations (e.g., unusual correlation changes, illiquidity of markets in stressed market situations or the behavior of complex structured products under stressed liquidity conditions). Finally, stress tests should foresee scenarios exposing the UCITS portfolio to large downside risks leading to events such as the default of the UCITS (i.e., NAV < 0) in case of significant leverage.

Qualitative elements require stress tests to be performed at least on a monthly basis. The design of the scenarios should be suitable to the UCITS portfolio composition and market conditions. The design of the program should be duly justified and documented.

Leverage ratio

Additional safeguards require regular monitoring of the UCITS leverage. Leverage should be calculated as the sum of the notionals of the derivatives used. The level of leverage may, for example, be the average of the levels of leverage observed during the financial year. The data must be at least bi-monthly.

CSSF Communiqué 12/29 clarifies that, in line with ESMA’s Guidelines on risk measurement and the calculation of global exposure and counterparty risk for UCITS, the leverage to be included in the prospectus (see also Section 12.5.1.) and the annual report (see also Section 12.5.1.) for those UCITS determining the global exposure using a VaR approach is to be calculated on the basis of the sum of the notionals of derivative instruments used, while allowing these UCITS to supplement this information using (a) leverage figure (s) calculated through the commitment approach.

UCITS employing high levels of leverage are required to provide additional information to the CSSF (see Section 9.2.8.).

Additional risk indicators

ESMA guidelines indicate that UCITS should supplement the VaR and stress testing framework, where appropriate by taking into account the risk profile and the investment strategy being pursued, with other risk measurement methods.

Conditional VaR (CVaR) or Extreme Value Theory (EVT) approaches might be considered together with basic risk indicators (e.g., Greeks).

B. Counterparty risk The counterparty risk linked to over-the-counter (OTC) FDIs should be calculated as the positive mark-to-market value of the contract. The 2010 Law limits the OTC counterparty risk exposure to 10% of the NAV when the counterparty is an EU credit institution, or a credit institution considered by the CSSF to be equivalent to that laid down in EU Law, and 5% in all other cases (Article 43(1) of the 2010 Law). Eligible counterparties must be subject to CSSF supervision or equivalent prudential supervision, and specialized in this type of transaction.

The net exposures of UCITS to a counterparty arising from securities lending transactions or reverse purchase/repurchase agreement transactions should be taken into account within the limit of 20% provided for in Section 5.2.2.8.1.I.(6) (Article 43(2) of the 2010 Law).

Exposure in relation to the initial margins posted by UCITS to a broker and variation margins to be received by UCITS from the broker within the context of FDIs dealt in on a regulated market or OTC FDIs must be included within the counterparty risk limits of 5% and 10% provided for in Article 43(1) of the 2010 Law if there are no arrangements that protect UCITS against the risk of insolvency of the relevant broker.

ESMA guidelines set out general principles related to collateral eligibility for netting purposes (e.g., in respect of liquidity, valuation and issuer credit rating).

ESMA’s Guidelines on ETFs and other UCITS issues lay down rules on the management of collateral for OTC financial derivative transactions (see Section 5.2.2.3.F.) and efficient portfolio management (EPM) techniques (see Section 5.2.2.6.). These include, inter alia:• ► Risk exposures to a counterparty arising from OTC financial derivative transactions and EPM

techniques should be combined when calculating the counterparty risk limits• ► Operational and legal risk related to the management of the collateral need to be mentioned in

the risk management process (RMP – see Section 9.2.8.)


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• ► UCITS receiving collateral for at least 30% of its assets need to design a stress testing policy in order to assess the liquidity risk attached to the collateral

• ► UCITS need to define a clear haircut policy adapted for each class of assets received as collateral

Additionally, UCITS using EPM techniques need to:• ►Adequately capture the risks arising from these activities in the RMP, with a focus on

counterparty risk• Ensure EPM does not add substantial supplementary risks in comparison to the original risk

policy• Consider the EPM usage when developing the liquidity risk management process, in order to

comply at any time with redemption obligations

OTC FDI transactions may be excluded from the counterparty risk exposure, if all of the following requirements are met:• ► Backing by an appropriate completion guarantee• ► Daily valuation of the market values of the positions on financial derivative instruments• ► Making margin calls at least once a day

ALFI issued practical guidelines in its Industry work paper - collateral management, as part of its Risk Management Guidelines of March 2012.

C. Liquidity riskManagement companies are required to implement an appropriate liquidity risk management procedure supported by a stress testing program (if appropriate) in order to ensure that the liquidity profile of the investments of the UCITS is appropriate to the redemption policy.

Liquidity risk is the risk that a position in the UCITS portfolio cannot be sold, liquidated or closed at limited cost in an adequately short time frame or that the ability of a UCITS to proceed, at any time, with investors redemptions is compromised.

The liquidity risk framework should cover funding risk, market liquidity risk, reconciliation to other risk types and regulatory requirements, and operational issues and be integrated into the current global risk management framework.

ALFI issued practical guidelines on UCITS Liquidity Risk Management in March 2013. The guidelines cover, inter alia:• Principles of liquidity risk management for UCITS funds distinguishing between

• Market liquidity risk (also referred to as asset liquidity risk)• Funding liquidity risk (also referred to as investor behavior risk or subscription/

redemption risk)• Elements of a sound liquidity risk management framework• Liquidity risk management tools and techniques

D. Concentration riskThe issuer concentration risk must be calculated using the commitment approach, if this is appropriate, or the maximum potential loss approach. Netting is authorized, provided certain conditions are met. For concentration risk requirements, see Section 5.2.2.8.1..

E. Operational riskOperational risk is defined as the risk of loss for the UCITS resulting from inadequate internal processes and failures in relation to people and systems of the management company or from external events, and includes legal and documentation risk and risk resulting from the trading, settlement and valuation procedures operated on behalf of the UCITS.

A management company is required to cover operational risks in its risk management policy. The operational risk entailed by delegated activities is covered in Section 9.2.7..


9.2.7. Delegation of risk management activitiesWhere management companies delegate the risk management function to third parties, the responsibility for risk management remains with the management company.

Management companies are required to exercise due skill, care and diligence when entering into, managing or terminating any arrangements with third parties in relation to the performance of risk management activities. Before entering into such arrangements, management companies must take the necessary steps in order to verify that the third party has the ability and capacity to perform the risk management activities reliably, professionally and effectively. The management company must establish methods for the ongoing assessment of the standard of performance of the third party (see also Subsection 7.4.15.B.).

ALFI issued a Guidance paper for the risk monitoring of functions outsourced/delegated by a management company or investment company as part of its Risk Management Guidelines of March 2012.

The paper covers each phase of delegation of outsourcing relationships:• ► Initiation (planning to outsource)• ► Life (ongoing delegate monitoring)• ► Termination

9.2.8. Communication to the CSSF

The CSSF requires management companies to provide certain information in relation to the risk management policy in order to identify, measure, manage, control and report on the risks that may be material for the UCITS they manage.

CSSF Circular 11/512 lays down the required content and format of the risk management process document (RMP):

1. Governance and risk management function organization1.1 Organization chart1.2 Governance structure1.3 Independence of the risk management function1.4 Risk management policy1.5 Permanent risk management function1.6 Adequacy and review of the risk management policy1.7 Risk reporting1.8 IT tools and systems1.9 Delegation1.10 New products approval process1.11 Interaction with compliance and internal audit

2. Global exposure2.1 General description (frequency, self-assessment and methodology)2.2 Commitment approach2.3 VaR approach2.4 Back-testing2.5 Stress testing2.6 Disclosure

3. Liquidity risk4. Counterparty risk of OTC FDIs5. Counterparty risk linked to EPM techniques6. Operational risk7. Concentration risk8. Pricing risk9. Legal risk10. OTC FDI valuation11. Cover rules12. Specific requirements for discretionary portfolio management13. List of UCITS 14. Conclusion


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The RMP must be included in the application for authorization for a management company.

It must be updated at least on a yearly basis and it must be submitted to the CSSF within one month of the closing date of the management company’s financial year or the self-managed UCITS financial year.

In case of any material modification to the risk management policy, the RMP must be updated promptly and communicated to the CSSF.

A copy of the report regularly established by the risk management function for the senior management and governing body relating to the adequacy and effectiveness of the method for risk management must be included with the RMP transmitted to the CSSF.

UCITS employing high levels of leverage should provide the CSSF with information on the ownership structure (e.g., target investors). The CSSF may request such UCITS to provide additional quarterly ad hoc reporting on performance and risks (e.g., leverage, VaR, stress tests).

Breaches of VaR limit requirements should be reported to the CSSF.

9.2.9. Disclosures to investors

The risk and reward profile of a UCITS must be disclosed in the key investor information (KII), including guidance on the associated risks. This will take the form of:• ► A synthetic risk and reward indicator (SRRI): The SRRI aims to provide potential investors with an

indication of the overall risk and reward profile of a UCITS. The SRRI corresponds to an integer number designed to rank the UCITS, according to its increasing level of volatility, on a scale from 1 to 7

• ► A narrative explanation of the main limitations of the SRRI • ► A narrative presentation of the material risks which are not fully captured by the methodology of

the SRRI

For further information, see Section 12.3.3.1..

Prospectus disclosures in relation to market risk are required on:• The method to calculate the global exposure • Expected level of leverage, as well as possibility of higher leverage levels, where relevant• Information on reference portfolio for UCITS using a relative VaR approach

Additional risk-related prospectus disclosures are required, inter alia, for:• ► Structured UCITS where the commitment approach is used for the calculation of global exposure • ► UCITS using efficient portfolio management (EPM) techniques• ► UCITS entering into total return swaps (TRS) or similar derivative instruments• ► Management of collateral• ► Index-tracking UCITS


Annual report disclosures are required on:• ► The method to calculate the global exposure • ► Information on reference portfolio for UCITS using a relative VaR approach• ► Information on the VaR limit• ► The leverage level during the last financial year for UCITS using the VaR to determine the global

exposure

Good practice would also be to disclose such information in the semi-annual report.



9.3.1. Introduction

AIFM must implement adequate risk management systems in order to identify, measure, manage and monitor appropriately all risks relevant to each AIF investment strategy and to which each AIF is or may be exposed.

Risk management systems comprise relevant elements of the organizational structure of the AIFM, with a central role for a permanent risk management function, policies and procedures related to the management of risk relevant to each AIF’s investment strategy, and arrangements, processes and techniques related to risk measurement and management employed by the AIFM in relation to each AIF it manages.

AIFM must review their risk management systems, and update them whenever necessary: • ► With appropriate frequency at least once a year• ► Where material changes are made to risk management policies, internal or external events indicate

that a review is required or material changes are made to the investment strategy and objectives of the AIF

AIFM must, for each AIF that they manage which is not an unleveraged closed-ended AIF, employ an appropriate liquidity management system and adopt procedures which enable them to monitor the liquidity risk of the AIF and to ensure that the liquidity profile of the investments of the AIF complies with its underlying obligations.


The risk and liquidity management requirements applicable to AIFM are laid down in the AIFM Law and the AIFM Level 2 implementing regulation.

9.3.3. Risk profile and risk limits

An AIFM’s governing body is required to approve the risk profile of the AIF it manages. The AIFM must ensure that the risk profile of the AIF corresponds to the size, portfolio structure and investment strategies and objectives of the AIF as laid down in the constitutional document, prospectus and offering documents. The AIFM is required to periodically disclose to investors the current risk profile of the AIF and the risk management systems employed to manage those risks.

The AIFM is required to establish and implement quantitative or qualitative risk limits, or both, for each AIF it manages, taking into account all relevant risks. The qualitative and quantitative risk limits for each AIF must, at least, cover:• ► Market risks• ► Credit risks• ► Liquidity risks• ► Counterparty risks• ► Operational risks

The risk management function is required to ensure that the risk profile of the AIF disclosed to investors is consistent with the risk limits. Senior management must approve and review on a periodic basis the risk limit system for each AIF.

AIFM must implement appropriate procedures on remedial action to be taken, in the best interests of shareholders or unitholders, in case of breaches or foreseeable breaches of the limits (see also Section 10.4.).

9.3. Risk management for AIF


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9.3.4. Risk management policy

An AIFM is required to establish, implement and maintain an adequate and documented risk management policy which identifies all the relevant risks to which the AIF it manages are or may be exposed.

The risk management policy must comprise the procedures necessary to enable the AIFM to assess for each AIF it manages the exposure of that AIF to market, liquidity and counterparty risks, and the exposure of the AIF to all other relevant risks, including operational risks, which may be material for each AIF it manages.

The risk management policy must cover:• ► The techniques, tools and arrangements that enable it to comply with its obligations regarding the

measurement and management of risk• ► The techniques, tools and arrangements that enable liquidity risk of the AIF to be assessed and

monitored under normal and exceptional liquidity conditions including through the use of regularly conducted stress tests

• ► The allocation of responsibilities within the AIFM pertaining to risk management• ► The risk limits set and a justification of how these are aligned with the risk profile of the AIF

disclosed to investors• ► The terms, contents, frequency and addressees of reporting by the permanent risk management

function to the governing body and senior management

The risk management policy must include a description of the safeguards against conflicts of interest to allow for the independent performance of the risk management activities (see Section 9.3.5.).

The risk management policy must be appropriate to the nature, scale and complexity of the business of the AIFM and of the AIF it manages.

Senior management must approve and review on a periodic basis the risk management policy and arrangements, processes and techniques for implementing that policy.

AIFM must assess, monitor and periodically, at least once a year, review:• ►The adequacy and effectiveness of the risk management policy and of the arrangements,

processes and techniques implemented for the measurement and management of risk • ► The degree of compliance by the AIFM with the risk management policy and with arrangements,

processes and techniques for the measurement and management of risk• The adequacy and effectiveness of measures taken to address any deficiencies in the performance

of the risk management process


An AIFM must establish and maintain a permanent risk management function.

The permanent risk management function is responsible for: • ► Implementing effective risk management policies and procedures in order to identify, measure,

manage and monitor on an ongoing basis all risks relevant to each AIF’s investment strategy to which each AIF is or may be exposed

• ► Ensuring that the risk profile of the AIF disclosed to investors is consistent with the risk limits • ► Monitoring compliance with the risk limits and notifying the AIFM’s governing body and, where it

exists, the AIFM’s supervisory function in a timely manner when it considers the AIF’s risk profile inconsistent with these limits or sees a material risk that the risk profile will become inconsistent with these limits

• ► Providing regular updates to the governing body of the AIFM and where it exists the AIFM’s supervisory function at a frequency which is in accordance with the nature, scale and complexity of the AIF or the AIFM’s activities on: • The consistency between and compliance with the risk limits and the risk profile of the AIF as

disclosed to investors • The adequacy and effectiveness of the risk management process, indicating in particular

whether appropriate remedial measures have been or will be taken in the event of any actual or anticipated deficiencies


• ► Providing regular updates to the senior management outlining the current level of risk incurred by each managed AIF and any actual or foreseeable breaches of any risk limits set to ensure that prompt and appropriate action can be taken

The risk management function must have the necessary authority and access to all relevant information necessary to fulfill its tasks.

AIFM must functionally and hierarchically separate the functions of risk management from the operating units, including from the functions of portfolio management. However, the CSSF may allow AIFM to derogate from this obligation in accordance with the principle of proportionality. The AIFM must, in any case, be able to demonstrate that specific safeguards against conflicts of interest allow for the independent performance of risk management activities and that the risk management process satisfies the requirements of the AIFM and is consistently effective.

The functional and hierarchical separation of the risk management function must be ensured throughout the whole hierarchical structure of the AIFM, up to its governing body, and must be reviewed by the governing body and, where it exists, the supervisory function of the AIFM.

The risk management function is considered as functionally and hierarchically separated from the operating units, including the portfolio management function, when all the following conditions are satisfied: • ► Persons engaged in the performance of the risk management function are not supervised by

those responsible for the performance of the operating units, including the portfolio management function, of the AIFM

• ► Persons engaged in the performance of the risk management function are not engaged in the performance of activities within the operating units, including the portfolio management function

• ► Persons engaged in the performance of the risk management function are compensated in accordance with the achievement of the objectives linked to that function, independently of the performance of the operating units, including the portfolio management function

• ► The remuneration of senior officers in the risk management function is directly overseen by the remuneration committee, where such a committee has been established (see also Section 7.4.20.)

The risk management policy must include a description of the safeguards against conflicts of interest to allow for the independent performance of the risk management activities, in particular: • ► The nature of the potential conflicts of interest• ► The remedial measures put in place• ► The reasons why these measures should be reasonably expected to result in independent

performance of the risk management function• ► How the AIFM expects to ensure that the safeguards are consistently effective

The safeguards against conflicts of interest must ensure, at least, that: • ► Decisions taken by the risk management function are based on reliable data, which are subject to

an appropriate degree of control by the risk management function• ► The remuneration of those engaged in the performance of the risk management function reflects

the achievement of the objectives linked to the risk management function, independently of the performance of the business areas in which they are engaged

• ► The risk management function is subject to an appropriate independent review to ensure that decisions are being arrived at independently

• ► The risk management function is represented in the governing body or the supervisory function, where it has been established, at least with the same authority as the portfolio management function

• ► Any conflicting duties are properly segregated • ► Where proportionate, taking into account the nature, scale and complexity of the AIFM:

• The performance of the risk management function is reviewed regularly by the internal audit function, or, if the latter has not been established, by an external party appointed by the governing body

• Where a risk committee has been established, it is appropriately resourced and its non-independent members do not have undue influence over the performance of the risk management function

AIFM must assess, monitor and periodically review:• ► The performance of the risk management function• ► The adequacy and effectiveness of measures aiming to ensure the functional and hierarchical

separation of the risk management function


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9.3.6. Risk measurement and management

AIFM are required to implement adequate and effective arrangements, processes and techniques in order to identify, measure, manage and monitor at any time the risks to which the AIF under their management are or might be exposed and comply with the risk limits. This implies at least:• ► Putting in place such risk measurement arrangements, processes and techniques as are necessary

to ensure that the risks of positions taken and their contribution to the overall risk profile are accurately measured on the basis of sound and reliable data, on an ongoing basis, and that the risk measurement arrangements, processes and techniques are adequately documented (see also Subsection 8.2.1.B.)

• ► Conducting periodic back-tests in order to review the validity of risk measurement arrangements which include model-based forecasts and estimates

• ► Conducting appropriate periodic stress tests and scenario analyses to address risks arising from potential changes in market conditions that might adversely impact the AIF

• ► Ensuring that the current level of risk complies with the risk limits • ► Establishing, implementing and maintaining adequate procedures that, in the event of actual

or anticipated breaches of the risk limits of the AIF, result in timely remedial actions in the best interest of investors

• ► Ensuring that there are appropriate liquidity management systems and procedures for each AIF

The arrangements, processes and techniques must be proportionate to the nature, scale and complexity of the business of the AIFM and of each AIF it manages and consistent with the AIF’s risk profile as disclosed to investors.

A. LeverageLeverage is defined as any method by which the AIFM increases the exposure of an AIF it manages whether through borrowing of cash or securities, or leverage embedded in derivative positions or by any other means. Leverage of an AIF is expressed as the ratio between the exposure of an AIF and its net asset value (NAV).

The AIFM is required to set a maximum level of leverage which the AIFM may employ on behalf of each AIF it manages as well as the extent of the right of the re-use of collateral or guarantee that could be granted under the leveraging arrangement.

The AIFM must demonstrate that the leverage limits for each AIF it manages are reasonable and that it complies at all times with the leverage limits set by it. The competent authority of the AIFM may impose limits on the use of leverage for systemic risk mitigation purposes.

AIFM are required to calculate the exposure of the AIF managed in accordance with both the gross method and the commitment method.

(a) General rulesAn AIFM must have appropriately documented procedures to calculate the exposure of each AIF under its management in accordance with the gross method and the commitment method. The calculation must be applied consistently over time.

The following general rules apply when calculating leverage:• ►Private equity: for AIF whose core investment policy is to acquire control of non-listed

companies or issuers, the AIFM should not include in the calculation of the leverage any exposure that exists at the level of those non-listed companies and issuers provided that the AIF or the AIFM acting on behalf of the AIF does not have to bear potential losses beyond its investment in the respective company or issuer

• ► Certain holding structures set up to increase the leverage of the AIF: Exposure contained in any financial or legal structures involving third parties controlled by the relevant AIF must be included in the calculation of the exposure where the structures referred to are specifically set up to directly or indirectly increase the exposure at the level of the AIF

For example, some Real Estate AIF may have to include certain holding structures in their leverage calculations.

• Temporary borrowing: AIFM should exclude temporary borrowing arrangements if these are fully covered by contractual capital commitments from investors in the AIF


(b) Gross method for calculating the exposure of the AIF The exposure of an AIF calculated in accordance with the gross method is the sum of the absolute values of all positions. The value of positions should be calculated in accordance with the AIFM Law valuation requirements (see Section 9.5.2.).

To calculate the exposure of an AIF according to the gross method an AIFM must: • Exclude the value of any cash and cash equivalents which are highly liquid investments

held in the base currency of the AIF• Convert derivative instruments into the equivalent position in their underlying assets• Exclude cash borrowings that remain in cash or cash equivalents • Include exposure resulting from the reinvestment of cash borrowings • Include positions within repurchase or reverse repurchase agreements and securities

lending or borrowing or other arrangements

The AIFM Level 2 measures outline methods of increasing exposure of an AIF for:• ► Derivative instruments: interest rate swaps, contracts for differences, futures contracts,

total return swaps, forward contracts, options and credit default swaps• ► Arrangements: convertible borrowings, repurchase agreements, reverse repurchase

agreements, securities lending arrangements and securities borrowing arrangements

The Level 2 measures lay down calculation methodologies to be adopted for the most common financial derivative instruments:• ► Futures contracts• ► Plain vanilla options (bought/sold puts and calls)• ► Swaps• ► Forward contracts• ► Financial instruments which embed derivatives

Non-standard (exotic) derivatives calculation methodologies are detailed for variance swaps, volatility swaps and barrier (knock-in knock-out) options.

(c) Commitment method for calculating the exposure of an AIF The exposure of an AIF calculated in accordance with the commitment method shall be the sum of the absolute values of all positions, after taking into account netting and hedging. The value of positions should be calculated in accordance with the AIFM Law valuation requirements (see Section 9.5.2.).

To calculate the exposure of an AIF according to the commitment method an AIFM must: • ► Convert each derivative instrument position into an equivalent position in the underlying

asset of that derivative, in accordance with the same methodologies and methods as those applied under the gross method (see (b))

• ► Apply netting and hedging arrangements• ► Calculate the exposure created through the reinvestment of borrowings where such

reinvestment increases the exposure of the AIF • ► Include positions within repurchase or reverse repurchase agreements and securities

lending or borrowing or other arrangements (see (a))

The AIFM Level 2 measures set out rules to be applied in relation to: • ► Netting arrangements • ► Hedging arrangements• ► Instruments which should not be converted into an equivalent position in the underlying

asset: swaps meeting certain criteria and derivatives equivalent to long positions• ► Exclusion of derivative instruments used for currency hedging purposes meeting certain

criteria

AIFM managing AIF that, in accordance with their core investment policy, primarily invest in interest rate derivatives are required to make use of the specific duration netting rules in order to take into account the correlation between the maturity segments of the interest rate curve.


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B. Operational riskAIFM are required to implement effective internal operational risk management policies and procedures in order to identify, measure, manage and monitor appropriately operational risks including professional liability risks to which the AIFM is or could be reasonably exposed. It should implement effective measures for the treatment of non-compliance with these policies and for taking corrective action.

Professional liability risks include, inter alia, risks of: • ► Loss of documents evidencing title to assets of the AIF• ► Misrepresentations or misleading statements made to the AIF or its investors• ► Acts, errors or omissions resulting in a breach of:

• Legal and regulatory obligations• Duty of skill and care towards the AIF and its investors• Fiduciary duties• Obligations of confidentiality• AIF rules or instruments of incorporation• Terms of appointment of the AIFM by the AIF

• ► Failure to establish, implement and maintain appropriate procedures to prevent dishonest, fraudulent or malicious acts

• ► Improperly carried out valuation of assets or calculation of share or unit prices• ► Losses arising from business disruption, system failures, failure of transaction processing or

process management

Operational risk management must be performed independently, as part of the risk management policy.

Operational risk exposures and loss experience must be monitored on an ongoing basis and must be subject to regular internal reporting. The AIFM must set up a historical loss database, in which any operational failures, loss and damage experience must be recorded. This database must record, inter alia, any professional liability risks that have materialized. The AIFM should use of its internal historical loss data and where appropriate of external data, scenario analysis and factors reflecting the business environment and internal control systems.

See also Subsection 7.4.4.D..

C. Liquidity risk AIFM must, for each AIF that they manage which is not an unleveraged closed-ended AIF, employ an appropriate liquidity management system and adopt procedures which enable them to monitor the liquidity risk of the AIF and to ensure that the liquidity profile of the investments of the AIF complies with its underlying obligations.

AIFM must regularly conduct stress tests, under normal and exceptional liquidity conditions, which enable them to assess and monitor the liquidity risk of the AIF.

AIFM must ensure that, for each AIF that they manage, the investment strategy, the liquidity profile and the redemption policy are consistent, i.e., when investors have the ability to redeem their investments in a manner consistent with the fair treatment of all AIF investors and in accordance with the AIF’s redemption policy and its obligations.

The liquidity management system and procedures must at least ensure that: • The AIFM maintains a level of liquidity in the AIF appropriate to its underlying obligations• The AIFM monitors the liquidity profile of the AIF’s portfolio of assets, and the material liabilities

and commitments, contingent or otherwise, which the AIF may have in relation to its underlying obligations. For these purposes the AIFM shall take into account the profile of the investor base of the AIF, including the type of investors, the relative size of investments and the redemption terms to which these investments are subject

• Where the AIF invests in other UCIs, the AIFM monitors the liquidity management approach adopted by the managers of those other UCIs


• The AIFM implements and maintains appropriate liquidity measurement arrangements and procedures to assess the quantitative and qualitative risks of positions and of intended investments which have a material impact on the liquidity profile of the portfolio of the AIF’s assets to enable their effects on the overall liquidity profile to be appropriately measured

• The AIFM considers and puts into effect the tools and arrangements, including special arrangements (e.g., side pockets, gates), necessary to manage the liquidity risk of each AIF under its management

AIFM must include appropriate escalation measures in their liquidity management system and procedures to address anticipated or actual liquidity shortages or other distressed situations of the AIF.

Where appropriate, considering the nature, scale and complexity of each AIF they manage, AIFM must implement and maintain adequate limits for the liquidity or illiquidity of the AIF consistent with its underlying obligations and redemption policy and in accordance with the quantitative and qualitative risk limits. AIFM should monitor compliance with those limits and where limits are exceeded or likely to be exceeded, determine the required (or necessary) course of action.

AIFM are required to regularly conduct stress tests, at least annually, under normal and exceptional liquidity conditions, which enable them to assess the liquidity risk of each AIF under their management. The stress tests must: • ► Where appropriate, simulate a shortage of liquidity of the assets in the AIF and atypical

redemption requests• ► Cover market risks and any resulting impact, including on margin calls, collateral requirements

or credit lines• ► Account for valuation sensitivities under stressed conditions

D. Securitization Risk management requirements in relation to investments in securitization positions are covered in Section 5.4.1..

9.3.7. Delegation of risk management activities

Delegation of the risk management function is subject to the general provisions on delegation. For example: the delegation arrangement must take the form of a written agreement between the delegate and the AIFM. The general provisions on delegation are covered in Section 7.4.15..

The AIFM is not permitted to delegate 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. When assessing the extent of delegation, the CSSF is required to assess the entire delegation structure taking into account not only the assets managed under delegation but also the qualitative criteria. These are outlined in Subsection 7.4.15.D..

As well as the general provisions on delegation, specific provisions apply to the delegation of investment management functions, including risk management. These are outlined in Subsection 8.2.2.C..


The risk profiles of AIF must be communicated in the application for authorization of the AIFM.

The AIFM will be required to describe their risk management systems in their applications for authorization, and must notify the CSSF of any material changes to the risk management policy and of the arrangements, processes and techniques.

AIFM are required to report to the CSSF information on the current risk profile of the AIF and the risk management systems employed by the AIFM to manage the market risk, liquidity risk, counterparty risk and other risks including operational risk (see Section 7.4.21.B.).


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AIFM managing one or more AIF employing leverage on a “substantial basis” (i.e., exceeding three times the NAV) must make available to the CSSF information about the overall level of leverage employed by each AIF it manages, a breakdown between leverage arising from borrowing of cash or securities and leverage embedded in financial derivatives, the five largest sources of borrowed cash or securities and the extent to which their assets have been reused under leveraging arrangements (see Section 7.4.21.B.).

9.3.9. Disclosures to investors

AIFM are required to disclose to investors, before they invest, a description of the AIF’s liquidity risk management, including the redemption rights both in normal and in exceptional circumstances, and the existing redemption arrangements with investors (see also Section 12.3.3.).

AIFM are required to periodically disclose to investors: • ► The percentage of the AIF’s assets which are subject to special arrangements arising from their

illiquid nature, and information on the arrangements • ► Any new liquidity management arrangements, systems and procedures• ► The current risk profile of the AIF • ► The main features of the risk management systems employed by the AIFM

See Section 12.4.2.2..

AIFM must disclose information on leverage to investors before they invest in an AIF (see Section 12.3.3.). AIFM managing leveraged AIF are also required to disclose information on leverage to investors on a regular basis (see Section 12.4.2.3.).

9.4. Risk management of SIFs

9.4.1. Introduction

SIFs are required to implement risk management systems to identify, measure, manage and monitor appropriately the risks associated with the investment positions and their contribution to the overall risk profile of the portfolio. The Directors of the SIF or its management company175 must adopt the risk management system of the SIF and, subsequently, have it reviewed and documented on a regular basis.


The risk management requirements applicable to SIFs are outlined in the SIF Law and CSSF Regulation No 12-01 laying down detailed rules for the application of Article 42a of the law of 13 February 2007 relating to specialised investment funds concerning the requirements regarding risk management and conflicts of interest.

ALFI issued Recommendations on the Risk Management System for Specialised Investment Funds in June 2012. They cover:• The risk management function and implementation of appropriate risk management systems:

• Responsibility for the maintenance of the risk management system• Interpretation of results• Ownership of the function within the decision making bodies• Independence of the function

175 ”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 limited by shares, the 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.


• Risk identification, measurement and monitoring:• Determining the material risks to which the SIF is or may be exposed• Determining the method to measure the risks identified• Approach to qualitative and quantitative risk limits and the monitoring frequency• Determining the process for reporting and escalation of breaches


SIFs are required to establish and maintain a risk management function.

The role of the risk management function includes: • ► Implementing and maintaining an appropriate and documented risk management policy that allows

adequate detection, measurement, management and monitoring of exposure to market, liquidity and counterparty risks, as well as of exposure to all other risks, including operational risk, which may be significant in the context of the activities of the SIF (or compartments thereof)

• ► Ensuring compliance with the risk limit system of the SIF

SIFs are required to take into account the nature, scale and complexity of their activities, as well as their structure.

The risk management function must have the necessary authority and access to all relevant information which is necessary for the performance of its tasks.

The risk management function should be hierarchically and functionally independent from operating units. However, the CSSF may allow a SIF to derogate from this obligation of independence where this derogation is appropriate and proportionate in view of the nature, scale and complexity of the activities, and the structure of the SIF.

A SIF must be able to demonstrate that appropriate safeguards against conflicts of interests have been adopted to allow the independent performance of risk management activities, and that its risk management system fulfills the SIF Law.

9.4.4. Delegation of risk management activities

SIFs are permitted to delegate all or part of the activities of the risk management function to third parties, provided that the third party has the necessary competence and capacity to exercise the activities of the risk management function in a reliable, professional and efficient manner and in accordance with the applicable legal and regulatory requirements.

The delegation does not impact the liability of the Directors of the SIF or its management company in relation to the adequacy and efficiency of the risk management system and the monitoring of risks linked to the activities of the SIF.


SIFs must provide a description of the risk management system to the CSSF as part of their application for authorization.

This description must cover, inter alia:• ► The risk management function (including the allocation of responsibilities), its independence or

the specific protection measures implemented to avoid conflicts of interest and ultimately allowing independent execution of the risk management activities or procedures

• ► Processes and methods to appropriately measure and manage the risks arising from the investment strategies and the risk profile of the SIF (or compartments thereof)

Any subsequent major change to their risk management system must be notified to the CSSF.

See also Sections 4.3. and 4.4..


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9.5.1. 2010 Law UCIs

Management companies are required to establish appropriate procedures which are consistent with the constitutional document to ensure the proper and accurate valuation of the assets and liabilities of the UCI.

In order to comply with the duty to act in the best interests of the shareholders or unitholders, management companies are required to ensure that fair, correct and transparent pricing models and valuation systems are used for the UCITS they manage. Management companies must be able to demonstrate that the UCITS’ portfolios have been accurately valued.

The 2010 Law states that unless otherwise provided for in the constitutional document of the UCI, the valuation of the assets of the UCI must be based, in the case of officially listed securities, on the last known stock exchange price, unless such price is not representative. For securities not so listed and for securities which are so listed, but for which the latest price is not representative, the valuation must be based on the probable realization value, estimated with care and in good faith.

For UCITS, the net asset value (NAV) must be calculated at least twice a month. For 2010 Law Part II UCIs, the NAV must be calculated at least monthly.

The rules for the valuation of assets must be described in the prospectus (see Section 12.3.1.).

The protective measures adopted by a UCI against late trading and market timing practices may include the valuation of securities at “fair value” (see Section 10.3.6.).

Detailed valuation rules or guidelines have been laid down for specific cases. These include the use of amortized cost as the valuation basis for sub-three month paper, and OTC FDIs in the portfolios of UCITS.

A. The use of amortized cost as the valuation basis for sub-three month paper (see also Section 5.2.2.7.5.)

In February 2009, ALFI issued recommendations on the use of amortized cost as the valuation basis for sub-three month paper.

In accordance with Article 9(3) and Article 28(4) of the 2010 Law, the CSSF accepts that the Board of Directors of management companies or investment companies may permit the inclusion of sub-three month paper in the mark-to-market assessment at an amortized cost price, if they consider that amortized cost is the closest to the probable realization value, estimated with care and good faith.

In such cases, ALFI recommends the following conditions be met:• ► Fair valuation at amortized cost should be restricted to securities with the highest-level

credit rating (A1/P1 and A1+/P1 or equivalent) and with a final residual maturity of less than three months. Where such securities are downgraded, full mark-to-market valuation should immediately be applied

• ► Full mark-to-market valuation should be applied to structured investment vehicles (SIVs)• ► The decision to value the money market instruments (MMIs) on an amortized cost basis for

the mark-to-market assessment must be approved by the Directors of the money market fund and the rationale underlying the decision documented

• ► The exclusion of MMIs from the mark-to-market valuation is based on the premise that such securities will be held to maturity or are realizable at par. If required to meet potential liquidity needs of the fund, these securities or a portion thereof should be reclassified within the full mark-to-market analysis. The reclassification process should be documented, reviewed and approved on a periodic basis by the Board of Directors of the investment company or management company

9.5. Valuation


B. OTC FDIsA reliable and verifiable valuation is required for OTC FDIs (see also Section 5.2.2.7.6.I.(3).

Management companies are thus required to establish, document, implement and maintain arrangements and procedures which ensure appropriate, transparent and fair valuation of OTC FDIs.

CSSF Circular 11/512 requires UCITS and management companies to draft policies and procedures for valuing OTC FDIs in a transparent, independent and fair manner. Valuation principles should be presented in the format laid out in the Appendix to the Circular on the content of the risk management process to be communicated to the CSSF, including the following information: type of FDIs, volume, price provider, frequency of valuation, valuing system, independence of source and valuation controls performed on the price.

A reliable and verifiable valuation is understood to refer to a valuation corresponding to the “fair value”. “Fair value” is understood to refer to the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. It should not rely only on the market quotations by the counterparty. The valuation should fulfill the following criteria:• ► The valuation must be based on a current market value. If no such market value is available,

then the valuation should be based on a valuation model that uses an appropriate and recognized methodology

• ► The verification of the valuation must be performed by one of the following:• An independent third party who performs the verification on a sufficiently frequent basis

(in practice at a frequency at least equal to the NAV calculation frequency) and following a process that can be monitored by the UCITS

• A unit independent of the portfolio management of the UCITS. The UCITS may use a third party valuation system or market data but must verify their adequacy. Models used by a party linked to the UCITS (such as a dealing room through which the UCITS settles its FDI transactions) are expressly prohibited if they have not been reviewed by the UCITS

The UCITS must be able to determine with reasonable accuracy the fair value of the OTC FDIs throughout their entire lifespan.

ESMA is of the view that a process must be developed which enables the UCITS, throughout the life of the FDI, to value the investment concerned with reasonable accuracy at its fair value on a reliable basis reflecting an up-to-date market value. This process must include organization and means of allowing for a risk analysis realized by a department independent from commercial or operational units and from the counterparty or, if these conditions cannot be fulfilled, by an independent third party.

In the latter case, the UCITS remains responsible for the correct valuation of the OTC FDIs and must, inter alia, check that the independent third party can adequately value the types of OTC FDIs it wishes to invest in.

Lastly, this organization of the UCITS implies that risk limits are to be defined.ESMA believes that “independent” and “adequately equipped” means a unit which has the adequate means to perform the valuation. This implies that the UCITS uses its own valuation systems, which can however be provided by an independent third party - excluding the use of valuation models provided by a third party related to the UCITS (such as a dealing room with which OTC FDIs are concluded) which have not been reviewed by the UCITS, and excluding the use of data (such as volatility or correlations) produced by a process which has not been qualified by the UCITS.

9.5.2. AIF

AIFM are required to establish, maintain, implement and review, for each AIF they manage, written policies and procedures that ensure a sound, transparent, comprehensive and appropriately documented valuation process. The AIFM must ensure that fair, appropriate and transparent valuation methodologies are consistently applied for the AIF it manages.


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AIFM must ensure that the net asset value per share or unit is calculated according to documented procedures and the methodology at each subscription or redemption of shares or units, and at least once a year.

A description of the AIF’s valuation procedure and of the pricing methodology for valuing assets, including the methods used in valuing hard-to-value assets, must be disclosed to investors before they invest (see Section 12.3.3.).

A. Implementation of valuation policies and proceduresThe valuation policies must identify, and the procedures implement, the valuation methodologies used for each type of asset in which the AIF may invest in accordance with applicable national law and the AIF constitutional document. The AIFM cannot invest in a particular type of asset for the first time unless the valuation policy covers appropriate valuation methodology or methodologies for that specific type of asset. The selection process of a particular methodology must include an assessment of the available relevant methodologies, taking into account their sensitivity to changes in variables and how specific strategies determine the relative value of the assets in the portfolio. Prices must be obtained from independent sources whenever possible and appropriate.

The valuation policies and procedures must cover:• Valuation methodologies covering, inter alia:

• Inputs, including selection criteria for pricing and market data sources• Models: main features (see Subsection 9.5.2.B.)

• ► The obligations, roles and responsibilities of all parties involved in the valuation process, including the senior management of the AIFM

• ► The competence and independence of personnel who are effectively carrying out the valuation of assets

• ► The specific investment strategies of the AIF and the assets the AIF might invest in• ► The controls over the selection of valuation inputs, sources and methodologies• ► Review process for the individual values of assets and escalation channels for resolving

differences in values for assets (see Subsection 9.5.2.F.)• ► The valuation of any adjustments related to the size and liquidity of positions, or to changes in

the market conditions, as appropriate• ► The appropriate time for closing the books for valuation purposes• ► The appropriate frequency for valuing assets• ► How a change to the valuation policy may be implemented (see Subsection 9.5.2.D.)

The valuation policies and procedures and the designated valuation methodologies must be applied consistently:• ► To all assets within an AIF taking into account the investment strategy, the type of asset and, if

applicable, the existence of different external valuers• ► Over time, where no update is required, and ensuring that valuation sources and rules remain

consistent over time• ► Across all AIF managed by the same AIFM, taking into account the investment strategies and

the types of asset held by the AIF, and, if applicable, the existence of different external valuers

B. Use of models to value assets If a model is used to value the assets of an AIF, the model and its main features must be explained and justified in the valuation policies and procedures. The reason for the choice of the model, the underlying data, the assumptions used in the model and the rationale for using them, and the limitations of the model-based valuation must be appropriately documented.

The valuation policies and procedures must ensure that, before being used, a model is validated by a person with sufficient expertise who has not been involved in the process of building that model. The model must be subject to prior approval by the senior management of the AIFM.

C. Valuation functionThe valuation function must be either performed by:• ► The AIFM itself, provided that the valuation task is functionally independent from the portfolio

management and the remuneration policy and other measures ensure that conflicts of interest are mitigated and that undue influence upon the employees is prevented


In this case, the valuation policies must include a description of the safeguards for the functionally independent performance of the valuation task. Such safeguards must include measures to prevent or restrain any person from exercising inappropriate influence over the way in which a person carries out valuation activities. The CSSF may require the AIFM to have its valuation procedures and/or valuations verified by an external valuer or, where appropriate, an auditor.

• ► An external valuer subject to mandatory professional registration, independent from the AIF and the AIFM.In this case, the valuation policies and procedures must:• Set out a process for the exchange of information between the AIFM and the external valuer

to ensure that all necessary information required for the purpose of performing the valuation task is provided

• Ensure that the AIFM conducts initial and periodic due diligence on third parties that are appointed to perform valuation services

External valuers must provide upon request professional guarantees to demonstrate their ability to perform the valuation function.

The professional guarantees must contain evidence of the external valuer’s qualification and capability to perform proper and independent valuation, including, inter alia evidence of: • ► Sufficient personnel and technical resources• ► Adequate procedures safeguarding proper and independent valuation• ► Adequate knowledge and understanding of the investment strategy of the AIF and of the assets

the external valuer is appointed to value• ► A sufficiently good reputation and sufficient experience with valuation• ► If the external valuer is subject to registration, name of the authority, and indication of the legal

or regulatory provisions or rules of professional conduct to which the external valuer is subject

D. Periodic review of valuation policies and procedures Valuation policies must provide for a periodic review of the policies and procedures, including of the valuation methodologies. The review must be carried out at least annually and before the AIF engages with a new investment strategy or a new type of asset that is not covered by the existing valuation policy.

The valuation policies and procedures must cover how a change to the valuation policy, including a methodology, may be effected and in what circumstances this would be appropriate. Senior management must review and approve any changes to the policies and procedures.

E. Frequency of valuation of assets The assets of an AIF must be valued, and the net asset value (NAV) per share or unit calculated (see Subsection 9.5.2.G.), at least once a year.

For open-ended AIF, financial instruments held must be valued every time the NAV per share or unit is calculated.

Other assets held by open-ended AIF must be valued at least once a year, and every time there is evidence that the last determined value is no longer fair or proper.

For closed-ended AIF, such valuations and calculations must also be carried out in case of an increase or decrease of the capital by the relevant AIF.

F. Review of individual values of assets AIFM must ensure that all assets held by the AIF are fairly and appropriately valued, and document the way the appropriateness and fairness of the individual values is assessed.

The valuation policies and procedures must set out a review process for the individual values of assets, where a material risk of an inappropriate valuation exists, including in the following cases: • ► The valuation is based on prices only available from a single counterparty or broker source• ► The valuation is based on illiquid exchange prices• ► The valuation is influenced by parties related to the AIFM


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• ► The valuation is influenced by other entities that may have a financial interest in the AIF’s performance

• ► The valuation is based on prices supplied by the counterparty who originated an instrument, in particular where the originator is also financing the AIF’s position in the instrument

• ► The valuation is influenced by one or more individuals within the AIFM

The review process must include sufficient and appropriate checks and controls on the reasonableness of individual values, including: • ► Verifying values by a comparison amongst counterparty-sourced pricings and over time• ► Validating values by comparison of realized prices with recent carrying values• ► Considering the reputation, consistency and quality of the valuation source• ► A comparison with values generated by a third party• ► An examination and documentation of exemptions• ► Highlighting and researching any differences that appear unusual or vary by valuation

benchmark established for the type of asset• ► Testing for stale prices and implied parameters• ► A comparison with the prices of any related assets or their hedges• ► A review of the inputs used in model-based pricing, in particular of those to which the model’s

price exhibits significant sensitivity

The valuation policies and procedures shall include appropriate escalation measures to address differences or other problems in the valuation of assets.

G. Calculation of the net asset value (NAV) per share or unitAIFM must ensure that for each AIF they manage the NAV per share or unit is calculated on the occasion of each issue or subscription or redemption or cancellation of shares or units, and at least once a year.

The procedures and the methodology for calculating the NAV per share or unit must be documented. The calculation procedures and methodologies and their application must be subject to regular verification by the AIFM.

Remedial procedures must be implemented in the event of an incorrect calculation of the NAV.

AIFM must ensure that the number of shares or units in issue is subject to regular verification, at least as often as the share or unit price is calculated.

H. OversightThe depositary is required to ensure that the value of the shares or units of the AIF is calculated in accordance with the applicable law and the constitutional document of the AIF (see Section 11.4.5.3.).

I. LiabilityThe AIFM is responsible towards the AIF and its investors for the proper valuation of the assets of the AIF, the calculation of the NAV and its publication. However, when an external valuer is appointed, it should be liable to the AIFM for any losses suffered by the AIFM as a result of its negligence or intentional failure to perform its tasks.

9.5.3. SIFs

The valuation of the assets of the SIF should be based on the fair value176. This value must be determined in accordance with the rules set forth in the constitutional document, and, in practice, disclosed in the offering document. These procedures could, for example, provide for valuation principles established by professional associations of a specific industry177.

176 Although the SIF Law states “The valuation of the assets of the SIF must be based on the fair value unless otherwise provided for in the constitutional document”, in practice assets should be valued at fair value.

177 e.g., the International Private Equity and Venture Capital Valuation Guidelines for private equity/venture capital funds and the Royal Institution of Chartered Surveyors (RICS) Valuation Standards in the case of real estate funds.

284 | 10. Administration

10.1. Introduction

This chapter covers the administration function including:• ➢Entitieswhichmayperformadministration

of Luxembourg UCIs: the management company,AIFMorthirdpartyadministrator

• ➢Therolesandresponsibilitiesoftheadministrator

• ➢Theauthorizationprocedureforadministration

• ➢TherequirementsapplicablewhereadministrationisperformedbythemanagementcompanyorAIFMitself,ordelegated

• ➢Thedetailedrulesrelatingtotheaccountingprocedures,systems,recordkeepingandreporting to investors on subscriptions and redemptions

• ➢Thesubscriptionandredemptionofsharesorunits,paymentofdividends,anti-moneylaunderingandcounterterroristfinancing(AML/CFT)procedures,andprotectionagainstlatetradingandmarkettimingpractices

• ➢ThetreatmentofNAVcomputationerrorsand compensation of losses arising from non-compliancewithapplicableinvestmentrestrictions

10. Administration


10. Administration | 285

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10.2. The administration function

10.2.1.EntitiesperformingadministrationofLuxembourgUCIs

Administrationisoneofthemanagementcompany’sorAIFM’sfunctions.

Inpractice,managementcompaniesandAIFMgenerallydelegateadministrationtoaspecializedthirdpartyadministrator(hereafterreferredtoasan“administrator”).Inthecaseofself-managedUCITSoraninternallymanagedAIF,theadministrationfunctionisalsogenerallydelegatedtoanadministrator.

Ingeneral,inLuxembourg,oneserviceproviderwillbeappointedtocarryouttheactivitiesof:• ➢Fundadministration(covering,forexample,accountingservices)• ➢Registrarandtransferagent(generallyreferredtoas“transferagent”,covering,forexample,the

maintenanceoftheshareholderorunitholderregister)• ➢Domiciliationagent

Itisalsopossibletoappointdifferentserviceproviderstocarryouttheseactivities,whichmayormaynotbepartofthesamegroup.

ALuxembourgadministratorofUCIsmustbeauthorizedasoneofthefollowing:• ➢Acreditinstitution• ➢Afinancialsectorprofessional(PSF)• ➢Amanagementcompany• ➢AnAIFM

PSFswhichofferadministrationserviceswillgenerallybeauthorizedasregistraragents.Thisauthorizationautomaticallypermitsthemtoalsoprovidetheservicesofclientcommunicationagentsandfinancialsectoradministrativeagents.

Luxembourgadministratorsarerequiredtocomplywiththerelevantlawsandregulatoryrequirements,haveadequateorganizationinordertoperformtheadministration,andobtainauthorizationfromtheCSSF(seeSection10.2.3.).

10.2.2. Scope of administration activities

The2010LawandtheAIFMLawdefinetheactivitiesofadministrationofUCIs.Theseinclude:• ➢Legalandfundmanagementaccountingservices• ➢Customerinquiries• ➢Valuationoftheportfolioandpricingofthesharesorunits(i.e.,calculatingtheNAV)(seeSection

10.4.)• ➢Regulatorycompliancemonitoring• ➢Maintenanceofshareholderorunitholderregister• ➢Distributionofincome• ➢Shareorunitissuesandredemptions• ➢Contractsettlements(includingcertificatedispatch)• ➢Recordkeeping


Inpractice,theadministratorwillgenerallyprovideadditionalservicesincluding:• ➢Supportingthedrawingupoftheprospectus,financialreportsandallotherdocumentsintended

for investors• ➢Dispatchingoffinancialreportsandotherdocumentsintendedfortheshareholdersorunitholders• ➢Reportingoffinancialinformationandelectronictransmissionofprospectus,KeyInvestor

Information(KII)forUCITS,andfinancialreports(annualreports,longformreportsandotherreports-seeChapter10)totheCSSF

• ➢Servicesrelatedtotaxreporting• ➢Supportrelatingtocompliance,riskmanagementanddistribution

10.2.3.Authorization

EntitiesrequestingauthorizationasadministratorsofUCIsarerequiredtoprovideinformationtotheCSSFincluding,inter alia,informationon:• ➢UCITS,otherUCIsandothervehiclesforwhichtheadministratorintendstoprovideadministration

servicesoverthenextthreeyears,andestimatedbudget• ➢Humanresources,includingcurriculumvitaeofresponsibleofficersandorganizationchart• ➢Technicalresources:

• ➢Administrativeprocedures• ➢Accountingprocedures• ➢Relatedfunctionsandresponsibilities

• ➢Detailsofofficepremises,includinglocation,size,securityarrangementsanddocumentarchivingprotocols

• ➢Internalcontrolprocedures:• ➢Registrar• ➢Administration• ➢Clientcommunication

• ➢Anti-moneylaunderingandcounterterroristfinancingprocedures(seeSection10.5.5.)• ➢Detailsontheexecutionofadministrativetasksincluding:

• ➢Accounting,includingNAVcalculation• ➢HoldingofaccountingandotheressentialdocumentationoftheUCI• ➢Holdingoftheshareholderorunitholderregister,includingmeasurestakenagainstmarket

timingandlatetrading(seeSection10.5.6.)• ➢Theissueandredemptionofthesharesorunits(seeSection10.5.)• ➢Thedrawingupoftheprospectus,financialreportsandallotherdocumentsintendedfor

investors• ➢Dispatchingoffinancialreportsandotherdocumentsintendedfortheshareholdersor

unitholders• ➢Reportingoffinancialinformationandelectronictransmissionofprospectus,KIIandfinancial

reportstotheCSSF(seeChapter12)• ➢Informationonsub-delegationofactivities• ➢Theinformationflowbetweentheadministratorandthedepositary

Thisinformationprovidedwillbeinadditiontothatincludedwithinastandardapplicationforauthorization;formanagementcompanies,thisiscoveredinSection7.4.1..

10.2.4.Requirements

AUCITSmanagementcompany,AIFMorthethirdpartyadministratoractingontheirbehalf,issubjecttothemanagementcompany’sorAIFM’shomeMemberState’sorganizationalrequirements,includingthoseonadministration.Theseinclude,inter alia: • ➢Requirementsontheimplementationofsoundadministrativeandaccountingprocesses• ➢Controlandsecurityarrangementsforelectronicdataprocessing• ➢Reportingrequirements


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InthecaseofUCITS,themanagementcompany,orthethirdpartyadministratoractingontheirbehalf,mustensuretheUCITShomeMemberState’srequirementsaremetregardingtheconstitutionandfunctioningoftheUCITS,aswellasthespecificrequirementsoftheUCITS’fundrulesorinstrumentsofincorporation,prospectusesandofferingdocuments,includingincaseswheretheUCITSismanagedcross-border.Forexample,theaccountingandvaluationmustbeperformedinaccordancewiththeUCITS’homeMemberStaterequirements(seeSection7.5.).

ALuxembourgUCITSmanagementcompanymaydelegatetheadministrationoftheUCITSitmanagestoathirdpartywhichisauthorizedtoprovideadministrationservicesandhasanadequateorganizationinordertoperformtheadministration:• ➢ALuxembourgUCITSmanagementcompanywhichmanagesaLuxembourgUCITSisauthorizedto

delegatetheadministrationoftheUCITStoanentityestablishedinLuxembourg• ➢ALuxembourgUCITSmanagementcompanywhichmanagesaUCITSdomiciledinanotherMember

StateisauthorizedtodelegatetheadministrationoftheUCITStoanentityestablishedineither:• Luxembourg • TheMemberStatewheretheUCITSisdomiciled

InthecaseofAIF,theAIFM,and,whereapplicable,thethirdpartyadministratoractingonitsbehalf,isrequiredtocomplywiththerelevantnationalAIFproductrules.

ThecentraladministrationofaLuxembourgAIF(2010LawPartIIUCIs,SIFandotherLuxembourgAIF)mustbeinLuxembourg.

ThemanagementcompanyorAIFMisrequiredtomonitorthethirdpartyadministratortoensurethatitcomplieswiththeregulatoryrequirements.Themanagementcompanyis,inter alia,requiredtoensurethatthedelegatehasaninternalorganizationandinternalprocedureswhichenableeasyaccesstoallnecessaryinformationpermittingefficientcontrolbythemanagementcompanyoverthe delegated activities.

IftheadministrationfunctionhasbeendelegatedtoaLuxembourgadministrator,theCSSFmaypermit,onacase-by-casebasis,theperformanceofcertain“preparatorytasks”outsideLuxembourgsubjecttotheoverallresponsibilityoftheappointedLuxembourgadministrator.

TheCSSFmustbeinformedbeforehandofanydelegationorsub-delegationasregardstheadministrationofUCIs,anddetailedrequirementsmustbemet(seeSubsection7.4.15.).

Therequirementsapplicabletoadministrationarelaiddownin:• ➢ForUCITSandotherUCIs:

• The2010Law• CSSFRegulation10-4,inter alia,onorganizational,conflictsofinterest,conductofbusinessand

riskmanagementrequirementsapplicabletoChapter15managementcompanies• CSSFCircular12/546ontheauthorizationandorganizationofChapter15management

companiesandUCITSinvestmentcompanieswhichhavenotdesignatedamanagementcompany• ➢ForAIF:

• TheAIFMLaw• EuropeanCommissionDelegatedRegulation(EU)No231/2013supplementingDirective

2011/61/EUwithregardtoexemptions,generaloperatingconditions,depositaries,leverage,transparencyandsupervision

CSSFCircular91/75providessomeadditionalclarification178.

10.2.4.1. Accounting procedures

ManagementcompaniesandAIFMarerequiredtoemployaccountingpoliciesandprocedurestoensure the protection of investors.

TheaccountsoftheUCImustbekeptinsuchawaythatallassetsandliabilitiesoftheUCIcanbedirectlyidentifiedatalltimes.IfaUCIhasdifferentinvestmentcompartments,separateaccountsmust be maintained for those compartments.

178 Circular91/75referstothe1988Law,theprecursortothe2002Law,nowtheprecursortothe2010Law.TheCSSFhasindicateditsintentiontoreviewthisCircularwithaviewtoissuingacircularwhichcomplementsandiscompatiblewiththeupdatedLaws(seeCircular03/87).CertainprovisionsofCircular91/75maystillberelevanttofundscreatedunderthe2010Law;someoftheseprovisionsmayalsoberelevanttofundscreatedundertheSIFLaw.


Managementcompaniesmustestablish,implementandmaintainaccountingpoliciesandprocedures,inaccordancewithaccountingrulesoftheUCITS’homeMemberStates,soastoensurethatthecalculationoftheNAVofeachUCITSisaccuratelycarriedout,onthebasisofitsaccounts,andthatsubscriptionandredemptionorderscanbeproperlyexecutedatthatNAV.

AIFMsmustestablish,implementandmaintainaccountingandvaluationpoliciesandproceduressoastoensurethatthenetassetvalueofeachAIFisaccuratelycalculatedonthebasisoftheapplicable accounting rules and standards.

ManagementcompaniesandAIFMmustestablishappropriateprocedurestoensuretheproperandaccuratevaluationoftheassetsandliabilitiesoftheUCIs(seeSection9.5.).

The“accountingadministration”ofmanagementcompaniesandAIFMiscoveredinSection7.4.11..


10.2.4.2. Electronic data systems

Themanagementcompany,AIFMoritsadministratormusthavesuitableelectronicsystemstopermitatimelyandproperrecordingofeachportfoliotransaction,subscriptionandredemptionorders.

ForChapter15managementcompanies,theCSSFhasclarifiedthattheaforementionedrequirementsinrelationtoportfoliotransactionsandsubscriptionandredemptionordersmaybyensuredthrougheitherofthefollowing:• Equippingitselfwithsuitableelectronicsystems• Ensuringthatitsdelegatesareequipped,onanongoingbasis,withsuitableelectronicsystems,

through initial and ongoing due diligence

Themanagementcompany,AIFMoritsadministratormustensureahighlevelofsecurityduringtheelectronicdataprocessingaswellasintegrityandconfidentialityoftherecordedinformation,asappropriate.Thiswouldinclude,inter alia,enablingatleasttimelyrecoveryofdataandfunctionsandresumptionofactivities(seeSection7.4.13.).

AccordingtoChapterDofCircular91/75,theITsystemwhichprocessestheaccountingrecordsandthecalculationoftheNAVshouldmeetthefollowingconditions:• ➢Theadministratorand/orthemanagementcompanyshouldhavethemeanstoinputandextract

information,suchaccessbeingimmediateandunrestricted• ➢Theadministratorand/orthemanagementcompanyshouldhaveknowledgeoftheoperationof

theprocessingunitandauthorizeanyprogrammodifications• ➢Theadministratorand/orthemanagementcompanyshouldhavetheabilitytointervenedirectlyin

the processing of information stored in the processing unit• ➢Whereotherpartiesusethecomputerunit,adequateprotectionshouldexisttopreventaccessto

the UCI data

AccordingtoChapterDofCircular91/75,thefollowingadditionalconditionsshouldbemetwheretheITsystemislocatedabroad:• ➢Informationstoredintheprocessingunitmustbetransferredanddownloadedoneachvaluationof

assetsandatleastweekly• ➢Theadministratorand/orthemanagementcompanymustbeabletocontinuenormaloperationsin

theeventofanemergency,suchasabreakdownincommunicationswiththeprocessingunit

ItwouldbeexpectedthatinvestmentadvisersorotheragentsabroadmayhaveimmediateaccesstotheITsystemandmayinstigateaccountingoperationswithinthescopeoftheirduties,providedthat:• ➢Controlsexisttoensurethatonlytheyhaveaccesstothedataapplicabletotheirduties• ➢TheUCIhasestablishedmanagementcontrolprocedurestoensurethattheoperationsinitiatedby

theportfoliomanagerscomplywithitsregulations

10.2.4.3. Recording of portfolio transactions

Themanagementcompany,AIFMoritsadministratormustensure,foreachportfoliotransactionrelatingtoUCITS,thatarecordofinformationwhichissufficienttoreconstructthedetailsoftheorderandtheexecutedtransactionoroftheagreement(inthecaseofAIF)isproducedwithoutdelay.


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The record must include:• ➢ThenameorotherdesignationoftheUCIandofthepersonactingonaccountoftheUCI• ➢Thedetailsnecessarytoidentifytheinstrumentinquestion,orinthecaseofanAIF,theasset• ➢Thequantity• ➢Thetypeoftheorderortransaction• ➢Theprice• ➢Fororders,thedateandexacttimeofthetransmissionoftheorderandnameorotherdesignation

ofthepersontowhomtheorderwastransmitted,orfortransactions,thedateandexacttimeofthe decision to deal and execution of the transaction

• ➢Thenameofthepersontransmittingtheorderorexecutingthetransaction• ➢Whereapplicable,thereasonsfortherevocationofanorder• ➢Forexecutedtransactions,thecounterpartyandexecutionvenueidentification

HandlingofordersiscoveredinSubsection8.2.1.F..

10.2.4.4. Subscription and redemption orders

A. RecordingThemanagementcompany,AIFMoritsadministratormusttakeallreasonablestepstoensurethatthesubscriptionandredemptionordersreceivedarecentralizedandrecordedimmediatelyafterreceiptofanysuchorderinthecaseofUCITSorwithoutunduedelayafterreceiptofanysuchorderinthecaseofAIF.

Thatrecordincludesinformationonthefollowing:• ➢TherelevantUCI• ➢Thepersongivingortransmittingtheorder• ➢Thepersonreceivingtheorder• ➢Thedateandtimeoftheorder• ➢Thetermsandmeansofpayment• ➢Thetypeoftheorder• ➢Thedateofexecutionoftheorder• ➢Thenumberofsharesorunitssubscribedorredeemed• ➢Thesubscriptionorredemptionpriceforeachshareorunitor,inthecaseofAIF,theamountof

capital committed and paid• ➢Thetotalsubscriptionorredemptionvalueofthesharesorunits• ➢Thegrossvalueoftheorderincludingchargesforsubscriptionornetamountafterchargesfor

redemption

B. Reporting to investorsUCITSmanagementcompaniesandAIFMaresubjecttosimilarbutslightlydifferentrequirementsonreporting of subscription and redemption orders to investors.

Managementcompaniesarerequiredtonotifyinvestors,nolaterthanthefirstbusinessdayfollowingexecutionofasubscriptionorredemption,bymeansofadurablemedium,confirmingexecutionoftheorder.Thenoticeshouldcontainthefollowinginformation:• ➢Managementcompanyidentification• ➢Designationoftheshareholder,unitholderorclient• ➢Dateandtimeofthereceiptoftheorderandmethodofpayment• ➢Dateofexecution• ➢UCITSidentification• ➢Ordertype(subscriptionorredemption)• ➢Numberofsharesorunitsinvolved• ➢NAVpershare/unit• ➢Valuedate• ➢Grossvalueoftheorderincludingchargesforsubscriptionornetamountafterdeductionof

charges for redemptions• ➢Totalsumofcommissionandexpenseschargedand,ifrequestedbytheinvestor,anitemized

breakdown


Ifthemanagementcompanydoesnotexecutetheorderitself,itshouldconfirmexecutionoftheordernolaterthanonedayafterreceptionofthethirdparty’snotice.

Whereshareholders’orunitholders’ordersareexecutedperiodicallyontheirbehalf,themanagementcompanymayprovideinvestorswithaperiodicdisclosureatleasteverysixmonths.

Managementcompaniesmustprovideinvestorswithinformationaboutthestatusoftheirorders,onrequest.

WhereAIFMshavecarriedoutasubscriptionor,whererelevant,aredemptionorderfromaninvestor,theymustpromptlyprovidetheinvestor,bymeansofadurablemedium,withtheessentialinformationconcerningtheexecutionofthatorderortheacceptanceofthesubscriptionoffer,astheycasemaybe.

Theessentialinformationmustincludethefollowing:• ➢TheidentificationoftheAIFM• ➢Theidentificationoftheinvestor• ➢Thedateandtimeofreceiptoftheorder• ➢Thedateofexecution• ➢TheidentificationoftheAIF• ➢Thegrossvalueoftheorderincludingchargesforsubscriptionorthenetamountafterchargesfor

redemptions


10.2.4.5. Procedures and documents

AccordingtoChapterDofCircular91/75,theadministratorand/orthemanagementcompanyshouldhaveatits/theirdisposalallaccountingandotherdocumentationoftheUCIrequiredfor:• ➢Thepreparationofaccountsandportfoliovaluations• ➢Thedrawingupofcertificatesoftitleandindebtedness• ➢Theallocationofsharesorunitsincirculation• ➢ThegeneralprotectionoftheinterestsoftheUCI,includingallagreements

Theserequirementsimplythatalldocumentsrelatingtotransactionsinitiatedfromabroadshouldbeimmediatelyforwardedtothedomicileoftheadministratorand/orthemanagementcompany.

10.2.4.6. Record keeping

TherecordsofaChapter15managementcompaniesandAIFMshouldbekeptatleastfiveyears,onamediumthatmustallowfor:• ➢Easyreconstitutionofallstepsofeachportfoliotransaction• ➢Easyidentificationofanycorrectionorupdatetotheoriginalrecords,aswellashavingaccessto

the original records• ➢Nomanipulationoralterationoftherecordcontent• ➢ReadyaccessbytheCSSF

10.2.4.7. Additional clarifications

AccordingtoChapterDofCircular91/75,theactivitiesofcentraladministrationwhicharetobecarriedoutinLuxembourgcompriseaccountingandadministrativefunctions,asfollows:• ➢TheaccountsmustbekeptandtheaccountingdocumentsmustbeavailableinLuxembourg• ➢SubscriptionsandredemptionsofsharesorunitsmustbecarriedoutinLuxembourg• ➢TheregisterofshareholdersorunitholdersmustbekeptinLuxembourg• ➢Theprospectus,financialreportsandallotherdocumentsintendedforinvestorsmustbe

establishedincooperationwiththecentraladministrationinLuxembourg• ➢Correspondenceandthedispatchoffinancialreportsandotherdocumentsintendedforthe

shareholdersorunitholdersmustbecarriedoutfromLuxembourgandinanycaseundertheresponsibilityofthecentraladministrationinLuxembourg

• ➢ThecalculationoftheNAVmustbecarriedoutinLuxembourg


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10.3. Subscriptions and redemptions of shares or units and payment of dividends

10.3.1.Subscriptions(issues)

Sharesorunitsarerepresentedbycertificatesinregisteredorbearerformorbyaconfirmationofregistration.Fractionsofsharesorunitsarepermitted.Sharesorunitsaretobeissuedinaccordancewiththeconditionslaiddownintheconstitutionaldocumentandmaybedenominatedinanycurrency.Inthecaseofacommonfund,themanagementcompanyandthedepositaryarerequiredtosignthecertificatesandsecuritiesrepresentingoneormoreportionsofthecommonfund.

ASIFmustimplementprocedurestoensurethatthesharesorunitsareonlydistributedtoinformedinvestors(seeSection3.4.2.).

Subscriptionsareroutinelymadeinexchangeforcash;however,theUCI,atthediscretionoftheDirectors,mayacceptpaymentforsharesbyaninkindsubscriptionofsuitableinvestments.

Forinkindsubscriptions(contributionsinkind),theindependentauditorisrequiredtoreviewthevaluation of the assets and liabilities subscribed.

MarketingiscoveredinChapter14.

10.3.1.1. Master-feeder UCITS

TheagreementbetweenthemasterUCITSandthefeederUCITSor,wherethemasterandfeederaremanagedbythesamemanagementcompany,themanagementcompany’sinternalconductofbusinessrules,mustcoverthefollowinginrelationtosubscriptionsandredemptions(seealsoSection3.3.4.1.):• ➢BasisofinvestmentanddivestmentbythefeederUCITS:

• ➢AstatementofwhichshareorunitclassesofthemasterUCITSareavailableforinvestmentbythe feeder UCITS

• ➢ThechargesandexpensestobebornebythefeederUCITS,anddetailsofanyrebateorretrocessionofchargesorexpensesbythemasterUCITS

• ➢Whereapplicable,thetermsonwhichanyinitialorsubsequenttransferofassetsinkindmaybemade from the feeder UCITS to the master UCITS

• ➢Standarddealingarrangementsincluding:• ➢CoordinationandfrequencyofNAVcalculationprocessandthepublicationofpricesofsharesor

units • ➢CoordinationoftransmissionofdealingordersbythefeederUCITS,including,whereapplicable,

theroleoftransferagentsoranyotherthirdparty• ➢Eventsaffectingdealingarrangements:

• ➢ThemannerandtimingofanotificationbyeitherUCITSofthetemporarysuspensionandtheresumption of redemption or subscription of shares or units of that UCITS

• ➢ArrangementsfornotifyingandresolvingpricingerrorsinthemasterUCITS

Conversion of UCITS into feeder UCITS and change of master UCITS are covered in Section 4.6.2..


ThesharesorunitsofventurecapitalUCIsunderPartIIofthe2010Law,whichmaybeinregisteredorbearerform,musthaveaminimumvalueof€12,400atthetimeofissue.

10.3.1.3. Futures contracts and options UCIs

ThesharesorunitsoffuturescontractsandoptionsUCIsunderPartIIofthe2010Law,whichmaybeinregisteredorbearerform,musthaveaminimumvalueof€12,400atthetimeofissue.



TheNAVofrealestateUCIsunderPartIIofthe2010Lawmustbecalculatedattheyear-endandoneachdaywhentheUCI’ssharesorunitsareissuedorrepurchased.

Propertyvaluationsattheyear-endmaybeusedinthedeterminationoftheNAVduringthefollowingyear,unlessachangeofcircumstancesrenderssuchvaluationinappropriate.

10.3.2.Redemptions(repurchases)

Redemptionsofsharesorunitsaretotakeplaceinaccordancewiththeconditionslaiddownintheconstitutional document.

UCITSarerequiredtorepurchasetheirsharesorunitsattherequestofinvestors.However,aUCITSmay,ifitcanbejustified,provideinitsconstitutionaldocumentthatmanagementisable,inspecificcircumstances(e.g.,temporaryliquidityshortage)orwhenrequestsinasingledealingdayexceedacertainsetlevelinrelationtothenumberofsharesorunitsincirculation,toarrangeforadelayinsettlementofredemptionrequestsforaspecifictimeorforaproportionalreductionofallredemptionrequestssothatthesetlevelisnotexceeded.

Redemptionsmaybesuspendedundertheconditionsspecifiedintheconstitutionaldocumentor,incertaincircumstances,attherequestoftheCSSF.

Redemptionsareroutinelymadeinexchangeforcash;howevertheUCIortheinvestormayrequestpayment,in lieuofcash,byaninkinddistributionofinvestments.Aninkinddistributioncanbederivedusingaproportionalornon-proportionalbasis.AproportionalbasisrequiresthattheinkindredemptionscompriseanequalshareofalltheUCIsinvestments.Anon-proportionalbasispermitsaweightingoftheportfolio.

Forinkindredemptions,theindependentauditorisrequiredtoreviewthevaluationoftheassetsandliabilitiesredeemed.UnlessstipulatedbytheprospectusorofferingdocumentoftheUCI,theCSSFmaypermitanexemptionfromtherequirementforareviewbytheindependentauditorwheretheredemption is performed on a proportional basis.

SuchreviewsareconductedinaccordancewiththeprofessionalguidanceissuedbytheLuxembourgInstitute of Auditors (Institut des Réviseurs d’Entreprises–IRE).Thevaluation,togetherwiththeNAVoftheshareorunitclass,determinestheinvestmentstobedistributed.


SeeSection10.3.1.1..


WhereinvestorshavetherighttoredeemtheirsharesorunitsinaventurecapitalUCIunderPartIIofthe2010Law,theUCImayprovideforcertainrestrictionstothisright.Anysuchrestrictionsmustbe stated in the prospectus.


WhereinvestorshavetherighttoredeemtheirsharesorunitsinarealestateUCIunderPartIIofthe2010Law,theUCImayprovideforcertainrestrictionstothatright.Anysuchrestrictionsmustbestatedintheprospectus.SeealsoSection10.3.1.4..

10.3.3.Subscriptionandredemptionprice

For2010LawUCIs,sharesorunitsmustbeissuedandrepurchasedatapricethatcorrespondstotheNAVoftherelevantshareorunitclassonthedealingday.TheNAVpershareorunitiscalculatedbydividingtheNAVbythenumberofsharesorunitsoutstanding.Suchapricemaybeincreasedinthecaseofsubscriptionsandreducedinthecaseofredemptionsbyaspecifiedpercentage to cover commissions and expenses.


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Thefrequencyofthedeterminationofthesubscriptionandredemptionpriceisspecifiedintheconstitutional document. The price must be determined and made public each time the shares or unitsareissuedorrepurchasedand,inprinciple,atleasttwiceamonthforaUCITSandatleastmonthlyforPartIIUCIs.

UndertheSIFLaw,thereissignificantflexibilityregardingsubscriptionandredemptionofsharesor units. The subscription and redemption of shares or units must be carried out in accordance withtheruleslaiddownintheconstitutionaldocument.Theserulescouldprovide,forexample,forsharesorunitstobesubscribedorredeemedatapriceotherthantheNAV.Thesubscriptionandredemptionconditions,includingthedeterminationofthepriceandthefrequency,arespecifiedinthe constitutional document.

Thevaluationoftheassetsof2010LawUCIsandSIFsiscoveredinSection9.5..

10.3.4.Paymentofdividends

TherearenorestrictionsondistributionsmadebyUCIsexceptthatthenetassetsoftheUCIafterdistributionmustexceedtheminimumcapitalof€1,250,000.

ASICAF,however,issubjecttothenormalauthorizationproceduresforpayinginterimdividendsandisalsorequiredtocreatealegalreserve.Theinterimdividendauthorizationproceduresincludespecificauthorizationinthearticlesofassociationandthepreparationofinterimfinancialstatements.TheindependentauditormustissueareportstatingwhethertheconditionsrelatingtothepaymentofinterimdividendsoutlinedinArticle72-2oftheLawof1915,asamended,havebeensatisfied.SICAFsarealsosubjecttothelegalreserverequirement,whichis5%ofnetprofituntiltheaccumulatedreserveequals10%ofsubscribedcapital.Thelegalreservecannotbedistributed.

10.3.5.Preventionofmoneylaunderingandterroristfinancing

10.3.5.1. Legal framework

The Law of 12 November 2004 on the fight against money laundering and terrorist financing,asamendedbytheLawof17July2008andtheLawof27October2010setsoutthelegalframeworkonthefightagainstmoneylaunderingandterroristfinancingandtheobligationsapplicabletopersons and entities in Luxembourg.

TheLawof17July2008transposestheThirdAnti-MoneyLaunderingDirective(Directive2005/60/EC)anditsimplementingmeasures(Directive2006/70/EC),modifying,inter alia,theLawof12November2004.

TheLawof27October2010reinforcesandclarifiestheLuxembourganti-moneylaunderingandcounterterroristfinancing(AML/CFT)framework.Itcovers:• ➢ScopeofEntitiessubjecttoAML/CFTobligations• ➢ScopeofoperationssubjecttoAML/CFTrequirements• ➢Standard,simplifiedandenhancedduediligence• ➢Politicallyexposedpersons(PEPs)• ➢Cooperationwiththeauthoritiesandsanctions

TheGrand-DucalRegulationof1February2010clarifiescertainprovisionsoftheamendedLawof12November2004onthefightagainstmoneylaunderingandterroristfinancing,covering,inter alia:• ➢Thedifferenttypesofcustomerduediligence:

• Standard customer due diligence • Simplifiedcustomerduediligence• Enhancedcustomerduediligence

• ➢Customerduediligenceperformedbythirdparties• ➢Obligationsofbranchesandsubsidiariesinforeigncountries


TheCSSFRegulation12/02onCombating money laundering and terrorist financing and prevention of the use of the financial sector for the purpose of money laundering and terrorist financing of 14December2012which:• ➢Makesexistinganti-moneylaunderingandcounterterroristfinancing(AML/CFT)professional

obligationslegallybinding• ➢ClarifiescertainelementsoftheLawon12November2004,asamended,andtheGrand-Ducal

Regulationof1February2010,withregardtothefollowingtopics:• Risk-basedapproach• Client due diligence• Internalorganization• Cooperationwithauthorities• Reviewbytheexternalauditor

• ➢TakesintoaccountsomeofthefeaturesoftheFinancialActionTaskForce(FATF)179 recommendationsreleasedinFebruary2012.ItisforeseenthattheserecommendationswillbecoveredbyanEUDirective,thatwouldsubsequentlyhavetobetransposedinLuxembourgLaw

ThefollowingCSSFCircularsarealsoapplicable:• ➢Circulars11/519and11/529onthe risk analysis regarding the fight against money laundering

and terrorist financing,applicabletocreditinstitutionsandotherfinancialsectorprofessionalentitiesunderthesupervisionoftheCSSF

• ➢Circular11/528on the abolition of the transmission to the CSSF of suspicious transaction reports regarding potential money laundering or terrorist financing

• ➢Circular10/486and10/484amendingCirculars03/113and01/27,bothrelatingtotheroleofexternal auditor

• ➢Circular13/556ontheentryintoforceofCSSFRegulation12-02andrepealingtheCSSFCirculars08/387andCSSF10/476

10.3.5.2. Industry practice

GuidancefortheLuxembourgfundindustryentitledPractices and Recommendations aimed at reducing the risk of money laundering and terrorist financing in the Luxembourg Fund Industrywasissuedin2006andupdatedinJuly2013bytheAssociationoftheLuxembourgFundIndustry(ALFI),inassociationwiththeLuxembourgBankers’Association(ABBL),theAssociationofLuxembourgComplianceOfficers(ALCO)andtheAssociationofProfessionalsinRiskManagement,Luxembourg(ALRiM).Itprovidesguidanceonarisk-basedapproachinrelationtocustomeridentificationandtransactionmonitoring,inlinewithinternationalstandards,whichincludestheFinancialActionTaskForce(FATF)“40Recommendations”updatedinFebruary2012.Italsoprovidesamethodologyforassessingtheequivalenceoflegalandregulatoryknowyourcustomer(KYC)requirementsofforeignjurisdictionsbycomparingthemtoFATFstandards.TheseguidelinesmaynotbeusedtooverruleanyprovisionoftheLuxembourglegislationonthefightagainstmoneylaunderingandterroristfinancingoranyCircularonthistopic.

10.3.5.3. Scope of the AML/CFT legal framework

A. AML/CFT offencesMoneylaunderingandterroristfinancingoffencesaredefinedinArticles506-1to506-7oftheLuxembourgCriminalCode.Ingeneralterms,theoffencesconsistofanyofthefollowing:• ➢Helpingtojustifytheuntrueoriginofthesubjectortheproceedsofcertaincriminalactivities• ➢Helpingtoplace,convertorhidethesubjectorproceedsofsuchactivities• ➢Acquiring,detainingorusingtheproceedsofsuchactivities

Theunderlyingcriminalactivitiesconcernedinclude,forexample,drugtraffic,organizedcrime,kidnappingofminors,sexualoffenceagainstminors,andprostitution.

Thedefinitionofmoneylaunderingoffencesincludesanycrimepunishedbyaprisonsentenceofmore than six months.

179 Anintergovernmentalbodywhosepurposeisthedevelopmentandpromotionofnationalandinternationalpoliciestocombatmoneylaunderingandterroristfinancing.


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B. Entities in scopeThescopeofapplicationofthelegalframeworkisasfollows:

(1) Entitiescoveredbypreventionofmoneylaunderingandterroristfinancingobligations(referredtointhisSectionas“Entities”)include,inter alia:• ➢BanksandProfessionalsoftheFinancialSector(PSF)entitieswhichareauthorizedto

exercisetheiractivitiesinLuxembourgonthebasisofthe1993Law.Thisincludes,forexample,banks,investmentadvisers,distributorsofsharesorunitsofUCIs,anddomiciliation agents

• ➢2010LawUCIsandSIFs• ➢ManagementcompanieswhichmarketsharesorunitsofUCIs,orperformadditional

activities(seeSection7.2.1.)• ➢ManagersandadvisersofUCIs,SICARsandpensionfunds• ➢Securitizationvehicleswheretheyprovideservicestocompanies• ➢ForeignprofessionalsprovidingservicesintoLuxembourgonacrossborderbasis(without

establishingabranch)

(2) BranchesandsubsidiariesofLuxembourgEntities:

AllEntitieswithinthescopeoftheLawof12November2004,asamended,arerequiredtoensurethattheirAML/CFTobligationsarealsocompliedwithbytheirbranchesandsubsidiarieslocatedabroad(payingparticularattentiontobranchesandsubsidiariesincountriesthatdonotapplyequivalentAML/CFTstandards).

ThebranchesandsubsidiariesofforeignEntitiesestablishedinLuxembourgarealsoinscopeofLuxembourgAML/CFTobligationsandmustcomplywiththem.

10.3.5.4. Professional AML/CFT obligations applicable to financial services Entities

10.3.5.4.1.Introduction

EntitiesarerequiredtoimplementappropriateAML/CFTpolicies,proceduresandcontrols,whicharetailoredtothespecificsituationoftheEntity.

Entitiesarerequiredtoperformcustomerduediligence,ortoensurethatcustomerduediligenceisdulyperformed.ThecustomerduediligencemustbeadaptedtotheclientAML/CFTrisks:• ➢Identificationoftheclient–i.e.,theinvestor(potentialshareholderorunitholder)–generally

referredtoinAML/CFTtermsasthe“beneficialowner”• ➢Verificationoftheclientidentity

Therearethreetypesofcustomerduediligence:• ➢Standardcustomerduediligence• ➢Simplifiedcustomerduediligence• ➢Enhancedcustomerduediligence

Thecustomerduediligencemaybeperformedby:• ➢TheEntityitself• ➢Athirdparty,suchastheentitieswhicharepartofafinancialgroup.Thirdpartiesmaybe:

• AnEntitywhichintroducestheclient• AdelegateoftheEntitywhichperformstheAML/CFTriskassessment

Thechoiceofcustomerduediligencemethodwilldependonanumberoffactorsincluding:• ➢Geographicaloriginoftheclient• ➢Typeofclient(e.g.,naturalperson,corporateentity)• ➢EvidenceofAML/CFTframeworkapplicabletoandimplementedbythirdparties:

• TheAML/CFTregulatoryandsupervisoryregimeapplicabletoanythirdparty• TheAML/CFTmeasuresimplementedbythethirdparty


Entitiesarerequiredtoperformongoingmonitoringof:• ➢TheirbookofclientsagainstAML/CFTblacklists• ➢Clienttransactionsinordertoidentifypotentiallysuspicioustransactions• ➢Thirdpartiesactingontheirbehalf• ➢Relatedstakeholders(includingdirectors,shareholdersowningmorethan25%ofthesharesofan

entity,andproxies)

Entitiesarerequiredto:• ➢AppointanofficerresponsibleforAML/CFT• ➢KeepadequaterecordsofAML/CFTdocumentationforarequiredperiodoftime

TheremainderofthissectionsummarizestheprofessionalAML/CFTobligationsapplicabletofinancialservicesEntities.

10.3.5.4.2.Internalorganization

A. Obligation to establish adequate internal organizationEntitiesmustimplementadequateandappropriatepoliciesandproceduresofcustomerduediligence,reporting,recordkeeping,internalcontrol,riskassessment,riskmanagement,compliancemanagementandcommunicationinordertomeettheirAML/CFTlegalobligations.

Policies,controlsandproceduresmustbevalidatedbythepersoninchargeofAML/CFTandapprovedbythemanagementandbytheBoardofDirectorsofcreditinstitutionsandinvestmentfirms.AML/CFTproceduresmustinclude,inter alia:• ➢Procedurestofollowincaseofaccountopeningbeforetheachievementoftheverificationof

identifyoftheclientandwhenrequiredoftheultimatebeneficialowner• ➢Procedurestofollowincaseofnumberedaccountopening(i.e.,accountswherethenameof

theclientorbeneficialownerisreplacedbynumbers)• ➢ProcedurestofollowtorespecttheobligationsincludedintheEuropeanRegulation(EC)

1781/2006inrelationtotransfersoffunds• ➢AML/CFThiringandtrainingprocedures

EntitiesarealsorequiredtocoordinatetheirAML/CFTprocedureswiththeirbranchesandsubsidiaries in foreign countries.

B. Appointment of an AML/CFT officerApersonmustbedesignatedspecificallyinchargeofensuringcompliancewithAML/CFTobligations.Thismaybethecomplianceofficer.Thispersonmustensureimplementationofinternalpoliciesandproceduresrelatingtocustomeracceptance,identification,monitoring,andriskmanagement.

TheAML/CFTofficermusthavetheprofessionalexperience,theknowledgeofthelegalandregulatoryframeworkinforceinLuxembourg,butalsotheaccesstotheidentificationdataandotherrelevantdocumentsandinformation,andnecessaryavailabilityrequiredtoefficientlyandautonomouslyperformhisfunctions.

ItispossibletodelegatetheAML/CFTactivities,althoughresponsibilityremainswiththeAML/CFTofficer,seniormanagementandthegoverningbody.

TheAML/CFTofficerisrequiredtoreportregularly,andonanad hocbasisifnecessary,toauthorizedmanagementand,whererelevant,totheBoardofDirectorsorspecializedcommittees.Thereportmustcoverthefollow-upofrecommendations,issues,deficienciesandexceptionsidentifiedinthepastandnewonesidentified.Eachreportmustspecifytherelatedrisksandtheirdegreeofimportance(measurementofimpact),andremediationactionproposed.Thesereportsshallenabletheevaluationofthesignificanceofsuspicionsofmoneylaunderingorterroristfinancing,andprovideanopinionontheadequacyoftheAML/CFTpolicy.

Onceayear,theAML/CFTofficermustproduceasummaryreportonitsactivitiesanditsoperations.ThisreportmustbesubmittedtotheBoardofDirectorsforapproval,andprovidedforinformationtoauthorizedmanagement.

OneormoreotherfunctionsheldbytheAML/CFTofficermustnotjeopardizehisindependence,objectivity,andindependentdecision-making.HisworkloadmustbeadaptedinordernottojeopardizetheeffectivenessoftheAML/CFTframework.


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10.3.5.4.3.Risk-basedapproach

Entitiesmustdefineandimplementa“risk-basedapproach”inrelationtocustomeridentificationandtransactionmonitoring.Theconceptofriskbasedapproachimpliesthereforethatentitiesshouldconcentratetheireffortsonclientsassessedashigherriskbecauseof,forexample,theircountry,sectorofactivity,orlevelofregulation.Entitiesarerequiredtoadapttheirpracticesandprocessestotheassessedlevelofriskofmoneylaunderingandterroristfinancing.

Thelevelofduediligencewilldependuponfactorsincludingwhethertheclientisanaturalpersonoralegalentity,andinthelattercase,whetherornottheEntityisregulated(authorizedandsupervisedbyacompetentauthority)andlocatedinanEEAMemberStateor“FATF-identified”(seeSubsection10.3.5.4.6.D.).

Standardcustomerduediligencemustbeappliedsystematically.However,thelevelofcustomerduediligencemustbeadapteddependingontherisk.Inspecificcases,simplifiedcustomerduediligencewillbesufficient(seeSection10.3.5.4.5.).Whenthereisahigherriskofmoneylaunderingorterroristfinancing,enhancedcustomerduediligencemustbeappliedinadditiontothestandardmeasures–forexample,incasetheclientislocatedinanon-equivalentcountryorlocatedinanequivalentcountrybutisnotregulated(seeSection10.3.5.4.6.).

10.3.5.4.4.Standardcustomerduediligence

A. Performed by the Entity TheEntitymustidentifyitsclientandverifyhisidentitybymeansofdocumentaryevidenceattheoutsetofabusinessrelationshipand,inparticular,whenopeninganaccount.

(1) Requiredidentificationdocumentation

Theidentificationandverificationofphysicalpersonsmustbebasedonavaliddocumentissuedbyacompetentauthority,bearingaphotoandsignature.Passports,identitycards,andotherofficialdocuments,suchasresidentialpermits,canbeaccepted.

Theidentificationandverificationoftheidentityofcorporate(legalentity)clientsmustbebasedonthelatestandcoordinatedarticlesofassociation(orequivalent)andarecentextractfromtheTradeandCompaniesRegister.

Forphysicalandcorporateclients,supplementaryverificationmeasurestobeappliedbasedontheriskassessmentoftheclientmayinclude,forexample:

• ➢Forcorporateentities,reviewoflatestannualreport,on-sitevisittothecompany• ➢Forphysicalclients,theverificationoftheaddressindicatedbytheclientbyevidenceof

domicile

(2) Personstobeidentified

Clientidentificationandverificationmustcoverboththedirectcustomer,whichmaybearepresentative,andthepersonsonwhoseaccountthedirectcustomerisacting–i.e.,the“beneficialowner(s)”.

Theprincipleofidentifyingbeneficialownersappliesbothtonaturalpersonsandlegalpersons.Identificationofboththepersonsinwhosenamesanaccountisopenedandthepersonsforwhoseaccounttheseclientsareactingismandatorywhenthecustomersdonotactontheirownbehalf.

Forcompanies,identifyingtheultimatebeneficialownerimpliesidentifyingthenaturalpersonswitha“controllinginterestandthenaturalpersonswhocomprisethemindandmanagementofthecompany”.

Abeneficialownercanbesomeonewhoownslessthan25%ofacompanystructurebutneverthelesscontrolsthecompany.

Abeneficialownerdeclarationshouldbesignedbytheclient(theaccountholder)orbythebeneficialownerhimself.However,theclientmustinformtheEntityofanychangerelatedtothebeneficialowner.

Thenotionofrepresentativealsocoverslegalrepresentativesofphysicalpersonswhoareincapableofmanagingtheirownaffairs,andrepresentativesofphysicalorcorporatepersonsauthorizedtoactonbehalfofclientsbasedonaproxy.


(3) Informationtobecollected

Forthepurposesoftheidentificationandverificationoftheultimatebeneficialowner(s),Entitiesarerequiredtocollectandstoreatleastthefollowinginformation:thename,firstname,nationality,dateandplaceofbirthandaddressofthebeneficialowner(s).

Whenestablishingarelationwithaclient,theinformationontheoriginoffundsmustformpartoftheinitialcustomerduediligence,whatevertheriskleveloftheclient.

B. Performed by a third party introducerAspecificintroductoryregimeisforeseenwheretheclientisidentifiedthroughaLuxembourgfinancialinstitutionoraforeignfinancialinstitutionsubjecttocustomeridentificationrequirementsequivalenttothoseprovidedunderLuxembourglaw.

Forexample,UCIsthatmarkettheirsharesorunitsviaanintermediary(distributor)whichisadomesticorforeignfinancialinstitutionsubjecttoequivalentAML/CFTobligationsareexemptfromidentificationrequirementsastheymayrelyonidentificationperformedbytheintermediary.

Thethirdpartyintroductionregimeavoidstheduplicationofknowyourcustomer(KYC)procedures.

Inthiscase,theintermediarymustbe:• ➢ALuxembourgcreditorfinancialinstitution,aLuxembourgauditor,notaryorlawyer• ➢AcreditorfinancialinstitutionestablishedinaforeignMemberStatethat:

• Issubjecttomandatoryprofessionalregistration,recognizedbylaw• Appliescustomerduediligenceandrecordkeepingrequirementsaslaiddown,orequivalent

tothoselaiddown,inLuxembourglaworintheThirdAnti-MoneyLaunderingDirective• IssupervisedincompliancewiththerequirementsofLuxembourglaw,theThirdAnti-Money

LaunderingDirective,orthelawofThirdCountrywhichimposesequivalentrequirementstothoselaiddownintheThirdAnti-MoneyLaunderingDirective

TheagreementbetweentheUCIandtheintermediarymustincludeanAML/CFTprovisionrequiringtheintermediarytoperformduediligencemeasuresfromthebeginningoftherelationship,towardsunderlyinginvestors,sothattheUCIobtainsthenecessaryassurancethatdocumentsandinformationhavebeenobtainedtowardsinvestorsandareavailableuponrequest.

Fromapracticalpointofview,theEntitywillbeexemptfromtherequirementtoidentifytheunderlyinginvestorswheretheinvestmentsareinitiatedviaaregulatedfinancialinstitutionsubjecttoequivalentAML/CFTrequirements.

WheresharesorunitsofUCIsaresubscribedbyintermediariesactingonbehalfofclients,theinvestmentfund,itsmanagementcompany,oritsrepresentativeisrequiredtoapplyenhancedduediligencetotheintermediaryinordertoensurethattheintermediaryappliesAML/CFTmeasureswhichcanbeconsideredasequivalenttoLuxembourg’s(seeSection10.3.5.4.6.).Thischeckmustbedocumentedandtherecordkept.

Entitiesmustassesstheequivalenceofthirdcountriesandestablishtheirownriskbasedapproach.

Inpractice,thismeansthattheEntitymustperformduediligenceonthecountriesofthedistributor/investorstoassesstheequivalenceofeachthirdcountry’sprovisions.

C. Performed by a third party delegateEntitiesmaycontractuallyoutsourcetheexecutionoftheidentificationrequirementstonationalorforeignfirmssubjecttoequivalentidentificationrequirementsundercertainconditions.TheEntityremains,however,responsibleforcompliancewiththeidentificationrequirements.

Thefollowingconditionsmustbemetwhenthematerialprocessofidentifyingcustomersisoutsourced:• ➢Thedelegationmustbeformalizedinanagreement• ➢Thecontractmustpreciselydefinethedelegatedtasksandlistindetailthedocumentsand

informationtoberequestedandverifiedbythedelegate• ➢Thedelegationagreementshouldforeseethatatleastacopyoftheidentificationdocumentsbe

transmittedtotheEntityeachtime


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• ➢Copieshavetobedulycertifiedbythedelegatesorauthorizedpersonsincaseofaclientwhoisnotphysicallypresentforidentificationpurposes(seeSubsection10.3.5.4.6.A.).Theprofessionalcannotrelyonacertificateissuedbyathirdpartywhichconfirmsthatitknowstheclient,hasverifiedtheclient’sidentityandhasreceivedtherequireddocumentation

• ➢ThecontractgrantstheEntitytherighttoaccessatanytimetheidentificationdocumentsduringadefinedperiod

• ➢EntitiesmusthaveamonitoringframeworktoensurethatdelegatescomplywithAML/CFTterms of contracts

Entitiescannotoutsourceidentificationtodelegatesin“FATF-identified”countries(seeSubsection10.3.5.4.6.D.).

The Practices and Recommendations for the Luxembourg Fund Industry(seeSection10.3.5.2.)provide guidance on the respective roles and responsibilities of the transfer agent and global distributorintermsofcustomerduediligence(KYCobligations):• ➢Roleandresponsibilitiesofthetransferagent

WheretheUCI’stransferagentisnotthesameastheglobaldistributor,theKYCobligationsofthetransferagentarelimitedtotheverificationoftheidentityoftheinvestorswhoseinstructions(subscriptionforms,transferandredemptionorders)havenotbeensubmittedbyaregulatedandsupervisedfinancialprofessionalsubjecttoequivalentAML/CFTobligations.Whiletransferagentshavenoresponsibilityovertheduediligenceprocesstobeperformedonappointeddistributors,theyareobligedtoidentifythedistributortoensurethatthedistributorissubjecttoequivalentAML/CFTobligations.

• ➢RoleandresponsibilitiesoftheglobaldistributorTheglobaldistributorisresponsiblefordevelopingandmaintainingadistributionnetworkwhichcomplieswithLuxembourgandFATFstandards.Itshouldberesponsiblefortheduediligenceprocessatboththecountryanddistributorlevel.

• ➢RoleandresponsibilitiesoftheBoardofDirectorsoftheUCIorofitsmanagementcompanyTheBoardofDirectorsoftheUCIorofitsmanagementcompanyisresponsibleformonitoringthedistributorsandshouldtakeallappropriatemeasurestoensurecompliancewithLuxembourgAML/CFTobligationsandstandards.

10.3.5.4.5.Simplifiedcustomerduediligence

Entitiesmay,incertaincases,applysimplifiedduediligencemeasureswhenthecustomerisaLuxembourgcreditinstitutionorfinancialinstitution(recognizedbytheLawof12November2004,asamended),orcreditorfinancialinstitution(recognizedunderwithinthemeaningofThirdAnti-MoneyLaunderingDirective)ofanotherMemberStateorsituatedinathirdcountrywhichimplementsrequirementsequivalenttothoselaiddownintheLuxembourgAML/CFTLaworintheThirdAnti-MoneyLaunderingDirective)andwhosecompliancewiththoserequirementsissubjecttosupervision.However,itisnotmandatorytoapplythesimplifiedcustomerduediligenceregime.

Beforeimplementingsimplifiedduediligenceandbeforerelyingonperformanceofclientduediligencebythirdparties,Entitiesarerequiredtoperformariskassessmentofthecountryinquestion(beitanEUMemberStateorathirdcountry)anddocument,atthetimewhenthedecisionistaken,thereasonsjustifyingwhytheydeemthecountry’sAML/CFTregimetobeequivalenttoLuxembourg’s.Suchdecisionsmustbebasedonrelevantanduptodateinformation.Thiscountryriskassessmentmustbeupdatedonaregularbasis.

Inrelationtothecountryriskassessment,EUMemberStatesaredeemedtohaveequivalentregimes,exceptwhenrelevantinformationindicatesthispresumptioncannotbemaintained.Inpractice,suchrelevantinformationcould,forinstance,includeCSSFCircularsonFATFstatementsonjurisdictionswhoseAML/CFTregimehassubstantialandstrategicdeficiencies,arenotmakingsufficientprogressinremedyingthedeficiencies,orarenotsatisfactory(jurisdictionswithinsufficientAML/CFTregimes–seealsoSubsection10.3.5.4.6.D.).

However,evenwhereanEUMemberStateorathirdcountryhasaregimeequivalenttoLuxembourg’s,thisdoesnotfreeEntitiesfromtheobligationtoapplyenhancedduediligencemeasuresinsituationsthat,bytheirnature,canpresenthighAML/CFTrisks.Enhancedduediligencemustbeappliedinanybusinessrelationshipandtransactionswheretheclient,representativeorbeneficialownerisaresidentofacountrywhoseAML/CFTregimeisconsideredbytheFATFtobeinsufficient.


Entitiesarerequiredtoensurethatsimplifiedduediligencerequirementscontinuetobefulfilledbythecustomers.Furthermore,whenapplyingsimplifiedduediligence,otherobligationssuchasmonitoringofclientsandtransactionsmuststillbeperformedbyEntities.

Inpractice,comfortlettersprovidedbyparentcompaniessubjecttoequivalentAML/CFTrequirementsareusedinrelationtotheimplementationofcustomeridentificationrequirementsbybranchesandsubsidiaries.ComfortlettersenableEntitiestoapplysimplifiedduediligencetotheirsubsidiarieslocatedinnon-equivalentcountries,andsubsidiariesinequivalentcountrieswhicharenotregulated.

10.3.5.4.6.Enhancedcustomerduediligence

Enhancedalertnessandduediligencemeasureshavetobeappliedinsituationsconsideredtobehigherrisk,includingnon-face-to-facerelationships,politicallyexposedpersons,transactionswithEntitiesholdingthirdpartyfunds,andanybusinessrelationshipwheretheclient,Directorsorbeneficialownerlivesinanon-equivalentcountry.

A. Non-face-to-face relationshipsWhereaclientisnotphysicallypresentforidentificationpurposes,theEntitymusttakethespecificandadditionalverificationmeasuresnecessarytobeabletoeffectivelyfacethehigherrisksofmoneylaunderingorterroristfinancing.

TheEntitymustchoosebetweenthefollowingtypesofadditionalverificationmeasurestobeappliedbeforeenteringintoabusinessrelationship,butmaydecide,basedonitsriskassessmentofthecustomer,toapplyseveralofthem:• ➢Scrutinyofthemostrecentmanagementreportandofthemostrecentaccounts,asthecase

maybe,certifiedbyanauthorizedauditor• ➢Verificationafterconsultationofthetradeandcompaniesregisteroranyothersourceof

professionaldata,thatthecompanyhasnotbeen,orisnotintheprocessofbeing,dissolved,removedfromtheregister,inbankruptcyproceedingsorliquidated

• ➢Verificationofinformationgatheredfromindependentandreliablesources,suchas,notably,frompublicandprivatedatabanks

• ➢Avisittothecompany,totheextentpossible,orviacontactwiththecompany,notablybyregisteredletterwithacknowledgementofreceipt

B. Politically exposed persons (PEPs)EnhancedcustomerduediligencemustbecarriedoutonPEPs.PEPsareindividualswhoholdorhavebeenappointedtoprominentpublicfunctions,theirfamilymembersandcloseassociates.

PEPsinclude:• ➢HeadsofStateorofgovernment,ministersanddeputyandassistantministers• ➢MembersofParliament• ➢Membersofsupremecourts,ofconstitutionalcourtsorofotherhigh-leveljudicialbodieswhose

decisions are not subject to further appeal except in exceptional circumstances• ➢Membersofcourtsofauditorsoroftheboardsofcentralbanks• ➢Ambassadors,chargés d’affairesandhigh-rankingofficersinthearmedforces• ➢Membersoftheadministrative,managementorsupervisorybodiesofState-ownedenterprises• ➢Importantpoliticalpartyofficials

PEPsalsoincludesuchpositionsatEuropeanCommunityandinternationallevels.

ImmediatefamilymembersofPEPswhoshouldalsobetreatedasiftheywerePEPs,includeallthefollowingnaturalpersons:• ➢Thespouse• ➢Anypartnerconsideredbynationallawasequivalenttothespouse• ➢Thechildrenandtheirspousesorpartners• ➢Theparents

SpecificattentionmustbepaidbyEntitieswhenseekingtoenterintoabusinessrelationshipwith,oracceptingcustodyofassetsbelongingtoPEPsresidingabroad,whetherdirectlyorindirectly.


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Inadditiontonormalduediligencemeasures,Entitiesarerequiredto:• ➢Implementappropriateprocedurestodeterminewhethertheinvestororthebeneficialowneris

aforeignPEP• ➢Verifythesourceoffundsandrequestdocumentaryevidenceifthereistheslightestdoubt• ➢Involvethecomplianceofficerintheacceptanceprocessand,wherejustified,obtain

authorizationofoneoftheauthorizedexecutivemanagersbeforeenteringintoabusinessrelationshipwithaPEP.Thebusinessrelationshipmustcontinuetobecloselymonitoredbythecomplianceofficer

Whereacustomerhasbeenacceptedandthecustomerorbeneficialownerissubsequentlyfoundtobe,orsubsequentlybecomesaPEP,Entitiesshallalsoobtainapprovaltocontinuethebusiness relationship from senior management.

EnhancedduediligencemustbeappliednotonlywhentheclientisaPEP,butalsowhentheeffectivebeneficialownerissuchaperson.Finally,enhancedduediligencemustbeappliedtoclientsandbeneficialownerswhentheylaterbecomePEPs.

C. Transactions with Entities holding third party fundsForclientshavingaprofessionalactivitythatimpliesthetransferofthirdpartyfunds(e.g.,lawyersandnotaries),theEntitymustdeterminewhethertherelevantclientactsforitsownaccountoronbehalfofthirdpartyclients.Inthelattercase,theEntitymustidentifynotonlyhisclientbutalsothebeneficialownerforwhomsuchclientactsandrequestassuchalltherequiredidentificationdocumentsoftheultimatebeneficialowner(s).

D. Clients from “FATF-identified” jurisdictionsAnyclientfroma“FATF-identified”jurisdictionmustbesubjecttoenhancedduediligenceatthetimetherelationshipisenteredintoandthroughouttherelationship.“FATF-identified”jurisdictionsarethoseidentifiedbytheCSSFasjurisdictionswhoseAML/CFTregimeisconsideredbyFATFas:• ➢Havingsubstantialandstrategicdeficiencies• ➢Notmakingsufficientprogress• ➢Notsatisfactory

10.3.5.4.7.OtherprofessionalAML/CFTobligations

A. Monitoring of client relationship and transactionsBlacklists,PEPsandcountryscreeningneedstobeperformedforallclients,theirdirectors,authorizedsignatures,beneficialownersandproxiesforallaccountsandalltransactions.

Allresultsofthesecontrolsmustbeevidencedanddocumented,whethertheresultispositiveornegative.

Incaseofpositiveblacklistscreening,thecasemustbereportedtotheLuxembourgprosecutorandtotheCSSF.

B. Obligation in relation to transfers of fundsThe name or account number of the transferor must be incorporated in fund transfer and associatedmessages,asrequiredbytheEURegulation(EC)No1781/2006.Thenameofthebeneficiarymustbementionedalongwiththenameofthecustomerinanytransactiondocument.

Entitiesmusthaveautomaticcontrolstodetectincompleteincomingoroutgoingpayment,forwhichinformationrequiredbyRegulation(EC)No1781/2006ismissing,unlessEntitiescanevidencethatautomaticsystemsarenotcompulsorybasedonthevolumeofbusinessoftheEntities.

C. Obligation to keep certain documentsDocumentsrelatingtoidentificationandtransactionsmustbekeptbytheEntity:• ➢Identificationdocumentsmustbekeptforatleastfiveyearsfromtheendofthebusiness

relationshipwiththecustomer


• ➢Transactiondocumentsmustbekeptforatleastfiveyearsfollowingthecarrying-outofthetransaction;thedifferentcomponentsoftransactionrecordsshall,whenbroughttogether,provide,atleast,thefollowinginformation:customer’sandbeneficiary’sname,addressorotheridentificationinformationnormallyrecordedbytheintermediary,thenatureanddateofthetransaction,thetypeandamountofcurrencyinvolved,andthetypeandnumberofanyaccount involved in the transaction

Theserequirementsarewithoutprejudicetoanylongerrecordkeepingperiodslaiddowninotherlaws.

Recordscanbekeptonanymedium,aslongasthedocumentsmeetthecriteriaallowingthemtoserveasevidenceinthecontextofajudicialprocedureorofaninvestigationonmoneylaunderingorterroristfinancing.

D. Obligation to co-operate with the authorities and obligation to informTheLuxembourgFinancialInvestigationUnit(Cellule de Renseignement Financier−CRF)isthedirectcontactpartnerofEntitiesonAML/CFTmatters.

EntitiesmustinformtheCRF,ontheirowninitiative,ofanysuspicionorproofofmoneylaunderingorterroristfinancing.Declarationsofsuspicionmustbemadeevenwhenthepersonwhoissuspiciousisnotabletoidentifyanunderlyingoffence.PriorformalconsentmustbeobtainedfromtheCRFbeforeaprofessionalcanreporttheexistenceofafreezingordertotheclients,inordertojustifythenon-executionofatransaction.

Theinitialdurationofthefreezingorderofthreemonthstosixmonthscanbeextended;extensions are granted for each additional month up to a maximum of six months.

Theno“tipping-off”ruledoesnotprohibitcommunicationofinformationonsuspiciouscaseswithotherEntitiesofthefinancialsector;undercertainspecificconditions,EntitiesareauthorizedtocommunicateinformationonsuspiciouscasesnotifiedtotheauthoritiestootherEntities.

Entitiesmustdocumenttheprocedures,conditions,deadlinesandstepsforthecommunicationofreportsofpotentialsuspicioustransactionsorfactsinrelationtotheirclientstotheAML/CFTofficer.TheanalysisofthesereportsandthedecisiontakenbytheAML/CFTofficeronwhetherornottoinform,onhisowninitiative,theStateProsecutoroftheCourtofLuxembourgofasuspicionorcertitudeofmoneylaunderingorterroristfinancing,mustbedocumented.

Incaseofabusinessrelationshipforwhichadeclarationtotheauthoritieshasalreadybeenmade,acomplementarydeclarationmustbemadeincaseofnewevidenceofmoneylaunderingorterroristfinancing.

Entities,theirDirectorsandemployeesareobligedtorespondandco-operateascomprehensivelyaspossibleinresponsetoanylegalrequestreceivedfromtheCRF.TheEntitymusthaveadequateinternalsystemstobeabletorespondfullyandwithoutdelaytotheCRF.

E. Obligation to establish a written AML/CFT risk analysis reportEntitiesarerequiredtoperformananalysisoftheAML/CFTrisksinherenttotheirbusinessactivitiesanddocumentthefindingsofthisanalysis.Thisimplies:• ➢IdentifyingtheAML/CFTriskstowhichitisexposed:thefeaturestobeconsideredinorderto

identifytheAML/CFTrisks,withregardtoandwithrespecttothenatureof:• TheclientsoftheEntityincludinginter alia:

• Geographicaloriginofcustomers(residential/non-residentialcustomers,customerscomingfromcountrieswhichdonotorinsufficientlyapplyAML/CFTmeasures;customerscomingfromcountriessubjecttointernationalsanctions)

• Activitysector/customers’profession• Meansofenteringintobusinessrelationshipwiththecustomer(businessproviders,non-

face-to-faceentryintobusinessrelationship,executionofcustomerduediligencebythirdparties,etc.)

• Degreeofcomplexityofthestructureimplementedforthebenefitofacustomer(useofshellcompanies,trusts,etc.)

• Customerswhorequiretheapplicationofenhancedduediligencemeasures,notablyincaseofpoliticallyexposedpersons


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• Theproductsandservicesoffered,includinginter alia: • Volumeandfrequencyoftransactions,applicationornonapplicationofrelevantlimits• TransfersfromortocountrieswhichdonotorinsufficientlyapplyAML/CFTmeasuresand/

orwhicharesubjecttointernationalfinancialsanctions• Product/serviceoffersfacilitatinganonymity(holdingnumberedaccounts)

• ➢Classifytherisksaccordingtoitsownmethodology:theimportancegiventoeachtypeofrisk(individuallyorincombination)willbedifferentforeveryinstitution.Eachinstitutionmustcarryouttheidentificationandcategorizationofmoneylaunderingandterroristfinancingriskstowhichitconsiderstobeexposedaccordingtoitsownmethodology

• ➢Defineandimplementmeasurestomitigatetheidentifiedrisks:thedescriptionmustinclude,inter alia,thefollowingfeatures:• Numberofclientstowhichsimplifiedduediligenceisapplied• Numberofclientstowhichenhancedduediligenceisapplied• Processofclientacceptance• Processofcompletionofincompleteclientfiles• Systemofidentificationofcomplex,unusualandsuspicioustransactions• Systemofnameandcountrymatching• Employeetrainingprocess• Corporate governance measures

Inordertohelpentitiestosetuptheirownriskbasedapproach,EntitiesarereferredtotheFATFGuidance on the Risk-Based Approach to Combating Money Laundering and Terrorist Financing – High Level Principles and Procedures.

F. AML/CFT requirements in relation to hiringEntitiesarerequiredtoimplementappropriatescreeningprocedurestoensurethatallemployeeshavethenecessaryhonorabilityandappropriateexperienceofAML/CFTforthetasksandfunctions.Inparticular,theAML/CFTofficermusthavethenecessaryexperienceandappropriatehonorabilityaccordingtotheAML/CFTriskdependingofthetasksandfunctiontoexercise.

Formanagement,informationmustbeobtainedregardingthejudicialpastofthepersons,byrequestingnotablyanextractofthecriminalrecordorequivalentdocument.

G. AML/CFT requirements in relation to trainingAlltheemployeesmustbeprovidedwithAML/CFTtrainingtailoredtothespecificitiesoftheirfunctions.Trainingmaterialsmustbeprovided,andtheimplementationofthetrainingprogramdocumented.

TrainingmusttakeintoaccounttheevolutionofAML/CFTtechniquesandshallreflectthelatestAML/CFTlegalandregulatoryupdates.

NewemployeesmustfollowanAML/CFTtrainingcoursethatmakesthemawareofAML/CFTpolicyandrequirements,whentheyarehired.

H. Internal auditThereviewoftheAML/CFTpolicymustbepartofthetasksoftheinternalauditfunction.TheinternalauditfunctionisrequiredtoreportatleastannuallyonwhethertheAML/CFTpolicyhasbeen respected.

10.3.5.4.8.Sanctions

Launderingmoneyfrom,orlinkedto,anyoftheseunderlyingcriminalactivitiesispunishablebyonetofiveyearsofimprisonmentand/orafineofupto€1,250,000.


10.3.6.Protectionagainstlatetradingandmarkettimingpractices

10.3.6.1. Introduction

On17June2004,theCSSFissuedCircular04/146ontheProtection of UCIs and their investors against Late Trading and Market Timing practices. The Circular:• ➢ClarifiestheprotectivemeasurestobeadoptedbyUCIsandcertainoftheirserviceproviders• ➢Fixesmoregeneralrulesofconducttobecompliedwithbyallprofessionalssubjecttothe

supervisionoftheCSSF• ➢ExtendstheroleoftheindependentauditoroftheUCI,asdescribedinCSSFCircular02/81(see

Section12.5.8.2.),regardingtheverificationoftheproceduresandcontrolsestablishedbytheUCItoprotectitagainstlatetradingandmarkettimingpractices

FollowingtheCircular,ALFIissuedin2004itsreportentitledFair Value Pricing & Arbitrage Protection. The report aims to provide a reference document collating the reports and recommendationsthatemergedfollowingaccusationsoflatetradingandmarkettimingintheinternationalmutualfundindustry.ThisincludestheGuidelinesissuedbyALFItoitsmembersandthecompleteReportoftheALFIWorkingGrouponfairvaluepricingandarbitrageprotection.

10.3.6.2. Definitions

A. Late tradingLatetradingistheacceptanceofasubscription,conversionorredemptionorderafterthetimelimitfixedforacceptingorders(cut-offtime)ontherelevantdayandtheexecutionofsuchorderatthepricebasedontheNAVapplicabletosuchsameday.

Throughlatetrading,aninvestormaytakeadvantageofknowledgeofeventsorinformationpublishedafterthecut-offtimewhicharenotyetreflectedinthepricewhichwillbeappliedtosuchaninvestor.Thisinvestoristhereforeprivilegedcomparedtotheotherinvestorswhohavecompliedwiththeofficialcut-offtime.Theadvantageofthispracticetotheinvestorisincreasedevenmoreifheisabletocombinelatetradingwithmarkettiming.

The late trading practice is not acceptable as it violates the provisions of the prospectuses of the UCIswhichprovidethatanorderreceivedafterthecut-offtimeisdealtwithatapricebasedonthenextapplicableNAV.

TheacceptanceofanorderisnotconsideredasalatetradingtransactionwheretheintermediaryinchargeofthemarketingoftheUCItransmitstothetransferagentaftertheofficialcut-offtimeanordertobedealtattheNAVapplicableonsuchday,iftheorderhasbeenissuedbytheinvestorbeforethecut-offtime.Tolimittheriskofabuse,thetransferagentoftheUCImustensurethatsuchanorderistransmittedtohimwithinareasonabletimeframe.

Theacceptanceofanorderdealtwithorcorrectedafterthecut-offtime,byapplyingtheNAVapplicableonsuchday,isalsonotconsideredasalatetradingtransaction,ifsuchorderhasbeenissuedbytheinvestorbeforethecut-offtime.

B. Market timingMarkettimingisanarbitragemethodthroughwhichaninvestorsystematicallysubscribesandredeemsorconvertssharesorunitsofthesameUCIwithinashorttimeperiod,bytakingadvantageoftimedifferencesand/orimperfectionsordeficienciesinthemethodofdeterminingtheNAVoftheUCI.

OpportunitiesariseforthemarkettimereitheriftheNAVoftheUCIiscalculatedonthebasisofmarketpriceswhicharenolongerup-to-date(“staleprices”)oriftheUCIisalreadycalculatingtheNAVwhenitisstillpossibletoissueorders.

ThepracticeofmarkettimingisnotacceptableasitmayaffecttheperformanceoftheUCIthroughanincreaseinthecostsand/orentailadilutionoftheprofit.

C. Master-feeder UCITSIncaseofmaster-feederstructures,themasterandthefeederUCITSarerequiredtotakeappropriatemeasurestocoordinatethetimingoftheirNAVcalculationandpublication,inordertoavoidmarkettimingintheirsharesorunits,preventingarbitrageopportunities.


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10.3.6.3. Prevention of late trading and market timing practices

AslatetradingandmarkettimingpracticesarelikelytoaffecttheperformanceoftheUCIandarelikelytoharminvestors,thepreventivemeasurespresentedhereaftershouldbeappliedwithgreatcare.

TheBoardofDirectorsshouldanalyzesuchsolutionswithcareandisresponsibleforimplementingthemormakingcertainthattheyareimplemented.

10.3.6.3.1.ProtectivemeasurestobeadoptedbytheUCIandbycertainofits service providers

A. Late tradingTheinvestormust,inprinciple,subscribe,redeemorconvertthesharesorunitsofaUCIatanunknownNAV.Thisimpliesthatthecut-offtimemustbefixedinamannertoprecedeortobesimultaneoustothemomentwhentheNAV,onwhichtheapplicablepriceisbased,iscalculated(“forwardpricing”).Anon-precisecut-offtimesuchas,forexample,“untilthecloseofbusiness”istobeavoided.Theprospectusmustspecificallymentionthatsubscriptions,redemptionsandconversionsaredealtwithatanunknownNAVandmustindicatethecut-offtime.

ThetransferagentoftheUCIisrequiredtoensurethatsubscription,redemptionandconversionordersarereceivedbeforethecut-offtimeassetforthintheUCI’sprospectusinordertoprocessthematthepricebasedontheNAVapplicableonthatday.Inrespectofordersreceivedaftersuchcut-offtime,thetransferagentappliesthepricebasedonthenextapplicableNAV.Thetransferagentisrequiredtoensurethatitreceiveswithinareasonabletimeperiodtheorderswhichhavebeenissuedbyinvestorsbeforethecut-offtimebutwhichhavebeenforwardedtothetransferagentbyintermediariesinchargeofthemarketingoftheUCIaftersuchtimelimitonly.

Inordertobeabletoensurethecompliancewiththecut-offtime,thetransferagentoftheUCImustadoptappropriateproceduresandundertaketoperformthenecessarycontrols.ThetransferagentundertakeseithertoprovidetheUCIonanannualbasiswithaconfirmationfromitsauditoronitscompliancewiththecut-offtimeortoauthorizetheindependentauditoroftheUCItoperformitsowncontrolsonthecomplianceofthecut-offtime.

IfintermediariesinchargeofmarketingtheUCIhavebeenappointedbytheUCItoensurethecollectionofordersandtocontrolthecut-offtimewithregardtotheacceptanceoftheorders,theUCImustensurethatitobtainsfromeachintermediaryconcernedacontractualundertakingpursuanttowhichtheintermediariesundertaketowardstheUCItotransmittothetransferagentoftheUCI,fortheprocessingattheNAVapplicableonsuchday,onlysuchorderswhichithasreceivedbeforesuchcut-offtime.

Thecut-offtime,thetimeatwhichthepricesofsecuritiesaretakenintoaccountforthecalculationoftheNAVandthetimeatwhichtheNAViscalculatedmustbecombinedinamannersoastominimizeanyarbitragepossibilitiesarisingfromtimedifferencesand/orimperfections/deficienciesinthemethodofdeterminingtheNAVoftheUCI.

B. Market timingUCIswhich,duetotheirstructure,areexposedtomarkettimingpracticesmustputinplaceadequatemeasuresofprotectionand/orcontroltopreventandavoidsuchpractices.Theintroductionofappropriatesubscription,redemptionandconversioncharges,increasedmonitoringofdealingtransactionsandthevaluationoftheportfoliosecuritiesat“fairvalue”(seeSection9.5.)mayconstitutepossiblesolutionsforsuchUCIs.

TheUCIshouldensurethattransactionswhichitknowstobe,orithasreasonstobelievearerelatedtomarkettiming,arenotpermittedanduseitsbestavailablemeanstoavoidsuchpractices.

IfformalcontractualrelationshipsexistbetweentheUCIandintermediariesinchargeofitsmarketing,theUCIshouldensureitobtainsacontractualundertakingfromeachintermediarynottopermittransactionswhichtheintermediaryknowstobe,orhasreasonstobelievetobe,relatedtomarkettiming.


The prospectus of the UCIs concerned must include a statement indicating that the UCI does notpermitpracticesrelatedtomarkettimingandthattheUCIreservestherighttorejectsubscription,conversionandredemption180ordersfromaninvestorwhotheUCIsuspectsofusingsuchpracticesandtotake,ifappropriate,thenecessarymeasurestoprotecttheotherinvestorsof the UCI.

Particularattentionhastobepaidtosubscription,conversionorredemptionordersfromemployeesoftheserviceproviderstotheUCIorfromanypersonwhoholdsorislikelytoholdprivilegedinformation(e.g.,knowledgeontheexactcompositionoftheportfoliooftheUCI).Accordingly,adequatemeasuresmustbetakenbytheserviceprovidersoftheUCIstoavoidtheriskthatanysuchpersoncouldtakeadvantageofhisprivilegedsituationeitherdirectlyorthrough another person.

10.3.6.3.2.RulesofconducttobefollowedbyallprofessionalssubjecttothesupervisionoftheCSSF

TheCSSFprohibitsanyexpressortacitagreementwhichpermitscertaininvestorstoundertakelatetradingormarkettimingpractices.

TheCSSFrequiresthatanyprofessionalsubjecttoitssupervisionrefrainsfromusinglatetradingormarkettimingpracticeswheninvestinginaUCIorfromprocessingasubscription,conversionorredemption181orderofsharesorunitsofaUCIwhichheknowstobe,orhasreasonstobelievetobe,relatedtolatetradingormarkettiming.

TheCSSFrequiresthatanyprofessionalsubjecttoitssupervision,thatdetectsorisawareofacaseoflatetradingormarkettiminginforms,assoonaspossible,theCSSFbyprovidingtothelatterthenecessaryinformationtoenableittomakeajudgmentonthesituation.

10.3.6.4. Compensation and sanctions

AnypersonwhoisguiltyofknowinglyundertakingorsupportinglatetradingormarkettimingpracticesasdefinedbyCSSFCircular04/146exposeshimselftosanctionsand,inaddition,totheobligation of repairing the damage caused to the UCI.

Incaseofindemnificationofinvestorsharmedbylatetradingormarkettimingpracticesduringtheaccountingyear,theindependentauditormustgive,inthelongformreport,anopinionastowhetherinvestorshavebeenadequatelyindemnified.CSSFCircular04/146providesdetailsoftheroleoftheindependentauditorinrelationtolatetradingandmarkettiming.Forfurtherinformation,see Section 12.5.8.2..

10.3.7.Swingpricing

10.3.7.1. Definition – a method of counteracting dilution

SwingpricinghasbeenidentifiedasapossiblemeansofprotectingaUCI’sperformanceandthustheinterestofexistinginvestorsfromthedilutioneffectoffrequenttradingwhichisalsoacharacteristicofmarkettimingactivity.

SwingingaUCI’sNAVpriceisanattempttopassonthecostofunderlyingcapitalactivitytotheactiveshareholdersorunitholdersandthustoprotectinvestorsfromcostsassociatedwithcapitalactivity.However,itmustbeunderstoodthatswingpricingaffordsprotectionagainstdilutionattheUCIlevelandisnotdesignedtoaddressspecificshareholderorunitholdertransactions.

TheswingpricingpolicyshouldbeapprovedbytheUCI’sBoardofDirectorsandreviewedatleastannually.

Theprospectusshoulddisclosetheswingpricingpolicy,includingamongothers,thepossibilityfortheUCItoswingtheNAV,ashortdescriptionoftheswingpricingmechanism,themaximumswingfactorasapercentageofaUCI’sNAVandappropriatewordingexplainingthatswingpricingisdesigned to prevent the dilution of existing investors.

180 RedemptionsarenotspecificallymentionedintheCircularinthiscontext,but,inpractice,themeasuresshouldalsocover redemptions.

181 Idem.


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10.3.7.2. The operational process

Theprimaryoperationalconsiderationsassociatedwithswingpricingcomprise:• ➢Whethertoadoptfullorpartialswing• ➢Ifapartialswingisadopted,theappropriateswingthresholdforaparticularfund• ➢OncethedecisionismadetoswingtheNAV,theappropriateswingfactorforaparticularfund• ➢Determinationofthefrequencyofreview

ALFIissuedaguidancepaperinFebruary2011onswingpricing,whichprovidesguidelinesonoperational considerations:

Fullorpartialswing

Generally,theNAVisswungusingoneofthefollowingmethods:• ➢Fullswing:TheNAVisswungoneverydealingdateonanetdealbasisregardlessofthesizeof

thenetcapitalactivity.Nothresholdisthereforeappliedinthefullswingmodel.• ➢Partialswing:Theprocessistriggered,andtheNAVswung,onlywhenthenetcapitalactivity

exceedsapredefinedthresholdknownasthe“swingthreshold”.

Determinationofthe“swingthreshold”

Inprinciple,theswingthresholdshouldreflectthepointatwhichnetcapitalactivitytriggerstheinvestmentmanagertotradeaUCI’ssecurities.Asanexample,thepolicywouldstatethatanetcapitalactivitygreaterthanX%oftheUCI’sNAVwouldtriggerswingpricing.Factorsinfluencingthedeterminationoftheswingthresholdordinarilyinclude:• ➢ThesizeoftheUCI• ➢ThetypeandliquidityofsecuritiesinwhichtheUCIinvests• ➢Thecosts,andhencethedilutionimpact,associatedwiththemarketsinwhichtheUCIinvests• ➢Theinvestmentmanager’sinvestmentpolicyandtheextenttowhichaUCIcanretaincash(or

nearcash)asopposedtoalwaysbeingfullyinvested

Ideallytheapplicationofswingpricingshouldbemechanicalandtriggeredonaconsistentbasis.

Determinationoftheappropriateswingfactor

Theswingfactoristheamount(normallyexpressedasapercentage)bywhichtheNAVisadjusted in order to protect existing investors in a UCI from the cost of trading securities as a resultofcapitalactivity.

Generally,oncethenetcapitalactivityisknownforagivendealingdateandtheswingpricingprocessistriggered,theNAVofalloftheUCI’sshareorunitclasses(inthecaseofamulti-shareorunitclassUCI)isswungonthefollowingbasis:• ➢Netinflows:thepriceusedtoprocessalltransactionsisadjustedupwardsbytheswingfactorto

a notional offer price. • ➢Netoutflows:thepriceusedtoprocessalltransactionsisadjusteddownwardsbytheswing

factor to a notional bid price.

ThemostcommonlyadoptedapproachistocalculatetheNAVandthenapplytheswingfactor.

Periodicverificationoftheswingfactor

Itisrecommendedthattheswingfactorshouldbemonitoredtoensurereasonabilitywhencomparedtothechargesincurredandshouldberevisedasandwhennecessary.TheobjectiveistoensurethattheswingfactorisconsistentwiththeUCI’ssecurityandinvestmentprofile,themarketsinwhichitinvestsandthevariouscostcomponents.ThisshouldbeundertakenbyaswingpricingcommitteeunderthesupervisionoftheUCI’sBoardofDirectorsorequivalentresponsiblebody.


10.4. Errors, materiality and compensation to investors

10.4.1. Introduction

ThisSectioncoversthetreatmentofNAVcomputationerrorsandcompensationoflossesarisingfromnon-compliancewithapplicableinvestmentrestrictions.

CSSFCircular02/77,entitledProtection of investors in case of NAV calculation error and correction of the consequences resulting from non-compliance with the investment rules applicable to undertakings for collective investment,establishesguidelinesfortheLuxembourgfundindustrywhendealingwitherrors.Itintroducedasimplifiedreportingprocedureformaterialerrorsandactivebreaches(i.e.,breachesforreasonswhicharenotbeyondthecontroloftheUCITS)wherethetotalcompensationdoesnotexceed€25,000andtheamountpayabletoasingleinvestordoesnotexceed€2,500.

ErrorsgenerallyrelatetoNAVerrorsorinstancesofbreachesoftheinvestmentpolicyoninvestmentorborrowinglimitsasspecifiedineithertheprospectusorthelaw.

Itistheresponsibilityofthemanagementcompany,sponsororpromoteroftheUCI,toensurethatanyerrorsareproperlydealtwithinaccordancewiththeCircular.

TheCirculardistinguishestheprocedurestobefollowedbetweenNAVcomputationerrorsandbreachesofinvestmentrestrictions,asoutlinedinSections10.4.2.and10.4.3..

Section10.4.4.coverstheapplicabilityofthesemeasurestoSIFs.

10.4.2.TreatmentofNAVcomputationerrors

10.4.2.1. Definition of a NAV computation error

ANAVcomputationerroroccurswherethereareoneormorefactorsorcircumstanceswhichleadtothecomputationprocessproducinganinaccurateresult.Asageneralrule,suchfactorsorcircumstancesmaybeputdowntoinadequateinternalcontrolprocedures,managementdeficiencies,failingsorshortcomingsincomputersystems,accountingsystemsorcommunicationsystems,ortonon-compliancewiththevaluationruleslaiddownintheUCI’sconstitutionaldocumentor prospectus.

10.4.2.2. Concept of materiality in the context of NAV computation errors

ItisgenerallyacknowledgedthattheNAVcomputationprocessisnotanexactscienceandthattheresultoftheprocessistheclosestpossibleapproximationoftheactualmarketvalueofaUCI’sassets.ItisacceptedpracticeinthemajorityofleadingfundadministrationcenterstorecognizeonlythosecomputationerrorswithamaterialimpactontheNAV.

TheCircularintroducestheconceptofmaterialitytoLuxembourgUCIsandsetstheacceptabletolerancelimitsforthedifferenttypesofUCIs.ThisdifferentiatedapproachiswarrantedbythefactthatthedegreeofinaccuracyinherentinagivenNAVcomputationmayvaryfromonetypeofUCItoanotherduetoexternalfactors,suchasmarketvolatility.

TheacceptabletolerancelimitsforthedifferenttypesofUCIsareasfollows:

As % of NAV

Moneymarketfunds/cashfunds: 0.25%

Bondfunds 0.50%

Equityandotherfunds 1.00%

Mixedfunds 0.50%

TheCSSFhasclarifiedthatthematerialitylevelmaybedefinedaccordingtotheunderlyingassetsofFDIs(look-throughprinciple)wheretheyieldoftheunderlyingassetsaccountsforatleast80%oftheperformanceoftheUCI.


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Themanagementcompany,sponsororpromoteroftheUCIareofcoursefreetosetlowertolerancelevelsoreventoadoptapolicyofzerotolerance.TheprocedurestobefollowedintheCircular,however,areonlyobligatoryformaterialerrorsusingthetolerancelevelssetoutintheCircular.ItisamatterfortheBoardofDirectorsofaUCI(oritsmanagementcompanyinthecaseofacommonfund)toensurethatwheretheUCI’ssharesorunitsaredistributedinaforeignjurisdiction,theproposedtolerancelevelsdonotconflictwithlocalrequirements.

Amaterialerrormaynotjustbeanisolatederrorbutalsoseveralerrorswhichinaggregateexceedthematerialitylimit.

TheobligationtocompensatelossesappliesonlytothosevaluationdaysaffectedbyamaterialNAVcomputation error.

10.4.2.3. Corrective action for material NAV computation errors

10.4.2.3.1.Reportingtothemanagementcompany,sponsororpromoter,depositary,CSSFandindependentauditor

ImmediatelyupondiscoveryofamaterialerrortheUCI’sadministratormustnotifythemanagementcompany,itssponsororpromoter,thedepositary,theCSSFandtheindependentauditorandsubmittothemanagementcompany,sponsororpromoterandthesupervisoryauthorityaremedialactionplandealingwiththecorrectiveactionproposedoralreadytakentoresolvetheproblemswhichcausedtheerrorandmakeappropriateimprovementstoexistingadministrativeandcontrolstructures to avoid a recurrence of the failure. The remedial action plan should further detail the actionproposedoralreadytakeninorderto:• ➢Determinecategoriesofinvestorsaffectedbytheerror• ➢RecomputeNAVsusedforsubscriptionsandredemptionsduringtheperiodtheerrorbecame

materialandthedateofcorrection(“errorperiod”)• ➢DetermineonthebasisoftherecomputedNAVstheamountstobepaidintotheUCIandtothe

investors as compensation• ➢Notifythesupervisoryauthoritiesinthoseforeignjurisdictionswherethesharesorunitsaresold,

wheresorequiredbysuchauthorities• ➢Adviseimpactedinvestorsoftheerrorandthearrangementsforcompensation

However,a“simplifiedprocedure”maybeadoptedwheretheamountofcompensationdoesnotexceed€25,000andtheamountpayabletoaninvestordoesnotexceed€2,500.SuchaprocedurerequiresthattheadministratornotifiestheCSSF;however,noremedialactionplanneedstobeprepared.

10.4.2.3.2.Quantifyingthefinancialimpactofacomputationerror

Theadministrationmustremedytheerrorasswiftlyaspossible.

Forthepurposeofquantifyingthefinancialimpactofacomputationerror,theUCI’sadministratorshouldmakeadistinctionbetween:• ➢Existinginvestorspriortotheerrorperiodwhoredeemedduringtheerrorperiod• ➢Newinvestorsduringtheerrorperiodwhoheldtheirsharesorunitsbeyondtheendoftheerror

period

ThefollowinggivesanoverviewofthepositionofaUCIanditsinvestorswheretheNAVisunderstated or overstated:

A. NAV understated

• ➢ExistinginvestorsbeforetheerrorperiodwhoredeemedtheirsharesorunitsduringtheerrorperiodmustbecompensatedforthedifferencebetweentherecomputedNAVandtheoriginalunderstatedNAVusedasthebasisfortheirredemptiontransaction

• ➢TheUCImustbecompensatedforthedifferencebetweentherecomputedNAVandtheoriginalunderstatedNAVasappliedtosubscriptionsduringtheerrorperiodforsharesorunitsheldbeyondtheendoftheerrorperiod


B. NAV overstated

• ➢TheUCImustbecompensatedforthedifferencebetweentheoriginaloverstatedNAVasapplied to redemptions during the error period of shares or units held prior to the error period andtherecomputedNAV

• ➢NewinvestorsduringtheerrorperiodwhoheldtheirsharesorunitsbeyondtheendoftheerrorperiodmustbecompensatedforthedifferencebetweentheoriginaloverstatedNAVasappliedtosuchsubscriptionsandtherecomputedNAV

InvestorsincurringalossasaresultofanerrormaybecompensatedoutoftheassetsoftheUCIwheresuchpaymentsrepresenttherefundofexcessreceiptsbytheUCI.Alternatively,themanagementcompany,itssponsor,ortheUCI’spromoteroradministratormay,asappropriate,electto bear the cost of such compensation.

ThequestionarisesastowhetheraUCIwhichhassustainedalossasaresultofacomputationerrorhastherighttolooktoinvestorswhohaveunknowinglybenefitedfromtheerrortocompensateanyunderpaymentforasubscriptionbasedonanunderstatedNAVoranyexcessreceiptfromaredemptionbasedonanoverstatedNAV.Asthisisasomewhatcontroversialissuetowhichnoclearanswermaybegivenintheabsenceofajudicialrulingonthematter,theCirculardoesnotadvocaterecoursetoinvestorsforcompensationoflossessustainedbytheUCI,exceptwhereinstitutionalorotherexpertinvestorsareconcerned,andwheresuchinvestorshaveexplicitlyandknowinglyagreedtoindemnifytheUCIforsuchlosses.

Inprincipletheadministrator,or,asappropriate,themanagementcompany,itssponsor,ortheUCI’spromotercompensatestheUCIforanyloss.

AssoonasthemisstatedNAVshavebeenrecomputedtheappropriateaccountingentriesmustbeenteredintheUCI’saccountingrecordstorecordthecompensationpaymentsreceivableand/orpayable.

10.4.2.3.3.Paymentofcompensationforlossesincurred

TheobligationtocompensatelossesincurredbytheUCIand/oritsinvestorsappliesonlytothosevaluationdaysaffectedbyamaterialNAVcomputationerror.

TheUCI’sadministratormustexpeditethecompensationpaymentstotheUCIand/ortheimpactedinvestorssubjecttocompletionoftheindependentauditor’sreview(seeSection10.4.2.3.4.).Inordertospeedupthecorrectionprocess,theUCI’sadministratormaybeginworkonthevariousstepsinvolvedwithoutpriorauthorizationfromtheCSSFwhomaybeinformedofactiontakenafterthe event.

Where,asaresultofaNAVcomputationerrortheamountofcompensationdoesnotexceed€25,000andtheamountpayabletoaninvestordoesnotexceed€2,500,theadministratormustexpeditethereleaseoftheamountsofcompensationduetotheUCIand/orimpactedinvestorsassoonassuchamountsofcompensationhavebeenquantified.

TheCSSFmay,however,interveneifitdeemsappropriate.

Inthemajorityofleadinginvestmentfundcenters,fundmanagersarepermittedbythesupervisoryauthoritytoapplyde minimis(minimumamount)rulestocompensationamountsduetoindividualinvestors.Thisprocedureavoidsthesituationofinvestorswhoareentitledtorelativelymodestamountsofcompensationseeingthepaymenteffectivelynullifiedbybankandotherexpensesincurredbythem.LuxembourgUCIsarepermittedtoapplyde minimisrules.TheCSSFhasnotsetafixedde minimisastheappropriateamountmayvaryfromUCItoUCIdependingonwhereitssharesorunitsaresold.ItisforeachUCItoset,withtheconsentoftheCSSF,itsproposedde minimis. The de minimis rulemaynotbeusedtorefusecompensationtoinvestorswhohavespecificallyrequestedcompensation.

InthecaseofinvestorswhostillholdsharesorunitsintheUCI,theUCImayelecttocreditthem(withoutcharge)withnewsharesorunitsratherthanbypayment.

Whereimpactedinvestorssubscribedviaanominee,theinvestorcompensationwillberemittedtothenominee,whomustgiveanundertakingtotheUCI’sadministratortoforwardtheamountstothebeneficialowner.

Inpractice,theCSSFmayrequestthattheUCIbereimbursedforlossesincurredduetofeeschargedincorrectlytotheUCI,evenwhensuchfeesarenotconsideredtobematerial.


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10.4.2.3.4.Theroleoftheindependentauditorinreviewingthecorrectionprocess

AsstatedinSection10.4.2.3.1.,whennotifyingthemanagementcompany,itssponsororpromoter,thedepositaryandtheCSSFoftheoccurrenceofamaterialcomputationerror,theUCI’sadministratormustalsoadvisetheUCI’sindependentauditorand,ifthesimplifiedprocedurecannotbeapplied,commissiona(first)specialreportontheappropriatenessofthemethodsintendedtobeused in order to:• ➢Determineinthemostappropriatemannerwhichcategoriesofinvestorsareaffectedbytheerror• ➢RecomputetheNAVsusedasthebasisforsubscriptionandredemptionordersreceivedduringthe

periodbetweenthedateatwhichtheerrorbecamematerialandthedateatwhichitwascorrected• ➢DetermineonthebasisoftherecomputedNAVstheamountstobepaidintotheUCIandtobepaid

toinvestorsbywayofcompensationforlossessustainedasaresultoftheerror

The conclusions of the independent auditor on the proposed methods should be attached to the compensationarrangementsdocumentreferredtoinSection10.4.2.3.1..

Wherethecalculationerrorisdetectedbytheindependentauditor,itshouldbereportedtotheUCI’sadministratorimmediatelytogetherwitharequestthatthemanagementcompany,sponsororpromoter,depositaryandtheCSSFbenotifiedforthwith.Wheretheindependentauditorfindsthattheadministrationhasfailedtocomplywiththisrequest,theCSSFshouldbeadvisedaccordingly.

OncetheUCI’sadministratorhascompletedthecorrectionprocesstotheextentofmakingtheappropriateentriesintheUCI’saccountingrecords,theindependentauditorshouldcarryoutproceduresandproducea(second)specialreportstatingwhether,intheiropinion,thecorrectionprocessisappropriateandreasonableinthecircumstances.Thereportshoulddealwith:• ➢ThemethodsreferredtointhefirstparagraphofthisSection• ➢TherecomputedNAVsasoriginallymisstated• ➢ThelosssustainedbytheUCIand/oritsinvestors

Theadministratorshouldforwardacopyofthe(second)specialreportoftheindependentauditortotheCSSF,andtothesupervisoryauthoritiesofthosejurisdictionsinwhichtheUCI’ssharesorunitsareregisteredfordistribution,ifrequestedbythem.

Theindependentauditorshouldissueafinal(third)specialreportcertifyingthattheamountsofcompensationduetotheUCIand/orimpactedinvestorshavebeeneffectivelypaid.

Acopyofthis(third)specialreportshouldalsobeforwardedtotheCSSFand,whereapplicabletotheauthoritiesofforeignjurisdictionswherethesharesorunitsaresold.

However,underthesimplifiedprocedure,theindependentauditorisrequiredtoreviewthecorrectionprocessanddeclareinthelongformreportwhether,initsopinion,thecorrectionprocessisrelevantand reasonable.

10.4.2.3.5.Communicatingwithimpactedinvestorsentitledtocompensation

Materialcomputationerrorsmustbereportedtoinvestorsentitledtocompensation.

Thismaybeeitherbyindividualnotificationorannouncementinthepress,givingparticularsofthecomputationerrorandtheactiontakentocorrecttheerrorandcompensatetheUCIand/orinvestorsaffected.

DraftversionsoftheproposedcommunicationsmustbesubmittedtotheCSSF,togetherwiththesupervisoryauthoritiesofthosejurisdictionsinwhichtheUCI’ssharesorunitsareregisteredfordistribution,ifrequestedbythem.

10.4.2.3.6.Liabilityforexpensesincurredinremedyingacomputationerror

Expensesincurredasaresultofremedialactiontakentocorrectacomputationerror,includingthecostofthespecialreport(s)oftheindependentauditor,mustnotbebornebytheUCI.TheyshouldthereforebeborneinfullbytheUCI’sadministratororbythemanagementcompany,itssponsorortheUCI’spromoter.

Itisthedutyoftheindependentauditortoensure,aspartofhisstatutoryreviewoftheaccountinginformationcontainedintheUCI’sannualreport,thatsuchexpenseshavenotbeenmetoutoftheassets of the UCI.



Formaster-feederUCITS,NAVcomputationerrorsdetectedwhichmayhaveanegativeimpactonthefeederUCITSmustinclude,butarenotlimitedto:• ➢ErrorsintheNAVcalculationofthemasterUCITS• ➢Errorsintransactionsfororsettlementofsubscriptionorredemptionofsharesorunitsinthe

masterUCITSundertakenbythefeederUCITS• ➢ErrorsinthepaymentorcapitalizationofincomearisingfromthemasterUCITSorinthe

calculationofanyrelatedwithholdingtax

10.4.3.Compensationforlossesarisingfromnon-compliancewithinvestmentrestrictions

10.4.3.1. Rectification of non-compliance

Immediatelyupondiscoveryofaninstanceofnon-compliancewithapplicableinvestmentrestrictions,themanagementoftheUCIshouldtakeallappropriatemeasurestorectifythesituationinwhichtheUCIfindsitselfasaconsequenceofthenon-compliance.Inparticular:• ➢Wherethenatureofthenon-complianceisthemakingofinvestmentsincontraventionofthe

investmentpolicystatedintheUCI’sprospectus,theUCIshouldarrangetodisposeofsuchinvestments

• ➢WheretheinvestmentlimitsstipulatedbylaworbytheUCI’sprospectushavebeenbreachedincircumstancesotherthanthoseprovidedforbyArticle49ofthe2010Law(seeSubsection5.2.2.8.1.V.),theUCIshouldarrangetodisposeoftheexcesspositions.However,wherethereisabreachofArticle43(2)ofthe2010Law(seePoint5.2.2.8.1.I.(2)),theUCImayalsoencashapositionotherthanthatwhichcausedthebreach

• ➢WheretheborrowinglimitsstipulatedbythelaworbytheUCI’sprospectushavebeenbreached,theUCIshouldarrangetoreducetheexcessborrowingwithintheapplicablelimit

10.4.3.2. Calculation of compensation

InthethreecasesreferredtoinSection10.4.3.1.,theUCIshouldseekcompensationforanylosssustainedbyit.

Inthefirsttwocases,theamountofsuchlossshouldbedeterminedinprinciplebyreferencetothelossondisposaloftheunauthorizedinvestment.Inthethirdcase,theUCIshouldinprincipleseekcompensationfortheamountofinterestpayableandothercostsattributabletotheunauthorizedportionoftheborrowing.

Wheremultipleinvestmentrestrictioncompliancefailuresoccur,compensationshouldbesoughtforanyaggregatenetlossarisingasaresultoftherectificationsasawhole.

WheresuchrectifyingtransactionsproduceanaggregatenetprofittotheUCI,theUCIshouldbeentitledtorecognizeandretainsuchprofit.Inthesecircumstances,theUCI’sadministratoronlyneedstonotifytheCSSFandtheindependentauditor.

Bywayofexception,wherewarrantedinallthecircumstances,alternativemethodsotherthanthoseoutlinedmaybeadoptedtodeterminetheamountoftheloss,including,inparticular,themethodwherebythelossisquantifiableintermsoftheperformancedifferentialhadtheunauthorizedinvestmentssustainedthesamemovementsastheauthorizedportfolioinvestedinaccordancewiththeinvestmentpolicyandinvestmentlimitsstipulatedbythelaworbytheprospectus.

10.4.3.3. Application of materiality levels

InJuly2004,theCSSFclarifiedtheapplicabilityofthematerialitylevels(seeSection10.4.2.2.)inthecaseofnon-compliancewithinvestmentrestrictions,asfollows:• ➢TheUCImustalwaysbecompensatedforlossesresultingfromsellingtheunauthorizedinvestment

ortheexcesspositionofthisinvestmentortheexpensesattributabletotheunauthorizedportionoftheborrowing,whatevertheimpactofthebreach;nomaterialitylevelsmaybeappliedtothesesituations


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• ➢IftherealizedlossshowsthattheimpactontheNAVexceedsthematerialitylevels,theNAVmustberecomputedforthebreachperiodandtheUCIanditsinvestorswhichhavesufferedalossmustbecompensated.If,however,therealizedlossshowsthattheimpactontheNAVdoesnotexceedthematerialitylevels,theNAVneednotberecomputedforthebreachperiodandtheUCIanditsinvestorswhichhavesufferedalossneednotbecompensated

10.4.3.4. Responsibility for compensation

Itistheresponsibilityofthepartywhichcausedthebreachthroughafailuretofulfillitsobligationstocompensatetheloss.Inallothercircumstances,themanagementcompany,itssponsorortheUCI’spromotershouldberesponsibleforrectifyingtheloss.

10.4.3.5. Remedial action procedures

ThesameprocedurefordeterminingwhatremedialactionisrequiredincasesofNAVcomputationerrorshouldapplyasisappropriateinthecircumstancestocasesofnon-compliancewithinvestmentrestrictions(seeSection10.4.2.).Specificreferenceismadeinthiscontexttothemandatoryprocedureswhichdealwith:• ➢Reportingtothemanagementcompany,sponsororpromoterandthedepositaryoftheUCIandto

theCSSF• ➢DeterminingwhichcategoriesofinvestorhavebeenimpactedbythelosssustainedbytheUCI• ➢Quantifyingthefinancialimpactofthelossforindividualinvestorsandmakingarrangementsfor

their compensation• ➢Theroleoftheindependentauditorinreviewingthecorrectionprocess• ➢Communicatingwithimpactedinvestorsentitledtocompensation• ➢Withrespecttoinvestorcompensationarrangements,theproceduresetoutinSection10.4.2.3.3.

applies


Formaster-feederUCITS,anon-compliancewithinvestmentrestrictionsdetectedwhichmayhaveanegativeimpactonthefeederUCITSincludes,inter alia:• ➢Breachesoftheinvestmentobjectives,policyorstrategyofthemasterUCITS,asdescribedinits

fundrulesorinstrumentofincorporation,prospectusorKII• ➢Breachesofinvestmentandborrowinglimitssetoutinnationallaworinthefundrules,

instrumentsofincorporation,prospectusorKII

10.4.4.ApplicabilitytoSIFs

CSSFCircular02/77is,inprinciple,notapplicabletoSIFs.SIFsmusthavetheirownguidelinescoveringvaluationerrors,compliancebreaches,materialityandcompensationtoinvestors;theymayapplytheprovisionsofCSSFCircular02/77.

314 | 11.Depositary

11.1. Introduction

ThischapterfocusesonthedepositaryofLuxembourg UCIs. It covers:• ➢Thequalificationsofthedepositary• ➢Thedutiesofthedepositary• ➢Conductofbusinessrules• ➢Depositaryliability• ➢Delegationbythedepositarytothird

parties

Inthischapter,theterm:• ➢“FullAIFMregimeAIF”meansAIF

managedbyauthorizedAIFMandinternallymanagedAIFwhicharesubjecttotheAIFMLaw

• ➢“SimplifiedAIFMregistrationregimeAIF”meansAIFwhosemanagerisnotsubjecttotheAIFMLaw(ortheAIFMDirective)andinternallymanagedAIFwhicharenotsubjecttotheAIFMLaw

Infuture,anumberofregulatorydevelopmentswillupdatetheregulatoryregimeapplicabletodepositaries.Onekeydevelopment,“UCITSV”,isexpectedtoalignthedepositaryregimeapplicabletothedepositariesofUCITSwiththeregimeapplicabletothedepositariesofAIF.Otherexamplesofregulatorydevelopmentswhichwillimpactdepositariesincludethoseonsecuritieslawandcentralsecuritiesdepositaries.Fromapracticalperspective,depositarieswillalsobeimpactedbytheimplementationofTarget2Securities,thepan-EuropeanITplatformfordomesticandcross-bordersettlementofsecurities.Current and future developments are covered in Chapter 2.

11. Depositary

314|11.Depositary

11.Depositary| 315

Depositary 11

11.2. Appointment

AdepositarymustbeappointedforeachLuxembourgUCI.Theappointment,andanyreplacement,ofthedepositarymustbeapprovedbytheCSSF.

Theappointmentofthedepositarymustbeevidencedbyawrittencontract.

ForUCITS,therequiredminimumcontentofthedepositarycontracthasbeenlaiddownforcaseswheretheUCITSismanagedcross-border–i.e.,wherethehomeMemberStateofthemanagementcompanyisnotthesameasthatoftheUCITS.

Alldepositarycontractsof“fullAIFMregimeAIF”mustalsomeetminimumcontentrequirements.

TheminimumcontentofthedepositarycontractsiscoveredinSection7.4.16..

NeitheramanagementcompanynoranAIFMcanactasdepositary.

11.3. Eligible entities

TheentitieswhichareeligibletoactasadepositarydependontheregimeapplicabletotheUCI.

11.3.1.DepositaryofaUCITS

ThedepositaryofaUCITSmustbeacreditinstitutionwithitsregisteredofficeinLuxembourg,orestablishedinLuxembourgifitsregisteredofficeisinanotherEUMemberState.ALuxembourgbranchofanon-EUcreditinstitutionmaynotthereforeactasdepositaryofaUCITS.

11.3.2.DepositaryofAIF

Thedepositaryofa2010LawPartIIUCIoraSIFmust,ingeneral,beacreditinstitutionoraninvestmentfirm(oftenreferredtoasaMiFID182firm)withitsregisteredofficeinLuxembourg,orestablishedinLuxembourgifitsregisteredofficeisinanotherEEAMemberState183.

ForLuxembourg“simplifiedAIFMregistrationregimeAIF”,acreditinstitutionorinvestmentfirmestablishedinLuxembourgwithregisteredofficeinanon-EEAMemberStatemayalsobeappointed.ALuxembourgbranchofanynon-EEAbankmayconsequentlyactasdepositaryforsimplifiedAIFMregistrationregimeAIF.

182 MarketsinFinancialInstrumentsDirective(MiFID),Directive2004/39/EC,asamended183 EuropeanUnion(EU)MemberStatesplusIceland,LiechtensteinandNorway.

316 | 11.Depositary

Undercertainconditions,aspecializedprofessionalofthefinancialsector(PSF)calleda“Professionaldepositaryofassetsotherthanfinancialinstruments”mayactasdepositaryofafullAIFMregimeAIForasimplifiedAIFMregistrationregimeAIF.BothofthefollowingconditionsmustbefulfilledbytheAIFforthe“Professionaldepositaryofassetsotherthanfinancialinstruments”tobeeligibletoactasdepositary:• ➢Itmusthavenoredemptionrightsexercisableduringtheperiodof5yearsfromthedateofthe

initial investments • ➢Itdoesgenerallynotinvestinassetstobeheldincustody,orgenerallyinvestsinissuersornon-

listedcompaniesinordertopotentiallyacquirecontroloversuchcompanies

SuchAIFaremainlyprivateequityandrealestatefunds.

11.3.2.1. Investment firms as depositaries

Whereaninvestmentfirmwishestoactasdepositary,itmustnotifytheCSSFpriortocommencingdepositaryactivities.TheCSSFmayobjectwithinaperiodofuptotwomonths,explainingitsreasons.Aninvestmentfirmwhichintendstoactasdepositarymustinter alia:• ➢Beauthorizedtoprovidetheancillaryserviceofsafekeepingandadministrationoffinancial

instruments for the account of clients• ➢Havecapitalof€730,000• ➢Haveaninternalgovernancestructure,includinganorganizational,administrativeandinternal

controlstructurewhichisappropriatetotheactivityofadepositary

11.3.2.2. Professional depositaries of assets other than financial instruments

AspecializedPSF“Professionaldepositaryofassetsotherthanfinancialinstruments”mustobtainauthorizationfromtheCSSFpriortostartingitsactivities.Itmusthaveminimumcapitalof€500,000.

11.3.3.Summaryofqualifications

TheeligibilityofdepositariesforUCITS,otherUCIsandSIFscanbesummarizedinthefollowingtable:

Entities eligible to act as depositaries by UCI regime

Full AIFM regime AIF

Simplified AIFM registration regime AIF

UCITS 2010 Law Part II UCI SIF 2010 Law

Part II UCI SIF

Luxembourg credit institution Yes Yes Yes Yes Yes

LuxembourgbranchofanEUcredit institution Yes Yes Yes Yes Yes

Luxembourgbranchofanon-EUcredit institution No No No Yes Yes

Luxembourginvestmentfirm No Yes Yes Yes Yes

Luxembourg branch of an investmentfirm No Yes Yes Yes Yes

Luxembourgbranchofanon-EEAinvestmentfirm No No No Yes Yes

Professionaldepositariesofassetsotherthanfinancialinstruments

No Yes Yes Yes Yes

11.Depositary| 317

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11.4. Duties

11.4.1.General

Ingeneral,thedepositaryofaUCIshouldperformthefollowingduties:• ➢ThesafekeepingoffinancialinstrumentsandotherassetsbelongingtotheUCI• ➢Cashflowmonitoring• ➢Carryingoutanumberofothermonitoringandoversightduties

TherearecertaindifferencesbetweenthedutiesofthedepositaryofaUCITS,afullAIFMregimeAIF,andasimplifiedAIFMregistrationregime2010LawPartIIUCIorSIF,aswellasbetweenthedutiesofthedepositaryofacommonfundandthedepositaryofaninvestmentcompany.

ThedutiesofthedepositaryinrelationtoLuxembourgUCIscanbesummarizedasfollows:

Overview of depositary duties

UCITS Full AIFM regime AIF Simplified AIFM registration regime AIF

2010 Law Part II UCI SIF 2010 Law

Part II UCI SIF

Com

mon

fu

nd

Inve

stm

ent

com

pany

184

Com

mon

fu

nd

Inve

stm

ent

com

pany

Com

mon

fu

nd

Inve

stm

ent

com

pany

Com

mon

fu

nd

Inve

stm

ent

com

pany

Com

mon

fu

nd

Inve

stm

ent

com

pany

SafekeepingoftheUCI’sassets X X X X X X X X X X

Carryingoutalloperationsconcerningtheday-to-dayadministrationoftheassets of the UCI185

X X X X X

Cashflowmonitoring X X X X

Ove

rsig

ht d

utie

s

Ensuringthatthesubscriptionandredemption of shares or units of the UCI arecarriedoutinaccordancewiththelawandtheconstitutionaldocument

X X X X X X

Ensuringthatthevalueofthesharesor units is calculated in accordance withthelawandtheconstitutionaldocument

X X X X X

CarryingouttheinstructionsofthemanagementcompanyorAIFM,unlesstheyconflictwiththeconstitutionaldocument

X X X X X X

EnsuringthatintransactionsinvolvingtheUCI’sassets,anyconsiderationisremittedtoitwithintheusualtimelimits

X X X X X X X X

EnsuringthattheUCI’sincomeisappliedinaccordancewiththeconstitutional document

X X X X X X X X

Signing,jointlywiththemanagementcompany,thecertificatesorsecuritiesrepresenting one or more shares or units of a UCI

X X X X X

184 ForUCITS,“UCITSV”isexpectedtoharmonizetheminimumdutiestobeperformedbythedepositariesofcommonfunds and the depositaries of investment companies.

185 Intheory,someofthedutiesarespecifictocommonfunds;inpractice,thedepositarygenerallyperformsthesedutiesfor both common funds and investment companies.

318 | 11.Depositary

ThedepositaryisalsorequiredtoprovidetheCSSF,onrequest,withalltheinformationthatithasobtainedintheexerciseofitsdutiesandwhichisnecessarytoenabletheCSSFtomonitorcompliancebytheUCIandtheAIFwiththelaw.

ThedepositaryanditsnetworkmayalsobeappointedtoprovidepayingagentservicestotheUCI.ThepayingagentarrangesforpaymentofdistributionsmadebytheUCI.ApayingagentmayberequiredincountrieswheretheUCIisdistributed.

11.4.2.Safekeeping

Thedepositary’ssafekeepingdutieswillgenerallyentail:• ➢Holdingincustody:

• AllfinancialinstrumentsbelongingtotheUCIwhichmayberegisteredinafinancialinstrumentsaccount,inaccountswhicharesegregated(i.e.,separatelyfromthedepositary’sownassets)andopenedinthenameoftheUCI(orofthemanagementcompanyactingonbehalfoftheUCI),sothattheycanatalltimesbeclearlyidentifiedasbelongingtotheUCI

Financialinstrumentsaregenerallyheldincustodythroughacustodynetwork.Theymayinclude,forexample,listedequities,bonds,andmoneymarketinstruments.

• Allfinancialinstrumentsthatcanbephysicallydeliveredtothedepositary• ➢ForallothersassetsoftheUCI,verifyingownershipandmaintainingarecordoftheassetsfor

whichitissatisfiedthattheybelongtotheUCI.TheassessmentofownershipisdeterminedonthebasisofallinformationanddocumentationregularlyprovidedbytheUCIoronbehalfoftheUCI,oranyevidencethedepositarycanrelyon

Otherassetsnotheldincustodymayinclude,forexample,over-the-counter(OTC)derivatives,foreignexchangederivatives,equitiesinnon-listedcompanies,realestate,physicalassetssuchasluxurygoods,andintellectualproperty.

Thedepositaryispermittedtodelegateitssafekeepingdutiesundercertainconditions(seeSection11.7.).

11.4.2.1. Safekeeping of the UCITS assets

SafekeepingoftheUCITSassetsimpliesthatthedepositaryknowsatanytimehowtheassetsoftheUCITShavebeeninvestedandwhereandhowtheseassetsareavailable.

Best practice guidelines for depositary banks in relation to the safekeeping of assets from UCITS fundsissuedbytheAssociationoftheLuxembourgFundIndustry(ALFI)inSeptember2009cover:• ➢GuidelinesinrelationtothesafekeepingofassetsfromUCITSfundsheldthroughthe

traditionalcustodynetwork:• ➢Responsibilityfortheselection,appointmentandmonitoringofthesub-custodian• ➢Accountstructureandsegregationofassetsatthecounterparty• ➢Re-hypothecationofassets• ➢Periodicreconciliationandauditconfirmation• ➢Disclosureinthefund’sprospectus

• ➢GuidelinesinrelationtothesafekeepingofassetsfromUCITSfundsnotheldthroughthetraditionalcustodynetwork:• ➢Responsibilitiesrelatingtotheappointmentandmonitoringofthecounterparties• ➢Accountstructureandsegregationofassetsatthecounterparty• ➢Re-hypothecationofassets

11.Depositary| 319

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AccordingtoESMA’s Guidelines on ETFs and other UCITS issuesissuedinDecember2012,whereaUCITSentersintoOTCfinancialderivativetransactionsandEPMtechniques,andthereisatransferoftitleofcollateralusedtoreducecounterpartyriskexposure,thecollateralreceivedshouldbeheldbythedepositaryoftheUCITS.Forothertypesofcollateralarrangement,thecollateralcanbeheldbyathirdpartycustodianwhichissubjecttoprudentialsupervision,andwhichisunrelatedtotheproviderofthecollateral.ESMA’sQuestionsandAnswers(Q&A)documentontheguidelines,updatedinJuly2013,clarifiesthatwhenthecollateralproviderisalsothedepositaryoftheUCITS,thecollateralshouldbeheldbythedepositaryoftheUCITSand,furthermore,thedepositaryshouldhavefunctionallyandhierarchicallyseparatedtheperformanceofitsdepositarytasksfromitsactivityascollateralprovidervis-à-vistheUCITS,inordertoaddresspotentialconflictsofinterest(seealsoSection5.2.2.8.2.(6)).

AIFwhichareinthescopeoftheAIFMLawortheAIFMDirectivearesubjecttodetailedrequirementswithrespecttosafekeepingofassets.ThesafekeepingrequirementsapplicabletoUCITSarecurrentlylessdetailed.AnoverallalignmentofthesafekeepingdutiesofUCITSwiththoseapplicabletoAIFisexpectedwiththeUCITSVupdatetotheUCITSDirective(seealsoSection2.2.1.).

11.4.2.2. Safekeeping of AIF assets

ForfullAIFMregimeAIF,adistinctionismadebetweenthedepositary’ssafekeepingdutiesrelatingtofinancialinstrumentswhichcanbeheldincustodyandthoserelatingtootherassets.

A. Assets held in custodyThedepositarymustholdincustody:• ➢AllfinancialinstrumentsbelongingtotheAIF(ortheAIFMactingonbehalfoftheAIF)where

bothofthefollowingrequirementsaremet:• Theyaretransferablesecurities,includingthosewhichembedderivatives(seeSection

5.2.2.7.3.),moneymarketinstrumentsorunitsofUCIs• Theyarecapableofbeingregisteredorheldinanaccountdirectlyorindirectlyinthenameof

thedepositary

Financialinstrumentswhich,inaccordancewithapplicablenationallaw,areonlydirectlyregisteredinthenameoftheAIFwiththeissueritselforitsagent,suchasaregistraroratransferagent,arenotconsideredtobeheldincustody.

• ➢Allfinancialinstrumentsthatcanbephysicallydeliveredtothedepositary

Inordertocomplywithitssafekeepingdutieswithrespecttofinancialinstrumentsheldincustody,thedepositarymustatleastensurethat:(1) Thefinancialinstrumentsareproperlyregisteredinthedepositary’sbookswithinsegregated

accounts,openedinthenameoftheAIF(ortheAIFMactingonbehalfoftheAIF),sothattheycanbeclearlyidentified,inaccordancewiththeapplicablelaw,asbelongingtotheAIFat all times

(2) Recordsandsegregatedaccountsaremaintainedinawaythatensurestheiraccuracy,andinparticularrecordthecorrespondencewiththefinancialinstrumentsandcashheldforAIFs

(3) Reconciliationsareconductedonaregularbasisbetweenthedepositary’sinternalaccountsandrecordsandthoseofanythirdpartytowhomcustodyfunctionsmaybedelegated

(4) Duecareisexercisedinrelationtothefinancialinstrumentsheldincustodyinordertoensure a high standard of investor protection

(5) AllrelevantcustodyrisksthroughoutthecustodychainareassessedandmonitoredandtheAIFMisinformedofanymaterialriskidentified

(6) Adequateorganizationalarrangementsareintroducedtominimizetheriskoflossordiminutionofthefinancialinstruments,orofrightsinconnectionwiththosefinancialinstrumentsasaresultoffraud,pooradministration,inadequateregisteringornegligence

(7) TheAIF’sownershiprightortheownershiprightoftheAIFMactingonbehalfoftheAIFovertheassetsisverified

Thedepositary’ssafekeepingdutiesapplyonalook-throughbasistounderlyingassetsheldbyfinancialorlegalstructurescontrolleddirectlyorindirectlybytheAIF(ortheAIFMactingonbehalfoftheAIF).Thisrequirementdoesnot,however,applytofundoffundsstructuresormaster-feederstructureswheretheunderlyingfundshaveadepositarywhichkeepsincustodythe assets of these funds.

320 | 11.Depositary

WhereanAIFprovidesitsassetsascollateraltoacollateraltaker,theseassetsmustbekeptincustodyaslongastheAIFownsthefinancialinstruments.Inthesecircumstances,custodycanbearrangedinoneofthefollowingways:• ➢ThecollateraltakeristhedepositaryoftheAIForisappointedbytheAIF’sdepositaryassub-

custodianovertheAIF’scollateralizedassets• ➢TheAIF’sdepositaryappointsasub-custodianthatactsforthecollateraltaker• ➢ThecollateralizedassetsremainwiththeAIF’sdepositaryandare“earmarked”infavorofthe

collateraltaker

FinancialinstrumentsownedbytheAIF(orbytheAIFMonbehalfoftheAIF)forwhichtheAIF(ortheAIFMonbehalfoftheAIF)hasgivenitsconsenttore-usebythedepositaryremainincustodyaslongastherightofre-usehasnotbeenexercised.

B. Other assetsForotherassets,thedepositaryisrequiredtoverifytheownershipoftheAIF(ortheAIFMactingonbehalfoftheAIF)ofsuchassetsandmaintainarecordofthoseassetsforwhichitissatisfiedthattheAIF(ortheAIFMactingonbehalfoftheAIF)holdstheownershipofsuchassets.

TheassessmentofwhethertheAIF(ortheAIFMactingonbehalfoftheAIF)holdstheownershipmustbebasedoninformationordocumentsprovidedbytheAIFortheAIFMand,whereavailable,on external evidence.

Inordertocomplywithitsobligationsinrelationtosafekeepingofotherassets,thedepositarymustatleasthaveaccesswithoutunduedelaytoallrelevantinformationitneedsinordertoperformitsownershipverificationandrecord-keepingduties,includingrelevantinformationtobeprovidedtothedepositarybythirdparties,and:• ➢PossesssufficientandreliableinformationforittobesatisfiedoftheAIF’sownershipright(or

oftheownershiprightoftheAIFMactingonbehalfoftheAIF)overtheassets• ➢MaintainarecordofthoseassetsforwhichitissatisfiedthattheAIF(ortheAIFMactingon

behalfoftheAIF)holdstheownership.Inordertocomplywiththisobligation,thedepositarymust:• Registerinitsrecord,inthenameoftheAIF,assets,includingtheirrespectivenotional

amounts,forwhichitissatisfiedthattheAIF(ortheAIFMactingonbehalfoftheAIF)holdstheownership

• Beabletoprovideatanytimeacomprehensiveandup-to-dateinventoryoftheAIF’sassets,including their respective notional amountsThis implies ensuring that there are procedures in place so that registered assets cannot be assigned,transferred,exchangedordeliveredwithoutthedepositaryoritsdelegatehavingbeeninformedofsuchtransactionsandthedepositaryshallhaveaccesswithoutunduedelaytodocumentaryevidenceofeachtransactionandpositionfromtherelevantthirdparty.TheAIFMisrequiredtoensurethattherelevantthirdpartyprovidesthedepositarywithoutunduedelaywithcertificatesorotherdocumentaryevidenceeverytimethereisasaleoracquisitionofassetsoracorporateactionresultingintheissueoffinancialinstrumentsandatleastonceayear.

• ➢EnsurethattheAIFMhasandimplementsappropriateprocedurestoverifythattheassetsacquiredbytheAIFitmanagesareappropriatelyregisteredinthenameoftheAIF,orinthenameoftheAIFMactingonbehalfoftheAIF,andtochecktheconsistencybetweenthepositionsintheAIFM’srecordsandtheassetsforwhichthedepositaryissatisfiedthattheAIF(ortheAIFMactingonbehalfoftheAIF)holdstheownership.TheAIFMisrequiredtoensurethatallinstructionsandrelevantinformationrelatedtotheAIF’sassetsaresenttothedepositary,sothatthedepositaryisabletoperformitsownverificationorreconciliationprocedure

• ➢SetupandimplementanescalationprocedureforsituationswhereananomalyisdetectedincludingnotificationoftheAIFMandofthecompetentauthoritiesifthesituationcannotbeclarifiedand,asthecasemaybe,orcorrected

Thedepositary’ssafekeepingdutiesapplyonalook-throughbasistounderlyingassetsheldbyfinancialand/orlegalstructuresestablishedbytheAIF(orbytheAIFMactingonbehalfoftheAIF)forthepurposesofinvestingintheunderlyingassetsandwhicharecontrolleddirectlyorindirectlybytheAIF(orbytheAIFMactingonbehalfoftheAIF).Thisrequirementdoesnotapplytofundoffundsstructuresandmaster-feederstructureswheretheunderlyingfundshaveadepositarywhichprovidesownershipverificationandrecord-keepingfunctionsfortheunderlyingfund’sassets.

11.Depositary| 321

Depositary 11

11.4.2.3. Other safekeeping duties

SpecificLuxembourgrequirementsmayapplyinadditiontothesafekeepingrequirementsapplicabletothedepositariesofUCITSandAIF.

IftheLuxembourgdepositaryitselfholdsthesecuritiesoftheUCIincustody,thenitisrequiredtorespecttheLuxembourglegalrequirementsondeposits,includingthoseoftheLuxembourgCivilCode(inparticularTitleXI)andtheLawof1August2001concerningthecirculationofsecuritiesandotherfungiblefinancialinstruments,asamended.TheLawof1August2001requires,inter alia,thatfungiblesecuritiesandotherfinancialinstrumentsreceivedondepositorheldinanaccountbebookedtoanaccountwiththedepositaryopenedinthenameofthedepositor,separatefromitsownassetsandoff-balancesheet.

InrespectoffinancialcollateralofUCITSand2010LawPartIIUCIs,CSSFCircular08/356specifieshowcollateralandassetsacquireduponreinvestmentofcashcollateralmustbesafekept(seePoint5.2.2.10.(6)and(7)).

Inaddition,thedepositarymayalsoberequiredtocomplywiththeLuxembourgLawof5August2005onfinancialcollateralarrangementswhichimplementsDirective2002/47/ECoftheEuropeanParliamentandoftheCouncilof6June2002onfinancialcollateralarrangements.

11.4.3.Day-to-dayadministrationoftheassetsoftheUCI

Day-to-dayadministrationoftheassetsoftheUCImayinclude,forexample,thecollectionofdividends,interestandproceedsofmaturedsecuritiesandtheexerciseofoptions,and,ingeneral,anyotheroperationconcerningtheday-to-dayadministrationoftheassetsoftheUCI.

11.4.4.CashflowmonitoringofAIF

ForfullAIFMregimeAIF,thedepositarymustingeneralensurethattheAIF’scashflowsareproperlymonitored,andinparticularensurethatallpaymentsmadebyoronbehalfofinvestorsuponthesubscriptionofunitsorsharesofanAIFhavebeenreceivedandthatallcashoftheAIFhasbeenbookedincashaccountsopenedinthenameoftheAIF,orinthenameoftheAIFMactingonbehalfoftheAIF,orinthenameofthedepositaryactingonbehalfoftheAIF.

TherearecurrentlynoequivalentcashflowmonitoringprovisionsapplicabletoUCITS.CashflowmonitoringprovisionsforUCITSareforeseenintheUCITSVDirective(seeSection2.2.1.).

TheAIFMisrequiredtoensurethatthedepositaryisprovided,uponcommencementofitsdutiesandonanongoingbasis,withallinformationitneedstocomplywithitscashflowmonitoringobligations.InordertohaveaccesstoallinformationregardingtheAIF’scashaccountsandcashflows,thedepositarymustatleastbe:• ➢Informed,uponitsappointment,ofallexistingcashaccountsopenedinthenameoftheAIF,orin

thenameoftheAIFMactingonbehalfoftheAIF• ➢InformedattheopeningofanynewcashaccountbytheAIF,orbytheAIFMactingonbehalfofthe

AIF• ➢Providedwithallinformationrelatedtothecashaccountsopenedatthethirdpartyentity,directly

bythosethirdparties

Thedepositaryisrequiredtoperformthefollowingcashflowmonitoringduties:• ➢EnsurethatallcashoftheAIFisbookedinaccountsopenedwithacentralbank,anauthorized

EUcreditinstitutionorabankauthorizedinathirdcountry,oranotherentityofthesamenature,intherelevantmarketwherecashaccountsarerequiredprovidedthatsuchentityissubjecttoeffectiveprudentialregulationandsupervisionwhichhavethesameeffectasEuropeanUnionlawandareeffectivelyenforced.WherethecashaccountsareopenedinthenameofthedepositaryactingonbehalfoftheAIF,nocashoftheentityatwhichthecashaccountsareopened,andnoneofthedepositary’sowncash,canbebookedonsuchaccounts.

• ➢Implementeffectiveandproperprocedurestoreconcileallcashflowmovementsandperformsuchreconciliationsonadailybasisor,incaseofinfrequentcashmovements,whensuchcashflowmovements occur

• ➢ImplementappropriateprocedurestoidentifyatthecloseofbusinessdaysignificantcashflowsandinparticularthosewhichcouldbeinconsistentwiththeAIF’soperations

322 | 11.Depositary

• ➢Reviewperiodicallytheadequacyofthoseprocedures,includingafullreviewofthereconciliationprocessatleastonceayearandensuringthatthecashaccountsopenedinthenameoftheAIF,inthenameoftheAIFMactingonbehalfoftheAIF,orinthenameofthedepositaryactingonbehalfoftheAIFareincludedinthereconciliationprocess

• ➢Monitoronanon-goingbasistheoutcomesofthereconciliationsandactionstakenasaresultofanydiscrepanciesidentifiedbythereconciliationproceduresandnotifytheAIFMifanirregularityhasnotbeenrectifiedwithoutunduedelayandalsothecompetentauthoritiesifthesituationcannotbeclarifiedand/orcorrected

• ➢ChecktheconsistencyofitsownrecordsofcashpositionswiththoseoftheAIFM

Withrespecttosubscriptions,theAIFMmustensurethatthedepositaryisprovidedwithinformationaboutpaymentsmadebyoronbehalfofinvestorsuponthesubscriptionofsharesorunitsofanAIFatthecloseofeachbusinessdaywhentheAIFM,theAIForapartyactingonbehalfofit,suchasatransferagent,receivessuchpaymentsoranorderfromtheinvestor.TheAIFMmustensurethatthedepositaryreceivesallotherrelevantinformationitneedstomakesurethatthepaymentsarethenbookedincashaccountsoftheAIF.

TheCSSFclarified,inaFrequently Asked Questions(FAQ)onLuxembourg’sAIFMLawandonCommissionDelegatedRegulation(EU)No231/2013(“Level2”),updatedinJuly2013,thatthedepositarymayrelyonmaterialtasksexecutedbyathirdpartywithrespecttocashflowmonitoringfortheexecutionofitsownobligationsormayuseinformationreceivedwithrespecttocashflowreconciliationsperformedbyathirdparty,providedthatthedepositaryobtainsallinformationitneedstocomplywithitsowncashmonitoringobligationandhasperformedanadequateduediligenceofthereconciliationprocessesperformedbythethirdparty.TheconceptofthirdpartyinthiscontextalsoincludesotherdivisionsorservicesoftheentityappointedasdepositaryofanAIF,providedthatafunctionalandhierarchicalseparationoftheperformanceofthedepositaryfunctionsisensured.

Whilethesafekeepingdutiesrelatedtofinancialinstrumentsandotherassetsaresubjecttoalook-throughobligationwithregardtoownershipverificationandotherdutiesforassetsheldbyunderlyinglegalstructureswhicharedirectlyorindirectlycontrolledbytheAIFM,thereisnosuchrulestipulatedonthemonitoringoftheAIF’scashflows.

TheCSSF’sFAQclarifiesthattheLevel2RegulationsolelyrequireseffectiveandpropermonitoringofcashaccountsopenedinthenameoftheAIF.

11.4.5.Oversightduties

11.4.5.1. General requirements

Thedepositaryisrequiredtoperformanumberofoversightduties.

Incarryingoutitsoversightduties,thedepositaryisnotrequiredtoexecutethetasksitself,butrathertoensurethattheyarecorrectlyexecuted.

ForfullAIFMregimeAIF,generalprinciplesandrequirementsmustbecompliedwithinrelationtooversightduties,aswellasspecificrequirements:• ➢Riskassessment:thedepositarymustatthetimeofitsappointmentassesstherisksassociated

withthenature,scaleandcomplexityoftheAIF’sstrategyandtheAIFM’sorganizationinordertodeviseoversightprocedureswhichareappropriatetotheAIFandtheassetsinwhichitinvestsandwhicharethenimplementedandapplied.Suchproceduresmustberegularlyupdated

• ➢Proceduresreview:thedepositarymustperformex-postcontrolsandverificationsofprocessesandproceduresthatareundertheresponsibilityoftheAIFM,theAIForanappointedthirdparty.Thedepositarymustinallcircumstancesensurethatanappropriateverificationandreconciliationprocedureexistswhichisimplementedandappliedandfrequentlyreviewed.TheAIFMmustensurethatallinstructionsrelatedtotheAIF’sassetsandoperationsaresenttothedepositary,sothatthedepositaryisabletoperformitsownverificationorreconciliationprocedure

• ➢Escalationprocedure:thedepositarymustestablishaclearandcomprehensiveescalationproceduretodealwithsituationswherepotentialirregularitiesaredetectedinthecourseofitsoversightduties,thedetailsofwhichshallbemadeavailabletothecompetentauthoritiesoftheAIFM,uponrequest

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• ➢Accesstoinformation:theAIFMmustprovidethedepositary,uponcommencementofitsdutiesandonanon-goingbasis,withallrelevantinformationitneedsinordertoperformtheoversightdutiesincludinginformationtobeprovidedtothedepositarybythirdparties.TheAIFMmust,inparticular,ensurethatthedepositaryisabletohaveaccesstothebooksandperformon-sitevisitsonpremisesoftheAIFMandofthoseofanyserviceproviderappointedbytheAIFortheAIFM,suchasadministratorsorexternalvaluers,and/ortoreviewreportsandstatementsofrecognizedexternalcertificationsbyqualifiedindependentauditorsorotherexpertsinordertoensuretheadequacyandrelevanceoftheproceduresinplace.

UCITSVmaylaydownsimilarrequirementsforUCITS.

11.4.5.2. Subscriptions and redemptions

TheoversightdutiesregardingsubscriptionsandredemptionsapplytoallUCITSand2010LawPartIIUCIs,andallfullAIFMregimeAIF.

Thedepositaryisrequiredtoensurethatthesale,issue,repurchase,andcancellationofsharesorunitsoftheUCIarecarriedoutinaccordancewiththelawandtheconstitutionaldocument.

MoredetailedrequirementsapplytofullAIFMregimeAIF:• ➢ThedepositarymustensurethattheAIF,theAIFMorthedesignatedentityhasestablished,

implements and applies an appropriate and consistent procedure to:• Reconcilethesubscriptionorderswiththesubscriptionproceeds,andthenumberofsharesor

unitsissuedwiththesubscriptionproceedsreceivedbytheAIF• Reconciletheredemptionorderswiththeredemptionspaid,andthenumberofsharesorunits

cancelledwiththeredemptionspaidbytheAIF• VerifyonaregularbasisthatthereconciliationprocedureisappropriateInparticular,thedepositarymustregularlychecktheconsistencybetweenthetotalnumberofsharesorunitsintheAIF’saccountsandthetotalnumberofoutstandingsharesorunitsthatappearintheAIF’sregister.

• ➢Adepositarymustensureandregularlycheckthattheproceduresregardingthesale,issue,repurchase,redemptionandcancellationofsharesorunitsoftheAIFcomplywiththeapplicablenationallawandwiththeAIFrulesorinstrumentsofincorporationandverifythattheseproceduresareeffectivelyimplemented

• ➢Thefrequencyofthedepositary’schecksmustbeconsistentwiththefrequencyofsubscriptionsand redemptions

SubscriptionsandredemptionsarecoveredinSection10.3..

11.4.5.3. Valuation of shares or units

TheoversightdutiesregardingthevaluationofsharesorunitsapplytoallUCITScommonfundsandallfullAIFMregimeAIF.

Thedepositaryisrequiredtoensurethatthevalueofthesharesorunitsiscalculatedinaccordancewiththelawandtheconstitutionaldocument.

MoredetailedrequirementsapplytofullAIFMregimeAIF:• ➢Thedepositarymust:

• Verifyonanon-goingbasisthatappropriateandconsistentproceduresareestablishedandappliedforthevaluationoftheassetsoftheAIFincompliancewithAIFMLaworAIFMDirective,anditsimplementingmeasures,andwiththeAIFconstitutionaldocument

• Ensurethatthevaluationpoliciesandproceduresareeffectivelyimplementedandperiodicallyreviewed

• ➢Thedepositary’sproceduresmustbeconductedatafrequencywhichisconsistentwiththeAIF’svaluationpolicyasdefinedintheAIFMLaworAIFMDirective,anditsimplementingmeasures

• ➢WhereadepositaryconsidersthatthecalculationofthevalueofthesharesorunitsoftheAIFhasnotbeenperformedincompliancewithapplicablelawortheAIFrulesorwiththeAIFMLawvaluationrequirements,itmustnotifytheAIFMand/ortheAIFandensurethattimelyremedialactionistakeninthebestinterestoftheinvestorsintheAIF

• ➢Whereanexternalvaluerhasbeenappointed,adepositarymustcheckthattheexternalvaluer’sappointmentisinaccordancewiththeAIFMLaworAIFMDirective,anditsimplementingmeasures

TheAIFMvaluationrequirementsarecoveredinSection9.5.2..

324 | 11.Depositary

11.4.5.4. Carrying out of the manager’s instructions

Theoversightdutiesregardingthecarryingoutofthemanager’sinstructionsapplytoallUCITSand2010LawPartIIcommonfunds,andallfullAIFMregimeAIF.

ThedepositaryisrequiredtocarryouttheinstructionsofthemanagementcompanyorAIFM,unlesstheyconflictwiththeconstitutionaldocument.

MoredetailedrequirementsapplytofullAIFMregimeAIF.

Thedepositarymustatleastsetupandimplement:• ➢AppropriateprocedurestoverifythattheAIFandAIFMcomplywithapplicablelawsand

regulationsandwiththeAIF’sconstitutionaldocument.Inparticular,thedepositarymustmonitortheAIF’scompliancewithinvestmentrestrictionsandleveragelimitslaiddownintheAIF’sofferingdocuments.Thoseproceduresshouldbeproportionatetothenature,scaleandcomplexityoftheAIF

• ➢AnescalationprocedureforsituationswheretheAIFhasbreachedoneoftheaforementionedlimits or restrictions

11.4.5.5. Timely settlement of transactions

TheoversightdutiesregardingthetimelysettlementoftransactionsapplytoallUCITSand2010LawPartIIfunds,andallfullAIFMregimeAIF.

MoredetailedrequirementsapplytofullAIFMregimeAIF:• ➢Thedepositarymustsetupaproceduretodetectanysituationwhereaconsiderationrelatedto

theoperationsinvolvingtheassetsoftheAIForoftheAIFMactingonbehalfoftheAIFisnotremittedtotheAIFwithintheusualtimelimits,notifytheAIFMand,wherethesituationhasnotbeenremedied,requesttherestitutionofthefinancialinstrumentsfromthecounterpartywherepossible

• ➢Wheretransactionsdonottakeplaceonaregulatedmarket,theusualtimelimitsmustbeassessedwithregardtotheconditionsattachedtothetransactions(OTCderivativecontractsorinvestmentsinrealestateassetsorinprivatelyheldcompanies)

11.4.5.6. Distribution of the UCI’s income

TheoversightdutiesregardingthedistributionofincomeapplytoallUCITSand2010LawPartIIfunds,andallfullAIFMregimeAIF.

MoredetailedrequirementsapplytofullAIFMregimeAIF.Thedepositarymust:• ➢Ensurethatthenetincomecalculation,oncedeclaredbytheAIFM,isappliedinaccordancewith

theAIFconstitutionaldocumentandapplicablenationallaw• ➢EnsurethatappropriatemeasuresaretakenwheretheAIF’sauditorshaveexpressedreservations

ontheannualfinancialstatements.TheAIF(ortheAIFMactingonbehalfoftheAIF)mustprovidethedepositarywithallinformationonthereservationsexpressedonthefinancialstatements

• ➢Checkthecompletenessandaccuracyofdividendpayments,oncetheyaredeclaredbytheAIFM,and,whererelevant,ofthecarriedinterest

WhereadepositaryofafullAIFMregimeAIFconsidersthattheincomecalculationhasnotbeenperformedincompliancewithapplicablelaworwiththeAIFrulesorinstrumentsofincorporation,itmustnotifytheAIFMand/ortheAIFandensurethattimelyremedialactionhasbeentakeninthebestinterestoftheAIF’sinvestors.

11.4.6.OtherspecificdutiesinrelationtoUCITS

11.4.6.1. Luxembourg UCITS managed cross-border

InthecaseofLuxembourgUCITSwhicharemanagedbyamanagementcompanyinanotherEUMemberState(i.e.,themanagementcompanypassportregime–seeSection7.5.),thedepositarymustsignawrittenagreementwiththemanagementcompanyregulatingtheflowofinformationdeemednecessarytoallowittoperformitsfunctions(seeSection7.4.16.).

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Inthecaseofmaster-feederUCITS(seeSection3.3.4.1.),ifthemasterandfeederUCITShavedifferentdepositaries,thosedepositariesmustenterintoaninformation-sharingagreementinordertoensurethefulfillmentofthedutiesofbothdepositaries.Theagreementmustcover,inter alia:• ➢Thedocumentsandinformationwhicharetoberoutinelysharedbetweenbothdepositaries• ➢ThemannerandtimingofthetransmissionofinformationbythedepositaryofthemasterUCITS

tothedepositaryofthefeederUCITS• ➢Thecoordinationoftheinvolvementofbothdepositaries,totheextentappropriateinviewoftheir

respectivedutiesundernationallaw,inrelationtooperationalmatters,including:• ➢TheprocedureforcalculatingtheNAVofeachUCITS,includinganymeasuresappropriateto

protectagainsttheactivitiesofmarkettiming• ➢TheprocessingofthefeederUCITS’subscriptionandredemptionordersforsharesorunits

inthemasterUCITS,andthesettlementofsuchtransactions,includinganyarrangementtotransferassetsinkind

• ➢Thecoordinationofaccountingyear-endprocedures• ➢InformationtobeprovidedbythedepositaryofthemasterUCITStothedepositaryofthefeeder

UCITSonbreachesbythemasterUCITSofthelawandtheconstitutionaldocument• ➢Theprocedureforhandlingad hocrequestsforassistancefromonedepositarytotheother• ➢Identificationofparticularcontingenteventswhichoughttobenotifiedbyonedepositarytothe

other on an ad hocbasis,andthemannerandtiminginwhichthiswillbedone

ThedepositaryofthemasterUCITSisrequiredtoimmediatelyinformthecompetentauthoritiesofthemasterUCITShomeMemberState,thefeederUCITSor,whereapplicable,themanagementcompanyandthedepositaryofthefeederUCITS,aboutanyirregularitiesitdetectswithregardtothemasterUCITSwhicharedeemedtohaveanegativeimpactonthefeederUCITS.Suchirregularities include:• ➢ErrorsintheNAVcalculationofthemasterUCITS• ➢Errorsintransactionsfor,orsettlementof,feederUCITS’subscriptionorredemptionordersfor

shares or units in the master UCITS • ➢ErrorsinthepaymentorcapitalizationofincomearisingfromthemasterUCITSorinthe

calculationofanyrelatedwithholdingtax• ➢Breachesoftheinvestmentobjectives,policyorstrategyofthemasterUCITS,asdescribedinits

constitutionaldocument,prospectusorKeyInvestorInformation(KII)• ➢Breachesofinvestmentandborrowinglimitssetoutinnationallaworinthemanagement

regulations,instrumentsofincorporation,prospectusorKII

11.4.6.3. Mergers of UCITS

WheretwoUCITSmerge(seeSection4.7.),thedepositariesofthemergingandreceivingUCITSwhichareestablishedinLuxembourgarerequiredtoverifycomplianceofcertainparticularsofthecommondrafttermsofmergerwiththerequirementsofthe2010LawandtheconstitutionaldocumentoftheirrespectiveUCITSandissueastatementtotheCSSFconfirmingthattheyhaveperformedtheverification.Theparticularstobeverifiedincludetherulesapplicabletothetransferof assets and the exchange of shares or units.

11.5. Conduct of business and conflict of interest rules

Thedepositaryisexpectedtoacthonestly,fairly,professionallyandindependently,solelyintheinterest of the UCI and its investors.

TheDirectorsofthedepositaryshouldbeofgoodrepute,andsufficientlyexperiencedinrelationtotheUCI.Thedepositarycannotbeappointedasadelegatetoprovidethecorefunctionofportfoliomanagement(seeSection8.2.2.).

326 | 11.Depositary

ThedepositaryoffullAIFMregimeAIFisnotpermittedtocarryoutactivitiesfortheAIFthatmaycreateconflictsofinterestbetweentheAIF,theinvestorsintheAIF,theAIFMandthedepositary,unlessthedepositaryhasfunctionallyandhierarchicallyseparatedtheperformanceofitsdepositarytasksfromitsotherpotentiallyconflictingtasks,andthepotentialconflictsofinterestareproperlyidentified,managed,monitoredanddisclosedtotheinvestorsoftheAIF.

TherelationshipbetweenthedepositaryandprimebrokeriscoveredinSection11.8..

TheassetsoftheAIFcannotbere-usedbythedepositarywithoutthepriorconsentoftheAIF(ortheAIFMactingonbehalfoftheAIF)(seealso12.3.3.and12.4.2.3.).

ThedepositaryofaUCITSisnotpermittedtograntloansoractasaguarantorforthirdparties.AdepositaryactingonbehalfofaUCITScommonfundcannotcarryoutuncoveredsalesoftransferablesecurities,moneymarketinstrumentsorotherfinancialinstruments.ThedepositaryofaPartIIcommonfundisnotpermittedtograntloanstopurchasersandunitholdersofthecommonfundwithaviewtotheacquisitionorsubscriptionofunits.

11.6. Liability

TheliabilityregimeapplicabletothedepositaryofUCITSandsimplifiedAIFMregistrationregimeAIFissignificantlydifferentfromtheregimeapplicabletofullAIFMregimeAIF.

11.6.1. UCITS

Thedepositaryisliabletothemanagementcompanyorinvestmentcompanyandshareholdersorunitholdersforanylosssufferedbythemasaresultofitsunjustifiablefailuretoperformitsdutiesorimproperperformanceofthem(alsoincaseofdelegationofsafekeepingtasks).

Thosewhohavesuffereddamagesshouldprovethedepositary’snegligenceinrespectofitsdutyofsupervisionandthelinkbetweencauseandeffect.

Asregardstheextentofthedutyofsupervisionofthedepositary,thedepositarymaybeconsideredtohaveperformeditsdutyofsupervisionwhenitissatisfiedfromtheoutsetandduringthewholeofthedurationofthecontractthatthethirdpartieswithwhomtheassetsoftheUCITSareondepositarereputableandcompetentandhavesufficientfinancialresources.

Theliabilityofthedepositaryinmattersofcustodyisdifferentfromthatinrespectofadepositagreement.WheretheassetsoftheUCITSareondepositwiththedepositaryitself,itsliabilityisgovernedbytheLawapplicabletodepositagreements(Article1915andsubsequentarticlesoftheCivilCode).

ThedetailedliabilityprovisionsapplicabletoUCITS,2010LawPartIIUCIswhicharesimplifiedAIFMregistrationregimeAIF,andSIFswhicharesimplifiedAIFMregistrationregimeAIFareslightlydifferent.

11.6.2.FullAIFMregimeAIF

11.6.2.1. Loss of financial instruments held in custody

Asageneralrule,thedepositaryisliabletoanAIF,oritsinvestors,forthelossbythedepositaryitself,orbyathirdpartytowhomcustodyhadbeendelegated(thesub-custodian186)offinancialinstrumentsheldincustody.Incaseofsuchloss,thedepositaryisrequiredtoreturntotheAIF(ortheAIFMactingonbehalfoftheAIF)afinancialinstrumentofidenticaltypeorthecorrespondingamount,withoutunduedelay.

186 Liabilityinthecaseofdelegationiscoveredin11.7.2.3..

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Alossofafinancialinstrumentheldincustodyisdeemedtohavetakenplacewhen,inrelationtoafinancialinstrumentheldincustodybythedepositaryorbyathirdpartytowhomthecustodyoffinancialinstrumentsheldincustodyhasbeendelegated,anyofthefollowingconditionsismet:• ➢AstatedrightofownershipoftheAIFisdemonstratednottobevalidbecauseiteitherceasedto

exist or never existed• ➢TheAIFhasbeendefinitivelydeprivedofitsrightofownershipoverthefinancialinstrument• ➢TheAIFisdefinitivelyunabletodirectlyorindirectlydisposeofthefinancialinstrument

TheascertainmentbytheAIFMofthelossofafinancialinstrumentmustfollowadocumentedprocessreadilyavailabletothecompetentauthorities.Oncealossisascertained,itmustbenotifiedimmediatelytoinvestorsinadurablemedium.

AfinancialinstrumentheldincustodyisnotdeemedtobelostwhereanAIFisdefinitivelydeprivedofitsrightofownershipinrespectofaparticularinstrument,butthisinstrumentissubstitutedbyorconvertedintoanotherfinancialinstrumentorinstruments.

Intheeventofinsolvencyofthethirdpartytowhomthecustodyoffinancialinstrumentsheldincustodyhasbeendelegated,thelossofafinancialinstrumentheldincustodymustbeascertainedbytheAIFMassoonasoneoftheaforementionedconditionsismetwithcertainty.Thereiscertaintyastowhetheranyoftheconditionsisfulfilledatthelatestattheendoftheinsolvencyproceedings.TheAIFMandthedepositarymustmonitorcloselytheinsolvencyproceedingstodeterminewhetherallorsomeofthefinancialinstrumentsentrustedtothethirdpartytowhomthecustodyoffinancialinstrumentsheldincustodyhasbeendelegatedareeffectivelylost.

Alossofafinancialinstrumentheldincustodymustbeascertainedirrespectiveofwhetherthelossistheresultoffraud,negligenceorotherintentionalornon-intentionalbehavior.

However,thedepositaryisnotliableifitcanprovethatthelosshasarisenasaresultofanexternaleventbeyonditsreasonablecontrol,theconsequencesofwhichwouldhavebeenunavoidabledespiteallreasonableeffortstothecontrary.

Thenotionof“externaleventbeyondreasonablecontrol”coversalleventsthatarenotrelatedtothedepositaryanditssub-custodians.

Therefore,eventsthatoccurwithinthe“chainofcustody”wouldnotbedeemed“external”,irrespectiveofwhethertheseeventshappenedatthelevelofanaffiliatedsub-custodianoratthelevelofasub-custodianthatdoesnotbelongtothesamecorporategroupasthedepositary.

Anynaturaldisasters,actsofstate,orgovernmentmeasures(e.g.,marketclosures)wouldbeclassifiedasbeing“externaleventsbeyondreasonablecontrol”.

11.6.2.2. Other losses

ThedepositaryisalsoliabletotheAIForitsinvestorsforallotherlossessufferedbythemasaresultofnegligentorintentionalfailuretoproperlyperformitsduties.

11.6.3.SimplifiedAIFMregistrationregimeAIF

TheliabilityregimeforsimplifiedAIFMregistrationregimeAIFissimilartothatapplicabletoUCITS.

328 | 11.Depositary

11.7. Delegation

11.7.1.UCITS

Thedepositaryispermittedtodelegateitssafekeepingdutiestoathirdparty,butnotitsoversightduties.

Inpractice,thedepositarygenerallyperformsduediligenceonthethirdpartyentrustedwiththesafekeepingoftheassetsoftheUCITStoensurethatitisofgoodrepute,thatithasadequatestructureandexpertise,thatitsegregatestheassetsoftheUCIfromitsownandthatitissubjectto effective prudential regulation and supervision.

Thedepositary’sliabilityisnotaffectedbythefactthatithasentrustedtoathirdpartyallorsomeoftheassetsinitssafekeeping.

ALFI’sBest practice guidelines for depositary banks in relation to the safekeeping of assets from UCITS fundsissuedinSeptember2009coverstheuseofacustodynetworkforsafekeeping(delegationofsafekeeping).Theguidelinescoverinter aliathesafekeepingofassetsfromUCITSfundsheldthroughthetraditionalcustodynetwork:• Appointmentandmonitoringofthesub-custodian(localAgents):

Theselectionprocess,appointmentandongoingmonitoringofthesub-custodian(delegate)inrelationtothesafekeepingoftheseassetsheldinsidethetraditionalsub-custodynetworkistheresponsibilityofthedepositary.Thedepositaryperformsproperduediligenceonthosesub-custodiansthroughanassessmentprocessincluding,butnotlimitedtotheexaminationof:• ➢Thelegalframework(incaseofdefault,fraud,bankruptcy,...),theregulatoryframework

(regulatoryprinciples,supervisorybody,regulationexistinginrelationtoliability,...),thepoliticalenvironment(stability,..)

• ➢Creditworthiness,themanagementandtheoperationalinfrastructure• ➢Staffingandexpertiseoftheoperation• ➢Custodyvolumecapacity• ➢Sophisticatedtechnology/communications• ➢Financialstrength• ➢Internalcontrolandrelatedriskmanagementinfrastructure• ➢Externallinkagestosettlementandregistrationprocesses,depositaries,exchangesand

clearing entities• ➢Incomeprocessing,corporateactionsandproxyvotingcapabilities• ➢Contingencyplans• ➢Resultsofexternal/internalaudits• ➢Insurancecoverage

• Accountstructureandsegregationofassetsatthecounterparty:Thesub-custodianeitheroperatesanomnibusclientaccountstructureoroperatessegregatedcustodyaccountsforeachclientaspertheprovisionsoflocalregulationsofeachjurisdiction.Incaseofomnibusaccountsmaintainedatsub-custodylevel,thedepositaryhastoensuresegregationattheUCITS/compartmentlevelwithinitssystems.Atsub-custodyleveltheassetsshouldalsobe“ring-fenced”andheldseparatelyfromthesub-custodian’saccountsand(non-cash)assets.Innocircumstancesproprietaryassetsofsub-custodianshouldbecomingledinitsbookswiththecustodyclientassetstoensurethatownershipontheclientassetscanbeeasilyevidenced and therefore claimed. Asageneralprinciple,thesecurityaccountwiththesub-custodianwouldideallybeopenedonbehalfofthedepositarywithexpressreferencetotherelevantclient.Insomemarkets(e.g.India)therearepossibilitiesthattheassetsareregistereddirectlyinthenameoftheclientwithno reference to the custodian.CashrelatedassetsheldbytheUCITS/compartmentwiththeLuxembourgdepositarybankare not subject to segregation rules due to the nature of these assets and thus fall under the counterpartyriskoftheLuxembourgdepositarybank.

• Re-hypothecationofassets:Re-hypothecationofassets,whereauthorizedbyregulationapplicabletotheUCITSandthesub-custodian,shouldbespecificallydisclosedandgoverned,includingnecessaryreportingrequirements,inaprovisionofthesub-custodycontractand,asthecasemaybe,inthefund’sprospectus.

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• Periodicreconciliationandauditconfirmation:Thedepositary’srecordsofholdingsarereconciledtostatementsofholdingsfromthelocalsub-custodiansatleastmonthly.Differencesareidentified,investigatedandresolvedonatimelybasis. Book/recordsfromthedepositaryassociatedwithanISAE3402reportorsimilarcontrolreportis provided.

• DisclosureintheprospectusoftheUCITS:Sub-custodiansaregenerallynotdisclosedintheprospectusoftheUCITS.Formarket-specificsub-custodiansadisclosureintheprospectushighlightingthespecificrisksofthemarketcouldbe recommended.

11.7.2.FullAIFMregimeAIF

11.7.2.1. General requirements

Thedepositaryispermittedtodelegatesafekeepingdutiestoathirdparty,butnotitscashflowmonitoring or oversight duties.

Thedepositarymaydelegatesafekeepingdutiestoathirdpartyifitcandemonstratethat:• ➢Thetasksaredelegatedforademonstrable,objectivereasonandnotwiththeintentionofavoiding

theAIFMrequirements• ➢Ithasexercisedalldueskill,careanddiligenceintheselection,appointment,periodicreviewand

ongoing monitoring of:• Thethirdpartytowhomithasdelegateditstasks• Thearrangementsofthethirdpartyinrespectofthemattersdelegated

Thedepositaryisrequiredtoimplementandapplyanappropriate,documentedduediligenceprocedurefortheselectionandon-goingmonitoringofthedelegate.Theduediligencemustbereviewedregularly,atleastonceayear,andmadeavailableuponrequesttocompetentauthorities.

Whenselectingandappointingathirdpartytowhomsafekeepingfunctionsaredelegated,thedepositarymustexercisealldueskill,careanddiligencetoensurethatentrustingfinancialinstrumentstothisthirdpartyprovidesanadequatestandardofprotection,includingatleast:• ➢Assessingtheregulatoryandlegalframework,includingcountryrisk,custodyriskandthe

enforceabilityofthethirdparty’scontracts.TheassessmentmustenablethedepositarytodeterminethepotentialimplicationofaninsolvencyofthethirdpartyfortheassetsandrightsoftheAIF.Ifadepositarybecomesawarethatthesegregationofassetsisnotsufficienttoensureprotectionfrominsolvencybecauseofthelawofthecountrywherethethirdpartyislocated,itmustimmediatelyinformtheAIFM(seealsoSection11.7.2.2.)

• ➢Assessingwhetherthethirdparty’spractice,proceduresandinternalcontrolsareadequatetoensurethatthefinancialinstrumentsoftheAIForoftheAIFMactingonbehalfoftheAIFaresubject to a high standard of care and protection

• ➢Assessingwhetherthethirdparty’sfinancialstrengthandreputationareconsistentwiththetasksdelegated.Thatassessmentmustbebasedoninformationprovidedbythepotentialthirdpartyaswellasotherdataandinformation,whereavailable

• ➢Ensuringthatthethirdpartyhastheoperationalandtechnologicalcapabilitiestoperformthedelegatedcustodytaskswithasatisfactorydegreeofprotectionandsecurity

Thedepositarymustexercisealldueskill,careanddiligenceintheperiodicreviewandon-goingmonitoringtoensurethatthethirdpartycontinuestocomplywiththeaforementionedcriteria.Tothisendthedepositarymustatleast:• ➢Monitorthethirdparty’sperformanceanditscompliancewiththedepositary’sstandards• ➢Ensurethatthethirdpartyexercisesahighstandardofcare,prudenceanddiligenceinthe

performanceofitscustodytasksandinparticularthatiteffectivelysegregatesthefinancialinstrumentsinlinewiththerequirements(seeSection11.7.2.2.)

• ➢ReviewthecustodyrisksassociatedwiththedecisiontoentrusttheassetstothethirdpartyandwithoutunduedelaynotifytheAIForAIFMofanychangeinthoserisks.Thatassessmentmustbebasedoninformationprovidedbythethirdpartyandotherdataandinformationwhereavailable.Duringmarketturmoilorwhenariskhasbeenidentified,thefrequencyandthescopeofthereviewmustbeincreased.Ifthedepositarybecomesawarethatthesegregationofassetsisnolongersufficienttoensureprotectionfrominsolvencybecauseofthelawofthecountrywherethethirdpartyislocated,itmustimmediatelyinformtheAIFM

330 | 11.Depositary

Thedepositaryisrequiredtoensurethat,atalltimesduringtheperformanceofthetasksdelegatedtoit,thethirdparty:(1) Hasthestructuresandexpertisethatareadequateandproportionatetothenatureand

complexityoftheassetswhichhavebeenentrustedtoit(2) Asfarasthedelegationofsafekeepingoffinancialinstrumentsisconcerned,issubjectto

effectiveprudentialregulation,includingminimumcapitalrequirements,andsupervisioninthejurisdictionconcerned,andtoexternalperiodicaudittoensurethatthefinancialinstrumentsare in its possession

(3) Segregatestheassetsofthedepositary’sclientsfromitsownassetsandfromtheassetsofthedepositarysothattheycanatanytimebeclearlyidentifiedasbelongingtoclientsofthedepositary(seeSection11.7.2.2.)

(4) DoesnotmakeuseoftheassetswithoutpriorconsentoftheAIF(ortheAIFMactingonbehalfoftheAIF)andpriornotificationofthedepositary

(5) Complieswiththesamegeneralcustodyobligationsandprohibitionsapplicabletothedepositary

WherethelawofathirdcountryrequiresthatcertainfinancialinstrumentsareheldincustodybyalocalentityandnolocalentitysatisfiesthedelegationrequirementsofPoint(2)ofthepreviousparagraph,certainexemptionsmayapply,understrictconditions(seethesecondparagraphofSection11.7.2.3.).

Incaseofdelegationofsafekeepingoffinancialinstrumentsheldincustody,thedepositaryremainssubjecttorequirementsonrecordsandsegregatedaccounts,reconciliations,duecare,andcustodyrisks(seePoints(2)to(5)ofthesecondparagraphofSubsection11.4.2.2.A.).Inaddition,thedepositaryisrequiredtoensurethatthethirdpartydelegatecomplieswiththeserequirementsand,inaddition,thoseonadequateorganizationalarrangementsandrightofownership(seePoints(2)to(7)ofthesecondparagraphofSubsection11.4.2.2.A.).

ThedepositaryisrequiredtomonitorcompliancewiththeAIFMrequirementsinrelationtoconflictsof interest.

Thedepositaryisrequiredtodevisecontingencyplansforeachmarketinwhichitappointsathirdpartyinaccordancewiththedelegationrulestoperformsafekeepingduties.Suchacontingencyplanmustincludetheidentificationofanalternativeprovider,ifany.

Thedepositaryisrequiredtotakemeasures,includingterminationofthecontract,whichareinthebestinterestoftheAIFanditsinvestorswherethedelegatenolongercomplieswiththerequirements.

Athirdpartydelegatemayinturnsub-delegatethesetasks,providedthatthesameconditionsaremet.

AIFMarerequiredtomakeavailabletoAIFinvestors,beforetheyinvestintheAIF,informationonanysafekeepingfunctiondelegatedbythedepositary,theidentificationofthedelegateandanyconflictsofinterestthatmayarisefromsuchdelegation,aswellasanymaterialchangesthereto(seeSection12.3.3.).

11.7.2.2. Segregation obligation

Wheresafekeepingfunctionshavebeendelegatedwhollyorpartlytoathirdparty,thedepositarymustensurethatthethirdpartyactsinaccordancewiththesegregationobligationbyverifyingthatthethirdparty:• ➢Keepssuchrecordsandaccountsasarenecessarytoenableitatanytimeandwithoutdelayto

distinguishassetsofthedepositary’sAIFclientsfromitsownassets,assetsofitsotherclients,assetsheldbythedepositaryforitsownaccountandassetsheldforclientsofthedepositarywhicharenotAIF

• ➢Maintainsrecordsandaccountsinawaythatensurestheiraccuracy,andinparticulartheircorrespondencetotheassetssafekeptforthedepositary’sclients

• ➢Conducts,onaregularbasis,reconciliationsbetweenitsinternalaccountsandrecordsandthoseofthethirdpartytowhomithasdelegatedsafekeepingfunctions

• ➢Introducesadequateorganizationalarrangementstominimizetheriskoflossordiminutionoffinancialinstrumentsorofrightsinconnectionwiththosefinancialinstrumentsasaresultofmisuseofthefinancialinstruments,fraud,pooradministration,inadequaterecord-keepingornegligence

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• ➢Wherethethirdpartyisacentralbank,anauthorizedEUcreditinstitutionorabankauthorizedinathirdcountrywhichissubjecttoeffectiveprudentialregulationandsupervisionthathasthesameeffectasEuropeanUnionlawandiseffectivelyenforced,thedepositarymusttakethenecessarystepstoensurethattheAIF’scashisheldinanaccountoraccountsinaccordancewiththecashflowmonitoringrequirementsapplicabletothedepositary(seeSection11.4.4.)

Whereadepositaryhasdelegateditscustodyfunctionstoathirdpartyinaccordancewiththedelegationrequirements,themonitoringofthethirdparty’scompliancewithitssegregationobligationsmustensurethatthefinancialinstrumentsbelongingtoitsclientsareprotectedfromanyinsolvencyofthatthirdparty.If,accordingtotheapplicablelaw,includinginparticularthelawrelatingtopropertyorinsolvency,therequirementslaiddowninthepreviousparagrapharenotsufficienttoachievethatobjective,thedepositaryisrequiredtoassesswhatadditionalarrangementsaretobemadeinordertominimizetheriskoflossandmaintainanadequatestandardof protection.

Thesamerequirementsapplywhenthethirdpartydelegatesub-delegatesitssafekeepingtasks.

11.7.2.3. Delegation and liability

Ingeneral,thedepositary’sliabilityisnotaffectedbydelegation.

Liabilityforlossoffinancialinstrumentsheldincustodycan,however,betransferredfromthedepositarytothethird-partyifthedelegationcomplieswiththedelegationrequirementsandthefollowingconditionsaremet:• ➢ThereisawrittencontractbetweenthedepositaryandtheAIF(ortheAIFMactingonbehalfofthe

AIF)whichestablishestheobjectivereasontocontractsuchadischargeofliability

Theobjectivereasonstocontractadischargeofliabilitymustbe:• Limitedtopreciseandconcretecircumstancescharacterizingagivenactivity• Consistentwiththedepositary’spoliciesanddecisionsTheobjectivereasonsmustbeestablishedeachtimethedepositaryintendstodischargeitselfofliability.Thedepositaryisconsideredtohaveobjectivereasonsforcontractingthedischargeofitsliabilitywhenthedepositarycandemonstratethatithadnootheroptionbuttodelegateitscustodydutiestoathirdparty.Thisisthecasewhere:• Thelawofathirdcountryrequiresthatcertainfinancialinstrumentsbeheldincustodybya

localentityandlocalentitiesexistthatsatisfythedelegationrequirements• TheAIFMinsistsonmaintaininganinvestmentinaparticularjurisdictiondespitewarningsbythe

depositaryastotheincreasedriskthispresents• ➢Thereisawrittencontractbetweenthedepositaryandthethirdpartywhichexplicitlyprovidesfor

thetransferofliabilityfromthedepositarytothethirdpartyandmakingitpossiblefortheAIF,theAIFM,orthedepositaryactingontheirbehalf,tomakeaclaimagainstthethirdpartyinrespectofthelossoffinancialinstruments

• ➢Thearrangementisdisclosedtoinvestorsbeforetheyinvest(seeSections12.3.3.and12.4.2.5.)

Further,wherethedelegationrequirementswithregardtofinancialinstrumentsheldincustodycannotbemetinacertaincountry(Point(2)ofthesixthparagraphofSection11.7.2.1.)becausetherearenosuchentities,thedepositarycandischargeitselfofitsliabilityprovidedthatthefollowingconditionsarefulfilled:• ➢Theconstitutionaldocumentexpresslyallowsforsuchdischarge• ➢TheinvestorsintheAIFhavebeendulyinformedofthedischargeandthereasonsjustifyingthe

discharge prior to their investment• ➢TheAIF(orAIFMactingonbehalfoftheAIF)instructedthedepositarytodelegatethecustodyof

suchfinancialinstruments• ➢ThereisawrittencontractbetweenthedepositaryandAIF(ortheAIFMactingonbehalftheAIF)

whichexpresslyallowssuchadischarge• ➢Thereisawrittencontractbetweenthedepositaryandthethirdpartythatexplicitlytransfersthe

liabilityofthedepositarytothatlocalentityandmakesitpossiblefortheAIF(ortheAIFMactingonbehalfoftheAIF)tomakeaclaimagainstthatlocalentityinrespectofthelossoffinancialinstruments,orforthedepositarytomakesuchaclaimontheirbehalf

332 | 11.Depositary

11.8. Prime broker

Aprimebrokeris,accordingtotheAIFMLaw,anentitysubjecttoprudentialregulationandongoingsupervision,which:

• ➢Offersoneormoreservicestoprofessionalinvestorsprimarilytofinanceorexecutetransactionsinfinancialinstrumentsascounterparty

• ➢Mayalsoprovideotherservicessuchasclearingandsettlementoftrades,custodialservices,securitieslending,customizedtechnologyandoperationalsupportfacilities

Theselectionandappointmentoftheprimebrokerisgenerallytheresponsibilityof:• ➢TheBoardofDirectorsoftheUCI,inthecaseofaninvestmentcompany• ➢ThemanagementcompanyorAIFM,inthecaseofacommonfund

Whereaprimebrokerisappointed,thedepositary,ifseparatefromtheprimebroker,mustbeinformedofthecontractwiththeprimebroker.TheappointmentoftheprimebrokeriscoveredinSection7.4.17..Theprimebrokerisrequiredtoreportinformationtothedepositaryonadailybasis(seeSection11.8.1.).IfthedepositaryentruststhesafekeepingoftheassetsoftheAIFtotheprimebroker,theprimebrokermustbeappointedbythedepositaryasasub-custodian,andalltherequirementsapplicabletodelegationofsafekeepingmustbemet(seeSection11.8.2.).Aprimebrokermayalsoactasdepositary,ifcertainconditionsaremet(seeSection11.8.3.).

ThemodelspossiblewhereanAIFprovidesitsassetsascollateraltoacollateraltakerareoutlinedinSubsection 11.4.2.2.A..

Thecontractwiththeprimebrokermustcoverthetermsunderwhichtheprimebrokermaytransferandre-useAIFassets(seeSection7.4.17.).

InformationwhichmustbedisclosedtoinvestorsbeforetheyinvestiscoveredinSection12.3.3..

11.8.1.Reportingobligations

Whereaprimebrokerhasbeenappointed,theAIFMisrequiredtoensurethatfromthedateofthatappointment,anagreementisinplacepursuanttowhichtheprimebrokerisrequiredtomakeavailabletothedepositaryastatementinadurablemediumwhichcontainsthefollowinginformationatthecloseofeachbusinessday:• ➢ThetotalvalueofassetsheldbytheprimebrokerfortheAIF,wheresafekeepingfunctionsare

delegated(seealsoSection11.8.2.),andthevalueofeachofthefollowing:• CashloansmadetotheAIFandaccruedinterest• SecuritiestoberedeliveredbytheAIFunderopenshortpositionsenteredintoonbehalfofthe

AIF• CurrentsettlementamountstobepaidbytheAIFunderanyfuturescontracts• Shortsalecashproceedsheldbytheprimebrokerinrespectofshortpositionsenteredintoon

behalfoftheAIF• Cashmarginsheldbytheprimebrokerinrespectofopenfuturescontractsenteredintoon

behalfoftheAIF.Thisobligationisinadditiontothecashflowmonitoringobligations• Mark-to-marketclose-outexposuresofanyOTCtransactionenteredintoonbehalfoftheAIF• TotalsecuredobligationsoftheAIFagainsttheprimebroker• AllotherassetsrelatingtotheAIF

• ➢Thevalueofotherassetsheldascollateralbytheprimebrokerinrespectofsecuredtransactionsenteredintounderaprimebrokerageagreement

• ➢ThevalueoftheassetswheretheprimebrokerhasexercisedarightofuseinrespectoftheAIF’sassets

• ➢AlistofalltheinstitutionsatwhichtheprimebrokerholdsormayholdcashoftheAIFinanaccountopenedinthenameoftheAIForinthenameoftheAIFMactingonbehalfoftheAIF

11.Depositary| 333

Depositary 11

ThestatementmustbemadeavailabletothedepositaryoftheAIFnolaterthanthecloseofthenextbusinessdaytowhichitrelates.

TheprimebrokerisalsorequiredtomakeavailabletothedepositarydetailsofanyothermattersnecessarytoensurethatthedepositaryoftheAIFhasup-to-dateandaccurateinformationaboutthevalueofassetsthesafekeepingofwhichhasbeendelegated.

11.8.2.Delegationtoprimebrokers

Delegationofcustodytasksbythedepositarytoaprimebrokerispermittedprovidedthedelegationconditionsaremet(seeSection11.7.).

11.8.3.Primebrokeractingasdepositary

Aprimebrokercanalsoactasadepositaryif,andonlyif:• ➢Ithasfunctionallyandhierarchicallyseparatedtheperformanceofitsdepositaryfunctionsfromits

tasksasaprimebroker• ➢Therequirementsondelegationofcustodytasksbythedepositarytoathirdpartyaremet(see

Section11.7.)• ➢Thepotentialconflictsofinterestareproperlyidentified,managed,monitoredanddisclosedtothe

investorsoftheAIF(seealsoSection12.3.3.)

334 | 12.Funddocumentationandreporting

12.1. Introduction

This chapter provides details of:• ➢Thecontentoftheinitialdisclosuresto

investors to be included in the:• Prospectus(for2010LawUCIs–UCITS

andPartIIUCIs)• KeyInvestorInformation(KII)document

(forUCITS)• InitialdisclosurestoinvestorsinAIF,as

requiredundertheAIFMrequirements• Offeringdocument(forSIFs)

• ➢Periodicinvestordisclosuresandupdates• ➢Financialreporting:theannual,semi-annual

andinterimreportingrequirementsandauditrequirements

• ➢Generalmeetings• ➢Submissionofperiodicreportstothetrade

register• ➢Informationtobesenttotheauthorities

responsible for the collection of such information,includingmonthly,quarterlyandannualfinancialinformationaswellasfinancialreportsandprospectusesoroffering documents

MarketingofUCIstoinvestorsiscoveredinChapter 14.

AdditionalreportingrequirementsforUCIsadmittedtotradingonasecuritiesmarketoftheLuxembourgStockExchange(LuxSE)areset out in Section 15.4.2..

InthisChapter,theterm“AIF”isusedtorefertobothAIFmanagedbyauthorizedAIFMandinternallymanagedAIFwhicharesubjecttotheAIFMLaw(“FullAIFMregimeAIF”).

12. Fund documentation and reporting

334|12.Funddocumentationandreporting

12.Funddocumentationandreporting| 335

Fund documentation and reporting 12

12.1.1.Investorinformationfor2010LawUCIs

A2010Lawinvestmentcompany,andamanagementcompanyforeachofthe2010Lawcommonfundsthatitmanages,isrequiredtopublish:• ➢Aprospectus

Theprospectusmustincludetheinformationnecessaryforinvestorstobeabletomakeaninformedjudgmentoftheinvestmentproposedtothem,and,inparticular,oftheassociatedrisks.Theessentialelementsoftheprospectusmustbekeptup-to-date.

• ➢KIIs,forUCITS

TheKIIisdesignedtoprovideinvestorswithinformationontheessentialcharacteristicsoftheUCITS,sothatinvestorsarereasonablyabletounderstandthenatureandtherisksoftheinvestmentproductthatisbeingofferedtothembeforetheyinvest.TheessentialelementsofKIImustbekeptup-to-date.

• ➢Anannualreportforeachfinancialyear:• ForUCITS:withinfourmonthsoftheendoftheperiodtowhichitrelates• ForPartIIUCIs:withinsixmonthsoftheendoftheperiodtowhichitrelates

• ➢Asemi-annualreportcoveringthefirstsixmonthsofthefinancialyearwithin:• ForUCITS:withintwomonthsoftheendoftheperiodtowhichitrelates• ForPartIIUCIs:withinthreemonthsoftheendoftheperiodtowhichitrelates

• ➢Subscriptionandredemptionprice(seeSection10.3.3.)

Theprospectusandthelatestpublishedannualandsemi-annualreportsmustbeprovidedtoinvestorsonrequestandfreeofcharge.ForUCITS,theKIImustbeprovidedtoinvestorsfreeofcharge;ingeneral,theKIImustbeprovidedtoinvestorsbeforetheyinvest(seeSection14.2.).Theprospectusand,forUCITS,KIImaybeprovidedtoinvestorsinadurablemediumorbymeansofawebsite.Apapercopyoftheprospectus,thelatestpublishedannualandsemi-annualreportsand,forUCITS,theKII,mustbedeliveredtotheinvestorsonrequestandfreeofcharge.

ForUCITS,anup-to-dateversionoftheKIImustbemadeavailableonthewebsiteoftheinvestmentcompanyormanagementcompany.

Theannualandsemi-annualreportsmustbeavailabletoinvestorsinthemannerspecifiedintheprospectusand,forUCITS,intheKII.

Allmarketingcommunicationstoinvestors(e.g.,factsheets)mustmeetcertainrequirements.ThemarketingofUCITS,includingprovisionoffundinformationtoinvestors,iscoveredinChapter14.

UpdatestoexistingUCIsmayentailamendmentstotheprospectusand,forUCITS,theKII;theproceduretobefollowedisoutlinedinSection4.4..

Themanagementcompanyandaself-managedinvestmentcompanyarerequiredtodiscloseinformationontheexerciseofvotingrightsandmayberequiredtodiscloseinformationinrelationtoconflictsofinterest.


12.1.2.InvestorinformationforSIFs

ASIFinvestmentcompany,andamanagementcompanyforeachoftheSIFcommonfundsthatitmanages,mustestablish:• ➢Anofferingdocument

Theofferingdocumentmustincludetheinformationnecessaryforinvestorstobeabletomakeaninformedjudgmentoftheinvestmentproposedtothemand,inparticular,oftheassociatedrisks.

• ➢Anannualreportforeachfinancialyearwhichmust,ingeneral,beavailabletoinvestorswithinsixmonthsfromtheendoftheperiodtowhichitrelates

Theofferingdocumentandthelatestannualreportmustbeprovidedtoinvestorsonrequest,freeof charge.

12.1.3.InvestorinformationforAIF

FullAIFMregimeAIFarerequiredtomeetAIFMinvestorinformationrequirementson:• ➢Informationwhichmustbeprovidedtoinvestorsbeforetheyinvest.Thisinformationmustbe

disclosedintheprospectusortheofferingdocument,orassupplementaryinformation• ➢Periodicandregulardisclosurestoinvestors,forexampleonleverageandliquidity• ➢Annualreport

12.1.4.Financialreportingstandards

MostUCIspreparetheirfinancialstatementsunderLuxembourggenerallyacceptedaccountingprinciples(LuxGAAP).TheLawof10December2010onthe introduction of international financial reporting standards for companies,however,introducedthepossibilityforcommercialcompaniestoprepareandpresenttheirannualandconsolidatedaccountsunderInternationalFinancialReportingStandards(IFRS)asadoptedbytheEuropeanUnion.Assuch,UCIscreatedasinvestmentcompaniesmaynowpreparetheirfinancialstatementsunderIFRSaslongasthisisdisclosedintheprospectusorofferingdocument.UCIscreatedascommonfundsshouldseekpre-approval,onacase-by-casebasis,fromtheCSSF,topreparetheirfinancialstatementsunderIFRS.

Inpractice,IFRSfinancialstatementsarepreparedwhentheinternationalusageofthestatementsdemandsit–forexample,wheninvestorsrequireIFRSstatements,tomeetrequirementsinrelationtofilingwithanauthorityinanothercountryortolistonaregulatedmarketoutsideLuxembourg.

12.2. Constitutional documents

12.2.1.Managementregulationsofacommonfund

Themanagementcompanyisrequiredtodrawupthemanagementregulationsforthecommonfund.Theprovisionsofthemanagementregulationsaredeemedacceptedbytheunitholdersbythemerefactoftheacquisitionoftheunitsofthecommonfund.

ThemanagementregulationsofthecommonfundaresubjecttoLuxembourgLawandmustcontainprovisionsatleastonthefollowing:• ➢Thenameanddurationofthecommonfund,thenameofthemanagementcompanyandofthe

depositary• ➢Theinvestmentpolicy,elaboratedinlinewiththespecificobjectivesandcriteriaoftheUCI



• ➢Thedistributionpolicy• ➢Theremunerationandexpenseswhichthemanagementcompanyisentitledtochargetothe

common fund and the method of calculation of that remuneration• ➢Informationtobedisclosed• ➢Thedateoftheclosingoftheaccountsofthecommonfund• ➢Subscriptionsandredemptions:

• The procedure for the issue of units • Inthecaseofa2010Lawcommonfund,theprocedurefortherepurchaseofunitsandthe

conditionsunderwhichrepurchasesarecarriedoutandmaybesuspended• InthecaseofaSIFcommonfund,theprocedurefortheredemptionofunits,whererelevant

• ➢Theproceduresforamendmentofthemanagementregulations• ➢Thecaseswhere,withoutprejudicetolegalgrounds,thecommonfundshallbedissolved

Themanagementregulationsofthecommonfundmustexpresslyprovidethatthecommonfundmaybecomprisedofmultiplecompartments,eachcompartmentcorrespondingtoadistinctpartoftheassetsandliabilitiesofthecommonfund,andtheapplicableoperationalrules(seeSection3.3.2.).

ThesemanagementregulationsmustbesubmittedtotheTradeandCompaniesRegister(Registre de Commerce et des Sociétés,Luxembourg-RCS)andpublishedintheOfficialGazette(theMémorial)bywayofanoticeadvisingofthesubmission,inaccordancewiththeprovisionsoftheLawof10August1915concerningcommercialcompanies,asamended.

12.2.2.Articlesofincorporationofaninvestmentcompany

Thearticlesofincorporationofaninvestmentcompany,andanyamendmenttothem,mustberecordedinaspecialnotarialdeeddrawnupinFrench,GermanorEnglish.WherethenotarialdeedisdrawnupinEnglish,translationintooneoftheofficiallanguagesisnotrequired.Thearticlesofincorporationofaninvestmentcompanygenerallycontainprovisionsonthefollowing:• ➢Thename,registeredoffice,durationandobject/purposeoftheinvestmentcompany• ➢Thesharecapitalandcharacteristicsofshares• ➢Thegoverningbodyandmanagementoftheinvestmentcompanyanditsadministration• ➢Expensestobebornebytheinvestmentcompany• ➢Thefinancialyear• ➢Generalmeetingsoftheinvestmentcompany• ➢Thedistributionpolicy• ➢Valuationpolicyfortheunderlyingassets• ➢Subscriptionsandredemptions:theissueandrepurchaseofshares,including,inter alia time limits

forissueandrepurchasepayments,thefrequencyofcalculationoftheissueandrepurchasepriceandtheconditionsunderwhichtheissuesandrepurchasesarecarriedoutandmaybesuspended

• ➢Theproceduretoamendthearticlesofincorporation• ➢Incaseofamultiplecompartmentinvestmentcompany,thepossibilitytoliquidateormerge

compartments • ➢Thecaseswhere,withoutprejudicetolegalgrounds,theinvestmentcompanyshallbeliquidated

Thearticlesofincorporationoftheinvestmentcompanymustexpresslyprovidethattheinvestmentcompanymaybecomprisedofmultiplecompartments,eachcompartmentcorrespondingtoadistinctpartoftheassetsandliabilitiesoftheinvestmentcompany,andtheapplicableoperationalrules(seeSection3.3.2.).

WhereotherdeedsrecordedinnotarialformaredrawnupinEnglish,suchasnotarialdeedsdrawing-upreportsofshareholders’meetingsofaninvestmentcompanyorrecordingamergerprojectregardinganinvestmentcompany,translationintooneoftheofficiallanguagesisnotrequired.


12.3. Initial disclosures to investors

12.3.1.Prospectusof2010LawUCIs

TheprincipalcontentsoftheprospectusaresetoutinScheduleAofAnnexItothe2010LawandinChapterLofCircular91/75.Theprospectus,andanyamendmentsthereto,mustbeapprovedbytheCSSFbeforetheprospectusisused(seeChapter5).Theessentialelementsoftheprospectusmustbekeptup-to-date.

Commission Regulation (EU) No 583/2010 outlinestheconditionsapplyingwhenprovidingaprospectustoinvestorsina“durablemedium”otherthanpaperorbymeansofawebsite.

Theinformationrequiredmaybesummarizedasfollows:

A. Information concerning the UCI and its management company

Common fund

Investment company

Management company

Name X X X

Legal form X X

Registeredandheadoffice(ifdifferent) X X

Dateofestablishment/incorporation X X X

OtherUCIsmanagedbymanagementcompany X

Forumbrellafunds,thenameofthecompartmentsx X X

Placewhereconstitutionaldocumentmaybeobtained(seeSection12.2.) X X

Briefdescriptionoftaxsystemincludingdetailsofwhetherdeductionsaremadeatsourcefromtheincomeandcapitalgainspaidbytheshareholdersorunitholders

X X

Accounting and distribution dates X X

Nameofauditor X X

Namesandpositionsofmanagementandtheiroutsideactivities X X

Capital X X

Detailsoftypesandcharacteristicsofsharesorunits(foreachcompartment,ifapplicable) X X

Stockexchangesonwhichsharesorunitsarelisted(foreachcompartment,ifapplicable) X X

Proceduresandconditionsforissuingsharesorunits(foreachcompartment,ifapplicable) X X

Proceduresandconditionsforrepurchasingandswitchingofsharesorunits(foreachcompartment,ifapplicable)

X X

Circumstances for suspending subscriptions and redemptions X X

Rulesfordeterminingandapplyingincome X X

Unlaunchedcompartmentsandcompartmentsawaitingreactivationformorethan18monthsmustberemovedfromtheprospectus(seeSection4.11.).



Common fund

Investment company

Management company

Descriptionoftheinvestmentobjectives(foreachcompartment,ifapplicable),includingitsfinancialobjectives(e.g.,capitalgrowthorincome),investmentpolicy(e.g.,specializationingeographicalorindustrialsectors),anylimitationsonthatinvestmentpolicyandanindicationofanytechniquesandinstrumentsorborrowingpowerswhichmaybeusedinthemanagementoftheUCI,oreachcompartmentofamultiple compartment UCI187

X X

Descriptionoftherisks(foreachcompartment,ifapplicable)188 X X

Rulesforvaluingassets X X

PeriodicityoftheNAVcalculation(foreachcompartment,ifapplicable)189 X X

Determinationofsubscriptionandredemptionprice(methodandfrequencyofcalculation,charges,placesandfrequencyofpublication)(foreachcompartment,ifapplicable)

X X

InformationonremunerationpaidbyUCItomanagementcompany,depositaryorthirdparties(foreachcompartment,ifapplicable)190

X X

187 TheprospectusofaUCITSmustindicatethecategoriesofassetsinwhichtheUCITSisauthorizedtoinvest(seeSection5.2.2.3.),andprominentlyindicateitspolicyinrelationtofinancialderivativeinstruments(FDIs).UCITSthatuseFDIsforpurposesotherthanhedgingshouldincludeintheirprospectusadescriptionoftherisks(including,ifappropriate,anindicationoftheleverageandmarketrisk).

WheretheUCITSisauthorizedtoinvestupto100%ofitsnetassetsinatleastsixdifferenttransferablesecurities,issuedorguaranteedbyanEUMemberState,itslocalauthorities,anon-MemberStateoftheEUorpublicinternationalbodiesofwhichoneormoreEUMemberStatesaremembers(seePoint5.2.2.8.1.II.(2)),thismustbeexplicitlystatedintheprospectus.

WhenaUCITSinvestsprincipallyinanycategoryofassetsotherthantransferablesecuritiesandmoneymarketinstruments,orreplicatesastockordebtsecuritiesindex,theprospectusmustincludeaprominentstatementdrawingattentiontoitsinvestmentpolicy.WhentheNAVofaUCITSislikelytohaveahighvolatilityduetoitsportfoliocompositionortheportfoliomanagementtechniquesthatmaybeused,theprospectusmustincludeaprominentstatementdrawingattentiontothischaracteristicoftheUCITS.

WhereaUCIintendstousetechniquesandinstrumentsrelatingtotransferablesecuritiesandmoneymarketinstruments(seeSection5.2.2.6.),itmustclearlyindicateinitsprospectus:• Thatitintendstoenterintosuchtechniquesandusesuchinstruments• Thetypesoftransactionconsideredandpurposethereof• The conditions and limits of such transactions• The conditions and limits of collateral cash reinvestment if the UCI intends to reinvest the collateral• Adescriptionoftherisksinherentinsuchtransactions

IfaUCITSinvestsmorethan20%ofitsnetassetsinMortgageBackedSecurities(MBS)orAssetBackedSecurities(ABS)theprospectusmustprovideexplicitinformationonsuchinvestments,inparticulartherisksassociatedwithinvesting in such securities.

Theuseofcreditdefaultswaps(“CDS”)on“loans”mustalsobespecificallymentionedintheUCITS’prospectus.

ForstructuredUCITSwherethecommitmentapproachisusedforthecalculationofglobalexposure,additionaldisclosuresarerequired(seeSection12.3.1.I.).

188 Requiredinpractice.189 Idem.190 Wherea“substantialproportion”ofnetassetsofaUCITSisinvestedinotherUCIswhicharelinkedtotheinvesting

UCITS,theprospectusmustdisclosethemaximumlevelofmanagementfeesthatmaybechargedbothtotheUCITSitselfandtotheotherUCIsinwhichitintendstoinvest(seePoint5.2.2.8.1.III.(3)).


B. Information concerning the depositary

• ➢Name,legalform,registeredandheadoffice(ifdifferent)• ➢Mainactivity

C. Information concerning investment advisers (for each compartment, if applicable)

• ➢Name• ➢Materialprovisionsofthecontract,excludingremuneration• ➢Othersignificantactivities

D. Investor redemption arrangements and investor informationInformationconcerningarrangementsformakingpaymentstoshareholdersorunitholdersandrepurchasingsharesorunitsandmakingavailableinformationontheUCI;suchinformationistobegiveninLuxembourgandothercountrieswheretheprospectusistobecirculated.

E. Other information (to be provided for all compartments in the case of multiple compartment UCIs)

• ➢HistoricalperformanceoftheUCI(whereapplicable):suchinformationmaybeeitherincludedinor attached to the prospectus and should be updated on an annual basis

• ➢Profileofthetypicalinvestor

F. Economic informationPossibleexpensesorfees,otherthanchargesrelatingtothesubscriptionorredemptionofsharesorunits,distinguishingbetweenthosetobepaiddirectlybytheshareholderorunitholderandthosetobebornebytheUCI.

G. DateTheprospectusmustbedatedandmayonlybeusedaslongastheinformationinitisaccurate.

H. Delegation of management company functionsTheprospectusofaUCITSmustlistthefunctionsdelegatedbythemanagementcompany.

I. Risk management disclosures for UCITS (see also Subsection 9.2.6.B.) TheUCITSshoulddiscloseinitsprospectusthemethodusedtocalculatetheglobalexposure(i.e.,commitmentapproach,relativeVaRorabsoluteVaR).

UCITSusingVaRapproachesshoulddisclosetheexpectedlevelofleverageandthepossibilityofhigherleveragelevelsintheprospectus.CSSFCircular11/512providesfurtherclarificationonthe assessment and disclosure of the expected level of leverage.

CSSFCommuniqué12/29clarifiesthat,asregardsthepublicationofleverageintheprospectus,theCSSFconsidersthatnewlycreatedUCITS(includingUCITScompartments)must,fromthemomentoflaunching,basethedisclosureofleverageintheprospectusonthesumofthenotionalsapproach.Thisinformationmaybecompletedwiththeleveragedeterminedbasedonthecommitmentapproach(providedthattheunderlyingcalculationmethodisclearlyandpreciselyindicatedforeverymentionedfigure)orwithotheradditionalexplanations.

WhenusingtherelativeVaRapproach,informationonthereferenceportfolioshouldbedisclosedintheprospectus.CSSFCircular11/512providesfurtherclarificationonthecontentoftheinformation to be disclosed.

ForstructuredUCITSwherethecommitmentapproachisusedforthecalculationofglobalexposure,theprospectusshould:• ➢Containfulldisclosureregardingtheinvestmentpolicy,underlyingexposureandpayoff

formulasinclearlanguagewhichcanbeeasilyunderstoodbytheretailinvestor• ➢Includeaprominentriskwarninginforminginvestorswhoredeemtheirinvestmentpriorto

maturitythattheydonotbenefitfromthepredefinedpayoffandmaysuffersignificantlosses



J. Prospectus of a feederInadditiontotheinformationrequiredbyScheduleAofAnnexI,theprospectusofafeederUCITSmustcontainthefollowing:• ➢AdeclarationthatthefeederUCITSisafeederofaparticularmasterUCITSandassuch

permanentlyinvests85%ormoreofitsassetsinsharesorunitsofthatmasterUCITS• ➢TheinvestmentobjectivesandpoliciesofboththemasterandthefeederUCITS• ➢DetailsofwheretoobtaintheprospectusofthemasterUCITS• ➢Asummaryoftheagreement(orinternalconductofbusinessrules)betweenmasterandfeeder• ➢Detailsofhowtheshareholdersorunitholdersmayobtainfurtherinformationonthemaster

UCITSandtheagreemententeredintobetweenthemasterandthefeeder• ➢Thecostsandtaximplicationsofthechosenstructure

K. Investor rightsTheCSSF’sNewsletterofNovember2011announcedthatanewparagraphoninvestorrightsistobeinsertedintotheprospectusesof2010LawUCIs.

TheparagraphdrawsattentiontothefactthatinvestorswillonlybeabletofullyexercisetheirinvestorrightsdirectlyagainsttheUCI(includingtherighttoparticipateingeneralshareholders’meetingsinthecaseofinvestmentcompanies)iftheinvestorisregisteredintheshareholders’orunitholders’register.Italsoadvisesinvestorstotakeadviceontheirrights.

ThetextoftheparagraphmustfollowthemodelprovidedintheCSSFNewsletterNo.130ofNovember2011.

L. Additional prospectus disclosuresESMA’sGuidelines on ETFs and other UCITS issuesrequiredisclosureofthefollowinginformationin the prospectus:• ➢EfficientPortfolioManagement(EPM)techniques:

• ➢Techniquesandinstrumentstobeemployed,therisksinvolvedincludingcounterpartyrisk,potentialconflictsofinterest,andtheimpactontheperformanceoftheUCITS

• ➢ApolicyrelatingtothetreatmentofdirectandindirectoperationalcostsandfeesarisingfromEPM,theidentityofentitiestowhichsuchcostsandfeesarepaidandanyrelationshipwiththemanagementcompanyordepositary

• ➢FinancialDerivativeInstruments(FDIs):UCITSenteringintototalreturnswaps(TRS)orsimilarderivativeinstruments:theunderlyingstrategyandcompositionoftheinvestmentportfolioorindex,informationoncounterparties,theirriskofdefaultandthepotentialeffectoninvestorreturns,theextenttowhichthecounterpartiesassumeanydiscretionovertheUCITS’portfolioorovertheunderlyingoftheFDIs,andwhethertheapprovalofthecounterpartyisrequiredinrelationtoanyUCITSinvestmentportfoliotransaction,and,whererelevant,identificationofthecounterpartyasinvestmentmanager

• ➢Managementofcollateral:theUCITS’collateralpolicycoveringpermittedtypesofcollateral,levelofcollateralrequired,haircutpolicyand,inthecaseofcashcollateral,reinvestmentpolicy

• ➢UCITSETFs:• ➢Useofthe“UCITSETF”identifierinthenameandprospectus;thisEnglishidentifiershouldbe

usedindependentlyofthelanguageofthedocument;theidentifiers“UCITSETF”,“ETF”or“exchange-tradedfund”cannotbeusedbyotherUCITS

• ➢Thepolicyonportfoliotransparencyandwhereinformationontheportfoliocanbeobtained,includingtheindicativenetassetvalue(iNAV)

• ➢HowtheiNAViscalculated,andthefrequencyofcalculation• ➢Foranactively-managedUCITSETFs:

• Thatitisactivelymanaged• Strategytomeetthestatedinvestmentpolicy,includinganyintentiontooutperforman

index• ➢Treatmentofsecondarymarketinvestors:inclusionofawarningintheprospectusand

marketingcommunicationstotheeffectthatsharesorunitspurchasedonthesecondarymarket,ifapplicable,aregenerallynotredeemablefromtheETF,aswellastheprocedureandcosts for direct redemptions in exceptional circumstances


• ➢Index-trackingUCITS:• ➢Descriptionoftheindex,includinginformationonitsunderlyingcomponents(orawebsite

linktosuchinformation),howtheindexwillbetrackedandimplicationsintermsofexposuretotheunderlyingindexandcounterpartyrisk,anticipatedtrackingerror(innormalmarketconditions),andfactorsimpactingtheabilityoftheUCITStotracktheperformanceoftheindex

• ➢Index-trackingleveragedUCITS:leveragepolicy,associatedcostsandrisks,impactonreturns,impactofanyreverseleverage(shortexposure),andadescriptionofhowtheperformancemaydiffersignificantlyfromthemultipleoftheindexoverthemediumtolongterm

• ➢Financialindices:• ➢WhenaUCITSintendstomakeuseoftheincreaseddiversificationlimitsforfinancialindices

referredtoinArticle53oftheUCITSDirective(seeSection5.2.2.7.7.),thisshouldbedisclosedclearlyintheprospectustogetherwithadescriptionoftheexceptionalmarketconditionswhichjustifythisinvestment

• ➢Rebalancingfrequencyanditseffectsonthecostswithinthestrategy

Theguidelinesbecameeffectiveon18February2013.

UCITSexistingatthattimearerequiredtoupdatetheprospectusatthetimeofitsnextrevisionorreplacement,andatthelatestwithinanadditional12months.AnynewUCITScreatedafterthatdateshouldcomplywiththeguidelinesimmediately.

12.3.1.1. Hedge funds

AslaiddowninCSSFCircular02/80,theprospectusofa2010LawPartIIUCIpursuinghedgefundstrategiesmustcontainadescriptionoftheinvestmentstrategyandtheinherentrisksandmakereference to the fact that:• ➢Potentiallossesfromshortsellingdifferfromthosewheresecuritiesareacquiredforcash• ➢Theleverageeffectcreatesanopportunityforincreasedyield,butatthesametimeincreases

volatilityandtheriskofcapitalloss.Borrowingsinvolveaninterestcostwhichmayexceedincomeor gains

• ➢Lowliquiditymaymeaninvestors’redemptionrequestscannotbemet

TheprospectusmustindicatethatinvestingintheUCIinquestionentailsahigherthanaverageriskandisonlysuitableforinvestorspreparedtolosethetotalvalueoftheirinvestment.

Whereapplicable,theprospectusmustcontainadescriptionofthedealingstrategyasregardsfuturesandoptions,makingreferencetotheirvolatility.


AslaiddowninChapterI.IofCircular91/75,theprospectusofa2010LawPartIIUCIinvestinginventurecapitalshouldcontainadetaileddescriptionofinvestmentriskinherenttothepolicyoftheUCIandofthetypeofconflictofinterestwhichcouldarisebetweentheinterestsoftheDirectorsoftheportfoliomanagementandadvisorybodiesandtheinterestsoftheUCI.

The prospectus must contain a statement indicating that an investment in such a UCI represents an aboveaveragerisk,isonlysuitableforpersonswhocanaffordtotakesucharisk,andthataverageinvestorsareadvisedtoinvestonlyapartoftheirsavingsinsuchlong-terminvestments.

Whereinvestorshavetherighttopresenttheirsharesorunitsforredemption,theUCImayprovideforcertainrestrictionstothisright.Anysuchrestrictionsshouldbestatedintheprospectus.

IftheremunerationoftheportfoliomanagementandadvisorybodiesishigherthanthatusuallyapplicabletoUCIs,theprospectusshouldstatewhethertheadditionalremunerationisalsopayableon assets not invested in venture capital.


AslaiddowninChapterI.IIofCircular91/75,theprospectusofa2010LawPartIIUCIinvestinginfuturescontractsandoptionsshouldcontainadetaileddescriptionofthetradingstrategywithregardtofuturescontractsandoptions,aswellastheinherentinvestmentriskandthehighriskofloss.



TheprospectusshouldincludeastatementindicatingthattheUCIisonlysuitableforpersonswhocanaffordtotakesucharisk.

IftheremunerationoftheportfoliomanagementandadvisorybodiesishigherthanthatusuallyapplicabletoUCIs,theprospectusshouldstatewhethertheadditionalremunerationisalsopayableon assets not invested in futures contracts and options.


AslaiddowninChapterI.IIIofCircular91/75,theprospectusofa2010LawPartIIUCIinvestinginrealestateshouldincludeadescriptionoftheinherentrisks.

Itshouldalsoprovidedetailsofthetypeofcommissions,expensesandchargestobebornebytheUCI,togetherwiththemethodofcalculationandaccountingtreatment.

IftheremunerationoftheportfoliomanagementandadvisorybodiesishigherthanthatusuallyapplicabletoUCIs,theprospectusmuststatewhethertheadditionalremunerationisalsopayableonassets not invested in real estate.

12.3.2.KeyInvestorInformation(KII)ofUCITS

KeyInvestorInformation(KII)documents191mustbedrawnupforeveryUCITS.TheKIImustincludeappropriate information about the essential characteristics of the UCITS concerned. It must be providedtoinvestorssothattheyarereasonablyabletounderstandthenatureandtherisksoftheinvestmentproductthatisbeingofferedtothemand,consequently,totakeinvestmentdecisionsonan informed basis.

12.3.2.1. Content and layout of the KII

TheKIImustbepresentedandlaidoutinawaythatiseasytoread.KIImustcontainfair,clearandprovideunderstandableinformationabouttheUCITS.Itmustbebriefandnon-technical.Itmustbeconsistentwiththerelevantpartsoftheprospectus.Itshouldbedrawnupinacommonformat,allowingforcomparison,andbepresentedinawaythatislikelytobeunderstoodbyretailinvestors.

Theform,presentationandcontentofthesectionsoftheKIIhasbeenlaiddowninCommission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council 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.TheKIImustinclude:• ➢Title• ➢Therequiredexplanatorystatement,inter alia advisingtheclienttoreaditinordertomakean

informeddecisionaboutwhethertoinvest• ➢Name(ofcompartmentorshareorunitclassfollowedbynameofUCITS)andidentificationofthe

UCITSbycodenumber(commonlytheISINoftheshareorunitclass)• ➢Nameofthemanagementcompanyandgroup,ifrelevant• ➢Adescriptionofobjectivesandinvestmentpolicycovering,inter alia:

• ➢Maincategoriesofeligiblefinancialinstruments• ➢TargetsoftheUCITSinrelationtoindustrial,geographicalorothermarketsectors,orspecific

asset classes• ➢WhethertheUCITSallowsfordiscretionarychoicewithregardtoparticularinvestments• ➢Referencetoabenchmark,ifrelevant• ➢Possibilitytoredeemsharesorunitsondemand,anddealingfrequency• ➢Whetherdividendincomeisdistributedorreinvested

• ➢Riskandrewardprofile,includingguidanceontheassociatedrisks;thiswilltaketheformof:• ➢Asyntheticriskandrewardindicator(SRRI)followingESMA’s192 guidelines on the methodology

for the calculation of the synthetic risk and reward indicator in the Key Investor Information Document,publishedinJuly2010.

191 AlsoreferredtoasKIIDs.192 TheCommitteeofEuropeanSecuritiesRegulators(CESR)becametheESMAon1January2011.


TheSRRIaimstoprovidepotentialinvestorswithanindicationoftheoverallriskandrewardprofileofaUCITS.TheSRRIcorrespondstoanintegernumberdesignedtoranktheUCITS,accordingtoitsincreasinglevelofvolatility,onascalefrom1to7.ThemethodologyistailoredtocovertheparticularfeaturesofthedifferenttypesofUCITS.ItmustbebasedontheestimatedvolatilityusingweeklypastreturnsoftheUCITSor,ifnototherwisepossible,usingmonthlyreturns.ThereturnsrelevantforthecomputationofvolatilitymustbegatheredfromasampleperiodcoveringthelastfiveyearsofthelifeoftheUCITSand,incaseofdistributionofincome,mustbemeasuredtakingintoaccounttherelevantearningsordividendpayoffs.

TherearespecificrulesonapplicationofthemethodologytoabsolutereturnUCITS,totalreturnUCITS,lifecycleUCITSandstructuredUCITS.InthecaseofstructuredUCITS,theSRRIshouldbecalculatedonthebasisoftheannualizedvolatilitycorrespondingtothe99%ValueatRisk(VaR)atmaturity.

• ➢AnarrativeexplanationofthemainlimitationsoftheSRRI• ➢Anarrativepresentationofthematerialriskswhicharenotfullycapturedbythemethodologyof

theSRRI• ➢Charges:followingthestandardpresentationformat,includingnarrativeexplanations.Ongoing

chargesshouldbecalculatedaccordingtoESMA’s193 guidelines on the methodology for calculation of the ongoing charges figure in the Key Investor Information Document,publishedinJuly2010

• ➢Pastperformanceforthelast10years;foranyyearsforwhichdataisnotavailable,theyearmustbeshownasblank;forUCITSwhichdonotyethavepastperformancedataforacompletecalendaryear,astatementmustbeprovidedexplainingthatthereisinsufficientdatatoprovideausefulindication of past performance

• ➢Practicalinformationincluding:• ➢Nameofdepositary• ➢WhereandhowtoobtainfurtherinformationabouttheUCITS,includingwhereandhowto

obtain,freeofcharge,theprospectusandannualandsemi-annualreports• ➢Whereandhowtoobtainotherpracticalinformation,includinglatestpricesofsharesorunits• ➢Astatementregardingthetaximpactontheinvestor• ➢Astatementregardingtheliabilityoftheinvestmentcompanyormanagementcompanyin

relationtotheKII• ➢Authorizationdetails• ➢Dateofpublication

TheKIIdocumentmustnotexceedtwopagesofA4-sizedpaperwhenprinted,orthreepagesinthecase of structured UCITS.

SpecificprovisionsofCommission Regulation (EU) No 583/2010covercompartments,shareorunitclasses,fundsoffunds,feederUCITSandstructuredUCITS.

InDecember2010,ESMAissuedvariousguidelinesonKIIincluding:• ➢ESMA’s194 template for the Key Investor Information document showingthetypeofcontentsand

layoutofaKIIforastandardUCITS• ➢ESMA’sguide to clear language and layout for the Key Investor Information document (KII),

whichisintendedasastatementofgoodpractice.Itcovers:• ➢Usingplainlanguage:whatismeantbyplainlanguage,andhowtodealwithbarrierstoclear

language• ➢DesigningaclearKII:covering,inter alia,font,layoutandcolors• ➢SpecificguidanceonkeysectionsoftheKII

• ➢GuidelinesontheSelection and presentation of performance scenarios in the Key Investor Information document (KII) for structured UCITS.ForstructuredUCITS,theobjectiveandinvestmentpolicysectionoftheKIImustincludeanexplanationofhowtheformulaworksorhowthepay-offiscalculated,accompaniedbyanillustrationshowingatleastthreescenariosoftheUCITSpotentialperformance.Theguidelinesindicatethatthescenariostoillustratehowthepay-offworksunderthedifferentmarketconditionsshouldincludeanunfavorableoutcome,afavorableoutcome,andamediumoutcome,andspecificfeaturesoftheformula.Theyalsoprovideexamples of scenario selection and presentation.

193 Idem.194 Idem.



TheAssociationoftheLuxembourgFundIndustry(ALFI)hasissueda Key Investor Information Document Q&A.TheQ&A,whichrepresentstheviewoftheALFIworkinggrouponKII,coversquestionsrelatingtoCommissionRegulation(EU)No583/2010,ESMA’sguidelinesandusingtheKIIindistributionnetworks.TheQ&Ahasbeenupdatedanumberoftimesandcovers:• ➢TheformandpresentationoftheKIIincluding:

• ➢Thetitleofthedocument,orderofcontentsandheadingsofsections• ➢Language,lengthandpresentation

• ➢ThecontentofsectionsoftheKIIaddressing:• ➢Theobjectivesandinvestmentpolicy• ➢Theriskandrewardprofile• ➢Charges• ➢Pastperformance• ➢Practicalinformationandcrossreferences• ➢ThereviewandrevisionoftheKII

• ➢ParticularUCITSstructuresincluding:• ➢Investmentcompartments• ➢Shareorunitclasses

• ➢Issuesinrelationto“durablemedium”• ➢ESMA’sguidelines on the methodology for the calculation of the synthetic risk and reward indicator

in the Key Investor Information Document• ➢ESMA’sguidelines on the methodology for the calculation of the ongoing charges figure in the Key

Investor Information Document• ➢UsingKIIindistributionnetworks

InMay2012,theCSSFissueda Key Investor Information Document – Frequently Asked Questions document,updatedinJuly2012,covering, inter alia:• ➢MinimumregulatorydocumentstobetakenintoconsiderationfordraftingaKII• ➢ProceduretofilethefinalversionofaKIIwiththeCSSF• ➢InthecontextofarequestforauthorizationofaUCITSorcompartmentthereof:

• ➢ProcedurewhensubmittingadraftoftheKIItotheCSSF• ➢RequirementtosubmitadraftoftheKIIofatleasttheshareorunitclassdeemedtobethemost

relevant per compartment• ➢ResponsibilityforthecontentoftheKII• ➢FormalCSSFapproval(orvisastamping)–noneisprovidedforKII• ➢Requirementstobemetbeforeissuingashareorunitclass(includingfilingtheKIIwiththeCSSF)• ➢ImpactoftemporarysuspensionofsubscriptionsandredemptionsonrequirementtokeepKIIup-

to-date• ➢ProvisionoftranslationsoftheKIItotheCSSF• ➢RequirementstobemetinrelationtothepublicationofKIIonawebsite

ESMA’s195 Guidelines on ETFs and other UCITS issuesrequiredisclosureofthefollowinginformationintheKII:• ➢UCITSETF:

• ➢Useofthe“UCITSETF”identifierinthenameandKII;thisEnglishidentifiershouldbeusedindependentlyofthelanguageofthedocument;theidentifiers“UCITSETF”,“ETF”or“exchange-tradedfund”cannotbeusedbyotherUCITS

• ➢Thepolicyonportfoliotransparencyandwhereinformationontheportfoliocanbeobtained,includingtheindicativenetassetvalue(iNAV)

• ➢Actively-managedUCITSETF:• ➢Thatitisactivelymanaged• ➢Strategytomeetthestatedinvestmentpolicy,includinganyintentiontooutperformanindex

195 TheCommitteeofEuropeanSecuritiesRegulators(CESR)becametheESMAon1January2011.


• ➢Index-trackingUCITS:• ➢Howtheindexwillbetrackedandimplicationsintermsofexposuretotheunderlyingindexand

counterpartyriskinsummaryform• ➢Index-trackingleveragedUCITS:leveragepolicy,associatedcostsandrisks,impactonreturns,

impactofanyreverseleverage(shortexposure),anddescriptionofhowtheperformancemaydiffersignificantlyfromthemultipleoftheindexoverthemediumtolongterminsummaryform

Theguidelinesbecameeffectiveon18February2013.

UCITSexistingatthattimearerequiredtoupdatetheirKIIatthetimeofitsnextrevisionorreplacement,andatthelatestwithinanadditional12months.AnynewUCITScreatedafterthatdateshouldcomplywiththeguidelinesimmediately.

12.3.2.2. Production of the KII

KIIsmustbedrawnupforeveryUCITS.InthecaseofumbrellaUCITS,aseparateKIImustbeproducedforeachcompartment.Inthecaseofmultipleshareorunitclasses,aseparateKIImustbeproducedforeachshareorunitclass,exceptwhereashareorunitclasscanbeselectedtorepresentothershareorunitclasses,andcertainconditionsaremet.Inthecaseofmaster-feederstructures,aseparateKIImustbeproducedforeachfeederUCITS.

WhereaUCITSconsistsofmorethanoneclassofsharesorunits,theALFIworkinggrouponKIIconsidersthattheremaybethreeoptions:• ➢SingleshareclassKIIs:separateKIIsarepreparedforeachclassofsharesorunits• ➢ArepresentativeshareclassKII:incaseofmultipleshareclass,oneshareclassmaybeselected

to represent one or more other classes of the UCITS• ➢AmultipleshareclassKII:informationonmultipleshareclassesisprovidedonasingleKII

KIIsmustbesubmittedtotheCSSFinEnglish,French,GermanorLuxembourgish.

WheretheUCITSisdistributedinotherMemberStates,KIIsmustbetranslatedintotheofficiallanguage,oroneofthelanguages,oftheUCITShostMemberStateorintoalanguageapprovedbythecompetentauthoritiesofthatMemberState(seeSection14.3.6.).

12.3.2.3. Update of the KII

Theinvestmentcompany,or,inthecaseofcommonfunds,themanagementcompany,mustensurethattheKIIisup-to-date.TheKIImustbeupdatedannuallyandreviewedpriortoorfollowinganychangesregardedasmaterialtotheinformationcontainedintheKII:• Ex-antematerialchanges:theKIImustbereviewedpriortoanychangetotheprospectus,

constitutionaldocumentoranyothermaterialchange.Ingeneral,beforeamaterialchangeisimplementedbytheinvestmentcompany,or,inthecaseofcommonfunds,themanagementcompany,adraftupdatetotheauthorizationfile,includingdraftupdatedKIIs,arecommunicatedtotheCSSF(seeSection4.4.)

• ➢SRRI:theKIImustbeupdatedwheneitherofthefollowingoccur:• ➢ChangestotheriskandrewardsectionoftheKIIaretheresultofadecisionbythemanagement

companyorself-managedUCITSregardingtheinvestmentpolicyorstrategyofthefund• ➢TherelevantvolatilityoftheUCITShasfallenoutsidethebucketcorrespondingtoitsprevious

riskcategoryoneachweeklyormonthlydatareferencepointovertheprecedingfourmonths• ➢Otherex-postmaterialchanges:itisuptotheBoardofDirectorsoftheinvestmentcompany,or,

inthecaseofcommonfunds,themanagementcompanytodefineafrequencyforidentificationofmaterialchanges.Thresholdsandproceduresneedtobeimplementedtoidentifymaterialchangesinthecompositionofthecharges,andmaterialchangestotheongoingcharges

• ➢Annualupdates:theKIImustbeupdatedannually.UpdatedKIIsmustbemadeavailableanddistributednolaterthan35businessdaysafterthe31December

Asamatterofgoodpractice,managementcompaniesandUCITSmayalsochoosetoreviewtheKIIbeforeenteringintoanyinitiativethatislikelytoresultinasignificantnumberofnewinvestorsacquiringsharesorunitsintheUCITS.



12.3.2.4. Distribution and publication of KII

NewandupdatedKIIsneedtobecommunicatedto:• ➢TheCSSF(seeSections4.2.,4.3.,and12.9.)• ➢EachhostMemberStatecompetentauthoritywheretheUCITSisregisteredforpublicdistribution

(the“writtennotice”–seeSection14.3.4.)

KIImustbeusedwithoutalterationsorsupplements,excepttranslation,inallMemberStateswheretheUCITSisnotifiedtobemarketedtothepublic.

CommunicationoftheKIItoinvestorsanddistributorsiscoveredinSection14.2.1..

Anup-to-dateversionoftheKIImustbemadeavailableonthewebsiteoftheinvestmentcompanyormanagementcompany.

AccordingtotheCSSFFAQ,theUCITSmayrelyonathirdpartywebsite,whichisnotthewebsiteoftheUCITSoritsmanagementcompany,tomakeavailableitsKIIs,onlywhenthethirdpartywebsiteallowsunconditionalaccessthatfulfillsthefollowingprinciples:• ➢TheinternetaddressofthelocationwheretheKIImustbemadeavailableisdisclosedinthe

prospectusandKII• ➢AccesstotheKIImustbeavailabletothegeneralpublic(withnoregistrationneeded)andfree

of charge• ➢PublicaccesstotheKIImustnotberestrictedintime• ➢PublicaccesstotheKIImustbestraightforwardanddedicatedtotheUCITSconsulted• ➢WhenaUCITSpublishesitsKIIsandotherdataandinformationontheinternet,allinformation

mustbecontainedwithinonesinglewebsite

12.3.2.5. Record keeping

UCITSortheirmanagementcompaniesarerequiredtokeeparecordofcertaininformationincluding,inter alia:• ➢Thechoiceofarepresentativeshareclass• ➢Calculations(e.g.,SRRI,simulateddataforpastperformance,charges)

Inpractice,UCITSortheirmanagementcompaniesmaychoosetokeeprecordsofmuchmoreoftheKIIprocess,fromunderlyingdatatoKIIdistribution.

12.3.2.6. Responsibility for KII

TheKIIconstitutespre-contractualinformation.TheKIImustbedrawnupandmadeavailablebytheinvestmentcompany,or,inthecaseofcommonfunds,themanagementcompany,inaccordancewiththeEUregulatoryrequirementsconcerningformat,contentandpublication.TheBoardofDirectorsoftheinvestmentcompanyormanagementcompanyisaccountableforthecontentofKIIs.TheinvestmentcompanyormanagementcompanymaybeheldliablesolelyonthebasisofanystatementcontainedintheKII(includinganytranslationthereof)thatismisleading,inaccurateorinconsistentwiththerelevantpartsoftheprospectus.

12.3.3.AIF

ThefollowinginformationmustbedisclosedtoinvestorsbeforetheyinvestinanAIF:• ➢AdescriptionoftheinvestmentstrategyandobjectivesoftheAIF• ➢InformationonwhereanymasterAIFisestablishedandwheretheunderlyingfundsareestablished

iftheAIFisafundoffunds• ➢AdescriptionofthetypesofassetsinwhichtheAIFmayinvest(seealsoSection8.2.1.)• ➢Thetechniquesitmayemployandallassociatedrisks(seeSection9.3.)• ➢Anyapplicableinvestmentrestrictions


• ➢Leverage(seealsoSubsection9.3.6.A.):• ThecircumstancesinwhichtheAIFmayuseleverage• Thetypesandsourcesofleveragepermittedandtheassociatedrisks• Anyrestrictionstotheuseofleverageandanycollateralandassetre-usearrangements• InformationonthemaximumlevelofleveragewhichtheAIFMmayemployonbehalfoftheAIF

• ➢AdescriptionoftheproceduresbywhichtheAIFmaychangeitsinvestmentstrategyorinvestmentpolicy,orboth

• ➢Adescriptionofthemainlegalimplicationsofthecontractualrelationshipenteredintoforthepurposeofinvestment,includinginformationonjurisdiction,ontheapplicablelawandontheexistenceornotofanylegalinstrumentsprovidingfortherecognitionandenforcementofjudgmentsintheterritorywheretheAIFisestablished

• ➢TheidentityoftheAIFM,theAIF’sdepositary,auditorandanyotherserviceprovidersandadescriptionoftheirdutiesandtheinvestors’rights

• ➢AdescriptionofhowtheAIFMiscomplyingwiththeprofessionalliabilitycoverrequirements(seeSection7.4.4.D.)

• ➢Adescriptionofanydelegatedmanagementfunction(seeSection7.4.15.)andofanysafe-keepingfunctiondelegatedbythedepositary(seeSection11.7.),theidentificationofthedelegateandanyconflictsofinterestthatmayarisefromsuchdelegations(seealsoSections8.2.2.C.and11.7.and11.8.)

• ➢Informationaboutanyarrangementmadebythedepositarytocontractuallydischargeitselfofliability(seeSection11.7.2.3.and12.4.2.5.)

• ➢AdescriptionoftheAIF’svaluationprocedureandofthepricingmethodologyforvaluingassets,includingthemethodsusedinvaluinghard-to-valueassets(seeSection9.5.2.)

• ➢AdescriptionoftheAIF’sliquidityriskmanagement,includingtheredemptionrightsbothinnormalandinexceptionalcircumstances,andtheexistingredemptionarrangementswithinvestors(seeSection9.3.6.C.)

• ➢Adescriptionofallfees,chargesandexpensesandofthemaximumamountsthereofwhicharedirectlyorindirectlybornebyinvestors(seeSection13.2.)

• ➢AdescriptionofhowtheAIFMensuresafairtreatmentofinvestorsand,wheneveraninvestorobtainspreferentialtreatmentortherighttoobtainpreferentialtreatment,adescriptionofthatpreferentialtreatment,thetypeofinvestorswhoobtainsuchpreferentialtreatmentand,whererelevant,theirlegaloreconomiclinkswiththeAIForAIFM(seeSection7.4.14.B.)

• ➢Thelatestannualreport(seeSection12.5.2.)• ➢Theprocedureandconditionsfortheissueandsaleofsharesorunits(seeSection10.3.)• ➢ThelatestnetassetvalueoftheAIForthelatestmarketpriceoftheshareorunitoftheAIF• ➢Whereavailable,thehistoricalperformanceoftheAIF• ➢Primebroker(seeSection7.4.17.):

• Identityoftheprimebroker• AdescriptionofanymaterialarrangementsoftheAIFwithitsprimebrokers,thewaythe

conflictsofinterestinrelationtheretoaremanaged• Theprovisioninthecontractwiththedepositaryonthepossibilityoftransferandre-useofAIF

assets• Informationaboutanytransferofliabilitytotheprimebrokerthatmayexist• ➢Adescriptionofhowandwhentheperiodicdisclosuresonliquidityandtheregulardisclosures

onleveragewillbeprovidedtoinvestors(seeSection12.4.2.)

WheretheAIFisrequiredtopublishaprospectus,onlyinformationwhichisinadditiontothatcontainedintheprospectusneedstobedisclosedseparatelyorasadditionalinformationintheprospectus.

Investorsmustalsobeinformedofanymaterialchangestotheinformationprovidedtothem.Anymaterialchangestotheinformationdisclosedtoinvestorsbeforetheyinvestandnotalreadypresentinthefinancialstatementsmustbedisclosedinthereportontheactivitiesforthefinancialyear(seeSection12.5.2.).



12.3.4.OfferingdocumentofSIFs

ASIForitsmanagementcompanymustestablishanofferingdocument.Theofferingdocumentmaybelabeledasaprivateplacementmemorandum,offeringmemorandum,issuingdocumentorprospectus,asthecasemaybe.Thedocumentmustincludetheinformationnecessaryforinvestorstobeabletomakeaninformedjudgmentoftheinvestmentproposedtothemand,inparticular,oftheassociatedrisks.

Theofferingdocumentmust,inter alia:• ➢Providedetailsonhowtheprincipleofriskdiversificationwillbeimplemented,including

quantifiableinvestmentlimits• ➢Listofthedelegatedfunctions

Theessentialelementsoftheofferingdocumentmustbeup-to-datewhennewsharesorunitsareissuedtonewinvestors.

Generally,theofferingdocumentofaSIFcontainsmostoftheinformationrequiredfor2010LawUCIs(seeSection12.3.1.).

12.3.5.EuVECAandEuSEF

ThemanagersofqualifyingEuropeanVentureCapitalFunds(EuVECA)andofqualifyingEuropeanSocialEntrepreneurshipFunds(EuSEF)are,foreachqualifyingEuropeanfundtheymanage,requiredtoprovideinvestorswithinformationbeforetheyinvestinaclearandunderstandablemanner,including:• ➢Theidentityofthemanagerandanyotherserviceproviders,andadescriptionoftheirduties• ➢Theamountofownfundsofthemanagerandadetailedstatementastowhythemanager

considersthatamounttobesufficientformaintainingtheadequatehumanandtechnicalresources• ➢AdescriptionoftheinvestmentstrategyandobjectivesofthequalifyingEuropeanfund,including

adescriptionofthetypesofthequalifyingportfolioundertakings,otherqualifyingEuropeanfundsandnon-qualifyinginvestments,inwhichthequalifyingEuropeanfundintendstoinvest,thetechniquesitmayemploy,andanyapplicableinvestmentrestrictions

• ➢InthecaseofEuSEFs:• ThepositivesocialimpactbeingtargetedbytheinvestmentpolicyoftheEuSEF,includingwhere

relevant,projectionsofsuchoutcomes,andinformationonpastperformanceinthisarea• The methodologies to be used to measure social impacts• Adescriptionoftheassetsotherthanqualifyingportfolioundertakingsandtheprocessandthe

criteriawhichareusedforselectingtheseassets(otherthancashorcashequivalents)• ➢AdescriptionoftheriskprofileofthequalifyingEuropeanfundandanyrisksassociatedwiththe

assetsinwhichthefundmayinvestorinvestmenttechniquesthatmaybeemployed• ➢AdescriptionofthequalifyingEuropeanfund’svaluationprocedureandofthepricing

methodologyforthevaluationofassets• ➢Adescriptionofhowtheremunerationofthemanageriscalculated• ➢Adescriptionofallrelevantcostsandofthemaximumamountsthereof• ➢Whereavailable,thehistoricalperformance• ➢Thebusinesssupportservicesandtheothersupportactivitiesthemanagerisprovidingor

arranginginordertofacilitatethedevelopment,growthorinsomeotherrespecttheongoingoperationsofthequalifyingportfolioundertakings,or,explanationofthefactthatsuchservicesoractivities are not provided

• ➢AdescriptionoftheproceduresbywhichthequalifyingEuropeanfundmaychangeitsinvestmentstrategyorinvestmentpolicy,orboth

TheEuVECAandEuSEFregimesareintroducedinSection3.4.3.3..


12.4. Periodic investor disclosures and updates

12.4.1. UCITS


UCITSmanagementcompaniesandself-managed2010Lawinvestmentcompaniesmustinforminvestorsaboutthesituationswhereorganizationoradministrativearrangementsmadebythemanagementcompanyortheinvestmentcompanytomanageconflictsofinteresthavenotbeensufficienttoensure,withreasonableconfidence,thatrisksofdamagetotheinterestsoftheUCITSitmanagesoritsshareholdersorunitholderswillbeprevented.Suchinformationmustbetransmittedinadurablemedium(seealsoSection7.4.18.).

12.4.1.2. Voting rights

Asummaryofthestrategiesfordeterminingwhenandhowvotingrightsattachedtoinstrumentsheldinthemanagedportfolioswillbeexercised,totheexclusivebenefitoftheUCITSitmanagesconcernedhastobemadeavailabletoinvestors,inparticularbywayofawebsite.Detailsoftheactionstakenonthebasisofthosestrategieshavetobemadeavailabletoinvestorsuponrequest(seealsoSubsections3.4.1.7.and8.2.1.G.).

12.4.2.AIF


WhereorganizationalarrangementsmadebytheAIFMinrelationtoconflictsofinterestarenotsufficienttoensure,withreasonableconfidence,thatrisksofdamagetoinvestors’interestswillbeprevented,theAIFMmustdiscloseinformationontheconflictsofinteresttotheinvestors.Thisdisclosuremustbeprovidedtoinvestorsbeforeundertakingbusinessontheirbehalfinadurablemediumorbymeansofawebsite(seealsoSections7.4.18.and,forSIFs,3.4.2.3.).

12.4.2.2. Liquidity risk

AIFMsarerequiredtoperiodicallydisclosetoinvestors:• ➢ThepercentageoftheAIF’sassetswhicharesubjecttospecialarrangementsarisingfromtheir

illiquidnatureprovidinganoverviewofanyspecialarrangementsinplaceincludingwhethertheyrelatetosidepockets,gatesorothersimilararrangements,thevaluationmethodologyappliedtoassetswhicharesubjecttosucharrangementsandhowmanagementandperformancefeesapplyto these assets.

• ➢ThecurrentriskprofileoftheAIFincluding:• MeasurestoassessthesensitivityoftheAIF’sportfoliotothemostrelevantriskstowhichthe

AIFisorcouldbeexposed• IfrisklimitssetbytheAIFMhavebeenorarelikelytobeexceededandwheretheserisklimits

havebeenexceededadescriptionofthecircumstancesand,theremedialmeasurestaken.• ➢TheriskmanagementsystemsemployedbytheAIFMoutliningthemainfeaturesoftherisk

managementsystemstomanagetheriskstowhicheachAIFitmanagesisormaybeexposed.Inthe case of a change the disclosure shall include the information relating to the change and its anticipatedimpactontheAIFanditsinvestors.

ThisinformationmustbeprovidedaspartoftheAIF’speriodicreportingtoinvestorsoratthesametimeastheprospectusandofferingdocumentand,asaminimum,atthesametimeastheannualreport is made available.

AIFMsarealsorequiredto:• ➢Notifyinvestorsofanymaterialchangestoliquiditymanagementsystemsandprocedures• ➢Immediatelynotifyinvestorswheretheyactivategates,sidepocketsorsimilarspecial

arrangementsorwheretheydecidetosuspendredemptions• ➢Provideanoverviewofanychangestoliquidityarrangements,includingspecialarrangements

SeealsoSection9.3.6..



12.4.2.3. Leverage

Thefollowinginformationmustbedisclosedtoinvestorsonaregularbasis:• ➢TheoriginalandrevisedmaximumlevelofleveragewhichtheAIFMmayemployonbehalfofthe

AIFcalculatedaccordingtothegrossmethodandthecommitmentmethod• ➢Thenatureoftherightsgrantedforthere-useofcollateral• ➢Thenatureofanyguaranteesgrantedundertheleveragingarrangement• ➢Detailsofanychangesinserviceprovidersrelatingtooneofthepreviousbulletpoints• ➢ThetotalamountofleverageemployedbythatAIF

TheinformationmustbedisclosedaspartoftheAIF’speriodicreportingtoinvestors,oratthesametimeastheprospectusandofferingdocumentand,ataminimum,atthesametimeastheannualreport is made available.

SeealsoSection9.3.6..

12.4.2.4. Voting rights

AsummarydescriptionoftheeffectivestrategiesfordeterminingwhenandhowanyvotingrightsheldintheAIFportfoliositmanageswillbeexercised,anddetailsoftheactionstakenonthebasisofthosestrategies,mustbemadeavailabletotheinvestorsontheirrequest(see8.2.1.G.).

12.4.2.5. Depositary liability

TheAIFMmustinforminvestorsofanychangeswithrespecttodepositaryliabilitywithoutdelay(seeSection11.6.).

12.4.3.Remunerationdisclosures

Amanagemententity(managementcompanyorAIFM),self-managedUCITSorinternallymanagedAIFshoulddiscloserelevantinformationontheremunerationpolicy,anyupdatesincaseofpolicychanges,inaclearandeasilyunderstandablewaytorelevantstakeholders.Suchdisclosuremaytaketheformofanindependentremunerationpolicystatement,aperiodicdisclosureinannualfinancialstatementsoranyotherform.

The information disclosed should include:• Thedecision-makingprocessusedfordeterminingtheremunerationpolicy• Linkagebetweenpayandperformance• Thecriteriausedforperformancemeasurementandtheriskadjustment• Performancecriteriaonwhichtheentitlementtoshares,optionsorvariablecomponentsof

remuneration is based • Themainparametersandrationaleforanyannualbonusschemeandanyothernon-cashbenefits

RemunerationrequirementsarecoveredinSection7.4.20.andAIFannualreportremunerationdisclosuresbyAIFMarecoveredinSection12.5.2..

12.4.4.SIFs


WheretheorganizationalandadministrativearrangementsmadebytheSIFtomanageconflictsofinterestarenotsufficienttoguarantee,withreasonableconfidence,thatrisksofdamagetotheinterestsoftheSIForitsinvestorswillbeprevented,theSIFisrequiredtoinformtheinvestorsofsuchconflictsofinterest,andexplainthemeasuresadoptedbytheSIF(seeSection3.4.2.3.).Theinformation must be provided in a durable medium.


12.5. Financial reporting

ThissectioncoversthefinancialreportingrequirementsforUCIs.Thereportingrequirementsapplyasfollows:• ➢UCITS:the2010Lawrequirements• ➢2010LawPartIIUCIs:the2010Lawrequirementsand,inthecaseoffullAIFMregimeAIF,theAIF

requirements• ➢SIFs:inthecasefullAIFMregimeSIFs,theAIFrequirements,andinthecaseofsimplifiedAIFM

registrationregimeSIFs,theSIFrequirements

12.5.1.Annualreportof2010LawUCIs

Anannualreportincludingtheauditedfinancialstatements(oftenreferredtoastheshortformreport)istobepublished:• ➢ForUCITS:withinfourmonthsoftheendoftheperiodtowhichitrelates• ➢ForPartIIUCIs:withinsixmonthsoftheendoftheperiodtowhichitrelates196

ItmustalsobecommunicatedtotheCSSF(seeSection12.9.).Theannualreportmustalsobeavailable15dayspriortotheannualgeneralmeetingofshareholders.

TheannualreportmustincludetheinformationspecifiedinScheduleBofAnnexItothe2010Law:

I. Statement of assets and liabilities: • Transferable securities• Bankbalances• Otherassets• Total assets • Liabilities • Netassetvalue(NAV)

II. Numberofsharesorunitsincirculation

III. NAVpershareorunit

IV. Portfolio,distinguishingbetween:a) Transferablesecuritiesandmoneymarketinstruments(MMIs)admittedtoofficialstock

exchange listingb) TransferablesecuritiesandMMIsdealtinonanotherregulatedmarketc) RecentlyissuedtransferablesecuritiesandMMIsd) Othertransferablesecuritiesandmoneymarketinstruments(seeSection5.2.2.3.)

TheportfolioshouldbeanalyzedinaccordancewiththemostappropriatecriteriainthelightoftheinvestmentpolicyoftheUCI(e.g.,inaccordancewitheconomic,geographicalorcurrencycriteria)asapercentageofnetassets;foreachoftheaboveinvestments,theproportionitrepresents of the total net assets of the UCI should be stated.

Statement of changes in the composition of the portfolio during the reference period.

TheCSSFmaypermitthatthisstatementbeomittedfromtheannualreport,providedthatitismadeavailablefreeofchargetoshareholdersorunitholders,andthatthisisclearlystatedin the annual report.

V. Statementofthedevelopments(generallyknownasthe“statement(s)ofoperationsandchangesinnetassets”)concerningtheassetsoftheUCIduringthereferenceperiodincludingthefollowing:• Income from investments • Otherincome• Managementcharges

196 Previouslyfourmonths.ThemodificationwasintroducedinJuly2013bytheAIFMLaw.



• Depositary’scharges• Otherchargesandtaxes• Netincome• Distributionsandincomereinvested• Increases or decreases of the capital account • Appreciation or depreciation of investments • AnyotherchangesaffectingtheassetsandliabilitiesoftheUCI

ForUCITS,transactioncostsshouldbedisclosed,onasub-fundbasis,inthestatementofdevelopmentsorinthenotestothefinancialstatements.

VI. Acomparativetablecoveringthelastthreeyearsandincluding,foreachfinancialyear,attheendofthefinancialyear:• ThetotalNAV• TheNAVpershareorunit

VII. DetailsofFDItransactionsandtechniquesandinstrumentsemployed,bycategoryoftransaction,carriedoutbytheUCIduringthereferenceperiod,andoftheresultingamountofcommitments(i.e.,transactionswithinthemeaningofArticle42ofthe2010Law).

The exchange rates applied must also be disclosed.

WhereaPartIUCI(UCITS)investsasubstantialproportionofitsassetsinotherUCIswhicharelinkedtotheinvestingUCITS(seePoint5.2.2.8.1.III.(3)),the2010LawrequiresdisclosureofthemaximumproportionofmanagementfeeschargedbothtotheUCITSitselfandtotheUCITSand/orotherUCIsinwhichitinvests.

WheretheUCIemployscertaintechniquesandinstrumentsrelatingtotransferablesecuritiesandmoneymarketinstruments(seeSection5.2.2.6.),theannualreportoftheUCImust:• ➢Disclosetheglobalvaluationofsecuritieslentattheyear-enddate• ➢Includeinformationonthesecuritiespurchasedwitharepurchaseoption.Thetotalamountof

opentransactionsattheyear-enddateshouldbedisclosed• ➢Provideinformationonthesecuritiessoldwitharepurchaseoption.Thetotalamountofopen

transactionsattheyear-enddateshouldbedisclosed• ➢Disclosethetotalamountofopenreverserepurchaseagreementsatthedateofreference• ➢Disclosethetotalamountofopenrepurchaseagreementsatthedateofreference

Anycollateralassetswhichhavebeenreinvestedmustbespecified,withtheirvaluesgiven,inanappendix to the annual report of the UCI.

SectionIofChapterHofCircular91/75requiresthatthefinancialstatementsofaUCITSidentifytheportfolioofsecuritieswhicharethesubjectofanoptionandindividuallyindicatethewritingofcalloptionsonsecuritieswhicharenotheldintheportfolio.Thefinancialstatementsalsobreakdown,bycategoryofoptions,theaggregateoftheexercise(strike)pricesofoptionsoutstandingasattheyear-enddate.Inaddition,SectionIIofChapterHofCircular91/75furtherrequirescertaindisclosuresfortechniquesandinstrumentsusedforcurrencyhedging.

TherequirementsofPointV.aregenerallydisclosedinthestatementofincomeandexpenditureand statement of changes in net assets. A statement of changes in the number of shares or units outstandingisalsonormallyincluded.Itisnotrequiredtodisclosetheindividualandtotalcostoftheinvestments.Comparativefiguresarealsonot,inpractice,disclosed.

InadditiontotheinformationprovidedforinScheduleBofAnnexI,theannualreportofthefeederUCITS must include a statement on the aggregate charges of the feeder UCITS and the master UCITS. Theannualandsemi-annualreportsofthefeederUCITSmustalsoindicatehowtheannualandthesemi-annualreportofthemastercanbeobtained.

Inpractice,thefinancialstatementsofthefeederUCITSshouldincludethefollowing:• ➢ThepositionheldbythefeederUCITSinthemasterUCITS,showninthestatementof

investmentsofthefeederUCITS.ThevalueofthemasterUCITSshouldbebasedonitsNAVasoftheyear-endofthefeederUCITS


• ➢Indicationofwheretheannualreportandsemi-annualreportofthemasterUCITScanbeobtained.Thelanguageinwhichtheannualreportandsemi-annualreportofthemasterUCITSmustbepreparedmustbealanguagecommonlyusedinLuxembourg(English,FrenchorGerman)

• ➢Anotecoveringthefollowinginformation:• Generaldescriptionofthemasterandfeederstructure• TheinvestmentobjectiveandpolicyofthemasterUCITS• ThefeederUCITSpercentageownershipshareofthemasterUCITSattheyear-enddateof

the feeder UCITS• ➢Aggregatechargesdisclosedinbothofthefollowingways:

• Monetaryterms(expressedinthefundcurrencyofthefeederUCITS)byapplyingalookthrough approach

• ByaddingtotalchargesexpressedasapercentageoftheaverageNAVofthemasterUCITSand feeder UCITS

Ifaggregatechargescannotbedisclosedinmonetaryterms,astransitionalmeasure,theaggregatechargesofthemasterUCITSandfeederUCITSmayonlybedisclosedbyaddingtotalchargesexpressedaspercentageoftheiraverageNAVs.

Fortheannualaccountsofthefinancialyearsendingonorafter1January2014,bothaggregatechargesdisclosuresmustbemadeintheannualreport.ThisinformationmaybepresentedinthenotestothefinancialstatementsofthefeederUCITS,orinthesectionprovidingotherinformation.

Thecharges-relatedinformationregardingthemasterUCITSshouldbepresented,inprinciple,forthesameaccountingperiodofthefeederUCITS.However,ifthisinformationcannotbeobtainedwithoutunduecosts,theinformationmaybeprovidedforthelastauditedperiodofthemasterUCITS,whereallofthefollowingconditionsaremet:• AggregatechargesofthefeederUCITSandmasterUCITSareexpressedinmonetarytermsand

asapercentageoftheaverageNAVs• ThesemainchargesapplicableforthemasterUCITShavenotchangedsignificantlysinceits

lastyear-end(i.e.,nochangeinthefeeratesapplicableto,forexample,portfoliomanagement,administration,custody,distribution)

• Therewerenosignificantsubscriptions/redemptionsatthelevelofthemasterUCITSwhichcouldhaveasignificantimpactonthetotalofchargesexpressedinmonetarytermsandaspercentageoftheaverageNAVduetodilutionoffixedcharged(chargesnotlinkedtotheNAVsuchasauditfeesandlawyerfees)

• ItisclearlymentionedintheauditreportthattotalchargesofthemasterUCITSdonotcovertheentirefinancialperiodofthefeederUCITS

ESMA’s197 Guidelines on risk measurement and the calculation of Global Exposure and Counterparty Risk for UCITSrequiresdisclosureofthefollowinginformationintheannualreport(seealsoSubsection9.2.6.B.):• ➢Themethodusedtocalculateglobalexposure,makingadistinctionbetweenthecommitment

approach,therelativeVaRortheabsoluteVaRapproach• ➢InformationonthereferenceportfolioforUCITSusingtherelativeVaRapproach.CSSFCircular

11/512providesfurtherclarificationonthecontentoftheinformationtobedisclosed• ➢TheVaRlimitoftheUCITS.Theinformationprovidedshouldatleastincludethelowest,thehighest

andtheaverageutilizationoftheVaRlimitcalculatedduringthefinancialyear;thisisfurtherclarifiedinCSSFCircular11/512

• ➢TheVaRmodelandparametersusedforcalculation(confidenceinterval,holdingperiod,lengthofdatahistory)

• ➢ThelevelofleverageemployedduringtherelevantperiodforUCITSusingVaRapproaches.CSSFCircular11/512providesfurtherclarificationonthedisclosureoftheexpectedlevelofleverage




CSSFCommuniqué12/29clarifiesthat,asregardsthepublicationofleverageintheannualreport,theCSSFconsidersthattheleverageinformationtobeincludedintheannualreportmustbe based on the sum of the notionals approach.

Thisinformationmaybesupplementedwiththeleveragedeterminedbasedonthecommitmentapproach(providedthattheunderlyingcalculationmethodisclearlyandpreciselyindicatedforeverymentionedfigure)orwithotheradditionalexplanations.

TheannualreportmustbeavailabletoinvestorsinthemannerspecifiedintheprospectusaswellasintheKII.Apapercopyoftheannualreportmust,inanycase,bedeliveredtoinvestorsonrequestandfreeofcharge.Anabridgedannualreport(comprisingareportonactivities,auditor’sreport,statementsofnetassets,operationsandchangesinnetassets)mayalsobeprepared.OnlythefullannualreportisrequiredtobefiledwiththeCSSF.

ForUCIsmarketingtheirsharesorunitsinforeigncountries,specificadditionalreportingmayhavetobeincludedintheannualreport.Additionalreportingrequirementsvaryfromonecountrytoanother(e.g.,numberofsharesorunitsissuedandredeemed,TotalExpenseRatio,performancesofshareorunitclasses,portfolioturnover)andmayinsomecaseshavetobeaudited.

Theannualreportofaclosed-endedUCIadmittedtotradingonanEUregulatedmarketreportmustincludeamanagementreportandaresponsibilitystatement(seeSection15.4.1.).ESMA’sGuidelinesonETFsandotherUCITSissuesrequiredisclosureofthefollowinginformationinthe annual report:• ➢EfficientPortfolioManagement(EPM)techniques:

• ➢TheexposuregainedthroughEPMtechniques• ➢Theidentityofcounterparties• ➢Typeandamountofcollateralreceivedtoreducecounterpartyexposure• ➢RevenuesarisingfromEPMtechniquesfortheentirereportingperiodtogetherwiththedirect

and indirect operational costs and fees• ➢FDIs:UCITSenteringintototalreturnswaps(TRS)orsimilarderivativeinstruments:theunderlying

exposurethroughFDIs,identityofcounterpartiesandtypeandamountofcollateralreceivedtoreducecounterpartyexposure

• ➢Index-trackingUCITS:actualtrackingerror,explanationofanydivergencewithanticipatedtrackingerror,andannualtrackingdifferencebetweentheperformanceoftheUCITSandtheperformanceoftheindextracked


Theannualandsemi-annualreportsofventurecapitalUCIsmustcontaininformationonthedevelopmentofthecompaniesinwhichtheUCIhasinvested,anddiscloseseparatelytheprofitorloss on investments sold.

SpecificinstanceswherepotentialconflictsofinterestcouldarisebetweentheinterestsofaDirectoroftheportfoliomanagementoradvisorybodiesandtheinterestsoftheUCImustbeindicatedinthefinancialstatements.


Theannualandsemi-annualreportsoffuturescontractsand/oroptionsUCIsmustdisclosetheprofitorlossforeachcategoryofclosedcontract.

Commissionspaidtobrokersandfeespaidtotheportfoliomanagementandadvisorybodiesmustbequantifiedinthefinancialstatements.


TheindependentauditoroftherealestateUCIanditsaffiliatedrealestatecompanies,whichare50%ormorefundedbytheUCI,mustbethesame.

TheaccountsoftheUCIanditsaffiliatedcompanies,whichshouldinprinciplebedrawnupatthesamedate,mustbeconsolidatedsemi-annually,disclosingtheaccountingprinciplesappliedfortheconsolidation.


Minorityunlistedshareholdingsinrealestatemustbeeitherpartiallyconsolidatedattheyear-endorvaluedbasedontheprobablerealizablevalue.Thevalueofminoritylistedshareholdingsinrealestatecompaniesshouldbebasedonthestockexchangevalue,ormarketvalue.

Theportfolioofpropertiesintheannualandsemi-annualreportsmustshow,foreachclassofproperties,thecost,insuredvalueandvaluation.Propertiesmustbeshownattheirvaluationinthefinancialstatements.

12.5.2.AnnualreportofAIF

AIFarerequiredtoproduceanannualreportwhichmustbemadeavailabletoinvestorswithinsixmonthsoftheendofthefinancialyear,orfourmonthswhentheAIFisadmittedtotradingonaregulatedmarket.TheannualreportmustbemadeavailabletothecompetentauthoritiesofthehomeMemberStateoftheAIFM,and,whereapplicable,thehomeMemberStateoftheAIF.

TheannualreportoftheAIFmustatleastcontainabalancesheetorastatementofassetsandliabilities,anincomeandexpenditureaccount,areportontheactivities,anymaterialchangesinthedisclosurestoinvestors(seeSection12.3.3.)includingthefollowingelementsandunderlyinglineitems:

I. Balancesheetorstatementofassetsandliabilities:• Investments• Cashandcashequivalents• ReceivablesTotal assets

• Payables• Borrowings• OtherliabilitiesTotal liabilities

Netassets

II. Income and expenditure account:• Investmentincome(dividendincome,interestincomeandrentalincome)• Realizedgainsoninvestments• Unrealizedgainsoninvestments• OtherincomeTotal income

• Investmentadvisoryormanagementfees• Otherexpenses• Realizedlossoninvestments• UnrealizedlossoninvestmentsTotal expenses

Netincomeorexpenditure

Thelayout,nomenclatureandterminologyoflineitemsmustbeconsistentwiththeaccountingstandardsapplicabletoortherulesadoptedbytheAIF,andshallcomplywithlegislationapplicablewheretheAIFisestablished.Suchlineitemsmaybeamendedorextendedtoensurecompliancewiththe above.

ThereportontheactivitiestobeincludedintheannualreportoftheAIFmustcontainatleastanoverviewofinvestmentactivities,anoverviewoftheAIF’sportfolioatyear-endorperiod-endandAIFperformanceovertheyearorperiodandadescriptionoftheprincipalrisksandinvestmentoreconomicuncertaintiesthattheAIFmightface,andanymaterialchangestotheinformationdisclosedtoinvestors.TheinformationinthereportontheactivitiesoftheAIFshallformpartofthedirectorsorinvestmentmanagers’report.



Anychangesinthedisclosurestoinvestors(seeSection12.3.3.)aredeemedmaterialifthereisasubstantiallikelihoodthatareasonableinvestor,becomingawareofsuchinformation,wouldreconsideritsinvestmentintheAIF,inter alia,becausesuchinformationcouldimpactaninvestor’sabilitytoexerciseitsrightsinrelationtoitsinvestment,orotherwiseprejudicetheinterestsofoneormoreinvestorsintheAIF.

TheannualreportoftheAIFmustalso:• ➢Disclosethetotalamountofremunerationforthefinancialyear,splitintofixedandvariable,paid

bytheAIFM,andwhererelevantcarriedinterestpaidbytheAIF• ➢Disclosetheaggregateamountofremunerationbrokendownbyseniormanagementandstaff

impactingtheriskprofileoftheAIF• ➢Statewhichofthefollowingthetotalremunerationdisclosurerelatesto:

• ➢ThetotalremunerationoftheentirestaffoftheAIFM• ➢ThetotalremunerationofthosestaffoftheAIFMwhoinpartorinfullareinvolvedinthe

activitiesoftheAIF• ➢TheproportionofthetotalremunerationofthestaffoftheAIFMattributabletotheAIF

• ➢Indicatethenumberofbeneficiaries• ➢IncludeanallocationorbreakdowninrelationtoeachAIF,wheretheinformationisdisclosedatthe

leveloftheAIFM• ➢Provideinformationonthefinancialandnon-financialcriteriaoftheremunerationpoliciesand

practicesforrelevantcategoriesofstafftoenableinvestorstoassesstheincentivescreated,includingtheinformationnecessarytoprovideanunderstandingoftheriskprofileoftheAIFandthemeasuresitadoptstoavoidormanageconflictsofinterest

WhenanAIFacquires,individuallyorjointly,controloveranon-listedcompany,theAIFMisrequired,inter alia,toeither:• ➢Maketheinformationintheannualreportofthenon-listedcompanyavailabletotheinvestorsof

eachsuchAIFatthelatestwhentheannualreportofthenon-listedcompanyismadeavailable• ➢IncludeintheannualreportofeachsuchAIFinformationrelatingtotherelevantnon-listed

company

Therequirementsonacquisitionsofmajorholdingsandcontrolovernon-listedcompanies,includingtheminimumamountofinformationtobedisclosedintheannualreportofthenon-listedcompanyoroftheAIFarecoveredinSection5.4.2..

12.5.3.AnnualreportofSIFs

SIFsarerequiredtoproduceanannualreportwhichmustbemadeavailabletoinvestorswithinsixmonthsoftheendofthefinancialyear,orfourmonthsforclosed-endedfundsadmittedtotradingontheLuxembourgStockExchange’s(LuxSE)regulatedmarket.TheannualreportofaSIFmustalsobecommunicatedtotheCSSF(seeSection12.9.).

SIFswhicharemanagedbyauthorizedAIFMDirective,aswellasinternallymanagedSIFssubjecttorequirements(seeChapter7),aresubjecttoAIFreportingrequirements(seeSection12.5.2.);theyarenotsubjecttothefollowingSIFLaw-specificreportingrequirements.

Itisnotnecessarytodisclosedetailsoftheportfolio,thoughsufficientquantitativeand/orqualitativeinformationforinvestorstomakeaninformedjudgmentabouttheevolutionoftheactivityandresultsoftheSIFshouldbeprovided.

TheannualreportmustincludeareportontheSIF’sactivities,astatementofassetsandliabilities,adetailedincomeandexpenditureaccountandtheinformationspecifiedintheAnnextotheSIFLawwhichissetoutbelow.

I. Statement of assets and liabilities: • Investments • Bankbalances• Otherassets• Total assets • Liabilities • NAV


II. Numberofsharesorunitsincirculation

III. NAVpershareorunit

IV. Quantitativeand/orqualitativeinformationforinvestorstomakeaninformedjudgmentabouttheevolutionoftheactivityandresultsoftheSIF

V. Statementofthedevelopments(generallyknownasthe“statement(s)ofoperationsandchangesinnetassets”)concerningtheassetsoftheSIFduringthereferenceperiodincludingthefollowing:• Income from investments • Otherincome• Managementcharges• Depositary’scharges• Otherchargesandtaxes• Netincome• Distributionsandincomereinvested• Changes in the capital account • Appreciation or depreciation of investments • AnyotherchangesaffectingtheassetsandliabilitiesoftheSIF

VI. Acomparativetablecoveringthelastthreefinancialyearsandincluding,foreachfinancialyear,attheendofthefinancialyear:• ThetotalNAV• TheNAVpershareorunit

The exchange rates applied must also be disclosed.

TherequirementsofPointV.aregenerallydisclosedinthestatementofincomeandexpenditureand statement of changes in net assets. A statement of changes in the number of shares or units outstandingisalsonormallyincluded.Itisnotrequiredtodisclosethecostoftheinvestments.Comparativefiguresarealsonotinpracticedisclosed.

Theannualreportofaclosed-endedUCIadmittedtotradingonanEUregulatedmarketreportmustincludeamanagementreportandaresponsibilitystatement(seeSection15.4.1.).

12.5.4.AnnualreportofEuVECAandEuSEF

ThemanagersofqualifyingEuropeanVentureCapitalFunds(EuVECA)andofqualifyingEuropeanSocialEntrepreneurshipFunds(EuSEF)are,foreachqualifyingEuropeanfundtheymanage,requiredtomakeavailableanauditedannualreporttothecompetentauthoritynolaterthansixmonthsaftertheendofthefinancialyear,andmakeitavailabletoinvestorsonrequest.ThereportmustdescribethecompositionoftheportfolioofthequalifyingEuropeanfund,andtheactivitiesfortheyear.ThereforetheannualreportofanEuSEFmustatleastinclude:• ➢Detailsoftheoverallsocialoutcomesachievedbytheinvestmentpolicyandthemethodusedto

measure these outcomes• ➢Astatementofanydivestmentsrelatedtoqualifyingportfolioundertakings• ➢AdescriptionofwhetherdivestmentsinrelationtotheotherassetsoftheEuSEFwhicharenot

investedintoqualifyingportfolioundertakings,occurredonthebasisofprocessesandcriteriawhichareusedforselectingsuchassetsandwhicharedisclosedtoinvestors

• ➢AsummaryoftheactivitiestheEuSEFhasundertakeninrelationtothequalifyingportfolioundertakingsintermsofbusinesssupportservicesandothersupportactivities

• ➢Informationonthenatureandpurposeoftheinvestmentsotherthanqualifyingportfolioundertakings




12.5.5.Semi-annualreport

Fora2010LawUCI,anunauditedsemi-annualreportistobepublished(andcommunicatedtotheCSSF–seeSection12.1.1.):• ➢ForUCITS:withintwomonthsoftheendoftheperiodtowhichitrelates• ➢ForPartIIUCIs:withinthreemonthsoftheendoftheperiodtowhichitrelates

Thesemi-annualreportmustdisclosetheinformationspecifiedinSubsections12.5.1.I–IV.Astatementofincomeandexpenditureisnotobligatory.However,whereaninterimdividendispaidorproposed,theresultsaftertaxforthehalf-yearandtheamountofsuchdividendmustbedisclosed.

SeealsoSections12.5.1.1.to12.5.1.3.forspecificadditionaldisclosurerequirementsforspecialized2010LawPartIIUCIs.

ESMA’s198 Guidelines on ETFs and other UCITS issuesrequiredisclosureoftheactualtrackingerrorinthesemi-annualreportofindex-trackingUCITS.

Thesemi-annualreportofaclosed-endedUCIadmittedtotradingonanEUregulatedmarketmustincludeaninterimmanagementreportandaresponsibilitystatement(seeSection15.4.1.).

Thereisnorequirementtoproduceasemi-annualreportforSIFs,exceptforclosed-endedfundsadmittedtotradingonanEUregulatedmarket(seeSection15.4.1.).

12.5.6. Interim management statement

Aninterimmanagementstatementmustbepublishedforclosed-endedUCIsadmittedtotradingonanEUregulatedmarket(seeSection15.4.1.).

12.5.7.MultiplecompartmentUCIs

InthecaseofmultiplecompartmentUCIs,alltheannualandsemi-annualinformationoutlinedinSections12.5.1.to12.5.5.isrequiredforeachcompartment.Eachcompartmentmaybedenominatedindifferentcurrencies.AggregatedfiguresofthefinancialstatementsarerequiredtobeshowninthecurrencyoftheUCI.Thenotestotheannualreportandsemi-annualreport(ifany)shouldincludetheexchangeratesbetweenthecurrencyoftheaggregatedfiguresandthecurrenciesof the various compartments.

Inadditiontothefullreport,multiplecompartmentUCIsmayprovideforthepublicationofseparatefinancialreportsforeachoftheircompartments.Suchreportsmustincludeeithertheindependentauditor’sgeneralreportoraseparateauditreportforeachcompartment.

12.5.8. Audit

12.5.8.1. General rules

Theauditrequirementsandauditors’responsibilitiesarecoveredinArticle154ofthe2010Law,Article55oftheSIFLaw,Article20oftheAIFMLaw,andCSSFCirculars02/77(onNAVcalculationerrorsandcompensationoflossesarisingfromnon-compliancewithapplicableinvestmentrestrictions)and02/81(onthelongformreport).Auditorsareboundbytheobligationofprofessionalsecrecy.

ThefinancialstatementsincludedintheannualreportmustbeauditedbyaLuxembourgindependent auditor (réviseur d’entreprises agréé),whichisapprovedbytheCSSFinaccordancewiththeLawof18December2009ontheauditprofessionandwhichisalsosuitablyqualifiedintermsofrelevantexperience.TheauditisconductedinaccordancewithInternationalStandardsonAuditing(ISAs)issuedbytheInternationalFederationofAccountants(IFAC),asadoptedforLuxembourgbytheCSSF.Theauditreportistobereproducedinfullineachannualreport.



TheindependentauditormustreportpromptlytotheCSSFwhereinformationprovidedtoinvestorsortheCSSFdoesnottrulydescribethefinancialsituationandanyfactordecisionofwhichhehasbecomeawareduringtheauditofaUCIwhichisliableto:• ➢ConstituteasubstantialbreachoftheLaworregulations• ➢AffectthecontinuousfunctioningoftheUCI• ➢Leadtoarefusaltocertifytheaccountsortotheexpressionofqualificationsthereon

TheCSSFmaydeterminerulesregardingthescopeoftheauditandtheindependentauditor’sreportandmayrequestauditorstocarryoutspecialaudits.

UCIsmustimmediatelysendtotheCSSF,withoutbeingspecificallyrequestedtodoso,thecertificates,reportsandwrittencommentaries(inparticularthe“managementletter”)issuedbytheindependentauditor,asindicatedinChapterPofCircular91/75.

TheindependentauditormustalsointerveneandhascertainreportingrequirementsinthecaseofNAVcalculationerrors,compensationoflossesarisingfromnon-compliancewithapplicableinvestmentrestrictions(seeSections10.4.2.3.4.and10.4.3.).

The2010LawrequiresthatifamasterandafeederUCITShavedifferentauditors,theauditorsshouldenterintoinformation-sharingagreementsinordertoensurethefulfillmentoftheirduties(seealsoSection3.3.4.1.).

Inkindsubscriptions,andinsomecasesredemptions(seeSections10.3.and4.9.3.),fundmergers(seeSection4.7.)andliquidations(seeSection4.10.)mayalsorequiretheparticipationoftheindependent auditor.

12.5.8.2. Long form report on the activity of 2010 Law UCIs

CSSFCircular02/81onlongformreports,whichwaspublishedon6December2002andcontainsexternalauditguidelines,introducedtherequirementfortheindependentauditortosubmitalongformreportontheactivityofthe2010LawUCItotheBoardofDirectorsandtheCSSFforeach2010LawUCI.NolongformreportisrequiredforSIFs.

Thelongformreport,issuedfortheexclusiveuseoftheBoardofDirectorsoftheUCIorofitsmanagementcompanyandoftheCSSF,coversdefinedareassuchasanevaluationofkeyinternalcontrolproceduresexistingatthecentraladministrationanddepositary,anti-moneylaunderingandcounterterroristfinancing(AML/CFT)provisions,valuationmethodsanddescriptionoftheriskmanagementsystem.

ThetableofcontentsofthelongformreportontheactivityoftheUCIisasfollows:

1. OrganizationoftheUCI:1.1. Central administration:

1.1.1. ReliancebytheUCI’sindependentauditoronareportissuedbytheindependent auditor of the central administration

1.1.2. AudittestsandproceduresconductedbytheUCI’sindependentauditor:1.1.2.1. Proceduresandcontrols1.1.2.2. Informationtechnology

1.2. Depositary:1.2.1. ReliancebytheUCI’sindependentauditoronareportissuedbytheindependent

auditorofthedepositary1.2.2. AudittestsandproceduresconductedbytheUCI’sindependentauditor:

1.2.2.1. Proceduresandcontrols1.2.2.2. Informationtechnology1.2.2.3. Resultsofreconciliations

1.3. Relationshipwiththemanagementcompany/conductingofficers1.4. Relationshipswithotherintermediaries

2. ReviewofthetransactionsoftheUCI:2.1. Anti-moneylaunderingandfightagainstterrorismfinancingprocedures2.2. Valuationmethods2.3. Riskmanagementsystems2.4. Specifictests,includingNAVerrorsandinstancesofnon-compliancewithinvestment

limits



2.5. Statementsofnetassetsandofchangesinnetassets,alsoincluding,“windowdressing”199,portfolioturnover200,performancefees,softcommissions201 (or similar arrangements)andrebates202,retrocessions203 and expenses

2.6. NAVpublication2.7. Resultsofreconciliations2.8. Latetradingandmarkettiming

3. Internet

4. Investor complaints

5. Follow-upofissuesraisedinthepreviousreportontheactivityoftheUCIorthemanagementletter

6. Overallconclusion

Inthecaseofachangeofserviceprovider(centraladministration,depositary,managementcompanyormanager)duringtheperiodunderreview,thelongformreportneedstomakereferenceonlytothenewserviceprovidersintherelevantsections.

UCIswhoseliquidationormergerbyabsorptionhasbeendecidedwithimmediateeffectmayobtainclarificationfromtheCSSFasregardstotheperiodcoveredbythelongformreport.

Theindependentauditorisrequiredtodraftamanagementlettercoveringtheperiodbetweenthelastaccountingperiodenddateandthedateofliquidationormerger.

12.5.8.3.Additionalprovisionsregardinglatetradingandmarkettiming

CSSFCircular04/146includesprovisionsontheroleoftheindependentauditorregardinglatetradingandmarkettiming(seeSection10.3.6.)whichareadditionaltothoseofCSSFCircular02/81.

TheindependentauditoroftheUCIcheckstheproceduresandcontrolsputinplacebytheUCIsoastoprotectitselffromlatetradingpracticesanddescribestheseinitslongformreport.ForUCIswhich,duetotheirstructure,arelikelytobesubjecttomarkettimingpractices,theindependentauditorchecksthemeasuresand/orcontrolsputinplacebytheUCItoprotectitselfbythebestpossiblemeansagainstsuchpracticesanddescribessuchmeasuresand/orcontrolsinitslongformreport.

IftheindependentauditoroftheUCI,duringtheperformanceofitsduties,becomesawareofacaseoflatetradingormarkettiming,itmustindicatethisinthelongformreport.

Incaseofindemnificationofinvestorsharmedbylatetradingormarkettimingpracticesduringtheaccountingyear,theindependentauditormustgive,inthelongformreport,anopinionastowhetherinvestorshavebeenadequatelyindemnified.

199 Purchaseandsalesofsecuritiesinordertoimprovetheappearanceoftheportfolioand/oritsconformitywiththeLawand the prospectus before presenting it to shareholders or unitholders.

200 UsingthemethoddescribedintheCSSFCircular2003/122issuedon19December2003:Turnover=[(Total1–Total2)/M]*100With:Total1=Totalofsecuritiestransactionsduringtherelevantperiod=X+Y,whereX=purchasesofsecuritiesandY=salesofsecuritiesTotal2=TotaloftransactionsinsharesorunitsoftheUCIduringtherelevantperiod=S+T,whereS = subscriptions of shares or units of the UCI and T = redemptions of shares or units of the UCI.M=averagemonthlyassetsoftheUCI.

201 Arrangementsbywhichtheinvestmentadviserorfundmanagerobtainsproductsorservicesfromabrokerinexchangefortheordersthebrokerhasreceivedfromtheinvestmentadvisor/fundmanager.

202 Arrangementsbetweenthebrokerandthemanagerofthefundand/oritslinkedentitiesbywhichthebrokerreduces,refundsorrenouncestopartofthebrokeragefeesduebythefundmanagerand/oritslinkedentities(e.g.,onthebasisofthetransactionvolume)tothebenefitofpartyotherthanthefund(forexamplethemanager).

203 Retrocessionsorrebatesreceivedbyfundmanageroranyrelatedpartyofthefundmanagerfrommanagersofinvestee funds.


12.5.9.ConsolidationofSIFs

SIFsandtheirsubsidiariesareexemptfromtheobligationofconsolidatingthecompaniesownedforinvestmentpurposesunderLuxGAAP.

12.6. General meetings

Aninvestmentcompany,orthemanagementcompanyofacommonfund,mustgenerallyholdatleastonegeneralmeetingofshareholderseachyearwithinsixmonthsofthefinancialyear-end204.

Inpractice,forUCITswhichmustpublishandcommunicatetheirauditedfinancialstatementstotheCSSFwithfourmonthsofthefinancialyearend,annualgeneralmeetingsofshareholdersareheldwithinfourmonthsofthefinancialyearend.

Theconvocationtotheannualgeneralmeetingmustindicatehowtoobtaintheannualaccounts,theindependentauditor’sreport,themanagementreport,andtheobservationsofthesupervisoryboard(ifapplicable)andstatethattheinvestormayrequestthatthesedocumentsbesenttohim.

Theannualaccounts,includingthereportoftheindependentauditor,mustbeavailableattheinvestmentcompany’sregisteredoffice15daysbeforetheannualgeneralmeeting.

12.7. Submission to trade register

TheannualreportofaninvestmentcompanyhastoberegisteredattheTradeandCompaniesRegister(Registre de Commerce et des Sociétés,Luxembourg-RCS)inoneoftheofficiallanguages(beingFrench,GermanandLuxembourgish)orEnglishduringthemonthofitsapprovalbythegeneral meeting of shareholders.

TheRCSnumberoftheinvestmentcompanyortheRCSnumberofthemanagementcompany(inthecaseofacommonfund)shouldbedisclosedonthecoveroftheannualreport.

12.8. Financial information reporting to authorities

12.8.1.2010LawUCIsandSIFs

Monthlyandannualfinancialinformationmustbeprovidedinanelectronicformatto:• ➢TheCSSFforstatisticalandsupervisorypurposes• ➢TheLuxembourgCentralBank(BCL)

ThecontentsofthemonthlyandannualfinancialinformationtobereportedtotheCSSFaresetout:• ➢For2010LawUCIsinCircular97/136,asamended• ➢ForSIFsinCircular07/310,asamended

204 Aninvestmentcompany,ormanagementcompany,formedasaprivatelimitedliabilitycompany(S.àr.l.)mustholdat least one annual general meeting of shareholders if there are more than 25 shareholders. If there are less than 25 shareholders,thereisnoobligationtoholdgeneralmeetings.



Theinformationmustbepreparedseparatelyforeachcompartment.Consolidatedinformationisnotrequired.

Report Reporting deadline (from end of period)

2010LawUCIs:

• Monthlyinformation(TableO1.1) 10days

• Annualinformation(TableO4.1andO4.2) 4 months205

SIFs:

• Monthlyinformation(TableO1.1) 10days

• Annualinformation(TablesO4.1andO4.2) 6 months

Monthlyinformation(TableO1.1)includesdetailsof:I. Informationonthemonth-endNAVII. Percentagevalueoftheinvestmentfundportfolioinrelationtototalnetassetsatmonth-endIII. Information on the number of shares or units issued and redeemed in the course of the month of

referenceIV. InformationoninvestmentincomeinthecourseofthemonthofreferenceV. Informationondistributionsmadeinthecourseofthemonthofreference

UCIsthatofferaformalguaranteetotheirinvestors(guaranteedfunds)arealsorequiredtocompleteanadditionaltableofmonthlyfinancialinformation(TableO1.2).

Thereferencedateformonthlyreportingis,inprinciple,thelastdayofeachmonth.ForUCIswhichcalculateaweeklyNAV,thereferencedatemaybethelastNAVcalculationday.ForUCIswhichcalculatetheirNAVonamonthlybasis,thereferencedateistheNAVcalculationdateclosesttothelastdayofthemonth.For2010LawPartIIUCIswhichcalculatetheirNAVonalessfrequentbasis,thereportingshouldbebasedonendofmonthaccountingdata.ForSIFswhichcalculatetheirNAVonalessfrequentbasis,thereportingcanbebasedonthelastavailableNAV;thefinalNAVpershareorunitmustbeprovidedtotheCSSFwhenitbecomesavailable.

Annualinformationtobereported(TableO4.1)includesdetailedbreakdownsof:

I. Netassets• Total assets• Total liabilities• Netassetsattheendoftheyear

II. Operations• Total income• Total charges• Netinvestmentincome• Profitorlossonoperations

III. Changes in net assets• Netassetsatthebeginningoftheyear• Netassetsattheendoftheyear

IV. Changesintheinvestmentportfolio• Total purchases of transferable securities and other investments• Total sales of transferable securities and other investments

V. BreakdownofthesecuritiesportfolioandofliquidassetsotherthancashatbankVI. CountriesinwhichtheUCIismarketed

Forwardtransactionsandoptionsdatatobereported(TableO4.2)includesdetailedbreakdownsof:I. Commitmentsattheyear-endarisinginrespectoftransactionsenteredintoforpurposesother

than hedgingII. Premiumsreceivedandpaidinrespectofoptionscontractsinthecourseofthefinancialyear

205 TheAIFMLawextendstheannualreportingdeadlineforPartIIUCIsto6months,but,atthetimeofwriting,noamendmenthadbeenmadetoCircular97/136inrelationtothis.


Thereferencedateforannualreportingistheyearendclosingdate.

InadditiontothereportingtotheCSSF,ingeneral,UCIsmustprovidetheBCLwithmonthlyandquarterlyinformation.

ThemaincircularcoveringBCLreportingisBCLCircular2013/231andCSSFCircular13/564onthestatisticaldatacollectionformoneymarketfundsandinvestmentfunds.Thereportingtemplates,detailedinstructions,circularsandcircularletters,andreportingcalendarsareavailableontheBCLwebsite.

TheBCLreportingrequirementsdistinguishbetweenmoneymarketfunds206and(other)investmentfunds. TheBCLreportingcomprisesthefollowing:

Report Reporting deadline (from month end in working days)

Monthlystatisticalreport:

• Moneymarketfunds(MMFs):S1.3.“MonthlystatisticalbalancesheetforMMFs” 10

• Investmentfunds:S1.6.“Informationonvaluationeffectsonthebalancesheetofinvestmentfunds” 20

Quarterlystatisticalreport:S2.13.“QuarterlystatisticalbalancesheetofUCIs” 20

Monthlysecuritybysecurityreporting:

• MMFs 10

• Investment funds 20

TheinformationtobeincludedintheMonthlystatisticalbalancesheetforMMFsisthesameastheinformationtobeincludedintheQuarterlystatisticalbalancesheetofUCIs.Breakdownsmustbeprovidedforthefollowingcategoriesofassetsandliabilities:

• ➢Assets:• Claims• Securities other than shares• Quotedshares• Unquotedshares• Participatinginterests:quotedshares• Participatinginterests:unquotedshares• Fixedassets• Accrued interest• Otherassets• Financialderivatives

Total assets

• ➢Liabilities:• Overnightborrowings• Borrowingswithagreedmaturity• Borrowingsredeemableatnotice• Repurchaseagreements• Short sale of securities• Shares or units issued• Accrued interest

206 ThecriteriatobemetbyMMFsforthepurposeofreportingarethesameasthosetobemetforthepurposeofutilizationofthe“moneymarketfund”labelunderESMA’sguidelines(seeSection3.6.1.).TheCSSFestablishesalistofMMFs,orcompartmentsofMMFs,thatarereportedonthelistofmonetaryfinancialinstitutions;theBCLtransmitsthislisttotheEuropeanCentralBank(ECB).



• Debtsecuritiesissued• Otherliabilities• Financialderivatives

Total liabilities

• The data must be provided according to:• ➢Countryofcounterpart• ➢Currency• ➢Economicsectorofthecounterpart• ➢Initialmaturity

Information on valuation effects on the balance sheet of investment funds includes information on fixedassetsandfinancialderivatives,whichmustbeprovidediftheamountreportedforanitemexceeds5%intermsoftotalassets.

Monthlysecuritybysecurityreportingmustbeprovidedforcertaincategoriesofassetsandliabilitiesand includes information on:• ➢Thebalancesheetline• ➢Theidentificationcodeofthesecurity• ➢Theidentificationoftheissuer• ➢Thetypeofholdingofsecurities• ➢Thequantityofsecurities• ➢SupplementaryinformationforsecuritiesnotidentifiedbyanISINcode

Inpractice,monthly,quarterlyandannualfinancialinformationisgenerallytransmittedtotheCSSFandtheBCLviae-file(seeSection12.9.1.).

12.8.2.AIF

ReportingbyAIFMandinternallymanagedAIFiscoveredinSubsection7.4.21.B..

12.9. Electronic transmissions to the CSSF and publication

12.9.1.Documentstotransmitelectronicallyandpublish

CSSFCircular08/371of5September2008coverstheelectronictransmissionofprospectusesandfinancialreportsofUCIstotheCSSF.

TheCircularintroducedtherequirementfor2010LawUCIstotransmitelectronicallytheirprospectuses,KII,annualandsemi-annualreports,intheirfinalform,totheCSSFviaanelectroniccommunication channel.

SIFsmustalsotransmitelectronically,intheirfinalform,totheCSSFtheirofferingdocuments,prospectuses and annual reports via an electronic communication channel.

Circular03/97of28February2003clarifiestheprocedureforthepublicationofKII,prospectusesandannualandsemi-annualreportsunderthe2010Law.ItrequiresthattheKII,prospectusesaswellastheannualandsemi-annualreportsofUCIssubjecttothe2010Lawbepublishedinthedatabaseofthefinancialcentre.


Inpractice,prospectuses,offeringdocuments,annualreportsandfinancialinformation(seeSection12.8.)aregenerallytransmittedtotheCSSFviae-file.

e-file(e-file.lu)isacommunicationplatformforthetransmissionofdata,documentsandregulatoryandstatisticalreportsbetweenfinancialinstitutionsandtheLuxembourgauthorities.

Thee-filesystemisajointinitiativeoftheLuxembourgStockExchangeanditssubsidiary,Finesti.FinestialsomakesavailableadatabaseofLuxembourginvestmentfunds.

Finestialsohoststhedatabaseofthefinancialcentre(finesti.com)

CSSFCircular09/423,issuedinDecember2009,outlinestheproceduresandtechnicalspecificationsfortheelectronictransmissionofUCImanagementlettersandlongformreports.TheelectronicfilingofthesedocumentsistobecompletedusingasecuredsystemwhichisacceptedbytheCSSF.

Inaddition,UCImanagementlettersandlongformreportsaretobefiledwiththeCSSFinpaperform.

12.9.2.Transmissiondeadlines

AUCI’sprospectusandaSIF’sofferingdocumentorprospectusmustbetransmittedonceithasbeenapprovedbytheCSSF,oriflaterthantheapprovalbytheCSSF,whenthemarketingoftheUCIbegins,orwhentheactivitiesoftheSIFbegin.

Annualandsemi-annualreportsmustbetransmittedwithinthedeadlineforthepublicationofthereportsinthecaseof2010LawUCIsandthedeadlineformakingthereportavailabletoinvestorsinthecaseofSIFs.2010LawUCIsandSIFsnolongerneedtotransmitthesereportstotheCSSFinpaper form.

12.9.3.Formatoftransmission

AllfilesmustbetransmittedtotheCSSFinPDF-textformatasdetailedinCSSFCircular08/371.



368 | 13.Expensesandtaxation

13.1. Introduction

This Chapter covers:• ➢Theformationandoperatingexpenses

incurredbyLuxembourgUCIs• ➢ThetaxationofLuxembourgUCIs,the

assetsofLuxembourgUCIs,investorsinLuxembourgUCIsandoffeespaidbyLuxembourgUCIs,andthetaximplicationsof restructuring UCIs

• ➢TheVATregimeapplicabletoservicesprovided to such Luxembourg UCIs and their service providers

13. Expenses and taxation

368|13.Expensesandtaxation

13.Expensesandtaxation| 369

Expenses and taxation 13

13.2. Expenses

ThissectioncoversthetypesofformationexpensesandannualoperatingexpensesofLuxembourgUCIs.

13.2.1.Formationexpenses

FormationexpensesincludecostsincurredtoestablishaUCIandtoenableittodobusiness,excludinginitialcapitalrequirements(seeSection3.5.).AnewlyestablishedcompartmentofaUCImayalsoincurformationexpenses.Formaster-feederUCIstructures,formationexpensesmaybeincurredatthemasterfundandfeederfundlevel(s).

FormationexpensesarebornebytheUCI,unlessitsmanagementcompanyagreestoabsorbtheseexpenses in full or to absorb a portion of the formation expenses in excess of an amount stated in the UCIprospectus.Formationexpensescanbeamortizedoveraperiodofuptofiveyears.

FormationexpensesforaLuxembourgUCImayincludethefollowing:• ➢Notaryfees• ➢Legalfees• ➢Advisoryfeesrelatingtoinitialstructuring• ➢CSSFinitialauthorizationfee:

• SinglecompartmentUCIorSIF €3,500• MultiplecompartmentUCIorSIF €7,000

• ➢Printingofprospectus/offeringdocument

FormationexpensesofaLuxembourgmanagemententityarecoveredinSection7.6.2..

13.2.2.Operatingexpenses

Luxembourg UCIs incur various expenses in the conduct of their operations.

ThemostsignificantexpenseincurredbyaLuxembourgUCIisthefeepaidforportfoliomanagementorinvestmentadvisoryservices(seealsoSection7.2.).Theportfoliomanagement/advisoryfeetypicallyisafixedpercentagerangingfrom0.5%to2%ofnetassets.Minimumamountsandreducedfeeratesforcertainassetlevelsmaybeapplied.Inaddition,aperformancefee,usuallyrangingfrom5%to20%,mayalsobeapplied.Thiswillnormallyincorporateahighwatermark,andsometimestriggerlimitsandclawbackprovisions.

AnothersignificantexpenseincurredbyaLuxembourgUCIisthefeepaidforadministration(including,inter alia,fundaccountingandtransferagency–seealsoChapter10).Theadministrationfeeisalsooftenbasedonaspecifiedpercentageofnetassets,oraveragenetassets,oftheUCI.Theadministrationagreementmayalsoprovideforminimumfeesand/orreducedfeeratesonnetassetsinexcessofspecifiedlevelsofassetsunderadministration.

IftheUCIismanagedbyamanagemententity,themanagemententitywillalsobepaidafeeforitsservicesbytheUCI.

OtheroperatingexpensesincurredbyaLuxembourgUCIinclude:• ➢Directorsfees,insurance,conductingpersonsfees(ifapplicable)andmanagementcompanyfees

(ifapplicable)• ➢Depositaryfees,transactionfeesandbrokeragefees


• ➢Domiciliationfees• ➢Preparationoffinancialreports(annualandsemi-annualreports,whererelevant)• ➢Annualandsemi-annualreportprintingcosts• ➢Netassetvalue(NAV)orpricepublicationexpenses• ➢Annualregistrationduty(ifapplicable)• ➢CSSFannualfee:

13.3. Taxation

13.3.1.Introduction

This Section covers the taxation of:• ➢LuxembourgUCIs• ➢TheassetsofLuxembourgUCIs• ➢InvestorsinLuxembourgUCIs• ➢FeespaidbyLuxembourgUCIs

This Section also covers taxation impacts of selected restructuring scenarios.

13.3.2.TaxationofLuxembourgUCIs

LuxembourgUCIsaretaxexemptinLuxembourgwiththeexceptionoftheregistrationdutyandannualsubscriptiontax.ThereisnostampdutyinLuxembourgonshareissuesortransfers.

TaxationofmanagementcompaniesandAIFMiscoveredinSection7.6..

• SinglecompartmentUCIorSIF €3,000• MultiplecompartmentUCIorSIF:

• 1to5compartments €6,000• 6to20compartments €12,000• 21to50compartments €20,000• Morethan50compartments €30,000

• ➢Legalfees• ➢Auditfees• ➢Stockexchangemaintenancefee(ifapplicable):

• 1stquotationline €1,875• 2ndquotationline €1,250• 3rdquotationline €875• 4thandsubsequentquotationlines,perline €500

• ➢Cross-borderregistrationapplication,authorizationandmaintenancefees• ➢Cross-bordertaxcompliancefees• ➢Distributioncosts• ➢Annualsubscriptiontax(seeSection13.3.2.2.)

SomeprospectusesofLuxembourgUCIsorservicelevelagreementsbetweentheLuxembourgUCIanditsserviceprovidersmayrequirethat,wherecertainlimitsareexceeded,serviceproviders:• ➢Waivetheirfee,oraportionoftheirfee• ➢Reimburseorassumecertainexpenses,oraportionoftheexpenses

OperatingexpensesmaybepaideitherbytheUCIorbythemanagementcompany(wherethefundisnotself-managed).Wheretheyarepaidbythemanagementcompany,itwillchargetheUCIaservicefee covering the operating expenses incurred on behalf of the UCI.

OngoingexpensesofaLuxembourgmanagemententityarecoveredinSection7.6.2..



13.3.2.1. Registration duty

UCIsincorporatedasinvestmentcompaniesaresubjecttoaregistrationdutyof€75onincorporationand in case of:• ➢Modificationofthearticlesofincorporation• ➢TransferoftheeffectiveplaceofmanagementorregisteredofficetoLuxembourg

Thisregistrationdutyisfixed;itdoesnotvarywiththenumberofcompartments.

UCIsconstitutedascommonfundsarenotsubjecttothisregistrationduty.

13.3.2.2. Annual subscription tax

13.3.2.2.1.Generaltaxrate

2010LawUCIsaregenerallysubjecttoanannualsubscriptiontaxof0.05%;forSIFs,therateis0.01%.Thistaxispayableandcalculatedquarterly,basedonthetotalNAVoftheUCIonthelastdayofeverycalendarquarter.

OnincorporationoftheUCI,thistaxiscalculatedinproportiontotheduration,indays,betweenthedateofincorporationandtheendofthefollowingquarter.Foreachadditionalcompartmentincorporatedthereafter,thetaxbaseremainsthetotalNAVonthelastdayofeachquarter.

OnthedissolutionoftheUCI,thesubscriptiontaxiscalculatedinproportiontothenumberofdaysbetweenthebeginningofthelastquarterandthedissolution(theappointmentofliquidatorinthecaseofaninvestmentcompany).WhereacompartmentisliquidatedbuttheUCIisnotdissolved,thereisnosubscriptiontaxdueforthequarterduringwhichthecompartmentwasliquidated.

13.3.2.2.2.Reducedtaxrate

For2010LawUCIs,areducedtaxrateisapplicableinthefollowingcases:

A. UCIs investing in money market instruments and depositsTherateisreducedto0.01%forUCIsandUCIcompartmentswhoseexclusivepolicyistheinvestmentinmoneymarketinstrumentsordepositswithcreditinstitutions.

AsclarifiedintheGrand-DucalRegulationof14April2003,suchmoneymarketinstrumentsaredeemedtoincludeanynotesandinstrumentsrepresentingclaims,whetherornottheymaybecharacterizedassecurities,includingbonds,certificatesofdeposit,treasurybillsandanyothersimilarinstrumentsprovidedthatatthetimeoftheiracquisitiontheirresidualmaturitydoesnotexceedtwelvemonths,takingaccountofanyrelatedhedgingfinancialinstruments.Inaddition,floatingratenoteswitharesidualmaturityexceedingtwelvemonthsarepermittedprovidedtheinterestrateisadjustedtomarketconditionsatleastannually.Incertaincases,aUCIwhoseportfoliohasanaverageremainingmaturitynotexceedingtwelvemonthsmayalsoqualifyforthereduced rate.

Itshouldbenotedthatthedefinitionof“moneymarketinstruments”forthepurposeofsubscriptiontaxisdifferenttothecriteriaforthepurposeofUCITS(2010LawPartIUCIs–seeSection5.2.2.7.5.).SeealsoSection3.6.1..

B. Institutional investor compartments or share classesThereducedrateofannualsubscriptiontaxof0.01%alsoappliestoindividualcompartmentsofmultiplecompartmentUCIssubjecttothe2010Law,aswellastoindividualshareclassesofaUCIorofacompartmentofamultiplecompartmentUCI,ifthesharesofthesecompartmentsorclasses are restricted to one or several institutional investors.

13.3.2.2.3.Exemption

Asubscriptiontaxexemptionisapplicableinthefollowingcases:

A. Investment in other Luxembourg UCIsInordertoavoiddoubletaxation,thevalueofassetsrepresentedbyinvestmentsinotherLuxembourgUCIs,whichhavealreadybeensubjecttosubscriptiontax,isexempt.


B. Institutional cash UCIs UCIs,compartmentsofmultiplecompartmentUCIsandshareclassesareexemptfromthesubscriptiontaxprovidedallofthefollowingconditionsaremet:• ➢Thesharesarereservedforinstitutionalinvestors• ➢Theexclusivepolicyistheinvestmentinmoneymarketinstrumentsordepositswithcredit

institutions• ➢Theweightedresidualportfoliomaturitydoesnotexceed90days(floatingratenoteswitha

maturityexceeding90daysbutwhoseinterestrateisadjustedatleastevery90daysarealsopermitted)

• ➢TheUCIbenefitsfromthehighestpossiblerankingbyarecognizedrankingagency

C. Pension Fund Pooling Vehicles (PFPVs)LuxembourgPensionFundPoolingVehicles(PFPVs)areexemptfromsubscriptiontax.

SeeSection1.3.5.forLuxembourg’ssolutionsforPFPVs.

D. Microfinance UCIs2010LawUCIs,SIFs,orcompartmentsthereof,whosemainobjectiveisinvestmentinmicrofinanceinstitutions,areexemptfromsubscriptiontax.

AGrand-DucalRegulationof14July2010clarifiedthatUCIs,aswellascompartmentsofumbrellaUCIs,whoseinvestmentpolicyistoinvestatleast50%oftheirassetsinoneorseveralmicrofinanceinstitutions,orwhichbenefitfromthemicrofinancelabelissuedbytheLuxembourgFundLabelingAgency(LuxFLAG)areexemptfromsubscriptiontax.MicrofinanceinstitutionsaredefinedasthosewhichinvestatleasthalfoftheirassetsinmicrofinanceinvestmentsormicrofinanceUCIs.Microfinanceincludesallfinancialoperationsotherthanconsumerloans,theobjectiveofwhichistosupportpoorpopulationsexcludedfromthetraditionalfinancialsystembyfinancingsmallrevenuegeneratingactivities,andwhosevaluedoesnotexceed€5,000.

E. Exchange Traded Funds or Products2010LawUCIs,orcompartmentsthereof,whosesecuritiesarelistedorregularlytradedonatleastonestockexchangeoranotherregulatedmarketandwhoseexclusiveobjectiveistoreplicatetheperformanceofoneormoreindices,areexemptfromsubscriptiontax.

13.3.2.3. Tax on dissolution

Mergers,demergersanddissolutionsofaLuxembourgUCIgenerallydonotgiverisetothelevyingofa Luxembourg tax at the level of the Luxembourg UCI.

SincetheimplementationoftheEUSavingsDirectiveintoLuxembourglaw207,mergersofUCIs,compartmentsandshareclassesofLuxembourgUCIsmayundercertainconditionstriggertheapplicationoftheregulationsoftheEUSavingsDirective(seealsoSection13.3.4.1.).

ThetransformationofaSICAVintoacommonfundandsimilarlyofacommonfundintoaSICAVhasnoimpactforLuxembourgtaxpurposes.Attentionshouldbepaid,however,tothepossibleimpactoftheEUSavingsDirective.

13.3.3.TaxationoftheassetsofLuxembourgUCIs

ThissectionprovidesanoverviewofthetaxationofassetsofLuxembourgUCIs.

13.3.3.1. Withholding tax on revenue

LuxembourgUCIsmaybesubjecttowithholdingtaxes(WHT)ondividendsandinterest,andtotaxoncapitalgainsinthecountryoforiginoftheirinvestments.

207 Lawof21June2005ontheEUSavingsDirective.



Onlycertaindoubletaxationtreaties(DTTs)signedbyLuxembourgareapplicabletoLuxembourgUCIs.Treatieswiththefollowing36countriesshouldbeapplicabletoinvestmentcompanies(accordingtopubliclyavailableinformation):

Armenia HongKong Mongolia208 SloveniaAustria Indonesia Morocco Spain210

Azerbaijan Ireland Poland Thailand Bahrain Israel Portugal209 Trinidad and Tobago China Liechtenstein Qatar TunisiaDenmark Malaysia Romania TurkeyFinland Malta SanMarino UnitedArabEmiratesGeorgia Moldova Singapore UzbekistanGermany Monaco Slovakia Vietnam

AsregardsinvestmentcompaniessetupasSIFs,treatieswiththesecountriesshouldinprinciplealsoapply(exceptforSpain).

TheapplicabilityofsuchDTTs,however,isnotalwaysclear.Inprinciple,commonfundswillnotbenefit(withcertainexceptions)unlesstheunitholdersthemselvesareabletoclaimthereducedrateundertheDTT,which,inpractice,maybeverydifficult.Furthermore,investmentcompaniesmaybeabletobenefitfromDTTswithcertainothercountrieswhichdonotspecificallymentiontheirapplicabilitytosuchfunds.Theseinclude:

Bulgaria Italy TheRussianFederationGreece Norway

AUCImayestablishasubsidiary(e.g.,aLuxembourgSOPARFI)inordertobenefitfromaDTT;thisisnowthepracticeforinvestingincertaincountries(seeSection1.3.4.1.).

AtableofWHTratesapplicabletoLuxembourgUCIs,preparedinthefirsthalfof2013,isshowninAppendix III.

13.3.3.1.1.Reclaimopportunityforwithholdingtax

Investmentfundsmayhavethepossibilitytoobtainrefundsofdividendwithholdingtaxes(typically,wherethewithholdingtaxwasconsideredtobediscriminatorybytheEuropeanCourtofJustice(e.g.,AberdeenC-303/07,SantanderC-338/11).

InvestmentfundsmaythereforeconsiderfilingprotectiveclaimsinarangeofEuropeanjurisdictionsin order to safeguard their potential refund claims.

Opportunitiesexisttofileprotectiveclaims,forexample,inarangeofEuropeanjurisdictionsincluding:Austria France Norway SwedenBelgium Germany Poland TheNetherlandsFinland Italy Spain

13.3.3.2. Financial transaction tax

Financialtransactiontax(FTT)regimesapplytocertaintransactionsinfinancialinstrumentsheldbyLuxembourg UCIs.

FranceandItalyhaveappliedFTTssince1August2012and1March2013,respectively.Chapter2coverstheproposedEuropeanFTT.

208 Atthetimeofwriting,theLuxembourgadministrationreportedonitswebsite,thatMongoliaterminatedtheDTTwithLuxembourg(from1998).TheDTTwillnolongerbeeffectivefrom1January2014.

209 OnlyapplicabletoUCITS(PartIofthe2010Law).210 InAugust2012,thePortuguesetaxauthoritiespublishedatechnicalnoteregardingtheentitlementofLuxembourg

domiciledinvestmentcompanieswithvariablecapital(SICAVs)tobenefitfromtheDoubleTaxationTreatybetweenLuxembourgandPortugal.ThenoteclarifiesthatTreatybenefitsshouldapply,providedtheSICAVmeetstheresidencyrequirementsoftheTreaty.However,itdoesnotclarifywhetherTreatybenefitswillbeextendedtoentitiesotherthanSICAVs.Historically,TreatybenefitswerenotgenerallyextendedtoLuxembourgSICAVs,duetointerpretationsofanarticleoftheTreaty.


13.3.3.3. Taxation of holding structures

InadditiontotaxationattheleveloftheunderlyingassetsofLuxembourgUCIs,intermediateholdingstructuresmayalsobesubjecttotaxation.

ThissectionprovidesageneraloverviewontheLuxembourgholdingregimes.ThemostcommonistheSOPARFI;thesecuritizationvehicleisalsousedincertaincases.

ThetaxationofinternationalholdingstructuresisbeyondthescopeofthisTechnical Guide.

A. SOPARFIsLuxembourgSOPARFIsarebrieflyintroducedinSubsection1.3.4.1.A..

SOPARFIsarefullytaxableLuxembourgcompanies,subjecttocorporateincometax,municipalbusinesstaxandnetworthtax.Thetaxableworldwideincomeissubjecttocorporateincometax(plusemploymentfundsurcharge)andmunicipalbusinesstax.Theaggregatetaxrateiscurrently29.22%inLuxembourgCity.Furthermore,SOPARFIsaresubjecttoannualnetworthtaxatataxrateof0.5%ontheadjustednetassetvalue(theunitaryvalue),which,undercertainconditions,canbecreditedagainstcorporateincometaxdue.However,SOPARFIswhicharesubjecttoLuxembourgcorporateincometaxandwhosenetassetsdonotconsistofmorethan90%offinancialassets,transferablesecurities,bankdeposits,receivablesheldagainstrelatedparties/companiesinwhomthecorporationholdsparticipationandsharesorunitsheldinataxtransparententityaresubjecttoaflatannualminimumcorporateincometaxof€3,000(pluscontributiontoemploymentfund).SOPARFIswhichdonotmeettheaboveconditionsaresubjecttoavariableannualminimumcorporateincometaxwhichrangesfrom€500to€20,000(pluscontributiontoemploymentfund),dependingonthebalancesheettotalasatthefinancialyearend.

Assetswhichgenerateincome(orarelikelytogenerateincome)forwhichthetaxationrightbelongstoanothercountrybasedonaDTTconcludedwithLuxembourg(e.g.,immovableproperty,orassetsallocatedtoapermanentestablishment)shouldbeexcludedfromthebalancesheettotalforthepurposeofdeterminingthesaidminimumtax.Thisallowsthat,amongothers,Luxembourgrealestatevehiclesholdingdirectlyforeignrealestatepropertyarenothighlyimpacted.

Itisnotpossibletoreducetheminimumtaxbyapplyingcertainavailabledomestictaxcredits(e.g.,investmenttaxcredit,taxcreditsforprofessionaltraining,hiringofunemployed,orventurecapitalinvestments).

Theminimumtaxistreatedasanon-refundableadvancepaymentontheLuxembourgcorporateincometaxoffuturetaxyears.

Withholdingtax(WHT)maybeleviedondividendsdistributedand,incertainspecificcases,interestpaidbyaSOPARFI.Furthermore,providedcertainconditionsaremet:• ➢DividendspaidbyandcapitalgainsrealizedfromdirectsubsidiariesofaSOPARFImaybe

exemptfromcorporateincometaxandmunicipalbusinesstax(i.e.,theparticipationexemptionregimemayapply)

• ➢Interestexpensesmaybetaxdeductible,ifthearm’slengthprincipleisrespectedandtheyarenotlinkedtothefinancingofataxexemptasset

• ➢QualifyingsubsidiariesoftheSOPARImaybeexemptfromnetworthtax

DividendspaidbySOPARFIsmaybeexemptfrom15%WHTonthegrossamountofthedividendunderdoubletaxtreaty(DTT)provisions.SOPARFIshaveaccesstomorethan60DTTSandbenefitfromtheprovisionsofEuropeanUnion(EU)Directives.

SubjecttoconfirmationoftheLuxembourgTaxAuthorities,structuringsolutionscanbeimplementedtomitigatethetaxablebasisoftheSOPARFIanditswithholdingtaxliability(anti-abuse/beneficialownershipprovisionsintheinvestmentcountriesshouldbemonitored).



B. Securitization VehiclesLuxembourgsecuritizationvehiclesarebrieflyintroducedinSubsection1.3.4.1.B.

Luxembourgsecuritizationvehicleshaveaccesstobeneficialtaxationregimes,whichcanbebrieflysummarizedasfollows:• ➢Securitizationcompanies:

• ➢Arefullytaxablecompaniessubjecttocorporateincometaxandmunicipalbusinesstax;however,commitments(interestordividend)toinvestorsandcreditorsqualifyastaxdeductibleinterestexpenseseveniftheyhavenotbeenactuallypaidoutinagivenyear.Therefore,inpractice,asmostoftheirincomeisimmediatelyrepaidorcommittedtoinvestors,thetaxablebasisofsecuritizationcompaniesisoftenclosetozero

• ➢Benefitfromanexemptionfromnetworthtax• ➢Arenotsubjecttospecificthincapitalizationrules• ➢HaveaccesstoexistingDTTsonacase-by-casebasis• ➢MaybesubjecttominimumtaxasdescribedinSubsection1.3.4.1.A.• ➢AresubjecttoVAT

• ➢SecuritizationfundsaretaxtransparententitieswhichareexemptfromanydirecttaxationinLuxembourg,includingtheannualsubscriptiontax

• ➢ManagementservicesprovidedtosecuritizationvehiclesareVATexemptinpractice• ➢RepatriationofproceedstoinvestorsarefreefromLuxembourgWHT

13.3.3.4. Other taxes impacting the assets of Luxembourg UCIs

TherearemanyothertypesoftaxeswhichmayimpacttheassetsofLuxembourgUCIs.Forexample,investmentsinrealestatemaybesubjecttotransfertaxesorregistrationduties.OthertaxesarebeyondthescopeofthisTechnical Guide.

13.3.4.TaxationofinvestorsinLuxembourgUCIs

13.3.4.1. Withholding tax on dividends paid by Luxembourg UCIs

Therearenowithholdingtaxes(WHT)ondividendspaidbyLuxembourgUCIs,exceptpossiblyinapplicationoftheEUSavingsDirective.

A. Luxembourg Law implementing the EU Savings DirectiveOn1July2005,theEUDirectiveonthetaxationofsavingsincomeintheformofinterestpayments(theEUSavingsDirective211)andthebilateralagreementswithcertaindependentorassociatedterritoriesandwithcertainthirdcountriesintroducingmeasuresidenticalorequivalenttothoseoftheEUSavingsDirective(the“BilateralAgreements”),cameintoeffect.

TheLuxembourgLawimplementingtheEUSavingsDirectiveandtheLawimplementingtheBilateralAgreementsalsocameintoforceon1July2005.

TheaimoftheEUSavingsDirectiveistoenableaneffectivetaxationofsavingsincomeintheformofinterestpaymentsmadeinoneMemberStateoftheEUtobeneficialownerswhoareindividualsresidentinanotherMemberState.Bywayofexchangeofinformationfromthepayingagent’sMemberStatetotheindividual’sMemberStateofresidence,savingsincomeismadesubjecttoeffectivetaxationinaccordancewiththelawsofthelatterMemberState.

ThemainaimoftheBilateralAgreementsistoensurethatmeasuresequivalentoridenticaltothoseoftheEUSavingsDirectiveapplytointerestpaymentsmadeinoneofthesignatorydependentterritoriesorthirdcountriestobeneficialownerswhoareindividualsresidentinanEUMemberState(and,forsomebilateralagreements,viceversa).

Tobringabouteffectivetaxationofinterestpaymentsinthebeneficialowner’sMemberStateofresidencefortaxpurposes,allMemberStatesandsignatorydependentterritoriesagreedtheywouldultimatelyapplyautomaticexchangeofinformationconcerninginterestpaymentsbetweenMemberStatessubjecttocertainconditionsbeingfulfilled.

211 Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments.


However,duetocertainstructuraldifferences,whereas22MemberStatesappliedexchangeofinformationwitheffectfrom1July2005,andthetwonewMemberStates,RomaniaandBulgaria,havedonesosincejoiningtheEUinJanuary2007,AustriaandLuxembourgapplywithholdingto“inscope”interestpaymentsduringatransitionalperiod,atarateof35%(previously15%until30June2008,and20%from1July2008to30June2011).Belgiuminitiallyalsoappliedthewithholdingmethod,butappliesexchangeofinformationsince1January2010.

AssociatedordependentterritoriesthathavesignedBilateralAgreementshaveimplementedoneofthefollowing:• ➢Appliedexchangeofinformationwitheffectfrom1July2005• ➢AreapplyingWHTatratesatleastashighasAustriaandLuxembourguntilsuchtimeasthey

switchtotheexchangeofinformation(seethefollowingtables)

Austria,LuxembourgandtheassociatedordependentterritoriesthathavesignedBilateralAgreementswillbeobligedtoapplytheexchangeofinformationon“inscope”interestpayments,afterallofthethirdcountriesthathavesignedBilateralAgreementshaveswitchedtotheexchangeofinformationuponrequestaccordingtotheOrganizationofEconomicCooperationandDevelopment(OECD)model.

Moreover,basedontheBilateralAgreementsconcludedwithcertainassociatedanddependentterritories,themeasuresintroducedbytheEUSavingsDirectivealsoapplytointerestpaymentstoindividualsresidentinJersey,Guernsey,theIsleofMan,theBritishVirginIslands,Montserrat,Curaçao,SintMaarten,Bonaire,Saba,SintEustatiusand,basedontheEUSavingsDirectiveitself,toindividualsresidentinGibraltar,whereapayingagentestablishedinaMemberStatepaysorsecuresthepaymentofinteresttotheseindividuals.

Exchange of information jurisdictionsAnguilla CzechRepublic Greece Lithuania SloveniaAruba Denmark Guernsey Malta SpainBelgium Estonia Hungary Montserrat SwedenBritishVirginIslands

Finland Ireland Poland TheNetherlands212

Bulgaria France IsleofMan Portugal TurksandCaicosIslands

CaymanIslands Germany Italy Romania UnitedKingdomCyprus Gibraltar Latvia Slovakia

WHT jurisdictionsAndorra Curaçao Liechtenstein Monaco SanMarinoAustria Jersey Luxembourg SintMaarten Switzerland

B. Investments potentially in scopeTheEUSavingsDirectiveandBilateralAgreementsapplyto“interest”payments.However,forthesepurposes“interest”isdefinedinabroadway.Incomedistributedby,orincomerealizedupontheredemption,saleorrefundofsharesorunitsofanyofthefollowingmaypotentiallyqualifyasinterestinthemeaningoftheEUSavingsDirective:• ➢UCITSrecognizedinaccordancewiththeUCITSDirective(i.e.,forLuxembourg,SICAVsor

commonfundsestablishedunderPartIofthe2010Law)• ➢UCIsestablishedindependentorassociatedterritoriesorthirdcountriesthathavesigned

BilateralAgreements,wheretheUCIisconsideredequivalenttoaUCITSinaccordancewithsuchBilateralAgreement(note:thesefundsarenotthesubjectofthisguide)

• ➢UCIsestablishedoutsidetheEUandthejurisdictionsthathavesignedBilateralAgreements(note:thesefundsarenotthesubjectofthisguide)

• ➢“Residualentities”havingoptedtobetreatedasaUCITS(including,forLuxembourg,SIFcommonfundsand2010LawPartIIcommonfunds–seeexplanationhereafter)

212 IncludingBonaire,SabaandSintEustatius



A“residualentity”isanentityestablishedinaMemberStateorinacertainassociatedordependentterritorywhichdoesnothavelegalpersonality,isnotsubjecttogeneralrulesofbusinesstaxation,isnotaUCITSandhasnotoptedtobetreatedasaUCITSforthepurposeoftheEUSavingsDirective.TheLuxembourglawimplementingtheEUSavingsDirectivestatesthatallentitiesestablishedinLuxembourgthatwouldotherwisehavequalifiedasresidualentitiesmustbeconsideredashavingoptedforbeingtreatedasUCITS.Therefore,noLuxembourgcommonfundsareresidualentitiesaccordingtotheLuxembourglawimplementingtheEUSavingsDirectiveandincomedistributedby,orincomerealizedupontheredemption,saleorrefundofsharesorunitsofsuchcommonfundsisalwayspotentiallyinscope.

ForLuxembourgUCIspotentiallyinscope,adistinctionhastobemadeaccordingtothetypeofincomerealizedbythebeneficialowner.Thefollowingrulesapply:• ➢Fordistributions,Luxembourghasoptedforthe“15%thresholdrule”,i.e.,distributionsof

UCITSwhichholddirectlyorindirectlynomorethan15%oftheirassetsintheformofin-scopedebtclaimsareoutofscopeoftheEUSavingsDirective

• ➢The“15%thresholdrule”isonlyapplicableiftheMemberStatewheretheUCIisestablishedhasincludedthisruleinitsnationallaws(optionforeachMemberState).The“15%thresholdrule”also applies to certain dependent or associated territories or third countries. The exercise of the optionisbindingontheotherMemberStates

• ➢Forredemptionsasof1January2011,thesaleorrefundofsharesofLuxembourgUCIsinvestingdirectlyorindirectlymorethan25%(previouslythethresholdwas40%)oftheirassetsinin-scopedebtclaimsareinscope

Notethatonlythepartofthedistribution/salesorredemptionproceedswhichrelatestointerestincomewithinthemeaningoftheEUSavingsDirectiveearnedbytheLuxembourgUCIissubjecttotheDirective.Furthermore,uponsaleorredemptionofsharesorunitsbythebeneficialowner,onlyifagainisrealizedisthebeneficialownerdeemedtoderive“income”fromthesale.Iftheinformation on the part of the distribution that derives from interest (taxable income distributed –TID)isnotavailable,thewholedistributionwillbeconsideredasbeingderivedfrominterestincomefromtheUCI.Iftheinformationonthepartofthesalesorredemptionprice–ineffect,oftheNAVpershareorunit−thatderivesfrominterest(taxableincomepershareorunit–TIS)isnotavailable,theentiregainrealizedbythebeneficialowneruponsale/redemption,ifknown,ortheentireredemptionproceedswillbeconsideredasbeingderivedfrominterestincomefromtheUCI.

WhetheraWHTisleviedortheexchangeofinformationregimeappliesdependsgenerallyonthecountryofestablishmentofthepayingagent.

C. Paying agentThepayingagentistheeconomicoperatorwhopaysinteresttoorsecuresthepaymentofinterestfortheimmediatebenefitofthebeneficialowner.

Inthepaymentchain,thepayingagentshouldbethelastintermediarythatactivelyinitiatesthepaymenttothebeneficialowner.

Whenaneconomicoperatorintervenesinapaymentprocessbuthasapassiverolebecauseitexecutesinstructionsgivenbysomebodyelse,thiseconomicoperatoris,fromaLuxembourgperspective,notnecessarilyapayingagent(e.g.,whenabankholdscashaccountsandsimplyexecutesatransferinstructiongivenbyatransferagentorbyadebtor).

TheLuxembourgpayingagenthastolevyaWHTbydefault.However,thepayingagenthastogivethebeneficialownertheopportunitynottobesubjecttoWHTbut,instead,tobesubjecttotheexchangeofinformationregime(wherethebeneficialownerexpresslyauthorizesthepayingagenttoreportinformation)ortoprovideacertificateofexemptionissuedbytheTaxAuthoritiesoftheMemberState(or,whereapplicable,ofthedependentorassociatedterritory)ofresidenceofthebeneficialowneroftheincome,confirmingtheauthority’sknowledgeofthesourceoftheinterest income.

WHTpaidinLuxembourgpursuanttotheEUSavingsDirectivemustgiverisetoataxcredit;thisistakenintoconsiderationinthecountryofresidenceofthebeneficialowner.IftheWHTdeductedexceedsthetotalamountofincometaxdueinthecountryofresidence,theexcessmustbereimbursedbythebeneficialowner’scountryofresidence213.

213 TheMemberStatesshouldtransferthegreaterpartoftheirrevenuefromthewithholdingtaxtotheMemberStateordependentorassociatedterritoryofresidenceofthebeneficialowner,i.e.,therevenuesharingwillbeasfollows:• 25%fortheMemberStateordependentorassociatedterritorythathasleviedthewithholdingtax• 75%fortheMemberStateordependentorassociatedterritoryofresidenceofthebeneficialowner.


In this Technical Guide,onlyLuxembourgUCIsarecovered.Note,however,thataLuxembourgpayingagentmayhavetowithholdtaxonincomedistributedbyaUCITSorUCIregisteredincountriesotherthanLuxembourg,incaseswheresuchincomefallswithinthescopeoftheEUSavingsDirective.

13.3.4.2. Foreign UCI investors and foreign feeders

Non-residentUCIinvestors(individualsandcorporations)areexemptfromtaxationinLuxembourgoncapitalgainsrealizedupondisposaloftheirsharesorunitsinaLuxembourgUCI(evenincaseswheretheyheldasubstantialshareholdingofmorethan10%).Thisfacilitatesthecreationofmaster-feederstructureswhereaLuxembourginvestmentcompanyisthemasterfund.

13.3.4.3. Luxembourg resident UCI investor

UpondistributionofdividendsbytheUCIorredemptionofthesharesorunitsoftheUCItheLuxembourg individual or corporate investor has to declare his income from the UCI in his annual tax return.CapitalgainsarisingfromthedisposalofUCIsharesorunits,otherthanspeculativegains(i.e.,saleofthesharesorunitsoftheUCIwithinsixmonthsafteracquisition),areexemptfromtaxation in the hands of Luxembourg resident individual investors. In case the individual investor holdsmorethan10%ofthecapitalofaninvestmentcompany(SICAVorSICAF)214,anygainrealizedupon disposal of the shares is subject to individual taxation in Luxembourg.

DividendsandcapitalgainsrealizeduponredemptionofsharesorunitsinaLuxembourgUCIaregenerallysubjecttocorporatetaxationatthelevelofaLuxembourgcorporateinvestor(regardlessoftheholdingperiodandthepercentageheld).

13.3.4.4. Enhanced international cooperation

13.3.4.4.1.EuropeanUnionMemberStates

TheLawof29March2013transposingtheDirective 2011/16/EU on administrative cooperation in the field of taxationenteredretroactivelyintoforcewitheffectfrom1January2013.

TheLawof29March2013laysdowntherulesandproceduresunderwhichLuxembourgwillcooperatewithotherEUMemberStatesontheexchangeoftaxrelatedinformationthatisforeseeablyrelevanttotheadministrationandenforcementofthedomesticlawsoftheMemberStates.TheLawcomplementsLuxembourg’slegislationenablingtheexchangeofinformationprovidedforbydoubletaxationtreaties(DTTs).Intherecentyears,LuxembourghassignednewDTTsandamendedexistingDTTswithothercountrieswhichcomplywiththeOECDstandardsontheexchangeofinformationbetweentaxauthorities.

TheLawappliestoalltaxesexceptvalueaddedtax(VAT),customsduties,andexcisedutiescoveredbyotherEUlegislationonadministrativecooperationbetweenEUcountries.Itdoesnotapplytosocialsecuritycontributions.

TheLawimplementsalmostallprovisionsoftheDirective,inter alia:• ➢Inclusionofinformationheldbyabankorothertypeoffinancialinstitutioninthescopeof

exchangeofinformationonrequestregardingtaxableperiodsasfrom1January2011• ➢Introductionofdeadlinesfortheexchangeofinformation• ➢Introductionofotherformsofadministrativecooperation

TheLawdoesnotimplementtheDirective’sprovisionsontheautomaticexchangeofavailableinformationandcertainspecificcategoriesofincome(professionalincome,directorfees,pensions,lifeinsuranceandrealestateincome)totheextentsuchinformationisinthetaxauthorities’possession.

InApril2013,Luxembourgannouncedautomaticexchangeofinformationoninterestpaymentsas of 2015.

InMay2013,LuxembourgsignedtheOECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters,andwasaddedtoalistofmorethan50countrieswhohaveagreedtoautomaticallyexchangetaxinformation.

214 The10%thresholdisdeterminedonanumbrellafundbasis.



InJune2013,theEuropeanCommissionissuedaProposal for a Council Directive amending Directive 2012/16/EU as regards mandatory automatic exchange of information in the field of taxation.

TheproposalaimstoextendtheautomaticexchangeofinformationbetweenEUtaxadministrations,aspartoftheintensifiedfightagainsttaxevasionbyadding,inter alia,dividends,capitalgains,allotherformsoffinancialincomeandaccountbalancestothelistofcategorieswhichwillbesubjecttoautomaticinformationexchange.

ThepackageoftheproposedDirectiveonautomaticexchangeofinformation,theEUSavingsDirective,asamended,andtheAdministrativeCooperationDirective,asamended,willenableEUMemberStatestoshareasmuchinformationamongstthemastheyhavecommittedtodoingwiththeUSundertheForeignAccountTaxComplianceAct(FATCA)(seeSection13.3.4.4.2.).

13.3.4.4.2.FATCA

The Foreign Account Tax Compliance Act(FATCA)isUnitedStateslegislationwhichappliestonon-USentitieswhichFATCAdefinesasForeignFinancialInstitutions(FFIs)andaimstopreventtaxevasionbyUSpersonsthroughtheuseofoffshoreaccountsorforeigninvestmentvehicles.

TheFATCAprovisionswereultimatelyincorporatedintotheHiringIncentivestoRestoreEmploymentAct(HIREAct),whichwasenactedinMarch2010.RegulationswereissuedinJanuary2013.InJuly2013,theIRSreleasedNotice2013-43announcingadelayofkeytimelineswithrespecttoFATCAregulations.

UnderFATCA,FFIsarede factorequiredtobecomeinformation-gatheringandtaxcollectionagentsonbehalfoftheIRS.FFIs,asdefinedbyFATCA,coversabroadrangeoffinancialinstitutions,includingbanks,insurancecompanies,investmentfunds,pensionfunds,mutualfunds,privateequityfunds,brokerdealersandmanagementcompanies.

FFIs’“on-boarding”processes215willhavetobeFATCA-compliantby1July2014andthereisadataand(insomecases)documentationreviewprocesswithrespecttoexisting“accounts”(includinginvestorsininvestmentfunds)tobeperformedandcertifiedbyspecifieddates.

InformationreportingbyFFIsonUSaccountsisphasedinasfollows:• ➢FFIsmustreporttheidentityandaccountbalancesofUSaccountholdersthatareUSSpecified

Personsnolaterthan31March2015(withrespecttothe2014calendaryearforUSaccountsidentifiedby31December2014)

• ➢FFIsmustreportinformationaboutincomepaidtosuchUSaccountsstartingin2016(withrespecttothe2015calendaryear)

• ➢FFIsmustreportfullinformation(includinggrossproceeds)onUSaccountsstartingin2017(withrespecttothe2016calendaryear)

CertainFFIsmayfacealighterburdenofcomplianceiftheyfulfillconditionstobe“deemed-compliant”FFIs.

FailurebyaFFItocomplywithFATCAwillresultina30%WHTbeingappliedbyUSwithholdingagentsandbyotherFFIson“withholdablepayments”216 tosucha“non-participatingFFI”,includingdividendsandinterestpaidbyUSissuers(insomecases,starting1July2014),aswellasgrossproceedsofthesaleofUSsecurities(starting1January2017).

IntergovernmentalAgreementsontheimplementationofFATCA(“IGAs”)arebeingnegotiatedbytheUnitedStateswithseveralcountries,includingLuxembourg.InMay2013,theLuxembourgMinistryofFinanceannouncedthattheLuxembourgIGAwouldbeaso-calledModelIIGA,wherebyFFIsestablishedinLuxembourgwillberequiredtoreporttheaboveinformationtotheLuxembourgtaxauthorities,whowillforwardtheinformationtotheIRS.

215 Thisrefersessentiallytotheprocedurestobeapplieduponopeningofanew“account”oruponissuanceofnewsharesorunitsofaUCItoaninvestor.TheUCI(orotherFFI)mustidentifytheinvestor(orother“accountholder”),categorizeitcorrectlyforFATCApurposesandobtaintheappropriatedocumentationforFATCApurposes.Withrespecttoindividuals,thepresenceofcertain“USindicia”needstobecheckedand,ifpresent,triggersfurtherdocumentationrequirements.Inthecaseofentities,thecategorizationisrelativelycomplexand,forsome,ownershipoftheentityneedstobeidentified.

216 “Withholdablepayment”includesnotonlypaymentsofincomeandgainsfromUSsources(includingbutnotlimitedtodividendsandinterest,rents,salaries,wages,premiums,annuities,compensations,remunerations,emolumentsandotherfixedordeterminableannualorperiodicalgains,profitsandincome)butalsogrossproceedsfromthedispositionofsecuritiesthatcanproduceUSsourceddividendsorinterest.Paymentsrelatingtocertaingrand-fathered obligations are excluded.


13.3.5.TaxationoffeespaidbyLuxembourgUCIs

13.3.5.1. Directors fees

Awithholdingtax(WHT)of20%isleviedonthegrossamountofthefees(equivalentto25%ofthenetamountofthefees)atthetimeofdistribution.ItappliestoDirectors’feespaidtocompaniesandtoindividualsandiscreditableagainstthecompany’s/individual’stax.

TheWHTwillbefinalfornon-residentDirectorsprovidedthatthisistheironlyLuxembourgsourceincomeandprovidedthisincomedoesnotexceed€100,000peryear.

TheWHTmustbepaidtotherelevanttaxauthoritywithineightdaysofthedistribution.AregisteroftheWHTsmustbekeptup-to-date,recordingthenameandaddressofthebeneficiary,theamountofthetaxwithheldandthedatewhenthetaxwaspaid.

13.3.5.2. Carried interest

TheAIFMLawdefines“carriedinterest”asashareintheprofitsoftheAIFaccruedtotheAIFMascompensationforthemanagementoftheAIFandexcludinganyshareintheprofitsoftheAIFaccruedtotheAIFMasareturnonanyinvestmentbytheAIFMintotheAIF.

TheLawpermitsthetaxationofcarriedinterestrealizedbycertainphysicalpersonswhichareemployeesoftheAIFortheirmanagementcompanyas“speculativeincome”underLuxembourg’sIncomeTaxLaw;theapplicabletaxrateis25%ofthemarginaltaxrateapplicabletotheadjustedincome.

Tobenefitfromthetaxregime,physicalpersonsmustnothavebeenLuxembourgtaxresidents,norhavebeensubjecttotaxinLuxembourgontheirprofessionalrevenuesduringthefiveyearsbeforetheyearofimplementationoftheAIFMLaw.Thephysicalpersonsmust,furthermore,establishtheirtaxdomicileinLuxembourgduringtheyearofimplementationoftheAIFMLaw,orduringthefollowingfiveyears.Thefavorabletaxtreatmentmaybelimitedintime.

13.3.5.3. Service providers

Section13.4.coverstheVATapplicabletoservicesprovidedto:• ➢Luxembourginvestmentcompanies• ➢LuxembourgcommonfundsmanagedbyaLuxembourgmanagementcompany• ➢Luxembourgadvisorycompanies• ➢CommonfundsestablishedoutsideLuxembourgmanagedbyaLuxembourgmanagementcompany

(commonfundsmanagedcross-borderfromLuxembourg)

13.3.6.Taxationimpactsofselectedrestructuringscenarios

Taxconsiderationsneedtobeexaminedcarefullypriortoproceedingwithanyparticularrestructuringproject,betheymergersofUCIs(seealsoSection4.7.),conversionsofordinaryUCITSintofeederUCITS(seealsoSection4.6.2.),creationofmaster-feederstructures(seealsoSection3.3.4.1.and13.3.4.2.),feederschangingmasterUCITS(seealsoSection4.6.2.),cross-borderrestructuringofthefundmanagementactivities(seeSections7.5.and7.6.7.)orrecoursetothird-partyserviceproviders(seealsoSection7.4.15.).

ThefollowingtablepresentsanoverviewofthepotentialtaximplicationsofselectedUCIrestructuring scenarios:



Potential tax implications of selected UCI restructuring scenarios on the UCI, on investors and on the management companies

UCI mergers Converting from UCI to feeder UCI

(or vice versa)

Creating a new feeder

UCI

Changing master UCI

Potentialtaximpactof restructuring to be ascertained:

(If portfolio sales

required to constitute

new portfolio,

or portfolio transfer to

master UCI)

(Due to portfolio sales or transfer

by existing master UCI, if required)

Inthecountryof: The merging UCI(s)

The UCI to be converted

The current master UCI

The feeder UCI

• Income tax on capital gainsrealizedbytheUCI

X X X X

• WHTtobeappliedbythe UCI or an agent on a deemed distribution or deemed interest payment

X X X

Inthecountryof: The receiving UCI

The converted

UCI

The feeder UCI

The future master UCI

The feeder UCI

• Capitaldutyoncapitalincrease

X X X

• Impact of the change of composition of the UCI’sportfolioonthestatusforEUSavingsDirectivepurposesandon Taxable Income per Share(TIS)

X X X X X

• Impact of the change of compositionoftheUCI’sportfolio on taxable income deemed to accruetotheinvestor,computedbytheUCI

X X X X X

Inthecountryoftheissuer of securities held by:

The merging fund(s)



The feeder UCI

• WHTupontransfer(e.g.,onaccruedinterest)

X X X

• Capital gains tax upon transfer

X X X X

• Stampduty X X X X




(or vice versa)


UCI

Changing master UCI

Inthecountryofresidenceof the investor in:

The merging UCI(s)


The current UCI/futuremaster UCI

The feeder UCI

The feeder UCI

• Taxation of capital gains realizedonthesharesor units of such UCI

X X X

• Taxation of income deemed to have been realizedbytheinvestor

X X X X X

• Impact of the change of compositionoftheUCI’sportfolio on taxable income deemed to accrue to the investor in thepost-restructuringUCI

X X X X X

Inthecountryofresidenceof the management company(ifany)of:

The merging UCI(s)

The UCI being

converted


The feeder UCI

• Ifthepre-restructuringUCI has no legal personalityandisnotataxpayer,whetherthemanagementcompanyis subject to income tax oncapitalgainsrealizedupon transfer of the pre-restructuringUCI’sassets

X X X X

• Income tax on an indemnityifthemanagementcompanyisindemnifiedforthetermination of the management contract

X X X

Postrestructuringtaximpact:

Impact of location of UCI onVATcosts

X X X X

Directtaxcostsduetodifferencesbetweenthe direct tax regimes (includingWHTondistributions)applicabletothefollowingUCIsintheirowncountry(ies)

The receiving UCI vs. the

merging UCI (s)

The combination of feeder UCI and master

UCI vs. single UCI

The combination of feeder UCI and master

UCI vs. single UCI

The future master

UCI vs. the current

master UCI

The feeder UCI holding

the future vs. the current master UCI





(or vice versa)


UCI

Changing master UCI

Differenttaxesinthecountryoftheissuerofsecuritieswhenheldby:


merging UCI (s)

The master UCI vs. the UCI being converted

The future master

UCI vs. the current

master UCI

• WHTuponsale(e.g.,onaccruedinterest)

X X X

• Capital gains tax upon sale

X X X

• Stampduty X X X

• WHTondividenddistributions/interestpayments

X X X

Differenttaxesinthecountryofresidenceoftheinvestor holding shares or units of:


merging UCI (s)

The converted UCI vs. the UCI to be converted

The feeder UCI vs. the

current UCI/futuremaster UCI

The future master

UCI vs. the current

master UCI (indirectly)

• Taxation of capital gain realizedonthesharesorunitsofthepost-restructuring UCI

X X

• Taxation of income deemed to have been realizedbytheinvestor

X X X

DifferentEUSavingsDirectivetreatmentofpaymentstotheinvestorpost-restructuringcomparedtopre-restructuring (other than UCI status and TIS computation)

X X


13.4. Value added tax (VAT)

13.4.1.Introduction

This Section outlines the taxable status of Luxembourg UCIs and their service providers (in particular managementcompanies,AIFMandadvisorycompanies),andtheVATregimeapplicabletoservicesprovided to such Luxembourg UCIs and their service providers.

InordertodeterminetheVATtreatment,andthereforetheVATrateorexemptionapplicable,thefollowingquestionsneedtobeanswered:• ➢ArethesupplierandthepurchaserofservicesconsideredasVATablepersons?• ➢Inwhichcountryistheservicedeemedtotakeplace?• ➢IftheplaceofsupplyisinLuxembourg,whatistheapplicableVATregime?

13.4.2.StatusofUCIsandmanagement/advisorycompanies

13.4.2.1. Common funds and their management companies

Asacommonfundhasnolegalpersonality,themanagementcompanyandthecommonfundareconsideredtobeasingleentityforVATpurposes.

Consequently,servicesprovidedtoacommonfundaredeemedtobeprovidedtothemanagementcompany.ThecombinedlegalentityrepresentedbythemanagementcompanyanditscommonfundisdeemedtobeaVATableperson.

13.4.2.1.1.Commonfundsmanagedcross-border

WhereacommonfundismanagedbyamanagementcompanyestablishedinadifferentMemberState,thelackofharmonizationwithintheEUinrespectoftheindependenttaxablestatusofcommonfundscould,fromaVATperspective,leadtoanyofthefollowingsituationsincaseofservices provided to the common fund:• ➢Doubletaxation• ➢TaxationinthehomeMemberStateofthecommonfund• ➢TaxationinthehomeMemberStateofthemanagementcompany• ➢Notaxation

13.3.7.TaxationofforeignUCIsmanagedinLuxembourg

Underthe2010LawandtheAIFMLaw,onlyUCIsestablishedinLuxembourgaresubjecttotheannualsubscriptiontaxinLuxembourg.Hence,foreignUCIsarenotsubjecttotheannualsubscriptiontaxinLuxembourg(seealsoSection13.3.2.2.).

The2010LawandtheAIFMLawhaveintroducedprovisionsintoLuxembourgtaxlawwherebyUCIsestablishedunderforeignlawwhoseplaceofeffectivemanagementorcentraladministrationisinLuxembourgareexemptfromcorporateincometax,municipalbusinesstaxandnetworthtax.

AssetsandprofitsofthemanagementcompanyresidentinLuxembourgremain,however,fullysubjecttocorporatetaxationinLuxembourg(seeSection7.6.).



BasedonthecurrentinterpretationoftheLuxembourgVATAuthorities,thecommonfundandthemanagementcompanyshouldcontinuetobeconsideredasasingleentityforVATpurposes.217

Consequently,fromaLuxembourgVATperspective,servicesprovidedbyathirdpartytoacommonfundestablishedinaMemberStateotherthanLuxembourg,whichhasaLuxembourgmanagementcompanyshouldcontinuetobedeemedtobeprovidedtothemanagementcompanyestablishedinLuxembourg.

13.4.2.2. Investment companies

Unlikecommonfunds,investmentcompanieshavealegalpersonality.FollowingadecisionoftheEuropeanCourtofJustice(ECJ)218,SICAVsaretobeconsideredastaxablepersonsforVATpurposes.Inviewofthis,VATCircularNo.723of29December2006confirmedthatinvestmentvehicles(suchasSICAVsandSICAFs)whosemanagementisVATexemptbyvirtueofArticle44(1)(d)oftheLuxembourgVATLaw219havethestatusof“taxablepersons”forVATpurposes.

13.4.2.3. Management companies and AIFM

InLuxembourg,managementcompaniesandAIFMareconsideredtoperformaneconomicactivity,andareconsequentlyregardedasVATablepersons.

13.4.2.4. Advisory companies

FromaLuxembourgperspective,advisorycompaniesofinvestmentcompaniesareconsideredtoperformaneconomicactivity,andareconsequentlyregardedasVATablepersons.

13.4.2.5. Fund mergers

The merger of Luxembourg funds should be considered as a transfer of going concern outside the scopeofVAT,providingcertainconditionsaremet.

Incaseofcross-bordermergers,theplaceoftaxationisinprinciplethecountryoftheabsorbingUCI(exceptincaseofrealestateassets)withpossibleexemptiondependingonthetypeofservicesorgoods transferred.

13.4.2.6. Conversion of a UCI into a feeder fund and master-feeder structures

NoLuxembourgVATconsequencesarisefromthesoleconversionofaLuxembourgUCIintoafeederUCI.Moreover,thetransferoftheportfolioofassetsofaLuxembourgfeederUCItoamasterfundinLuxembourgorinanothercountryshouldfalloutsidethescopeoftheLuxembourgVAT(withexceptions,suchasforrealestateassets).

13.4.3.Placeofsupply

13.4.3.1. General rule

InordertodeterminetheVATregimeapplicabletoaservice,itisnecessarytoestablishthecountryinwhichtheserviceisdeemedtoberendered.

ForservicesrenderedbyLuxembourgsupplierstoaLuxembourgpurchaser,theserviceisdeemedtobe rendered in Luxembourg.

Example: An advisory service provided by a Luxembourg bank to a Luxembourg UCI is deemed to have been rendered in Luxembourg.

217 ThisinterpretationisnotablysupportedbysomeotherEUMemberStates.218 IntheBBLcase(C-8/03,21/10/2004),theEuropeanCourtofJustice(ECJ)highlightedthefactthattheactivities

performedbyinvestmentfundsinvestingintransferablesecuritiessurpassthescopeofthesimpleacquisitionandsaleof securities and consist of the exploitation of an asset for the purpose of obtaining income on a continuous basis. Therefore,theactivitiescarriedoutbySICAVsqualifyaseconomicactivitiesfromaVATperspective.Hence,SICAVsaretobeconsideredastaxablepersonsforVATpurposes.

219 Lawof12February1979concerningvalueaddedtax,asamended.


ForservicesrenderedbyforeignsupplierstoaLuxembourgtaxablepurchaser,theplaceofserviceis,asageneralrule,consideredtobetheplacewheretherecipientisestablished.

Since1January2010,thegeneralruletodeterminetheplaceofsupplyofaserviceisasfollows:• ➢ForservicesrenderedtoaVATableperson220,theplaceofsupplyiswherethatpersonhas

establisheditsbusiness,ortheplacewhereafixedestablishmentislocated(ifthoseservicesareprovidedtothatfixedestablishment)

• ➢Forservicesrenderedtoanon-VATableperson,theplaceofsupplyiswherethesupplierhasestablisheditsbusiness,ortheplacewhereafixedestablishmentislocated(iftheservicesaresuppliedfromthatfixedestablishment–seeSection13.4.3.2.).Fornon-taxablepersonsoutsidetheEU,theplaceofsupplyiswherethatpersonisestablished,hashispermanentaddressorusuallyresides

AsthemanagementcompanyestablishedinLuxembourgisconsideredtobeaVATableperson,servicesrenderedtoitbyforeignsuppliersgenerallyfallwithinthescopeofLuxembourgVAT.

Example: An advisory service provided by a foreign company to a Luxembourg management companyisdeemedtotakeplaceinLuxembourg.TheLuxembourgmanagementcompanyisliabletopayVATrelatingtothissupplyofservices(reversechargemechanism),unlessanexemptionapplies.

Asinvestmentcompaniesareconsideredastaxablepersons,theplaceofsupplyofservicesprovidedbyaforeignsuppliertosuchLuxembourgentitiesisdeemedtobewithinthescopeofLuxembourgVAT.

Example: An advisory service provided by a foreign company to a SICAV is, from a Luxembourg point of view, deemed to take place in the country of establishment of the SICAV

(i.e., in Luxembourg).

13.4.3.2. Fixed establishment in the field of supply of services

AsmentionedinthepreviousSection,theplaceofsupplyofservicesrenderedtoaVATableperson,iswherethatpersonhasestablishedhisbusiness,ortheplacewhereitsfixedestablishmentislocated(ifthoseservicesareprovidedtothatfixedestablishment).

AfixedestablishmentaccordingtoCouncilImplementingRegulation(EU)No282/2011of15March2011221isanyestablishment,otherthantheplaceofestablishmentofabusinesswhichischaracterizedbyasufficientdegreeofpermanenceandasuitablestructureintermsofhumanandtechnicalresourcestoenableittoprovidetheservices,orreceiveandusetheservicessuppliedtoitforitsownneeds.

Whenreceivingaservice,havingaVATidentificationnumberisnotinitselfsufficienttoconsiderthatataxablepersonhasafixedestablishment.

13.4.4.Natureofserviceandapplicablerate

13.4.4.1. General rule

Oncetheplaceofsupplyhasbeenestablished,itisimportanttodeterminetheapplicableVATrate,unless an exemption applies.

Intellectualservicesaregenerallysubjecttothestandard15%VATrateiftheyarelocatedinLuxembourg.

220 Since1January2010,theconceptof“taxablepersons”forthepurposeofapplyingtherulesconcerningtheplaceofsupplyofservicesalsoincludes,forallservicesrenderedtothem:• Ataxablepersonwhoalsocarriesoutactivitiesortransactionsthatarenotconsideredtobetaxablesuppliesof

goodsorservicesfromaVATstandpoint• Anon-taxablelegalpersonwhoisidentifiedforVATpurposes

221 Article11,§1and§2ofCouncilImplementingRegulation(EU)No282/2011of15March2011layingdownimplementingmeasuresforDirective2006/112/ECinthecommonsystemofvalueaddedtax.



Example: Lawyers’ and tax advisors’ services rendered to Luxembourg UCIs are, in principle, subject to 15% VAT.

13.4.4.2. Domiciliary services

DomiciliaryservicesprovidedtoUCIsareconsideredtobepartofthemanagementservices,whichare,inprinciple,exemptfromVATundertheLuxembourgVATLaw.

13.4.4.3. Management service based on a direct contractual link

ManagementservicesprovideddirectlytoUCIsandAIFareexemptfromVATinaccordancewithArticle44(1)(d)oftheLuxembourgVATLaw.

TheLuxembourglegislatordoesnotexpresslydefinethenotionofmanagementofUCIs.

InvestmentmanagementservicesaswellasUCIandAIFadministrationservicescomewithintheVATexemption provisio222.ThefollowingservicesalsofallwithintheVATexemption(non-exhaustivelist),asconfirmedbytheLuxembourgVATadministrationinitsVATCircularNo723:• ➢Investmentmanagement• ➢Administration:

• ➢Legal223 and fund management accounting services• ➢Customerinquiries• ➢Valuationofportfolioandpricingofthesharesorunits(includingtaxreturns)• ➢Regulatorycompliancemonitoring• ➢Maintenanceofshareholderorunitholderregister• ➢Distributionofincome• ➢Shareorunitissuesandredemptions• ➢Contractsettlements(includingcertificatedispatch)• ➢Recordkeeping

FurthertothereleaseofVATCircularNo.723bytheLuxembourgVATadministration,theVATtreatmentofdepositaryservices,theaimofwhichistoensurethatthemanagementisperformedincompliancewiththelaw,hasbeenconfirmed.Whilemostoftheservicesrenderedbydepositariesareexempt,thecontrolandsupervisoryactivities,asdefinedinArticles7(1)and(3),and14(1)and(3)oftheUCITSDirective,arehenceforthtaxableattheVATrateof12%.

13.4.4.4. Management services classified as “complete services”

TheapplicationoftheexemptionofArticle44(1)(d)oftheLuxembourgVATLawhasbeenextendedtooutsourcedserviceswhencertainconditionsaremet.

Inthisrespect,outsourcedservicesfallundertheexemptionprovidedtheprincipallimitsitsactivitytostrictlyre-chargingtheservicesreceivedfromthesub-contractortotheUCIsandthat,inthecaseofadministrativeandmanagementservicesoftheUCI,theseservicesformadistinctwhole,fulfillingineffectthespecificandessentialfunctionsoftheexemptmanagementservices.Consequently,merematerialortechnicalsupplies,forinstance,arenotVATexempt.224

Furthermore,theCourtofJusticeoftheEuropeanUnionconfirmedthatadvisoryservicesprovidedbyathirdpartytothemanagementcompanyofaUCIshouldbeconsideredasVATexempt.225

222 TheLuxembourgBankers’Association(Association des Banques et Banquiers, Luxembourg–ABBL)togetherwiththeVATAdministrationhadlaiddownanon-exhaustivelistoftheservicesfallingunderthescopeoftheexemption.However,morerecently,theECJ,intheAbbeyNationalcase(C169/04,4/5/2006)confirmedthatportfoliomanagementservicesaswellasUCIadministrationservicesfallwithintheVATexemptionprovision.TheECJ,aswellastheLuxembourgVATadministrationinitsVATCircularNo723,referredtoAnnexIIoftheUCITSDirectiveprovidinganon-exhaustivelistofservicesfallingwithintheVATexemption.

223 Totheextentthatlegalservicesareprovidedbytheentityperformingtheadministration.224 ThisisinaccordancewiththeECJdecisionintheAbbeyNationalcaseandhasbeenconfirmedbytheLuxembourg

VATadministrationinCircularNo723and723bis.225 GfBk Gesellschaft für Börsenkommunication mbH (C-275/11,7March2013).


13.4.5.Summarytables

ThesummarytableshereafterhavebeenpreparedbasedontheLuxembourglegislationanddoctrine,aswellastheECJcaselaw.ItisimportanttonotethattheinterpretationofthelegislationcouldbedifferentincountriesotherthanLuxembourg,notablyconcerningtheVATstatusofUCIsandtheirmanagementcompanies,whichmighthaveanimpactonthelocalizationofthesupplyofservices.

13.4.5.1. Services provided to a Luxembourg investment company

Supplier Service Place of supply VAT treatment

Luxembourg company

Managementservices

Luxembourg Exempt

EUcompany(exceptLuxembourg)

Managementservices

Luxembourg Exempt

USadvisorycompany Legal advice Luxembourg 15%VAT(reversechargemechanism)

Luxembourg central administration

Administration services

Luxembourg Exempt

Luxembourg depositary

Control and supervisoryservices

Luxembourg 12%VAT

Luxembourgauditor/lawyer/taxadvisor

Audit/legaladvice/tax advice

Luxembourg 15%VAT

EUlawyer(exceptLuxembourg)

Legal advice Luxembourg 15%VAT(reversechargemechanism)

13.4.5.2. Services provided to a Luxembourg common fund managed by a Luxembourg management company


Luxembourg company

Managementservices

Luxembourg OutsidethescopeofVAT


Managementservices

Luxembourg Exempt




Luxembourg Exempt



Luxembourg 12%VAT



Luxembourg 15%VAT





13.4.5.3. Services provided to Luxembourg advisory companies


Luxembourg company

Advisoryservices Luxembourg Exempt


Advisoryservices Luxembourg Exempt




Luxembourg 15%VAT



13.4.5.4. Services provided to a common fund established outside Luxembourg managed by a Luxembourg management company (common fund managed cross-border from Luxembourg)226


Luxembourg company

Managementservices



Managementservices





Luxembourg Exempt



Luxembourg 12%VAT



Luxembourg 15%VAT



226 Inthetable,onlythetaxationinLuxembourgisconsidered.Thisdoesnotprecludetaxationinthecountryofthecommonfund,potentiallyresultinginasituationofdoubletaxation.

390 | 14.Marketing

14.1. Introduction

ThisChaptercoverstherequirementsapplicabletothemarketingofUCITSandotherUCIs:• ➢Informationprovidedtoinvestorsbefore

theyinvest• ➢MarketingLuxembourgUCITSinother

EuropeanEconomicArea(EEA)MemberStates227

• ➢MarketingforeignUCITSinLuxembourg• ➢MarketingofotherUCIs• ➢Marketingregulationsapplicablein

Luxembourg

Italsocoverstherequirementsapplicabletodistributorsandothermarketingintermediaries.

Thegeneralrequirementsonfunddocumentation and reporting are covered in Chapter 12.

14. Marketing

227 TheEEAincludesEuropeanUnion(EU)MemberStatesplusIceland,LiechtensteinandNorway.ThereferencetotheEEAisclarifiedin1.3.1.B.

390|14.Marketing

14.Marketing| 391

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14.1.1. UCITS

SomeofthemainreasonswhypromotersandinitiatorscreateUCITSarelinkedtomarketinganddistribution:• ➢UCITScanbemarketedtoalltypesofinvestorsinmostkeydistributionmarkets• ➢UCITSarerelativelyeasytodistribute,comparedwithotherUCIs• ➢Investorsrecognizeanddemand“UCITSbrand”products

UCITScanbedistributedtoalltypesofEU/EEAinvestors–retail,professionalandinstitutional.ManyinternationalinvestorsarealsoattractedtoUCITS,forexample,tobenefitfromwell-recognizedEUregulation.

TheLuxembourgUCITSistheleadingproductforcross-borderfunddistributionintheEUandevenbeyond.AcontinuouslyincreasingnumberofLuxembourgUCITSareregisteredforsaleinEU/EEAMemberStatesandoutsidetheEU/EEA,particularlyinAsia,theMiddleEastandLatinAmerica.

TheUCITSDirectiveprovidesforaharmonized“Europeanpassport”forUCITS–theideabeingthataUCITSauthorizedinoneMemberState(the“homeMemberState”)maybemarketedinanyotherMemberState(the“hostMemberState”)followingnotificationofthehostMemberStatecompetentauthority.

TheprovisionsonthenotificationprocedureformarketingUCITSarecoveredbythe2010Law.ThepracticalandtechnicalproceduresthatUCITSmustfollowforcross-bordermarketing–i.e.,thenotificationprocedurestobefollowedbyaLuxembourgUCITSintendingtomarketitssharesorunitsinanotherEU/EEAMemberStateandbyaUCITSofanotherEU/EEAMemberStatewishingtomarketitssharesorunitsinLuxembourg–areclarifiedinCSSFCircular11/509andinCSSFRegulation10-05,asamended.

MarketingofUCITSoutsidetheEEAissubjecttoeachcountry’snationalregime.

SeveralserviceprovidersofferservicesfacilitatingtheglobaldistributionofUCITS,suchasfundregistrationservicesandplatformsprovidingaccesstolocaldistributionnetworks.

14.1.2.AIF

Inthischapter,theterm:• ➢“FullAIFMregimeAIF”meansAIFmanagedbyauthorizedAIFMandinternallymanagedAIF

whicharesubjecttotheAIFMLaw• ➢“SimplifiedAIFMregistrationregimeAIF”meansAIFwhosemanagerisnotsubjecttotheAIFM

Law(ortheAIFMDirective)andinternallymanagedAIFwhicharenotsubjecttotheAIFMLaw

14.1.2.1. Full AIFM regime AIF

AuthorizedAIFMbenefitfroma“passport”permittingthemtodistributeEU/EEAAIFtheymanagetoprofessionalinvestorsintheEU/EEA,withoutbeingrequiredtocomplywithnationalprivateplacementregimes(NPPRs).AuthorizedinternallymanagedAIFwhicharesubjecttotheAIFMLawortheAIFMDirectivealsobenefitfromthe“passport”.

MemberStatesmayalsopermitmarketingbyAIFMtoretailinvestorsintheirMemberState;theymayapplystricterrequirements.

MarketingoffullAIFMregimeAIFoutsidetheEEAissubjecttoeachcountry’snationalregime.

227 TheEEAincludesEuropeanUnion(EU)MemberStatesplusIceland,LiechtensteinandNorway.ThereferencetotheEEAisclarifiedin1.3.1.B.

392 | 14.Marketing

14.1.2.2. Simplified AIFM registration regime AIF

MarketingofothersimplifiedAIFMregistrationregimeAIFissubjecttoeachcountry’snationaldistributionrequirements.

Meetingspecificnationaldistributionrequirementsgenerallymakesthecross-bordermarketingofsimplifiedAIFMregistrationregimeAIFwithintheEEAamorecomplexandcostlyexercise.

ThemanagersofqualifyingEuropeanVentureCapitalFunds(EuVECA)andofqualifyingEuropeanSocialEntrepreneurshipFunds(EuSEF)benefitfromaspecific“passport”permittingthemtomarkettheUCIstheymanagetoqualifiedinvestorsacrosstheEU/EEA.

MarketingofsimplifiedAIFMregistrationregimeAIFoutsidetheEEAissubjecttoeachcountry’snational regime.

14.1.3.Summaryofmarketingregimes

ThefollowingtablesummarizesthemarketingregimesapplicabletothemarketingofUCITSandAIF:

Summary of marketing of UCIs

Regulatory framework

Description Investors Region Marketing regime

UCITS MarketingofUCITS Retailandprofessional

EU/EEA EU/EEA“passport”

Retailorprofessional

Third countries Thirdcountryregime

FullAIFMregimeAIF

MarketingthroughouttheEU/EEAbyoronbehalfof:• AuthorizedEU/EEAAIFM

of:• EEAAIF• Non-EEAAIF228

• Authorizednon-EEAAIFM229of:• EEAAIF• Non-EEAAIF

Professional EU/EEA EEA“passport”

Retail EU/EEA Nationalregimes



SimplifiedAIFMregistration regimeAIF

MarketingofEU/EEAAIFbyregisteredEU/EEAAIFM(i.e.,notauthorizedAIFM)

Professional EU/EEA Nationalprivateplacement regimes(NPPRs)

Retail EU/EEA NPPRs



EuVECAandEuSEF

MarketingofqualifyingEuVECAandEuSEFbyregistered managers

Qualifiedinvestors

EU/EEA EU/EEA“passport”

OtherAIF(non-EEAAIFand/orAIFwithanon-EEAAIFM)

Marketing:• Ofnon-EEAAIFbyEEAand

non-EEAAIFM230

• OfEUandnon-EEAAIFbynon-EEAAIFM231

Professional EU/EEA NPPRs

Retail EU/EEA NPPRs



AnyAIF Professionalinvestorsinvest,ontheirowninitiative,inanyAIFoftheirchoice,irrespective of the domicile of theAIFortheAIFM

Professional EU/EEA Reversesolicitation(i.e.,nomarketing)

228 From2015attheearliest.229 Idem.230 Until 2018 at the earliest.231 Idem.

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14.2. Information provided to investors before they invest

14.2.1. UCITS

Ingeneral,thekeyinvestorinformation(KII)documentmustbeprovidedtoinvestorsfreeofchargebeforetheyinvest.

ESMA’sQuestions and Answers, Key Investor Information Document (KIID) for UCITS issued in September2012clarifiesthattheKIIshallconstitutepre-contractualinformationandeachadditionalsubscriptionisanewcontract.

Allprospectiveinvestors,includingprofessionalinvestors,mustbeprovidedwithaKII.

Asapre-contractualdocument,theinvestormustreceivetheKIIforthecompartment(orshareorunitclass,ifapplicable)whichheisintendingtoinvestinto,includingwherethisinvestmentarisesfromswitchingfromanothercompartmentwithintheumbrella.

ESMAisoftheviewthataKIIdoesnotneedtobeprovidedtoexistinginvestors,unlesstheyaremakingadditionalsubscriptions.

However,whereshareholdersorunitholdersinaUCITSinvestthrougharegularsavingsplan,aKIIisnotrequiredinrelationtotheperiodicsubscriptions,unlessachangeismadetothesubscriptionarrangements,forexample,increasesordecreasesinthesubscriptionamount,whichwouldrequireanewsubscriptionform.

ESMAalsounderlinesthatinvestorsalwayshavetherighttobeprovidedwiththeKIIonrequest.

Aninvestmentcompany,andamanagementcompanyforeachofthecommonfundsthatitmanages,whichsellsUCITSdirectlyorthroughanothernaturalorlegalpersonwhoactsonitsbehalfandunderitsfullandunconditionalresponsibilityisrequiredtoprovideinvestorswiththeKIIonsuchUCITS in good time before their subscription for shares or units.

ALFI’sKey Investor Information document Q&A(ALFI’sQ&A)suggeststhatthirdpartiesactingonbehalfof,andunderthefullandunconditionalresponsibilityoftheinvestmentcompany,ormanagementcompany,havenoobligationundertheUCITSDirectivetoprovidetheKIItoinvestors.Theirobligationmayonlybeestablishedunderthetermsofacommercialagreementwiththeinvestmentcompanyormanagementcompany.

Aninvestmentcompany,andamanagementcompanyforeachofthecommonfundsthatitmanages,whichdoesnotsellUCITSdirectlyorthroughanothernaturalorlegalpersonwhoactsonitsbehalfandunderitsfullandunconditionalresponsibilitytoinvestors,isrequiredtoprovidetheKIIto product manufacturers and intermediaries selling or advising investors on potential investments insuchUCITSorinproductsofferingexposuretosuchUCITSupontheirrequest.TheintermediariessellingoradvisinginvestorsonpotentialinvestmentsinUCITSshouldprovidetheKIItotheirclientsor potential clients232.

ALFI’s Q&ArecommendsintermediarieswithintheEUtotakelegaladviceonwhethertheyhaveanobligationundernationallawsimplementingtheUCITSDirectivetodelivertheKIItotheirclients and potential clients.

WhendistributingUCITSoutsidetheEU,ALFI’sQ&A considers that investment companies andmanagementcompaniesarerequiredtoprovidetheKIItoinvestorsand,onrequest,tointermediaries.ALFI’sQ&Aisoftheopinion,however,thatthisobligationshouldapplyonlytotheextentthatdeliveryoftheKIIispermittedbytheapplicablelawsofthenon-EUcountry.

Certainnon-EUcountriesrequirethatadocumentcomparabletotheKIIbeprovidedtoinvestorsinUCIsbeforetheyinvest(e.g.,HongKongandSingapore).

232 AccordingtotheUCITSDirective,Directive2009/65/EU,“MemberStatesshallrequirethatintermediariessellingoradvisinginvestorsonpotentialinvestmentsinUCITSprovidekeyinvestorinformationtotheirclientsorpotentialclients.”InLuxembourg,the2010Lawtransposedthisrequirement.

394 | 14.Marketing

TheKIImaybeprovidedtoinvestorsinadurablemediumorbymeansofawebsite.Commission Regulation (EU) No 583/2010outlinestheconditionsapplyingwhenprovidingKIItoinvestorsina“durablemedium”otherthanpaperorbymeansofawebsite.Apapercopymustbeprovidedtoinvestorsonrequestandfreeofcharge.Anup-to-dateversionoftheKIImustbemadeavailableonthewebsiteoftheinvestmentcompanyormanagementcompany.

Theprospectusandthelatestpublishedannualandsemi-annualreportsmustbeprovidedtoinvestorsonrequestandfreeofcharge.Therequirementscoveringtheprovisionofthesedocumentstoinvestors,andtheircontent,arecoveredinChapter12.

AdditionalinvestorinformationrequirementsapplicabletothemarketingofLuxembourgUCITSinotherEUMemberStates,includingtranslationrequirements,areoutlinedinSection14.3.6..

14.2.2.AIF

DetailedinformationmustbedisclosedtoinvestorsbeforetheyinvestinafullAIFMregimeAIF(seeSection12.3.3.).

LuxembourgLawdoesnotspecificallyrequirethatinformationbeautomaticallyprovidedtoinvestorsinsimplifiedAIFMregistrationregimeAIFbeforetheyinvest.

For2010LawPartIIUCIs,theprospectusandthelatestpublishedannualandsemi-annualreportsmustbeprovidedtoinvestorsonrequestandfreeofcharge.

ForSIFs,theofferingdocumentandthelatestannualreportmustbeprovidedtoinvestorsonrequestfree of charge.

Therequirementscoveringtheprovisionofthesedocumentstoinvestors,andtheircontent,arecovered in Chapter 12.

14.2.3.Marketingcommunicationsof2010LawUCIs

Anymarketingcommunicationtoinvestors(e.g.,factsheet)mustbeclearlyidentifiableassuch.Itmustbefair,clearandnotmisleading.

Inparticular,anymarketingcommunicationcomprisinganinvitationtopurchasesharesorunitsofUCIsthatcontainsspecificinformationaboutUCIsmustnotmakeastatementthatcontradictsordiminishesthesignificanceoftheinformationcontainedintheprospectusand,inthecaseofUCITS,theKII.Itmustindicatethataprospectusexistsand,forUCITS,theKIIisavailable.Itmustspecifywhereandinwhichlanguagesuchinformationanddocumentsmaybeobtainedbyinvestorsorpotentialinvestorsorhowtheymayhaveaccesstothem.

14.3. Marketing Luxembourg UCITS in other EU Member States

WhereaLuxembourgUCITSintendstomarketitssharesorunitstoinvestorsinanotherEUMemberState(i.e.,inahostMemberState),itmustsubmitanotificationtoitshomeMemberStateregulator,theCSSF.Thisprocedureappliesincasesof:• ➢AUCITSintendingtomarketallorpartofitssharesorunitsinthehostMemberStateforthefirst

time• ➢AnumbrellaUCITSintendingtomarketallorpartofitssharesorunitsofoneorseveralofits

compartmentsinthathostMemberStateforthefirsttime• ➢AnumbrellaUCITSintendingtomarketallorpartofthesharesorunitsofoneorseveraladditional

compartments(i.e.,wherethemarketingofsharesorunitsofothercompartmentshasalreadybeennotifiedinthathostMemberState)forthefirsttime

14.Marketing| 395

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Inpractice,theprovisionsonmarketingofUCITScross-borderintheEUaregenerallyconsideredtoapplytothemarketingofUCITSbyentitiesbasedinthehostMemberStatetoinvestorsinthehostMemberState.Inothercases,nationalprivateplacementregime(NPPR)anddistancemarketingrequirementsmayapply(seealsoSection14.6.1.).

SubsequentupdatestotheinformationsubmittedviathenotificationproceduremustbeprovideddirectlytothehostMemberStateviaawrittennotice(seeSection14.3.4.).

14.3.1.Keynotificationprocedurecomponents

TheLuxembourgUCITSisrequiredtosubmitanotificationfiletotheCSSFwhichcontains:• ➢Anotificationletter• ➢Thelatestversionsoftherequireddocuments(seeSection14.3.2.)

ThenotificationfileistobetransmittedelectronicallytotheCSSF(seeSection14.3.3.).

ForeachhostMemberStateinwhichtheUCITSintendstomarketitssharesorunits,acompletenotificationfileneedstobepreparedandtransmittedtotheCSSF.

TheCSSFverifiesthatthedocumentationprovidedbytheUCITSiscomplete.Itthentransmits,withinamaximumof10workingdays,thecompletedocumentationtothecompetentauthoritiesofthehostMemberStatetogetherwithanattestationthattheUCITScomplieswiththeprovisionsoftheUCITSDirective.ThehostMemberStateregulatorconfirmsreceiptandcompletenessofthenotificationwithinfiveworkingdays.Inpractice,theregulator’sconfirmationisnotalwaysissued.

ThistransmissiontothecompetentauthoritiesofthehostMemberStateisnotifiedwithoutdelaybytheCSSFtotheUCITS.TheUCITSmayaccessthemarketoftherelevanthostMemberStateasofthedateofthisnotification.

The UCITS notification procedure

Notification Attestation Notificationoftransmission

Writtennotice Updated documents

UCITS

• Notificationletter,including information onmarketingarrangements

• Constitutional documents

• Prospectus• KII(class/language)• Latest annual report

(andanysubsequentsemi-annualreport)

• Localmarketingmaterials

Attestation Notificationoftransmission

UCITS may be marketed

Changes have to be transmitted before

implementation

Up-to-datedocumentsmust be made available bymeansofawebsite

Home regulator

Host regulator

10workingdays

Check

396 | 14.Marketing

14.3.2.Thecontentofthenotificationfile

Thenotificationfilemustcontain:• ➢Notificationletter.Thenotificationletterincludes:

• ➢InformationontheUCITS,thecompartment,and,whererelevant,theshareorunitclassestobemarketed,themanagementcompanyorself-managedinvestmentcompany

• ➢ThearrangementsformarketingtheUCITSinthehostEUMemberState• ➢DetailsofthefacilitiesthatareavailableinthehostMemberStateformakingpaymentsto

shareholdersorunitholders,repurchasingorredeemingsharesorunitsandmakingavailabletheinformationwhichUCITSarerequiredtoprovide

• ➢Otherinformationrequiredbylaws,regulationsandadministrativeprovisionsofthehostMemberStatewhicharenotgovernedbytheUCITSDirectiveandwhicharespecificallyrelevanttothearrangementsmadeforthemarketingofsharesorunitsofUCITS,suchasdetailsofanyadditional information to be disclosed to shareholders or unitholders or their agents (see also Section14.3.5.)

ThenotificationlettermustfollowthetemplateprovidedforinCommission Regulation (EU) No 584/2010.CSSFCircular11/509providesfurthertechnicalrequirementstobemet.

• ➢Thelatestversionsofthefollowingdocuments:• ➢CSSFattestation:theattestationtobeattachedtothefileistheattestationthattheCSSF

deliveredtotheUCITSalongwiththelatestvisa-stampedprospectus• ➢Constitutionaldocument:thelatestconsolidatedversionoftheconstitutionaldocumentmustbe

appendedtothefileasasingledocument• ➢Prospectus:theprospectustobeappendedtothefilehastobethelatestprospectusvisa-

stampedbytheCSSF• ➢KIIs• ➢Report(s):thelatestauditedannualreportandanysubsequentsemi-annualreport• ➢Marketingarrangements:thisdocumentisoptionalandprovidesadditionalinformationon

thearrangementsmadeformarketingthesharesorunitsoftheUCITSinthecasewherethestructureofthenotificationletterwouldnotpermittheinternalmethodsofmarketingtobereproducedexactly

• ➢Confirmationofpayment:thisdocumentshouldonlybeappendedtothefileformarketingapplicationsinhostMemberStatesrequiringconfirmationofthepaymentoftaxtowhichtheUCITSissubjectinthehostMemberState

Requirementsoninformationtobeprovidedtoinvestors,includingtranslationrequirements,arecoveredinSection14.3.6..

14.3.3.Submissionandprocessingofthenotificationfile

TheCSSFrequiresthatthenotificationfileissubmittedelectronicallyusingoneofthefollowing:• ➢SystemsbasedonchannelsacceptedbytheCSSFinaccordancewiththeprovisionsofCSSF

Circular08/334onencryption channels for reporting firms. This Circular provides detailed technical standards

• ➢DirectfilingoftherequireddocumentsontheCSSFwebsite(subjecttospecificconditions,specifiedontheCSSFwebsite)

Fromatechnicalpointofview,allthedocumentsconstitutinganotificationfileintendedforagivenhostMemberStatemustbegroupedtogetherina“singlepackage”.FurtherdetailsonthenomenclatureandformatforelectronictransmissionarespecifiedintheAnnexestoCSSFCircular11/509.

TheCSSFexecutesanumberofverificationsonthenotificationfilesreceivedtoensurecompletenessandcompliance.Theverificationrules,cover,inter alia,compliancewiththerequirednomenclature,documentformat,ensuringthatthedocumentsrelatetoanexistingLuxembourgUCITSorcompartmentsthereof,thattheyareup-to-dateand,whererelevant,consistentwithCSSFdocuments.

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Inordertobeabletoexecutetheverificationseffectively,theCSSFmust,atalltimes,beinpossessionofthelatestelectronicversionsoftheconstitutionaldocument,prospectus,KII,auditedannualandsemi-annualreports. Wheretheformalverificationofthefilerevealsthatthefileisincompleteordoesnotcomplywiththerelevanttechnicalrequirements,theCSSFinformstheUCITS,throughthesamecommunicationchanneltheUCITSusedforsubmittingthenotificationfiletotheCSSF,ofthereason(s)preventingthesubmissionofthefiletothecompetentauthoritiesoftherelevanthostMemberState.ItisthentheresponsibilityoftheUCITStosubmitanew,correctandcompletenotificationfile.

IfahostMemberStatecompetentauthoritydoesnot,foranyreason,acceptanotificationfilesubmittedbytheCSSF,theUCITSisinformedofthereason(s)ofrefusalthroughthesamecommunicationchannelitusedforsubmittingthefiletotheCSSFordirectly.ItisthentheresponsibilityoftheUCITStosubmitanew,correctandcompletenotificationfiletotheCSSF.

14.3.4.Writtennotice

UpdatestotheinformationsubmittedviathenotificationproceduremustbeprovideddirectlytothehostMemberStateviaawrittennotice.Thisprocedureappliesincaseof:• ➢Amendmentstotheinformationregardingthearrangementsformarketingcommunicatedinthe

notificationletter• ➢Achangeregardingtheshareorunitclassestobemarketed• ➢Achangetothedocumentssubmittedinthenotificationfile

TheUCITShastoaddressawrittennoticeoftheamendments,togetherwithalltheamendeddocuments,directlytothecompetentauthorityofthehostMemberState,beforeimplementingtheamendment.

ItisnotnecessarytofileacopyofthisnoticewiththeCSSF.TheCSSFremainsresponsible,however,fortheapprovalofanyamendmenttotheconstitutionaldocumentorprospectusoftheUCITS(seeSection4.4.).SuchapprovalmustbeobtainedpriortosendingthewrittennoticetothecompetentauthorityofthehostMemberState.

AnumberofMemberStateshavespecificrequirementsinrelationtothecessationofthemarketingofthesharesorunitsofaUCITS,oracompartmentthereof.

14.3.5.HostMemberStatemarketingrequirements

AUCITSwhichmarketsitssharesorunitsinahostMemberStateisusuallyrequired,inaccordancewiththelawsandregulationsandadministrativeprovisionsinforceinthehostMemberState,totakethenecessarymeasurestoensurethatfacilitiesareavailableinthehostMemberStateformakingpaymentstoshareholdersorunitholders,repurchasingorredeemingsharesorunits,andmakingavailabletheinformationwhichUCITSarerequiredtoprovidetoinvestorsinthehostMemberState.

TheUCITSisalsorequiredtocomplywiththelaws,regulationsandadministrativeprovisionsofthehostMemberStatewhicharenotgovernedbytheUCITSDirectiveandwhicharespecificallyrelevanttothearrangementsmadeforthemarketingofsharesorunitsofUCITS.

SelectedtypesofhostMemberStaterequirementsrelevanttothemarketingofUCITS:• Definitionofmarketingandapplicablelanguagerequirements• Representativeand/orpayingagent(s)oftheUCITSinthehostMemberState• Promotion(i.e.,publicoffering),includingadvertisingmaterials• Investorsolicitation(i.e.,communicationtoatargetedclientele)• Meansofcommunication(e.g.,durablemedium(suchaspaper,CDorDVD),email,website,

radio,TV)• EntitieswhichareeligibletosellsharesorunitsofUCITS(e.g.,managementcompanies,credit

institutions,investmentfirmssuchasinvestmentadvisersanddistributors)

398 | 14.Marketing

• Conductofbusinessrulesapplicabletoentities(e.g.,creditinstitutions,investmentfirms)sellingUCITS,andinparticularwhenprovidinginvestmentservices(e.g.,investmentadvice,orthereceptionandtransmissionoforders),inter aliaimplementingtheMarketsinFinancialInstrumentsDirective(MiFID)233requirements

• Rulesofconductapplicabletomanagementcompanies,aswellasconductofbusinessrequirementsapplicabletomanagementcompaniesprovidinginvestmentservices, inter alia,implementingMiFIDrequirementsapplicabletomanagementcompanies

• Distancemarketing,inter alia,implementingtheDistanceMarketingDirective234

• Consumer protection rules• InformationtobedisclosedintheprospectustoinvestorsinthehostMemberState• Informationaboutanyinvestorcompensationand/orguaranteescheme(s)• Additionalinformationwhichinvestorsmayrequesttobeprovidedwith• Informationonrelevanttaxprovisionsapplicabletoinvestorsandonanylocallyapplicabletax

reportingregimecompliedwithbytheUCITS• Information to be provided to investors regarding certain changes occurring during the life of

the UCITS • Publicationrequirements,e.g.,fornoticestoinvestorsandUCITSprices• Remunerationofdistributors(e.g.,retrocessions)• InformationonanyexemptionsfromrulesorrequirementsapplicableintheUCITShost

MemberStateinrelationtomarketingarrangementsfortheUCITS,aspecificshareorunitclassoranycategoryofinvestors

MemberStatesarerequiredtomakeinformationonsuchprovisionseasilyaccessiblefromadistanceandbyelectronicmeans–ingeneralonthewebsiteofthecompetentauthority.

14.3.6.Investorinformationrequirements

WhereaUCITSmarketsitssharesorunitsinahostMemberState,itmustprovideinvestorsinthehostMemberStatewithalltheinformationanddocumentswhichitisrequiredtoprovidetoinvestorsinLuxembourg(seeSection12.1.1.onthedocumentstobeprovided).

Suchinformationanddocumentationmustbeprovidedtoinvestorsincompliancewiththefollowingprovisions:• ➢TheinformationordocumentsmustbeprovidedtoinvestorsinthehostMemberStateintheway

prescribedbythelaws,regulationsoradministrativeprovisionsofthehostMemberState• ➢TheKIImustbetranslatedintotheofficiallanguage,oroneofthelanguages,oftheUCITShost

MemberStateorintoalanguageapprovedbythecompetentauthorityofthatMemberState• ➢InformationanddocumentsotherthantheKIImaybetranslated,atthechoiceoftheUCITS,into

theofficiallanguage,oroneoftheofficiallanguages,oftheUCITShostMemberState,orintoalanguageapprovedbythecompetentauthorityofthatMemberStateorintoalanguagecustomaryinthesphereofinternationalfinance

• ➢TranslationsofinformationanddocumentsmustalsobeproducedundertheresponsibilityoftheUCITSandmustfaithfullyreflectthecontentoftheoriginalinformation

Theseprovisionsapplyalsotoallchangestotherelevantinformationanddocuments.

ThefrequencyofthepublicationofthesubscriptionorredemptionpriceofsharesorunitsofUCITSissubjecttothecurrentlaws,regulationsandadministrativeprovisionsofLuxembourg(seeSection10.3.3.).

233 MarketsinFinancialInstrumentsDirective(MiFID),Directive2004/39/EC,asamended.234 Directive2002/65/ECconcerningthedistancemarketingofconsumerfinancialservices.

14.Marketing| 399

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14.4. Marketing foreign UCITS in Luxembourg

14.4.1.Notification

IfaUCITSdomiciledinanotherMemberStatewishestomarketitssharesorunitsinLuxembourg,theCSSFmustreceiveanotificationfromitshomeMemberStatecompetentauthority.Thenotificationmustbecomposedof:• ➢ThedocumentationrequiredbytheUCITSDirective:

• ➢Notificationletter• ➢Thelatestversionsofthefollowingdocuments:

• ➢Constitutionaldocument• ➢Prospectus• ➢KII• ➢Report(s)

• ➢AnattestationthattheUCITSfulfillstheconditionsimposedbytheUCITSDirectivefromthecompetentauthorityoftheUCITShomeMemberState

Thenotificationlettermustprovidethefollowinginformation:• ➢ThenameandaddressofthepayingagentinLuxembourgthatmaymakedividendpaymentsand

paymentsinrelationtosubscriptionandredemptionofsharesorunitsoftheUCITSinLuxembourg• ➢Theplacewheretheinvestorsmaypresentsubscription,redemptionorconversionrequestsof

shares or units of the UCITS• ➢TheplacewhereLuxembourginvestorsmayobtainthenetassetvalues,issueandredemption

prices,thelastprospectus,thelastfinancialreports,theconstitutionaldocumentand,ifrelevant,accesstocontractswiththeUCITS

• ➢Thenameofthelocalnewspaperwhereanynoticetotheshareholdersorunitholderswillbepublished in Luxembourg

TheKIIandotherdocumentsmustbesubmittedinFrench,German,EnglishorLuxembourgish.TranslationsaredeemedtobemadeundertheresponsibilityoftheUCITSandmusttrulyreflecttheoriginal information.

UponconfirmationtotheUCITSofthetransmissiontotheCSSFbythecompetentauthorityofthehomeMemberState,theUCITScanaccesstheLuxembourgmarket.

Whileevidenceoffeepaymentneedstobeprovidedwiththeapplicationfile,aninvoicewillbemailedbytheCSSFtotheapplicantafterreceiptofthenotificationfile.ThevarioustaxesleviedbytheCSSFtocoverthehandlingcostsofthenotificationandtheregistrationcostsofaUCITSformarketingitssharesorunitsinLuxembourgarelaiddownbytheGrand-DucalRegulationof29September2012,as amended.

14.4.2.Writtennotice

UpdatestotheinformationsubmittedviathenotificationproceduremustbeprovideddirectlytotheCSSFviaawrittennotice(asdescribedinSection14.3.4.)submittedviathee-filesystem(seeSection12.9.1.)ore-mailtothespecifiedaddress.

14.4.3.Luxembourgmarketingrequirements

AUCITSestablishedinanotherMemberStatewhichmarketsitssharesorunitsinLuxembourgmustappointacreditinstitutiontoensurethatfacilitiesareavailableinLuxembourgformakingpaymentsto shareholders or unitholders and redeeming units.

Section14.7.providesinformationonthemarketingregulationsinLuxembourg.

400 | 14.Marketing

14.5. Marketing of full AIFM regime AIF

14.5.1.Summary

Marketingcoversanydirectorindirectofferingorplacement,attheinitiativeoftheAIFMoronbehalfoftheAIFM,ofsharesorunitsinanAIFitmanagestoorwithinvestorsdomiciledintheEU/EEA.

Inthissection,weusethetermAIFMtorefertoauthorizedAIFMandauthorizedinternallymanagedAIF.

ThemainprinciplesofthemarketingprovisionsoftheAIFMDirectiveregimecanbesummarizedasfollows:• ➢AuthorizedEU/EEAAIFMbenefitfroma“marketing”passportpermittingthemtomarketEU/

EEAAIFtoprofessionalinvestorsintheirhomeMemberStateandinotherMemberStates(“host”MemberStates)sinceJuly2013

• ➢ForEEAAIFMmanagingandmarketingnon-EEAAIF,andnon-EEAAIFMmarketingEEAandnon-EEAAIF,tworegimeswillcoexistformarketing:• ➢Continuationofnationalprivateplacementregimes(NPPRs),whichmaybephasedoutin2018

at the earliest• ➢Apassportregime,whichmaybephasedinfrom2015attheearliest

• ➢Non-EEAAIFMintendingtomarketAIFtheymanageintheEEAwithapassportmustobtainpriorauthorizationfromtheir“MemberStateofreference”

• ➢AllmarketingwithapassportofEU/EEAandnon-EEAAIFtoprofessionalinvestorsbyEEAandnon-EEAAIFMintheirhomeMemberState(or“MemberStateofreference”)oranotherMemberStateissubjecttoanotificationprocedure

• ➢MemberStatesmaypermitmarketingofEEAornon-EEAAIFbyAIFMtoretailinvestorsintheMemberState.Theymayalsoapplystricterrequirements

• ➢EEAprofessionalinvestorsmayinvest,ontheirowninitiative,inanyAIFoftheirchoice,irrespectiveofthedomicileoftheAIForAIFM(alsoreferredtoas“reversesolicitation”)

Theextensionofthe“passport”regimestonon-EEAAIFandnon-EEAAIFMisdependentonESMAissuingapositiveopiniononthefunctioningofthepassportforEEAAIFMmarketingEEAAIFandtheEuropeanCommissionadoptingtherequireddelegatedactinthelightofESMA’sadvice.ESMA’sfirstopinionisexpectedinthefirsthalfof2015.ThephasingoutoftheNPPRsisdependentonESMAissuingasecondopiniononthefunctioningofmarketingbyEEAAIFMofnon-EEAAIFintheEEAandonthemanagingandmarketingbynon-EEAAIFMofAIFintheEEA(bothunderthepassportandunderNPPRs)andtheterminationoftheexistenceofnationalregimes,andtheEuropean

14.4.4.Investorinformationrequirements

TheUCITSisrequiredtotakethemeasuresnecessarytoensurethatthedocumentsandinformationwhichmustbeprovidedtoinvestorsinitshomeEUMemberStatearemadeavailabletoinvestors,eitherinFrench,German,EnglishorLuxembourgish.Thisalsoappliestoanychangestothedocuments and information.

ThefrequencyofthepublicationofthesubscriptionorredemptionpriceofthesharesorunitsoftheUCITSissubjecttothecurrentlaws,regulationsandadministrativeprovisionsintheUCITShomeMemberState.

WhereaUCITS,whichisdomiciledinanEEAcountryotherthananEUMemberState,marketsitssharesorunitsinLuxembourg,theprovisionsdescribedabovearealsoapplicablewithinthelimitsprovidedforintheEEAAgreement.

14.4.5.Cessationofmarketing

TheCSSFhastobeinformedaboutanycessationofmarketingofsharesorunitsoftheUCITS.

14.Marketing| 401

Marketing 14

Commissionadoptingaseconddelegatedact.ESMA’ssecondopinionisexpectedthreeyearsaftertheadoptionofthefirstdelegatedact,implyingthattheNPPRscouldbephasedoutby2018attheearliest.

Professionalinvestorsinclude:• ➢Entitieswhicharerequiredtobeauthorizedorregulatedtooperateinthefinancialmarkets:

• ➢Regulatedfinancialinstitutionsandinsurancecompanies• ➢UCIs,pensionfundsandtheirmanagementcompanies• ➢Commodityandcommodityderivativesdealers• ➢Locals235

• ➢Otherinstitutionalinvestors• ➢Largeundertakings:whichmeetatleasttwoofthefollowingcriteria:

• ➢Balancesheettotal:€20m• ➢Netturnover:€40m• ➢Ownfunds:€2m

• ➢Nationalandregionalgovernments,etc.• ➢Otherinstitutionalinvestorswhosemainactivityistoinvestinfinancialinstruments,including

entitiesdedicatedtothesecuritizationofassetsorotherfinancingtransactions• ➢InvestorswhichmaybetreatedasprofessionalclientswithinthemeaningofAnnexIItotheMiFID

Directive

Retailinvestorsareinvestorswhicharenotprofessionalinvestors.

TheregimeformarketingofEEAandnon-EEAdomiciledAIFby,oronbehalfofEEAAIFM,toEEAandnon-EEAinvestorsissummarizedinthefollowingtable:

Marketing regimes applicable to authorized EEA AIFM

Domicile Any EEA marketing?

Is AIFM Directive

applicable?

AIFM marketing regimes

Requirements applicable to AIFM

and AIF

Requirements applicable to third country

domiciles

AIFM AIF

EEA EEA Yes Yes Passport(from2013)

FullAIFMDirective None

EEA EEA No Yes None FullAIFMDirective None

EEA Non-EEA

Yes Yes NPPR(2013until at least 2018)

FullAIFMDirectiveexcept provisions ondepositary,butentityneedstobe appointed to executedepositaryfunctions

Cooperation arrangementsAMLrequirements

Passport(expected from 2015 onward)

FullAIFMDirective Cooperation arrangementsAMLrequirementsTax agreements

EEA Non-EEA

No Yes None FullAIFMDirectiveexcept provisions ondepositaryandannual report

Cooperation arrangements

235 Firmsdealingfortheirownaccountonmarketsinfinancialfuturesoroptionsorotherderivativesandoncashmarketsforthesolepurposeofhedgingpositionsonderivativesmarkets,ordealingfortheaccountsofothermembersofthosemarketsandbeingguaranteedbyclearingmembersofthesamemarkets,whereresponsibilityforensuringtheperformanceofcontractsenteredintobysuchafirmisassumedbyclearingmembersofthesamemarkets.

402 | 14.Marketing

TheAIFMDirectiveappliestonon-EEAAIFMonlytotheextentthattheymanageEEAAIFormarketAIF(EEAornon-EEA)toEEAinvestors.TheregimeformarketingEEAandnon-EEAdomiciledAIFby,oronbehalfofnon-EEAAIFM,toEEAandnon-EEAinvestorsissummarizedinthefollowingtable:

Marketing regimes applicable to non-EEA AIFM

Domicile Any EEA marketing?

Is AIFM Directive

applicable?

AIFM marketing regimes

Requirements applicable to AIFM

and AIF

Requirements applicable to third country

domiciles

AIFM AIF

Non-EEA

EEA Yes Yes NPPR(2013untilexpected 2015236)

Provisionsontransparency,andmajor holdings and control provisions (if applicable)



FullAIFMDirective,including“MemberStateofreference”authorizationEEAlegalrepresentative

Cooperation arrangementsAMLrequirementsTax agreements

Non-EEA

EEA No Yes None FullAIFMDirective,including“MemberStateofreference”authorizationEEAlegalrepresentative


Non-EEA

Non-EEA

Yes Yes NPPR(2013until at least 2018)

Provisionsontransparency,andmajor holdings and control provisions (if applicable)



FullAIFMDirective,including“MemberStateofreference”authorizationEEAlegalrepresentative


Non-EEA

Non-EEA

No No None None None

Cross-bordermanagementofAIFbyAIFMiscoveredinSection7.5..

14.5.2.EU/EEAAIFM

14.5.2.1. Marketing of EU/EEA AIF

14.5.2.1.1.Passportregime

AuthorizedEEAAIFMareentitledtomarkettheirEEAAIFtoprofessionalinvestorsinanyEEAMemberState–theybenefitfroma“passport.”

WheretheEEAAIFisafeederAIF,however,therearetwopossiblescenarios:• ➢ThemasterAIFisanEEAAIFmanagedbyanauthorizedEEAAIFM:inthiscase,thefeeder

benefitsfromapassport• ➢ThemasterAIFisnotanEEAAIFmanagedbyanauthorizedEEAAIFM:inthiscase,theprovisions

applicabletothemarketingofnon-EEAAIFbyEEAAIFMapply(seenSection14.5.2.2.2.)

236 BecauseEEAAIFismanagedbynon-EEAAIFM.

14.Marketing| 403

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EEAAIFMexistingasof22July2013haveuntilJuly2014tosubmitanapplicationforauthorization.Atthetimeofwriting,itwasunclearwhatregime(s)wouldbeapplicabletomarketingofAIFbyAIFMbetween22July2013andthedateoftheirauthorizationundertheAIFMDirective.Forexample,privateplacementbyEEAAIFM,whicharenotyetauthorized,oftheEEAAIFtheymanagemaybepermittedbysomeMemberStates,atleastduringtheadditionaloneyearperiod–i.e.,untilJuly2014.

MemberStatesmaypermitthemarketingofAIFtoretailinvestorsintheMemberState.TherequirementsoftheAIFMDirectivemustbemet,and,inaddition,MemberStatesmayimposestricterrequirementsontheAIFMortheAIFthanthoseapplicabletomarketingtoprofessionalinvestors.TheserequirementsmustnotbestricterforEEAAIFmarketedcross-borderthanforAIFmarketeddomestically(seealsoSection14.5.4.).

WhenanEEAAIFMintendstomarketitsEEAAIFinanEEAMemberState(itshomeMemberStateorahostMemberState),itmustsubmitanotificationtoitshomeMemberStateforeachAIF.Thenotificationmustinclude:• ➢AnotificationletteridentifyingtheAIFwhichtheAIFMintendstomarketandinformationonwhere

it is established• ➢TheAIFconstitutionaldocument• ➢TheidentityofthedepositaryforeachAIF• ➢Adescriptionof,orinformationon,theAIFavailabletoinvestors,aswellasinformationthatmust

beprovidedtothembeforetheyinvest• ➢InformationonthemasterAIF,iftheAIFisafeeder• ➢TheidentificationoftheMemberState(s)inwhichitintendstomarkettheAIF• ➢MeasurestopreventtheAIFfrombeingmarketedtoretailinvestors(ifrelevant)• ➢InformationonarrangementsmadeformarketingtheAIFinthehome,orhost,MemberState

The AIF notification procedure

ProvidedthattheprovisionsoftheAIFMDirectivearemet,incaseofmarketingintheAIFM’shomeMemberState,thecompetentauthorityisrequiredtoinformtheAIFMwithin20workingdaysthatitmaystartmarketingtheAIF.Incaseofcross-bordermarketing,thecompetentauthorityoftheAIFM’shomeMemberStateisrequiredtotransmitthecompletedocumentationtothecompetentauthorityofthehostMemberState,togetherwithanattestationthattheAIFMisauthorizedtomanageAIFwiththatparticularinvestmentstrategywithin20workingdays.Upontransmission,itisrequiredtonotifytheAIFMofthetransmission.TheAIFMmaystartmarketingtheAIFinthehostMemberStatefromthedateofnotificationoftransmission.

Notification Attestation Notificationoftransmission

Writtennotice Updated documents

AIFM

• Notificationletter,identifyingAIFtobemarketedbyAIFM,anddomicile(s)thereof

• AIFconstitutionaldocument(s)

• Identificationofdepositary(ies)

• DescriptionofAIF(s)• InformationonAIF

disclosed to investors• Master-feeder

information(ifapplicable)• TargetEEAMember

State(s)• Informationonmarketing

arrangements,includingmeasures to prevent marketingtoretailinvestors(ifapplicable)

Attestation Notificationoftransmission

AIF may be marketed

Changes have to be transmitted before

implementation (one monthpriornotice)

Information on material changes must be made available to investors

20workingdays

AIFM home regulator(HomeMemberState/

MemberStateofReference)

Host regulator

Check

404 | 14.Marketing

ArrangementsmadeformarketingtheAIFandmeasurestopreventtheAIFfrombeingmarketedtoretailinvestorsinthehostMemberState(ifprohibited)aresubjecttothelawsandsupervisionofthehostMemberState.

TheserequirementsdonotapplytothemarketingofAIF’ssharesorunitsthatweresubjecttoacurrentoffertothepubliconanEEA-regulatedstockexchangeunderaprospectusthathasbeendrawnupandpublishedinaccordancewiththeProspectusDirective(Directive2003/71/EC)before22July2013,aslongasthisprospectusisstillvalid.

14.5.2.1.2.Nationalprivateplacementregimes(NPPRs)

SimplifiedAIFMregistrationregimeAIFarenotrequiredtocomplywiththefullrequirementsoftheAIFMDirective.SuchAIFMhaveatleastthefollowingoptions:• ➢ContinuetomarkettheirAIFunderNPPRs,wherepermitted• ➢“Optin”–i.e.,voluntarilycomplywiththerequirementsoftheAIFMDirective–andbenefitfrom

themarketingpassport237

• ➢Benefitfromanotherpassport238

14.5.2.2. Marketing of non-EU/EEA AIF

14.5.2.2.1.Passportregime

Oncethepassporthasbeenphasedin(seeSection14.5.1.),authorizedEEAAIFMmaymarket,witha passport:• ➢Non-EEAAIFtheymanage(from2015attheearliest)• ➢EEAfeederAIFtheymanagewhichdonothaveEEAmasterAIFmanagedbyanauthorizedEEA

AIFM(from2015attheearliest)

TheEEAAIFMmustcomplywithalloftherelevantrequirementsoftheAIFMDirective,andthefollowingadditionalconditionsmustbefulfilled:• ➢TheremustbeappropriatecooperationarrangementsbetweentheEEAAIFMhomeMemberState

competentauthorityandthesupervisoryauthorityofthenon-EEAAIFthirdcountry,atleastforefficientexchangeofinformation

• ➢Thenon-EEAAIFcountrymustnotbelistedasanon-cooperativecountryandterritory(NCCT)bytheFinancialActionTaskForce(FATF)239

• ➢Thenon-EEAAIFcountrymusthavesignedanOrganisationforEconomicCo-operationandDevelopment(OECD)Article26Modelcomplianttaxconvention240withtheAIFMhomeMemberStateandanyotherMemberStateinwhichthenon-EEAAIFisintendedtobemarketed

InJuly2013,ESMAannouncedthatithadapprovedcooperationarrangementsbetweenEEAcompetentauthoritieswithresponsibilityforthesupervisionofAIFand38oftheirglobalcounterparts.ESMAnegotiatedtheagreementsonbehalfofallEUMemberStatecompetentauthoritiesaswellastheauthoritiesfromIceland,LiechtensteinandNorwayandthesupervisoryauthorities of the third countries.

InJuly2013,theCSSFannouncedthatithadsignedMemorandaofUnderstanding(MoU)withthesupervisoryauthoritiesofthethirdcountries,basedonESMA’sapprovedcooperationagreementtemplates.ThesupervisoryauthoritiesofthirdcountrieswithwhomtheCSSFhassignedMoUarelistedinSection8.2.2.C..

WhentheEEAAIFMintendstomarketitsnon-EEAAIFinanEEAMemberState,itmustsubmitanotificationtoitshomeMemberStateforeachnon-EEAAIF,similartothatrequiredforeachEEAAIF.

237 SeeSection7.2.2..238 SeeSection14.6.4.ontheventurecapitalandsocialentrepreneurshipregimesproposedbytheEuropean

Commission.239 Anintergovernmentalbodywhosepurposeisthedevelopmentandpromotionofnationalandinternationalpoliciesto

combatmoneylaunderingandterroristfinancing.240 Article26oftheOECDModelTaxConventioncreatesanobligationtoexchangeinformationthatisforeseeably

relevanttothecorrectapplicationofataxconventionaswellasforpurposesoftheadministrationandenforcementofdomestictaxlawsofthecontractingstates.

14.Marketing| 405

Marketing 14

14.5.2.2.2.NPPRs

EEAMemberStatesmaypermitEEAAIFMtomarketnon-EEAAIFtheymanage,orEEAfeederAIFwhichdonothaveEEAmasterAIFmanagedbyanauthorizedEEAAIFM,withoutapassportprovidedthat:• ➢TheAIFMcomplieswithalltherelevantrequirementsoftheAIFMDirectiveexceptthefull

requirementsoftheAIFMDirectiveondepositaries.Anentitymust,however,beappointedtocarryoutdepositaryfunctions

• ➢ThereareappropriatecooperationarrangementstoensureefficientexchangeofinformationforsystemicriskoversightbetweentheEEAAIFMhomeMemberStatecompetentauthorityandthenon-EEAAIFthirdcountrysupervisoryauthority

• ➢Thenon-EEAAIFcountryisnotlistedasaNCCTbyFATF

MemberStatesmayimposestricterrequirementsonmarketingtoinvestorsintheirterritory.

14.5.3.Non-EU/EEAAIFM

14.5.3.1. Marketing AIF with a passport

Oncethepassporthasbeenphasedin(in2015attheearliest),non-EEAAIFMwhichhaveobtainedauthorizationfromtheir“MemberStateofreference”(seeSection7.5.3.C.)maymarkettheEEAandnon-EEAAIFtheymanagewithapassport.

Themarketingwithapassportbynon-EEAAIFMregimeworksasfollows:• ➢EEAAIF:whereanauthorizednon-EEAAIFMintendstomarketitsEEAAIFinanEEAMember

State(itsMemberStateofreferenceoranotherMemberState)withapassport,itmustsubmitanotificationtoitsMemberStateofreferenceforeachEEAAIF.TheprocedureissimilartothatapplicabletoEEAAIFMintendingtomarketEEAAIF

• ➢Non-EEAAIF:theregimeissimilartothatforEEAAIFand,inaddition:• ➢Theremustbeappropriatecooperationarrangementsbetweenthenon-EEAAIFM’sMember

Stateofreferencecompetentauthorityandthesupervisoryauthorityofthenon-EEAAIFthirdcountry,atleastforefficientexchangeofinformation(seeSection14.5.2.2.1.)

• ➢Thenon-EEAAIFcountrymustnotbelistedasaNCCTbyFATF• ➢Thenon-EEAAIFcountrymusthavesignedanOECDArticle26Modelcomplianttaxconvention

withthenon-EEAAIFM’sMemberStateofreferenceandanyotherMemberStateinwhichthenon-EEAAIFisintendedtobemarketed

14.5.3.2. National private placement regimes (NPPRs)

EEAMemberStatesmaypermitnon-EEAAIFMtomarkettheEEAornon-EEAAIFtheymanagewithoutapassport,providedthat:• ➢Thenon-EEAAIFMcomplieswiththerelevantrequirementsonannualreport(seeSection12.5.2.),

disclosuretoinvestors(seeSection12.3.3.and12.4.2.)andreportingtocompetentauthorities(seeSection7.4.21.)241,aswellas,whererelevant,theprovisionsonacquisitionofcontrol(seeSection5.4.2.)inrespectofeachAIFitmarkets

• ➢Thereareappropriatecooperationarrangementstoensureefficientexchangeofinformationforsystemicriskoversightbetween:• ➢EEAAIF:thecompetentauthoritiesoftheMemberStateswheretheAIFaremarketed,theEEA

AIFhomeMemberStatecompetentauthoritiesandthenon-EEAAIFMthirdcountrysupervisoryauthority

• ➢Non-EEAAIF:thecompetentauthoritiesoftheMemberStateswheretheAIFaremarketedand:• Thenon-EEAAIFMthirdcountrysupervisoryauthority• Thenon-EEAAIFthirdcountrysupervisoryauthority

• ➢Neitherthenon-EEAAIFMcountryofestablishmentnor,whererelevant,thenon-EEAAIFcountrymustbelistedasaNCCTbyFATF

MemberStatesmayimposestricterrequirementsonmarketingtoinvestorsintheirterritory.

241 Inthiscase,thereportingmustbeprovidedtothecompetentauthoritiesoftheMemberStateswheretheAIFaremarketed.

406 | 14.Marketing

14.5.4.Distributiontothepublic

MemberStatesmaypermitthemarketingofAIFtoretailinvestorsintheMemberState(seeSection14.5.2.1.1.).

AnumberofEEAandthirdcountriespermitdistributionofAIFtothepublicprovidedspecificrequirementsaremet,suchas:• ➢Registrationwiththenationalregulatororpriorauthorizationfordistributionfromtherelevant

authorities• ➢Regulationofthedistributor• ➢Fundmeetingcertaincriteria:

• ➢Regulation–meetingspecificregulatoryrequirements• ➢Domicile–fromspecificdomiciles,themostrecognizedonebeingLuxembourg• ➢Typeoffunds(e.g.,certainfundsoffunds)• ➢Riskmanagementordiversification• ➢Investmentpolicyorstrategy• ➢Stockexchangelisting(seeChapter15)

OtherexamplesoftypesofrequirementsareoutlinedinSection14.3.5..

14.6. Marketing of simplified AIFM registration regime AIF

MarketingofsimplifiedAIFMregistrationregimeAIFissubjecttoeachcountry’snationaldistributionrequirements.Somecountriesmaypermitprivateplacementoreven,insomecircumstances,distribution to the public.

Inadditiontotheapplicablehostcountryrequirements,SIFsarerestrictedto“informedinvestors”bytheSIFLaw.

14.6.1.Nationalprivateplacementregimes(NPPRs)

InmostkeydistributionmarketsforUCIs,nationaldistributionrulespermitprivateplacement.NPPRspermitmarketparticipantstobuyandsellfinancialinstruments,includingthesharesorunitsofUCIs,toeachotherwithouthavingtocomplywithrulesthatwouldusuallyapplywhenthesameinstruments are offered to the public or retail investors.

Typically,NPPRsmayprovideexemptionsfromnationalpublicdistributionregimesfordistributionoffundsmeetingcertaincriteria(e.g.,certainfundsoffunds)to:• ➢Alimitednumberofinvestors• ➢Aspecificinvestortype,suchasassetmanagers,professionalorqualifiedinvestors,orhighnet

worthindividuals(HNWIs)• ➢Investorssubscribingaminimumamount

TheseNPPRparticipantsrelyonprivatecontractlawtoresolveanydisputesthatarise.Theregulatorysafeguardsforretailinvestorprotectionarewaivedin“privateplacement”.Often,themarketingtakesplacethroughanintermediaryorplacingagent.

14.Marketing| 407

Marketing 14

14.6.2.Distributiontothepublic

Anumberofcountriespermitdistributionofothernon-AIFMDirective-compliantLuxembourgUCIstothepublic(seeSection14.5.4.).

14.6.3.MarketingSIFs

TheSIFLawrestrictsdistributionofthesharesorunitsofSIFsto“informedinvestors”,betheyinoroutsideLuxembourg(seeSection3.4.2.).Proceduresmustbeimplementedtoensurethatthisrequirementisrespected.

14.6.4.MarketingEuVECAandEuSEF

ThemanagersofqualifyingEuropeanVentureCapitalFunds(EuVECA)andofqualifyingEuropeanSocialEntrepreneurshipFunds(EuSEF)benefitfroma“passport”permittingthemtomarketthesharesorunitsofitsqualifyingEuropeanfundstosuitablyqualifiedinvestorsthroughouttheEEAfromJuly2013.

Eligibleinvestorsareprofessionalclients,investorswhohaverequestedtobetreatedasprofessionalclients242,andotherinvestorswhomeetbothofthefollowingcriteria:• Theinvestorcommitstoinvestingaminimumof€100,000• Theinvestorstatesinwriting,inadocumentseparatefromthecontracttobeconcludedforthe

commitmenttoinvest,thattheyareawareoftherisksassociatedwiththeenvisagedcommitmentor investment

ThemanagersofqualifyingEuropeanfundswishingtousetheEuVECAandEuSEFdesignationstomarkettheirqualifyingEuropeanfundsarerequiredtoinformthecompetentauthorityoftheirhomeMemberState,providingthefollowinginformation:• Theidentityofthepersonswhoeffectivelyconductthebusinessofmanagingthequalifying

Europeanfunds• TheidentityofthequalifyingEuropeanfundswhosesharesorunitsshallbemarketedandtheir

investment strategies• InformationonthearrangementsmadeforcomplyingwiththerequirementsoftheRegulation• AlistofMemberStateswherethemanagerofthequalifyingEuropeanfundsintendstomarket

eachqualifyingEuropeanfund• AlistofMemberStateswherethemanagerofthequalifyingEuropeanfundshasestablished,or

intendstoestablishqualifyingEuropeanfunds

WhenthecompetentauthorityofthehomeMemberStateofthemanagerregistersthemanager,theregistrationprovidesthemanagerwithapassportallowingittomarketitsqualifyingEuropeanfundsunderthedesignationEuVECAandEuSEFthroughouttheEEA.

ThemanagermustalsoinformitshomeMemberStateauthorityifitintendstomarket:• AnewqualifyingEuropeanfund• AnexistingqualifyingEuropeanfundinanotherMemberState

Immediatelyafterregistration,orachangethereto,thecompetentauthorityofthemanager’shomeMemberStateisrequiredtonotifytheMemberStateswherethemanagerintendstomarketitsqualifyingEuropeanfunds.ESMAwillmaintainacentraldatabaseofqualifyingEuropeanfundmanagers,thequalifyingEuropeanfundstheymarketandthecountriesinwhichtheyaremarketed.


242 AsdefinedinSectionIofAnnexIItotheMarketsinFinancialInstruments(MiFID)Directive(Directive2004/39/EC).

408 | 14.Marketing

14.7. Marketing regulations applicable in Luxembourg

TheprovisionsgoverningmarketinginLuxembourgwhichaUCIalsoneedstocomplywithareasfollows:• ➢Lawof8April2011(ConsumerCode),which,inter alia,includesprovisionsconcerningthe

distancemarketingofconsumerfinancialservicesimplementingDirective2002/65/EC• ➢Lawof30July2002asamendedregulatingcertaintradepractices,penalizingunfaircompetition

andtransposingDirective97/55/ECamendingDirective84/450/EECconcerningmisleadingadvertising so as to include comparative advertising

• ➢Lawof16July1987asamendedconcerningdoor-to-doorselling,itinerantsale,displayofgoodsand solicitation of orders

AdditionalLuxembourgrequirementsimpactingthemarketingofUCIsinclude:• ➢ConductofbusinessrulesapplicabletoLuxembourgcreditinstitutionsandinvestmentfirmsselling

UCIsandprovidinginvestmentservices(e.g.,investmentadvice,orthereceptionandtransmissionoforders)underthe1993Law243(implementingMiFIDrequirements)

• ➢RulesofconductapplicabletomanagementcompaniesandAIFM(seeSection7.4.14.),aswellasconductofbusinessrequirementsapplicabletomanagementcompaniesandAIFMprovidinginvestmentservices(seeSection7.4.24.)

EntitiesmarketingUCITStoinvestorsinLuxembourgthroughtheirLuxembourgbranchesoronacross-borderbasisaresubjecttotheirhomeMemberStateconductofbusinessrulesorrulesofconduct,implementingMiFIDandUCITSDirectiverequirementsrespectively.

14.8. Marketing intermediaries

ThemarketingandexecutionofsubscriptionsandredemptionsofsharesorunitsisoftensupportedbyLuxembourgorforeignintermediariesofdifferenttypes.TheappointmentofintermediariesasfinancialagentsandrepresentativesforplacingordersinsharesorunitsofUCIsinnowayrestrictstheabilityofinvestorstodealdirectlywiththeUCI.

Luxembourgorforeignintermediariesmayparticipateinsubscriptionandredemptionoperationsprovided that certain conditions are met. These intermediaries include:• ➢Distributors• ➢Nominees• ➢Marketmakers

14.8.1.Distributors

Distributorsareintermediarieswhichperformoneorbothofthefollowingactivities:• ➢Activelymarketthesharesorunits• ➢ReceivesubscriptionandredemptionordersasappointedagentsoftheUCI

Thefollowingconditionsareapplicabletodistributors:(1) Forthepurposesofprocessingthesubscriptionandredemptionorders,distributorsmust

immediatelyforwardthenecessarydatatotheUCImanagementcompanyoradministrator(see,however,Point(4))

(2) Forordersconcerningregisteredsharesorunits,distributorswillprovidetheUCImanagementcompanyoradministratorwiththeregistrationdatanecessarytoaccomplishtherelatedtaskson an individual basis

243 TheLawof5April1993onthefinancialsector,asamended

14.Marketing| 409

Marketing 14

(3) TherequirementofPoint(2)doesnotapplyinthecaseofordersconcerningbearersharesorunits.Insuchcases,distributorsactassubscribersinrelationtotheUCImanagementcompanyoradministratorinLuxembourg.Theymaythereforeaggregateindividualsubscriptionorredemption orders and transmit them in the form of a combined order to the UCI management companyoradministratorinLuxembourg

(4) ItisnotnecessaryfordistributorstoforwardtotheUCImanagementcompanyoradministratorthedocumentationrelatingtosubscriptionandredemptionordersfrominvestors.However,theUCImanagementcompanyoradministratormustbeallowedaccesstosuchdocumentationincase of need

(5) PaymentsandreceiptsinrespectofsubscriptionandredemptionordersmaybeaggregatedbydistributorsinordertodealwiththeUCImanagementcompanyoradministratoronanetbasis

14.8.2.Nominees

NomineesactasintermediariesbetweeninvestorsandtheUCIoftheirchoice.

Theuseofnomineesisonlyauthorizedifthefollowingconditionsaremet:(1) TherelationshipbetweentheUCI,thenominee,managementcompanyoradministratorandthe

investorsisdeterminedbycontract(2) Themanagementcompany,investmentcompany,ortheUCI’spromoterisrequiredtoensure

thatthenomineecanadequatelyguaranteetoexecuteproperlyitsobligationstowardsinvestors

(3) Theroleofthenomineeisadequatelydescribedintheprospectus(4) InvestorshavetherighttodirectlyinvestintheUCIwithoutusinganomineeandthisrightis

expresslystatedintheprospectus(5) Agreementsbetweenthenomineeandtheinvestorsincludeaterminationclausegivingthe

investor the right to claim title to the shares or units subscribed through the nominee

TheconditionsofPoints(4)and(5)arenotapplicablewheretheuseofanomineeiseithercompulsoryorindispensable.

TheCSSFhasintroducedatemplateparagraphinrelationtoinvestorrightstobeinsertedintheprospectuscovering,inter alia,caseswheretheUCIusesanominee(seeSubsection12.3.1.K.).

14.8.3.Marketmakers

Marketmakersareintermediariesparticipatingontheirownaccountandattheirownriskinsubscription and redemption transactions of UCI shares or units.

Theuseofmarketmakersisonlyauthorizedifthefollowingconditionsaremet:(1) TherelationshipbetweentheUCI,managementcompanyoradministratorandthemarket

makerisdeterminedbycontract(2) Theroleofthemarketmakerisadequatelydescribedintheprospectus(3) Marketmakersmaynotactascounterpartstosubscriptionandredemptiontransactions

withoutspecificapprovaloftheinvestors(4) Marketmakersmaynotpricesubscriptionandredemptionordersaddressedtothemonless

favorabletermsthanwouldbeappliedbytheUCIdirectly(5) MarketmakersmustregularlynotifytheUCI,managementcompanyoradministratorof

ordersexecutedbythemwhichrelatetoregisteredsharesorunitstoensurethattheregisterofshareholdersorunitholdersisupdatedandthatregisteredcertificatesorconfirmationsofinvestmentmaybesentoutfromLuxembourg

410 | 15.Stockexchangelisting

15.1. Introduction

Inmanycases,investors,inparticularinstitutionalinvestors,willonlypurchasesecurities(generallysharesorunits)issuedbyUCIswhicharelistedonarecognizedorregulatedstockexchange.Asaresult,astockexchangelistingwilloftenbekeytoaccessingcertain distribution channels.

ThischapteroutlinesasummaryofsomeofthekeyconditionsforlistingthesecuritiesofUCIseitherontheregulatedmarketoftheLuxembourgStockExchange(La Société Anonyme de la Bourse de Luxembourg – LuxSE),oronthe“multilateraltradingfacility”(the“MTF”)operatedbytheLuxSE.

15. Stock exchange listing

410|15.Stockexchangelisting

15.Stockexchangelisting| 411

Stock exchange listing 15

15.2. The Luxembourg Stock Exchange (LuxSE)

TheLuxSEoperatestwosecuritiesmarkets:a“regulatedmarket244”–designatedasthe“Bourse de Luxembourg”–anda“multilateraltradingfacility245”–the“EuroMTF”.SecuritiesmaynotbesimultaneouslyadmittedtotheBourse de LuxembourgandtheEuroMTF.

TheregulatedmarketoffersissuersaEuropeanpassport.IssuersontheregulatedmarketmustcomplywiththerequirementsoftheProspectusDirective246andTransparencyDirective247,orbenefitfromanexemption.TheCSSFisresponsibleforapprovingprospectusesundertheProspectusDirective.TheLuxSEwillnormallyapprovetheprospectusesdrawnupinconnectionwithadmissiontotradingontheregulatedmarketofsecuritiesoutsidethescopeoftheProspectusDirective.

TheEuroMTF,ontheotherhand,wassetuptomeettheneedsofissuersnotrequiringaEuropeanpassport;theydonothavetomeettherequirementsoftheProspectusDirectiveandtheTransparencyDirective.TheLuxSEis,inprinciple,itselfinchargeofapprovingprospectusesforadmissiontotheEuroMTF.

ThestockexchangelistingrequirementsforbothmarketsaresetoutintheRules and Regulations of the Luxembourg Stock Exchange publishedbytheLuxSE;thesewereupdatedinJuly2012,andareavailableontheLuxSEwebsite.

15.3. Procedures for admission to a securities market of the LuxSE

Thedecisionontheapplicationwillbetakenwithinamaximumperiodofonemonthfollowingreceiptofacompleteapplication.TheadmissiondatewillbedecideduponbytheLuxSE,althoughapplicantsmayrequestaspecificdateofadmission.De facto,theLuxSEandtheapplicantwilljointlydecideupon a timetable for admission.

15.3.1.Contentsoftheapplication

TheapplicationfilemaybesubmittedinEnglish,FrenchorGermanandmustincludeadulysignedapplication form detailing:• ➢Nameoflegalentityfilingtheapplication• ➢Thesecuritiesmarket(Bourse de LuxembourgorEuroMTF)forwhichtheadmissionissought• ➢InformationontheUCIforwhichtheapplicationissubmitted• ➢Detailsofsecuritiestobelisted• ➢Nameofthelegalentitiesresponsibleforpaymentoftheapproval,listingandmaintenancefees• ➢Effectivedateofadmission

244 WithinthedefinitionofArticle4(1)14oftheMarketsinFinancialInstrumentsDirective(MiFID),Directive2004/39/EC,asamended

245 WithinthedefinitionofArticle4(1)15oftheMarketsinFinancialInstrumentsDirective(MiFID),Directive2004/39/EC,asamended

246 Directive2003/71/EC,asamendedbyDirective2010/73/EU247 Directive2004/109/EC,asamendedbyDirective2010/73/EU


• ➢DeclarationfromtheUCIseekingadmissionthatitcommitstocomplywiththeEUand/orLuxembourglawsandregulationsfortherelevantmarket.AseparatedeclarationfromtheUCImaybeincludedwiththeapplicationfileinsteadofsigningthedeclarationintheapplicationform

• ➢Auditorinformation

Someotherkeydocumentationthateachapplicationfileshouldcontainincludes:• ➢Acopyoftheprospectusandanysupplementstotheprospectus• ➢Confirmationfromtherelevantcompetentauthoritythattheprospectushasbeenapprovedor

confirmationthattheconditionsforexemptionfrompreparingaprospectushavebeenmet• ➢Declarationthatnosignificanteventshaveoccurredsincetheprospectusapprovalthatmay

impact the valuation of the securities• ➢Declaration(letterofundertaking)tocomplywiththeapplicableEuropeanCommunityobligations

andtheprovisionsprescribedbytheGrand-DucalRegulationof13July2007relatingtotheholdingofanofficiallistforfinancialinstruments

• ➢Confirmationthat:• ➢TheUCIisincompliancewiththeapplicablelegislationandregulationsrelatingbothtoits

constitution and its operation under its constitutional document • ➢Thesecuritiescomplywiththerelevantapplicablelegislationandregulations• ➢AcreditorfinancialinstitutionhasbeenappointedtoensurefinancialserviceinLuxembourgfor

the holders of securities• ➢Appropriateprocedureshavebeenputinplacetoadministerallcorporateeventsandthe

paymentsofdividendsorcoupons• ➢Acopyoftheagreementsoranyotherdocumentgoverningtherepresentationoftheholdersof

the securities • ➢Theauditedannualreportsofthelastthreefinancialyears• ➢TheconstitutionaldocumentoftheUCI,andwhereapplicable,oftheguarantor• ➢Atrueandcertifiedcopy,oracopyoftheofficialpublication,oftheconstitutionaldocumentofthe

UCI• ➢AtrueandcertifiedcopyoftheminutesauthorizingtheUCItoissuethesecurities

Inpractice,thedocumentationtobeincludedintheapplicationfilewouldgenerallyincludetheUCI’sordinaryprospectusorofferingdocumentandanyrelatedsupplementsaswellastheUCI’sarticlesofassociation.TheLuxSEwillensurethattheprospectusorofferingdocumentcomplieswiththeRules and Regulations of the Luxembourg Stock Exchange.Ifthisisnotthecase,theLuxSEmayrequestthattheprospectusbeamendedaccordingly.Thelistingproceduresmaybecarriedoutbyalistingagent on behalf of the UCI.

15.3.2.GeneralrulesandconditionsforadmissiontotheBourse de Luxembourg

Toqualifyforadmissiontothe Bourse de Luxembourg(astheLuxSE’sregulatedmarket),thesecuritiesmustbefreelynegotiablewhichmeansthattheyare“capableofbeingtradedinafair,orderlyandefficientmannerandtobenegotiatedfreely”.

Inaddition,thesecuritiesmustbeeligibleforsettlementinarecognizedsystembytheLuxSE.

TheLuxSEwillconsiderthefollowingwhenevaluatingifanopen-endedUCI’ssecuritiesare“freelynegotiable”:• ➢Thedistributionofthesecuritiestothepublic• ➢Whetherthereareappropriatemarket-makingarrangements,orwhetherthemanagementbodyof

the UCI provides appropriate alternative arrangements for investors to redeem the securities• ➢Whetherthevalueofthesecuritiesismadesufficientlytransparenttoinvestorsbymeansofthe

periodicpublicationofthenetassetvalue(NAV)



Withrespecttoaclosed-endedUCI(seeSection3.3.)theLuxSEwillconsiderthefollowing:• ➢Thedistributionofthesecuritiestothepublic• ➢Whetherthevalueofthesecuritiesismadesufficientlytransparenttoinvestors,eitherby

publicationofinformationontheUCI’sinvestmentstrategyorbytheperiodicpublicationoftheNAV

Non-UCITSarenotrequiredtocomplywiththeregistration,notificationorotherprocedureswhichareanecessarypreconditionforthemarketingoftheUCIinLuxembourg(seeChapter14),iftheyareonlyseekingalisting.

15.3.3.GeneralrulesandconditionsforadmissiontotheEuroMTF

ToenableadmissiontotheEuroMTF,aUCImustgenerallycomplywiththeconditionssetoutinSection15.3.2..However,theLuxSEmaygrantawaivertotheseconditionsonacase-by-casebasisiftheydeemsuchawaiverisnotdetrimentaltotheprincipleoffairtradingandacontraventionofanyotherrelevantlistingprovision.

15.3.4.Generalrulesandconditionsforadmissiontotheofficiallist

AnapplicationforadmissiontotradingononeofthesecuritiesmarketsoperatedbyLuxSEisalsodeemedtoconstituteanapplicationforadmissiontotheofficiallist.However,anissuermayspecificallyrequestthesecuritiesarenotadmittedtotheofficiallist.

Aclosed-endedUCIisrequiredtomeetcertainconditionsbeforeitssecuritieswillbeadmittedtotheofficiallist,theseinclude:• ➢TheUCImustcomplywiththelawsandregulationstowhichitissubjectbothinrelationtoits

constitution and its operation• ➢Minimumcapitalof€1million(aloweramountmaybeaccepted,provideditcanbedemonstrated

thattherewillbeanadequatemarketinthesecurities)• ➢TheUCImusthavebeeninexistencefortheprecedingthreeyearsandhavefileditsauditedannual

accountsfortheprecedingthreeyearsinaccordancewithrelevantnationallaws(aderogationispossiblesubjecttocertainconditions)

• ➢Sufficientpublicdistribution(generallydefinedas25%)oftheentity’ssecuritiestothepublichasbeenmadeatthetimeoftheadmissiontotheofficiallist(orconfirmationthatthiswillbeachievedshortlythereafter)

• ➢Securitiesmustbefreelytransferable• ➢Allsecuritiesofthesamecategorymustbelisted• ➢Wherephysicalformofsecuritiesexist,theremustbeappropriatedisclosuresandsufficient

procedures to safeguard and protect investors

TheadmissiontotheofficiallistofsecuritiesissuedbyUCIsotherthanaclosed-endtypeisnotsubject to these conditions.


15.4. Continuing obligations for issuers of securities

15.4.1. Information to be made available to the public

UCIsmustensureequaltreatmentofallsecuritiesholders(generallyshareholdersandunitholders)whoareinidenticalsituations.

Aclosed-endedUCIadmittedtotheBourse de LuxembourgissubjecttotheTransparencyDirectiveimplementedinLuxembourgthroughtheLawof11January2008andmustcomplywithcertaininformationrequirementsincludingthefollowing:• ➢Periodicinformation:

• ➢Auditedannualreportwhichmustbemadepublicwithinfourmonthsofeachfinancialyear-end.Thereportshouldcomprisefinancialstatementsandtherelatedauditreportandamanagementreport

• ➢Semi-annualreportwhichmustbemadepublicwithintwomonthsofthehalfyear.Thereportshouldcompriseacondensedsetoffinancialstatementsandaninterimmanagementreport

• ➢InterimmanagementstatementprovidingexplanationsofmaterialeventsandtransactionsthathavetakenplaceduringtherelevantperiodandtheirimpactonthefinancialpositionoftheUCI,aswellasageneraldescriptionoftheUCI’sfinancialpositionandperformanceandthatofitscontrolledundertakings(ifapplicable),duringtheperiod

• ➢Ongoinginformation:• ➢Informationonmajorholdings• ➢Informationforholdersofsecuritiesadmittedtotradingonaregulatedmarket

Open-endedUCIsadmittedtothe Bourse de LuxembourgarenotwithinthescopeoftheLawof11January2008.

UCIsadmittedtotheEuroMTFarealsosubjecttoongoingobligations.Theymustmakeavailabletothe public:• ➢FinancialstatementspreparedinaccordancewiththeUCI’snationallegislation,relatedaudit

report thereon and management report• ➢Asemi-annualreportonactivitiesandresultswithinfourmonthsoftheendofthehalfyear,

exceptwheretheapplicablenationallegislationdoesnotrequirethis.Thisreportwillincluderesultsofincomeandprofit,andastatementcoveringthesixmonthperioddiscussingsignificantinformationenablinginvestorstomakeaninformedassessmentoftheUCI’sactivitiesandresultsand,asfaraspossible,referringtotheUCI’sexpectedfuturedevelopmentsinthecurrentfinancialyear

• ➢Informationonanynewdevelopments• ➢Anyamendmentstotherightsattachedtothedifferentcategoriesofsecurities• Allnecessarycommunicationstothesecuritiesholders,inparticularthoserelatingtothe

allotmentofdividends,newshareissues,etc.

15.4.2.InformationtobeprovidedtotheLuxSE

Inadditiontotheinformationrequiredtobemadeavailabletothepublic,UCIswhosesecuritiesarelistedononeofthesecuritiesmarketsoperatedbyLuxSEmustcommunicatetotheLuxSEasearlyaspossibleandinanycaseinadvanceoftheevent,anyeventsaffectingthesecuritiessoadmitted.



15.5. Listing of SIFs

Closed-endedSIFsmustcomplywiththerulesandregulationsoutlinedinthisChapterwithrespecttolistingtheirsecuritiesononeofthesecuritiesmarketsoperatedbyLuxSE.

Open-endedSIFs,however,areexemptfromtheprovisionsoftheProspectusDirective.TheSIF’sofferingdocumentandanyrelatedsupplementsmaysufficeprovidedtheycomplywiththerulesandregulationsoftheLuxSE.

SIFscanthereforebelistedononeofthesecuritiesmarketsoperatedbyLuxSEprovidedthecriteriaoutlinedinSections15.3.1.and15.3.2.aremet.

However,andbecauseoftheirparticularfeatures,notablythefactthattheownershipofsharesorunitsofSIFsislimitedtoinformedinvestors,specificandad hoc solutions are found to ensure the distributionofsharesorunitstoinformedinvestors(seealsoSection14.6.3.).

15.6. Transfer, suspension, withdrawal and delisting

SecuritiesofaUCImaybetransferred,suspendedorwithdrawnfromtradingattherequestoftheissuer,orbydecisionoftheLuxSE.Adecisiontowithdrawordelistfromtradingisalsotakentomeanadecisiontoremovefromtheofficiallist.Iftheissuerrequestssecuritiesbetransferred,suspendedorwithdrawn,reasonsjustifyingtherequestmustbeprovided.

TheLuxSEmaydecidetosuspendorwithdrawsecuritiesofaUCIfromtradingiftheynolongercomplywith,oriftheirissuernolongercomplieswith,therelevantrulesandregulations.

TheLuxSEmaydecidetotransferthesecuritiesfromtheBourse de LuxembourgtotheEuroMTFwhentheissuerdoesnotcomplywiththeregulatoryprovisionsapplicabletosecuritiesadmittedtotradingonaregulatedmarket.

TheLuxSEmayalsodecidetodelistasecurityifitbelievesthatanormalandconsistentmarketforthesecuritycannotbemaintained.

Decisionstotransfer,suspend,withdrawordelistsecuritieswillbepublishedontheLuxSE’sinternetsiteandwillalsobecommunicatedtotheCSSF.

Suchcommunicationsmayinclude:• ➢Amendmentsaffectingdifferentrightsofsecurities• ➢Anymergerordemerger• ➢Anychangeoftransferorpayingagent• ➢Announcementofanydistribution• ➢Paymentanddetachmentofdividends• ➢ChangeofnameoftheUCI• ➢Importantchangesinactivitiesoranymodificationsmadetotheconstitutionaldocuments• ➢Noticesofshareholders’meetings• ➢Anyotherusefulinformationforinvestorprotection

416 | Appendices

Appendices

Appendices

Appendices | 417

418 | Appendix I – Understanding UCIs418 | Appendix I – Understanding UCIs

Appendix IUnderstanding UCIs

I.1. Introduction

This appendix introduces investment funds (referred to in this guide as Undertakings for Collective Investment - UCIs), describes what UCIs are and explains the various types of funds and asset classes.

Appendix I – Understanding UCIs | 419

I.2. What is a UCI?

A UCI has the following characteristics:• There is collective investment of funds• The capital is raised from a number of investors• Thecapitalisinvestedinaccordancewithadefinedinvestmentpolicyforthebenefitofthoseinvestors,

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 circlesofinvestors,suchasinformed,qualifiedorinstitutionalinvestors.DependingonthestructureoftheUCI,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.

A UCI can offer investors the possibility to:• Generate current income or a capital appreciation, or both• Accessadiversifiedportfolioofinvestments• Benefitfromprofessionalmanagementoftheportfolio• Share the associated costs• Gainexposuretospecificinvestmentsinthecaseofinvestorswhoarenotabletoaccesstheinvestment

directly,forexampleduetoinvestorqualificationrequirements

I.3. Types of UCIs

The principal types of UCIs are described below.

I.3.1. Equity

Equity funds invest predominantly in equities, otherwise known as stocks or shares. The investment strategies of equity funds are generally geared towards long-term growth through capital appreciation and/or receiving income from the underlying equities, in the form of dividends which can be reinvested in the fund or paid out to the investors.

420 | Appendix I – Understanding UCIs

AccordingtotheEuropeanFundClassification(EFC)248, an equity fund must invest at least 85% of its assets in equities.Forafundtobeclassifiedinaspecificinvestmentcategory,itmustinvestaminimumof80%ofitsassetsinequitiesinthatinvestmentcategory.Investmentcategoriescanbebrieflyillustratedasfollows:• Country or geographic region, e.g.:

• Global: Equity Global, Equity Global Advanced Markets• Americas: Equity Americas, Equity North America• AsiaPacific:EquityAsiaPacific,EquityAsiaPacificExJapan,EquityGreaterChina• Europe: Equity Europe, Equity Advanced Europe, Equity Eurozone, Equity Europe Ex UK, Equity Nordic,

Equity Iberia• Emerging Markets: e.g., Equity Emerging Market Global, Equity Emerging Latin America, Equity Emerging

AsiaPacific,EquityEmergingEurope,EquityEmergingMiddleEastandNorthAfrica• Country: e.g., Equity Belgium, Equity Germany, Equity France

• Sector, e.g.: Energy, Financials, Healthcare, Industrials, Information, Technology, Materials, Telecommunication, Utilities

• Marketcapitalization–SmallCap:equityfundsinvestingatleast80%insmallcapitalizationstocksasdefinedby the following regional limits: United States: US$4 billion, United Kingdom: £1 billion, Eurozone: €3 billion, AsiaPacific:US$1.5billion,Global:US$2.5billion

Beingexposedtovariationsinshareprices,equityfundsaregenerallymorevolatilethanfixedincomeandmixed funds (see Sections I.3.2. and I.3.3.) – they offer investors higher potential returns but with a higher level of risk.

I.3.2. Fixed income

Fixedincomefundsinvestmainlyinfixedincomeinstrumentssuchasbondsandmoneymarketinstruments(MMIs).Theseinvestmentsgenerateregularfixedincome.

I.3.2.1. Money Market

Money market funds generally invest in high quality MMIs or deposits with credit institutions. They do not take direct or indirect exposures to equities or commodities, including via derivatives. Therefore, they are generally consideredaslowriskfundswhichpaydividendsreflectingthemoneymarketrates.

AccordingtotheEFC,moneymarketfundscanbeclassifiedasfollows:• Short-term money market funds:

• Short weighted average maturity (max. 60 days) and weighted average life (max. 120 days)• Currency exposure mentioned in the name and fully exposed or hedged to a single currency• Constant net asset value (CNAV) or variable net asset value (VNAV) valuation methode.g.:shorttermmoneymarketDKK−CNAV,shorttermmoneymarketEUR−CNAV,shorttermmoneymarketEUR−VNAV,shorttermmoneymarketUSD−CNAV,shorttermmoneymarketUSD−VNAV

• Money market funds: • Weighted average maturity (max. 6 months) and weighted average life (max. 12 months)• Currency exposure mentioned in the name and fully exposed or hedged to a single currency• Variable net asset value method to be appliede.g.:MoneyMarketAUD,MoneyMarketCHF,MoneyMarketDKK,MoneyMarketEUR,MoneyMarketGBP,MoneyMarketSEK,MoneyMarketUSD

All European money market funds are subject to ESMA’s Guidelines on the common definition of European money market funds issued in May 2010. See also Section 3.6.1..

248 TheEFCisapan-EuropeanclassificationsystemforinvestmentfundsdevelopedbytheEuropeanFundCategorizationForum(EFCF), a working group of the European Fund and Asset Management Association (EFAMA). In April 2012, EFAMA published its updated The European Fund Classification Categories.Thegeneralruleapplyingtotheclassificationstructureisthatonefundcanonlybeclassifiedinonecategoryaccordingtotheassetsinwhichitinvests.Themaintypesoffundscanbeclassified:equity,bond,multi-asset and money market – according to nine criteria: country/region, sector, market capitalization, currency exposure, credit quality, interest rate exposure, emerging market exposure, asset allocation and structural characteristics (e.g., fund of funds, ETF instruments, responsible investment or style). The EFC also describes Absolute Return Innovative Strategies (ARIS) and other types offundsfallingoutsidethefivebroadcategories(e.g.,capitalprotection,convertibles,realestate).Inthisappendixwereferon,anumber of occasions, to the EFC.


I.3.2.2. Bond

Bondfundsfocusprimarilyongeneratingincomebyinvestinginfixedincomesecuritieswithmaturitiesofmorethan approximately one year.

Bond funds may also be characterized by:• Credit quality• Interest rate exposure • Currency exposure

AccordingtotheEFC,bondfundsmustinvestaminimumof80%oftheirassetsinfixedincomesecurities.Only20% may be invested in cash or other assets. Convertible bonds are limited to 20% of assets. Asset-backed and mortgage-backed securities are permitted and may be held up to a maximum of 20%. Equity exposure is not permitted.

Abondfund’screditqualitywillbeclassifiedasfollows:• A government bond fund must invest at least 80% in such government bonds (issued or explicitly guaranteed

by a national government) with a maximum of 10% exposure to corporate bonds. The exposure to emerging market debt should be less than 30%. The maximum exposure to non-investment grade bonds is 30%, of which a maximum of 10% can be emerging market bonds

• A corporate bond fund must invest at least 70% in corporate bonds with a maximum exposure of 30% to non-investment grade bonds of which a maximum of 10% can be emerging market bonds. The maximum exposure to emerging market debt is 30%

• An aggregate bond fund invests in government and corporate bonds and in emerging market bonds (maximum 30%) with a maximum exposure of 30% to non-investment grade bonds of which a maximum of 10% can be emerging market bonds

• An aggregate high yield bond fund invests beween 30% and 70% of its assets in non-investment grade investments (of which up to 30% can be in emerging market bonds)

• A high yield bond fund invests at least 70% of its assets in non-investment grade investments (less than 30% can be in emerging market debt)

Abondfund’sinterestrateexposurewillbeclassifiedasfollows:• Short-term:morethan1yearandlessthan3yearsaveragemodifiedduration• Medium-term:morethan3yearsandlessthan7yearsaveragemodifiedduration• Long-term:morethan7yearsaveragemodifiedduration

Currency exposure is referred to in the name of the category when the fund has at least a 70% exposure to the stated currency (with or without currency hedging).

Othertypesofbondfundsinclude:• Emerging market bond funds• Floating rate bond funds• Inflationlinkedbondfunds• Flexible bond funds

The risk and return of bond funds are generally lower when the securities invested in are investment grade, and higher when the fund invests in non-investment grade securities.

I.3.3. Mixed

Mixedfundsinvestinamixtureofvariableincomesecurities,debtsecurities,cashandcashequivalents.Debtsecuritiesinclude,amongotherthings,floatingratenotes,convertiblebonds,highyieldandcorporatebonds.Real estate and commodity securities should be treated as variable income securities.


AccordingtotheEFC,mixedfunds(whichtheEFCcalls“multi-asset”funds)canbeclassifiedaccordingto:• Geographicalexposure:whichreflectsthelocalorregionalexposureofthefundinvestments.Asinglecountry

fund must invest at least 80% of its assets in securities of companies established in the country or region• Asset allocation:

• Defensive:lessthan35%variableincomesecurities• Balanced: between 35% - 65% variable income securities • Aggressive: more than 65% variable income securities• Flexible: may invest up to 100% in any asset class

• Currency exposure, where applicable, a minimum of a 70% exposure to the stated currency (with or without currency hedging)

Othermixedfunds249 will adapt the portfolio mix to market conditions or investor aims. For example, life-cycle funds offer investors the possibility to adapt their investment to their changing life circumstances – typically, inviewofretirement,bygraduallydecreasingexposuretoequitiesandincreasingexposuretofixedincomeinvestments over time, progressively providing more stable income at less risk.

Therisk/returnprofileofamixedfundisgenerallybetweenthatofanequityfundandafixedincomefund.

I.3.4. Hedge funds

Althoughseveralbodieshaveattemptedtoprovideadefinitionofahedgefundthereisnoofficialdefinition.Hedge funds vary widely in investment strategy, risk levels, types of securities owned, etc. However, one could describe a hedge fund by looking at the common or similar characteristics of hedge funds.

While traditional investment funds aim for “relative returns” – i.e., a return relative to a benchmark – hedge funds aim for “absolute returns” i.e., positive returns which are linked not to a benchmark but to particular assets. Hedge fund portfolios are commonly a basket of securities which have been “cherry picked” as a result of the hedge fund manager employing investment strategies that differ from the traditional investment fund and often make extensive use of derivatives, for example, to short/long securities or the market as a whole.

TheEFCdefinessuchfundsasabsolutereturninnovativestrategies(ARIS)funds.ARISfundsareclassifiedonthe basis of the fund promoters’ declaration on strategy style:• Directionalstrategies:broadrangeofstrategieswithabiastriggeredbymacrofactors• Long/short: funds that implement analytical techniques to capture the direction of price movement regardless

of whether prices are rising or falling• Relative value: relative value techniques to exploit a valuation discrepancy (i.e., price discrepancies)• Event driven: investment in securities of companies currently or prospectively involved in corporate

transactions or subject to other corporate events• Multi-strategy: different types of strategies (e.g., equity long/short, commodities, volatility arbitrage)• Indextrackers:replicatetheperformanceofaparticularindexmadebyaminimumoffivedifferentARISfunds• Fund of ARIS funds: investment in a portfolio of other ARIS funds rather than directly in securities (see also

Section I.3.10.)

I.3.5. Real estate and infrastructure

There are two main categories of real estate UCIs: direct real estate funds and indirect real estate funds.

Directfundsinvestinpropertyassetsorstructuresholdingpropertyassets,generallyinsectorssuchasretail,office,residential,parking,industrialandlogistics.Theygenerallygeneratereturnsfromtheincreasesinthevalueoftheassetsandfromrentalincome.Otherpotentialinvestmentsincludeland,constructionactivities,realestatefinancingactivitiesanddistressedrealestatedebtsecurities.

249 Here we are no longer referring to the EFC.


Infrastructure funds focus on the infrastructure projects (such as airports, ports and roads), their operation and maintenance.Diversifieddirectfundsinvestinmorethanonesector.Directfundsareusuallymediumtolong-term investments.

Indirect funds invest in listed real estate securities or in other real estate funds.

I.3.6. Private equity

Private equity generally refers to the acquisition of a company or a stake in a company through a transaction involving privately held equity or other non-public securities by an investor or group of investors; private equity investments are usually medium to long-term.

The main types of private equity investment are:• Leveraged buyout: involves the acquisition of a company, business unit or business asset• Venture capital: refers to investment in companies at different stages of their maturity from start-up to late

stage• Growth capital: refers to equity investments in more mature companies to fund the expansion of the business

or restructuring

Aprivateequityfund/vehicleisa“partnership”betweenaprivateequityfirm(generalpartners)andinvestorsinthe fund/vehicle (limited partners).

Privateequityvehiclescanbesetupasfunds;thereare,however,alsoothervehiclesspecificallydesignatedforprivate equity instruments.

A key characteristic of a private equity fund, as well as, in certain cases, a direct real estate fund, is the draw-down. The private equity fund will collect or “call” capital from the investors in a series of tranches, i.e., when the fund manager wants to invest, he requests the cash he needs from investors. The goal is to have a minimum amount of cash held in the fund in order to optimize performance.

I.3.7. Thematic funds

Thematicfundsspecializeinareassuchasspecificsegments,exoticassetsormeetspecificcriteria.

Thematic funds may offer investors potentially higher returns than certain other types of funds, opportunities to diversify a portfolio and exposure to asset classes which may have a low correlation with traditional asset classes.

Therearefewcommonlyagreeddefinitionsofthetypesofthematicfunds.Inmanycases,thecategoriesofthematic fund types overlap:• Specificsegments,suchas:

• Environment250, including• Renewable energy and environmental technologies, such as solar, wind and biomass • Carbon investments, related to carbon credits • Environmental technology, such as water and waste treatment technology

• Energy, such as equity in energy companies and energy commodities • Technology, such as mechanical technologies, materials, electronics and information technologies• Biotechnology• Life sciences• Natural resources, such as forestry, plantations and water supply• Transportation, such as ships, aircraft, containers • Commodities, generally including a combination of commodities, commodity futures and options

250 The Luxembourg Fund Labeling Agency (LuxFLAG) offers an Environment Label designed to reassure investors that an investment fund actually invests the majority of its assets in environment related sectors in a responsible manner.


• Collectibles such as luxury goods, including art objects, jewelry, racing and breeding animals (such as horses), expensive alcohols (wines and spirits), and vehicles (such as cars and motorbikes)

• Intangible assets such as patents, marketing rights, and libraries of intellectual property (e.g., music libraries) • Specificcriteria,suchas:

• Responsible investment – generally funds meeting certain environmental, social and governance criteria251

• Sustainable investment, such as fair trade, sustainable agriculture and infrastructure• Impactfinance,coveringareassuchaseducation,healthandfood• Ethical, such as Sharia funds• Social entrepreneurship - funds which have the achievement of measurable, positive social impacts as a

primary objective (see Section 5.5.)• Microfinance252-fundswhichinvestinmicrofinanceinstitutions

I.3.8. Exchange traded

Exchange traded funds (ETFs) are investment funds investing in a basket of securities or commodities generally designed to track the performance of an underlying index. They are listed on stock exchanges.

The shares or units of ETFs are not issued or repurchased in the same way as traditional funds. Institutional investors create and redeem ETF shares directly from the ETF, in large blocks, called “creation units”. The transaction is generally in kind, with the institutional investor swapping a basket of securities or commodities for units of the ETF in the case of a creation or vice versa in the case of a redemption. Some ETFs may require or permit a purchasing or redeeming shareholder to substitute cash for some or all of the securities or commodities in the basket. The creation and redemption mechanism means that units are normally traded at a price close to the net asset value (NAV).

The shares or units of ETFs are traded on the secondary market where prices are available from market makers on an intra-day basis.

While passive ETFs track the performance of an underlying index, actively managed ETFs seek to outperform a benchmark. These ETFs could aim to outperform through an algorithmic process, such as ranking stocks under certain criteria at set intervals and automatically rebalancing the portfolio accordingly, or by linking performance to the discretionary trading expertise of a particular manager.


I.3.9. Structured products

Astructuredproductisnormallya“packaged”productwithapre-definedinvestmentobjective.The“package”willnormallyincludeacombinationoftraditionalfinancialinstruments,derivativesand/orinsuranceproducts.

Within the context of investment funds, there are two categories of structured products:(1) Structuredfunds,orstructuredcompartments(sub-funds)offunds,whichofferinvestorsapredefined

payoff depending on different scenarios based on the value of the underlying assets(2) Structured products based on funds

There are two main types of structured funds:• Guaranteed funds: guaranteed funds offer partial or full capital or income protection - i.e., some or all of the

investment in the fund or income generated therefrom is guaranteed (e.g., at maturity). At the same time, guaranteedfundsoffersomeexposuretospecificfinancialinstruments.Someguaranteedfundsimplementa lock-in mechanism, whereby at certain times, or when certain thresholds are met, the gains are “locked in”-i.e.,guaranteed.Guaranteesaregenerallyachievedbyusingfinancialinstrumentsand/orbydynamicallyadjusting exposures to risky assets; a guarantor may also be involved. Guaranteed funds are generally long-term investments

251 For example, meeting the United Nations Principles for Responsible Investment.252 TheLuxembourgFundLabelingAgency(LuxFLAG)offersaMicrofinanceLabeldesignedtoreassureinvestorsthattheMicrofinance

InvestmentVehicleactuallyinvests,directlyorindirectly,intheMicrofinancesector.


• Leveraged funds: leveraged funds take a risk exposure exceeding the amount of capital invested, by borrowing orthroughtheuseoffinancialderivativeinstruments(FDIs).Thus,thepotentialreturns,butalsotheriskinherent in leveraged funds, is greater

For more information on structured UCITS, see also Section 3.6.4..

Structured products based on funds include capital protection products, products offering leveraged exposure to a basket of funds or products dynamically allocating assets to a basket of funds, for example to top performing funds. Structured products based on funds are outside the scope of this guide.

I.3.10. Fund of funds

A fund of funds invests in several investment funds. Some funds of funds allocate their assets to diverse or geographical fund strategies while others focus on just one or two. The emphasis is on selection of strategies aligned to investors’ preferences and leveraging the expertise of different managers. Careful selection of the best managers is, therefore, key.

Fundsoffundsgenerallyofferamorediversifiedandlowerriskinvestmentopportunitythantheunderlyingfunds themselves. They may also offer exposure to investment funds to some investors who would not be able to invest in the funds directly, for example, due to minimum investment requirements. A key disadvantage of funds of funds may be the two levels of fees (i.e., fees being charged both at the fund and at the underlying fund levels).

I.3.11. Multiple asset class, multiple compartment funds

In the context of convergence between alternative and traditional asset classes, new types of multiple compartment (sub-fund), multiple asset class funds are emerging:• Multi-compartment fund with separate individual compartments. Each compartment invests in a different

asset class such as private equity and real estate – each being managed by different managers• Funds with interlinked compartments. They can include private equity and hedge fund portfolios, whereby the

hedgefundportfolioprovidestheliquidityforflexibledraw-downandcashmanagementthatprivateequitygeneral partners are seeking and the hedge fund managers gain access to the potential returns from private equity investment

See also Sections 3.3.2. and 3.3.5..

I.3.12. Pension Fund Pooling Vehicles (PFPVs)

PFPVs are collective investment schemes (e.g., common funds) created by international groups in order to pool the assets of different pension funds that they manage in various jurisdictions where they have operations.

Poolingassetsofmultiplepensionfunds,oftenindifferentjurisdictions,offersbenefitssuchasreducedoperationalfeesandcosts,efficientmanagementofassets,accesstoawiderrangeofpotentialinvestments,acentralized governance structure and consistency between pension funds. However, to offer these advantages toinvestors,thePFPVmustallowinvestorsthesamefiscaltreatmentasiftheyhadinvestedintheirhomejurisdiction.

426 | Appendix II – Key regulations and reference texts

Appendix IIKey regulations and reference texts

426 | Appendix II - Key regulations and reference texts

Appendix II – Key regulations and reference texts | 427

European Union LuxembourgLegislation (level 1) EUDirectives(whentransposedinto

national laws)Luxembourg Law EU Regulations (directly applicable)

Implementing measures (level 2)

CommissionDirectives(whentransposed into national regulations)

Commission Regulations (directly applicable)Grand-DucalRegulationsCSSF Regulations

Guidelines (level 3) ESMA guidelines CSSF CircularsBCL Circulars

II.1. Introduction

The regulations applicable to the Luxembourg fund industry include:• Primary legislation – “Level 1”:

• Luxembourg Laws • EU Regulations

• Implementing measures – “Level 2”:• Grand-DucalRegulations• Commission for the Supervision of the Financial Sector (CSSF) Regulations• Commission Regulations

• Guidelines – “Level 3”:• CSSF Circulars• Luxembourg Central Bank (BCL) Circulars• European Securities and Markets Authority (ESMA, formerly CESR253) Guidelines • VAT Circulars

Otherrules,clarificationsandguidancecanbefoundin:• Luxembourg Stock Exchange rules and regulations• CSSF questions and answers (Q&A), Press Releases and Newsletters• ESMA Q&A and opinions• Association of the Luxembourg Fund Industry (ALFI) guidelines and publications

The following table provides a brief overview of the relationship between European and Luxembourg legislation:

LuxembourgLaws,Grand-DucalandCSSFRegulationsarepublishedintheOfficialGazette(theMémorial). Most key Laws and Regulations are available on the CSSF website, along with CSSF Circulars and available translations (http://www.cssf.lu/en).

Section II.2. is intended to provide an overview of the key regulations, guidelines and reference texts. The remaining sections of this Appendix list the principal regulations and reference texts by type of regulation in chronological order.



II.2. Summary of key regulations and reference texts

This section is intended to provide an overview of the key regulations, guidelines and reference texts applicable to:• UCITS and UCITS (Chapter 15) management companies • Alternative Investment Fund Managers (AIFM)• Other(Chapter16)managementcompanies• 2010 Law Part II UCIs• Specialized investment funds (SIFs)• European venture capital funds (EuVECA) and European social entrepreneurship funds (EuSEF)

This overview is not intended to be exhaustive.

UCITS and UCITS (Chapter 15) management companies

European Union Luxembourg

Legislation (level 1)

Directive2009/65/ECof13July2009on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities, as amended (recast UCITSDirective–UCITSIV)

Lawof17December2010relatingtoundertakings for collective investment, as amended (the 2010 Law)

Eligible assets


CommissionDirective2007/16/ECof19 March 2007 implementing the UCITS Directiveasregardstheclarificationofcertaindefinitions

Grand-DucalRegulationof8February2008concerningcertaindefinitionsofthe2002Law(now the 2010 Law)

Guidelines (level 3)

• CESR254 Guidelines concerning eligible assets for investment by UCITS, March 2007

• CESR guidelines on Eligible assets for investmentbyUCITS–Theclassificationofhedgefundindicesasfinancialindices,July2007

CSSF Circular 08/339 of 19 February 2008 on CESR Guidelines concerning eligible assets for investment by UCITS (updated by Circular 08/380)

ETF and other UCITS issues


• ESMA guidelines entitled ETFs and other UCITSissues,December2012

CSSF Circular 13/559 of February 2013 covering ESMA’s guidelines on ETFs and other UCITS issues

Frequently Asked Questions (FAQs)

ESMAQuestionsandAnswers:ESMAGuidelinesonETFsandotherUCITSissues,July2013

Management companies


CommissionDirective2010/43/EUofJuly2010implementingDirective2009/65/EC as regards organizational requirements, conflictsofinterest,conductofbusiness,riskmanagement and content of the agreement between a depositary and a management company

CSSFRegulation10-04ofDecember2010as regards organizational requirements, conflictsofinterest,conductofbusiness,riskmanagement and content of the agreement between a depositary and a management company


CSSFCircular12/546ofOctober2012asregards the authorisation and organisation of the Luxembourg management companies subject to Chapter 15 of the Law of 17 December2010relatingtoundertakingsforcollective investment as well as to investment companies which have not designated a management company within the meaning ofArticle27oftheLawof17December2010 relating to undertakings for collective investment




Risk management


European Securities and Markets Authority (ESMA) guidelines (directly applicable in Luxembourg)• CESR255 Risk management principles for UCITS, February 2009• CESR Guidelines on risk measurement and the calculation of global exposure and counterparty

riskforUCITS,July2010• ESMA Guidelines to competent authorities and UCITS management companies on risk

measurement and the calculation of global exposure for certain types of structured UCITS, April 2011

CSSF Circular 11/512 of May 2011 on the main regulatory changes in risk management following the publication of CSSF Regulation 10-4andESMAclarificationsandproviding:• FurtherclarificationsfromtheCSSFonrisk

management rules• Definitionofthecontentandformat

of the risk management process to be communicated to the CSSF

Otherguidelines ALFI guidelines:• Risk Management guidelines, updated March

2012• UCITS Liquidity Risk Management, March

2013• Principles for Sound Stress Testing Practices,

June2013

Key investor information (KII)


CommissionRegulation(EU)No583/2010ofJuly2010asregardsKIIandconditionstobemetwhen providing KII or the prospectus in a durable medium other than paper or by means of a website (directly applicable in Luxembourg)


ESMA guidelines• CESR’sGuidetoclearlanguageandlayoutfortheKIIdocument,December2010• CESR’sTemplatefortheKIIdocument,December2010• CESR’s Guidelines on the methodology for the calculation of the synthetic risk and reward

indicatorintheKIIDocument,July2010• CESR’s Guidelines on the selection and presentation of performance scenarios in the KII

documentforstructuredUCITS,December2010• CESR’sGuidelinesonthemethodologyforcalculationoftheongoingchargesfigureintheKII

Document,July2010

FAQs • ESMA Questions and Answers (Q&A) document entitled Key Investor Information Document(KIID)forUCITS,September2012

• CSSF FAQ entitled Key Investor Information Document–FrequentlyAskedQuestions,updatedJuly2012

• ALFI guidance entitled UCITS IV implementationproject,KIIDocumentQ&A,updated September 2012

Fund mergers, master-feeder structures and notification procedure


CommissionDirective2010/42/EUofJuly2010implementingDirective2009/65/EC as regards certain provisions concerning fund mergers, master-feeder structures and notificationprocedure

CSSFRegulation10-05ofDecember2010as regards certain provisions concerning fund mergers, master-feeder structures and notificationprocedure,asamended

FAQ CSSF FAQ entitled Master/Feeder Structures, June2013




Notification procedure


CommissionRegulation(EU)No584/2010ofJuly2010implementingDirective2009/65/ECasregardstheformandcontentofthestandardnotificationletterandUCITSattestation,theuseofelectroniccommunicationbetweencompetentauthoritiesforthepurposeofnotification,andproceduresforon-the-spotverificationsandinvestigationsandtheexchangeofinformationbetween competent authorities (directly applicable in Luxembourg)

Guidelines(level 3)

CSSF Circular 11/509 of April 2011 on new notificationprocedurestobefollowedbyaUCITS governed by Luxembourg law wishing to market its units in another Member State of the European Union and by a UCITS of another Member State of the European Union wishing to market its units in Luxembourg

Authorization process and updates to authorization

Explanations of the application for authorization or updates thereto, covering legal requirements, procedure to be followed and list of documents and information to be submitted

UCIs:• CSSF document on Setting up a Luxembourg

based undertaking for collective investment or additional sub-fund(s) to an existing undertaking for collective investment

• CSSF document on Amending a Luxembourg based undertaking for collective investment ontheofficiallist

Management companies• CSSF document on Setting up a Luxembourg

management company (Chapter 15 of thelawof17December2010relatingtoundertakings for collective investment)

Alternative Investment Fund Managers (AIFM)



Directive2011/61/EUof8June2011onAlternative Investment Fund Managers (AIFM)

TheLawof12July2013onAlternativeInvestment Fund Managers (the AIFM Law)


• CommissionDelegated(EU)RegulationNo231/2013ofDecember2012supplementingDirective2011/61/EUonexemptions,generaloperatingconditions,depositaries,leverage,transparency & supervision

• Commission Implementing Regulation (EU) No 448/2013 of 15 May 2013 establishing a procedure for determining the Member State of reference of a non-EU AIFM pursuant to Directive2011/61/EU

• Commission Implementing Regulation (EU) No 447/2013 of 15 May 2013 establishing the procedureforAIFMswhichchoosetooptinunderDirective2011/61/EU


ESMA guidelines:• ESMAGuidelinesonsoundremunerationpoliciesundertheAIFMD,February2013

(2013/201)• ESMAGuidelinesonkeyconceptsoftheAIFMD,May2013(2013/600)• ESMAGuidelinesonreportingobligationsunderArticle3andArticle24oftheAIFMD

(Consultation paper at the time of writing)

FAQs and Opinions

• European Commission, standard list of all questions related to this legislative act. Where a question is linked to multiple provisions, only one provision is displayed, April 2013 (32011L0061)

• ESMAOpiniononpracticalarrangementsforthelatetranspositionoftheAIFMD,August2013

CSSF Frequently Asked Questions (FAQ) concerning the Luxembourg Law of 12 July2013onalternativeinvestmentfundmanagersaswellastheCommissionDelegatedRegulation(EU)No231/2013of19December2012,June2013,updatedinJuly2013



Application forms

• CSSF Application questionnaire for the set up of a fully licensed alternative investment fundmanager,June2013

• CSSFDeclarationforafullylicensedAIFM,June2013

Other(Chapter16)managementcompanies



Full AIFM regime or registration regime of Directive2011/61/EUof8June2011onAlternative Investment Fund Managers (AIFM)

• Lawof17December2010relatingtoundertakings for collective investment, as amended (the 2010 Law)

• Registration regime under the Law of 12 July2013onAlternativeInvestmentFundManagers (the AIFM Law, if applicable)



• CSSF document on Setting up a Luxembourg management company (Chapter 16 of theLawof17December2010relatingtoundertakings for collective investment)

Where applicable: • CSSF Registration form for an alternative

investmentfundmanager,June2013• CSSFDeclarationforaregisteredAIFM,June

2013

2010 Law Part II UCIs



Lawof17December2010relatingtoundertakings for collective investment, as amended (the 2010 Law)


• ChapterGofCircular91/75of21January1991 on UCIs

• Circular02/80of5December2002onUCIs with alternative investment strategies (hedge funds)



• CSSF document on Setting up a Luxembourg based undertaking for collective investment or additional sub-fund(s) to an existing undertaking for collective investment

• CSSF document on Amending a Luxembourg based undertaking for collective investment ontheofficiallist


Specialized investment funds (SIFs)



Law of 13 February 2007 on Specialized Investment Funds, as amended (the SIF Law)


CSSF Regulation No 12-01 laying down detailed rules for the application of Article 42a of the law of 13 February 2007 relating to specialized investment funds concerning the requirements regarding risk management and conflictsofinterest


Circular 07/309 of 3 August 2007 on risk spreading in the context of Specialized Investment Funds

FAQs ALFI Recommendation on the Risk management system for Specialized InvestmentFund,June2012

Application forms • Setting up a Luxembourg based undertaking for collective investment or additional sub-fund(s) to an existing undertaking for collective investment

• Amending a Luxembourg based undertaking forcollectiveinvestmentontheofficiallist

European venture capital funds (EuVECA) and European social entrepreneurship funds (EuSEF)



• Regulation (EU) No 345/2013 of 17 April 2013 on European venture capital funds (EuVECA)• Regulation (EU) No 346/2013 of 17 April 2013 on European social entrepreneurship funds

(EuSEF).

FAQs and Opinions

• CSSF Press Release 13/36 entitled Guidance in relation to regulation (EU) No 345/2013 (EuVECA) and regulation (EU) No 346/2013 (EuSEF), August 2013

II.3. Luxembourg Laws

Investment fund Laws

Regulation Brief description

Lawof17December2010onUCIs(the2010 Law)

ThegeneralLawonUCIs,whichalsoincorporatestheUCITSDirective(the UCITS IV recast). It is structured as follows: • Part I: UCITS (European passport) • PartII:OtherUCIs• Part III: Foreign UCIs • Part IV: Management companies • Part V: General provisions

Law of 13 February 2007 on Specialized Investment Funds, as amended (the SIF Law)

The Law on Specialized Investment Funds

Lawof12July2013onalternativeinvestment fund managers

This Law transposes the Alternative Investment Fund Managers Directive,andamendsanumberofexistingLawsincludingthe2010Law, the SIF Law and the 1993 Law


OtherrelevantLaws


Civil Code The Civil Code covers, in Book III, the manners in which property is acquired, including, inter alia, sale, exchange, lending and deposit.

Consumer Code The Consumer Code covers, inter alia, consumer information, unfair commercial practices, and consumer contracts. It implements, inter alia,Directive2002/65/ECoftheEuropeanParliament and of the Council of September 2002 concerning the distancemarketingofconsumerfinancialservices.

Criminal Code The Criminal Code covers, inter alia, money laundering and terroristfinancingoffences,andotherprovisionsrelatingtothecriminal liability of natural and legal persons.

Law of 10 August 1915 on commercial companies, as amended (the 1915 Law)

This Law is the basic law on commercial companies. It is applicable to investment companies where the law they are under does not derogate from it.

Lawof4December1967concerningincometax, as amended

This Law is Luxembourg’s general income tax law.

Law of 12 February 1979 concerning value added tax, as amended

This Law lays down the Luxembourg legal framework for value added tax (VAT).

TheLawof16July1987ondoor-to-doorselling, itinerant trade, display of goods and soliciting of orders, as amended

Law of 5 April 1993 on the Financial Sector, as amended (the 1993 Law)

GeneralLawonthefinancialsectorstructuredasfollows:• PartI:Accesstoprofessionalactivitiesinthefinancialsector• Part II: Professional obligations, prudential rules and rules of

conductinthefinancialsector• PartIII:Prudentialsupervisionofthefinancialsector• Part IV: Reorganization and winding up of certain professionals

ofthefinancialsector• Part V: Penalties• Part VI: Amendments, repeals and transitional provisions

The Law of 1 August 2001 concerning the circulation of securities and other fungible financialinstruments,asamended

This Law covers the concept of transfer of ownership by way of securities and the terms and obligations thereto.

TheLawof30July2002asamendedregulating certain trade practices, penalizing unfair competition

ThisLawtransposesDirective97/55/ECoftheEuropeanParliamentandoftheCouncilamendingDirective84/450/EECconcerning misleading advertising so as to include comparative advertising.

Lawof12November2004onthefightagainstmoneylaunderingandterroristfinancing,asamended

ThisLawprovideslegalprovisionsinthefightagainstmoneylaunderingandterroristfinancing(AML/CFT).

Lawof20June2005ontheEUSavingsDirective

This Law implements the directive on the taxation of savings income in the form of interest payments from debt claims.

Lawof10July2005onprospectusesforsecurities, inter alia,transposingDirective2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amendingDirective2001/34/EC,asamended

ThisLawtransposestheProspectusDirective.

Lawof5August2005onfinancialcollateralarrangements

ThisLawonfinancialcollateralarrangementstransposesDirective2002/47/EC of the European Parliament and of the Council of 6 June2002.



Law of 9 May 2006 on market abuse (Market Abuse Law), as amended

This Law lays down the legal framework for the detection and prevention of market abuse, as well as sanctions. This Law transposes: • Directive2003/6/ECoftheEuropeanParliamentandofthe

Councilof28January2003oninsiderdealingandmarketmanipulation (market abuse)

• CommissionDirective2003/124/ECof22December2003implementingDirective2003/6/ECoftheEuropeanParliamentandoftheCouncilasregardsthedefinitionandpublicdisclosureofinsideinformationandthedefinitionofmarketmanipulation

• CommissionDirective2003/125/ECof22December2003implementingDirective2003/6/ECoftheEuropeanParliamentand of the Council as regards the fair presentation of investment recommendationsandthedisclosureofconflictsofinterest

• CommissionDirective2004/72/ECof29April2004implementingDirective2003/6/ECoftheEuropeanParliamentand of the Council as regards accepted market practices, the definitionofinsideinformationinrelationtoderivativesoncommodities,thedrawingupoflistsofinsiders,thenotificationofmanagers’transactionsandthenotificationofsuspicioustransactions

Lawof19May2006implementingDirective2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids

This law applies to takeover bids for the securities of companies governed by the laws of a Member State of the European Union or the European Economic Area (hereinafter referred to as a “Member State”) where all or some of those securities are admitted to trading on a regulated market in one or more Member States (hereinafter referred to as a “regulated market”).

Law of 25 August 2006 on the European company, as amended

This Law introduces the concept of the European company (Societas Europeae or S.E.) and modernizes the 1915 Law.

Lawof13July2007onmarketsinfinancialinstruments

This Law transposes the “Level 1” Markets in Financial Instruments Directive(MiFID-Directive2004/39/EC).Italsomodifies,inter alia, the 1993 Law.

Lawof11January2008Lawontransparencyrequirements in relation to information about issuers whose securities are admitted to trading on a regulated market, as amended

This Law transposes, inter alia,Directive2004/109/ECoftheEuropeanParliamentandoftheCouncilof15December2004on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market.

Lawof17July2008onthefightagainstmoneylaunderingandterroristfinancing

ThisLawtransposestheThirdAnti-MoneyLaunderingDirective(2006/70/EC) on AML/CFT.

Lawof24October2008improvingthelegislativeframeworkofthefinancialcenter

This Law updates Luxembourg’s legal framework for covered bonds under the Law of 5 April 1993. The updated framework, inter alia, permits loans to be granted by covered bond banks in the form of investments in debt securities issued by securitization vehicles, permits loan coverage in the form of any type of guarantee provided by a public institution, and extends the collateral of covered bonds to moveable property, such as rolling stock, provided certain conditions are met.

Lawof19December2008modifyingcertainprovisions relating to direct taxation

This Law introduces a series of tax measures aimed at improving the competitiveness and attractiveness of Luxembourg’s tax environment. The Law inter alia: extends the application of the withholding tax exemption to dividends paid to qualifying entities residing in a State that has a double taxation treaty with Luxembourg, abolished capital duty, and introduced a registration duty.

Lawof18December2009ontheauditprofession

This Law inter alia outlines the main provisions on the training and appropriate monitoring of the audit profession in Luxembourg.



Lawof27October2010ontheanti-moneylaunderingandcounterterroristfinancinglegalframework

This Law enhances the anti-money laundering and counter terroristfinancing(AML/CFT)legalframework,organizesthecontrols of physical transport of cash entering, transiting through or leaving Luxembourg, implements United Nations Securities Council resolutions and acts adopted by the EU concerning prohibitionsandrestrictivemeasuresinfinancialmattersinrespect of certain persons, entities and groups in the context of thecombatagainstterroristfinancing.

Lawof10December2010ontheintroductionofinternationalfinancialreportingstandardsfor companies

This Law introduces the possibility for commercial companies to prepare and present their annual and consolidated accounts under International Financial Reporting Standards (IFRS).

Lawof3July2012implementsDirective2010/73/EU amending the Prospectus Directive(Directive2003/71/EContheprospectus to be published when securities are offered to the public or admitted to trading)andtheTransparencyDirective(Directive2004/109/EContheharmonizationof transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market).

ThisLawmodifiestheProspectusLaw(theLawof10July2005on prospectuses for securities) and the Transparency Law (the Law of11January2008ontransparencyrequirementsforissuersofsecurities).

TheLawof21July2012onmandatorysqueeze-out and sell-out of securities of companies currently admitted or previously admitted to trading on a regulated market or having been offered to the public

This Law governs the mandatory squeeze-out, the mandatory sell-outandcertainnotificationanddisclosureobligations,whereacompanyhasitsregisteredofficeinLuxembourgandallorpartofits securities:• Are admitted to trading on a regulated market in one or several

Member States• Were admitted on a regulated market• Were offered to the public

Law of 6 April 2013 on dematerialized securities

TheLawdefinestheLuxembourglegalframeworkapplicabletodematerialized securities. It lays down, inter alia, the requirements relating to:• Issuance of dematerialized securities• Conversion of existing securities into dematerialized form• The transmission of dematerialized securities

Lawof12July2013onshortsellingoffinancialinstruments

The Law, inter alia,confirmsthattheCSSFisthecompetentauthority in relation to short selling.

II.4. EU Regulations

Investment fund Regulations


Regulation (EU) No 345/2013 of 17 April 2013 on European venture capital funds (EuVECA)

This regulation aims at laying down a common framework of rules regarding the use of the designation “EuVECA” for qualifying venture capital funds, in particular the composition of the portfolio of funds that operate under that designation, their eligible investment targets, the investment tools they may employ and the categories of investors that are eligible to invest in them by uniform rules in the European Union.

Regulation (EU) No 346/2013 of 17 April 2013 on European social entrepreneurship funds (EuSEF).

This regulation lays down a necessary common framework of rules regarding the use of the designation “EuSEF” for qualifying social entrepreneurship funds, in particular on the composition of the portfolio of funds that operate under that designation, their eligible investment targets, the investment tools they may employ and the categories of investors that are eligible to invest in them by uniform rules in the European Union.


OtherrelevantRegulations


Regulation (EC) No 1781/2006 of the European Parliament and of the Council of 15 November 2006 on information on the payer accompanying transfers of funds

This Regulation lays down rules on information on the payer to accompany transfers of funds for the purposes of the prevention, investigation and detection of money laundering and terrorist financing.

Council Implementing Regulation (EU) No 282/2011 of 15 March 2011 laying downimplementingmeasuresforDirective2006/112/EC in the common system of value added tax

This Regulation lays down new implementing measures for the VAT Directive.Thisregulationbecameeffectiveon1July2011.

Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies, as amended by Regulation (EU) 513/2011 of 11 May 2011 and Regulation (EU) 462/2013 of 21 May 2013

This Regulation contains rules aiming at ensuring that credit rating activities are conducted in accordance with the principles of integrity, transparency, responsibility and good governance in order to ensure that resulting credit ratings used in the European Community are independent, objective and of adequate quality.

Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps

This Regulation contains rules on short selling and certain aspects ofcreditdefaultswapswithregardtodefinitions,thecalculationof net short positions, covered sovereign credit default swaps, notificationthresholds,liquiditythresholdsforsuspendingrestrictions,significantfallsinthevalueoffinancialinstrumentsand adverse events.

Regulation (EU) No 648/2012 of the European ParliamentandoftheCouncilof4July2012onOTCderivatives,centralcounterpartiesandtrade repositories

This Regulation contains rules on introducing a reporting obligationforOTCderivatives;aclearingobligationforeligibleOTCderivatives;measurestoreducecounterpartycreditriskandoperationalriskforbilaterallyclearedOTCderivatives;commonrules for central counterparties (CCPs) and for trade repositories; and rules on the establishment of interoperability between CCPs.

II.5. Grand-Ducal Regulations


Grand-DucalRegulationof14April2003onUCIs eligible for the reduced rate of subscription tax (taxe d’abonnement) under the 2002 Law (now the 2010 Law)

ThisRegulationclarifiesconditionsandproceduresforUCIs(subject to the 2010 Law) to obtain the reduced subscription tax.

Grand-DucalRegulationof3August2005onprospectuses for securities, as amended

This Regulation provides details on prospectuses for securities andwasamendedbytheGrand-DucalRegulationof13July2007relatingtothekeepingoftheofficiallistingforfinancialinstruments.

Grand-DucalRegulationof27February2007onSIFs eligible for the reduced rate of subscription tax (taxe d’abonnement) under the SIF Law

This Regulation determines the conditions and criteria for SIFs to obtain the exemption from subscription tax.

Grand-DucalRegulationof13July2007onthe organizational requirements and operating conditionsforinvestmentfirms

ThisRegulationtransposesthe“Level2”MiFIDDirective(2006/73/EC). It lays down implementing measures for certain articles of the 1993 Law, as amended, inter alia by the Law of 13 July2007.

Grand-DucalRegulationof13July2007relatingtotheholdingofanofficiallistingforfinancialinstruments

This Regulation, inter aliaexecutesarticle37oftheLawof13July2007relatingtomarketsinfinancialinstruments.



Grand-DucalRegulationof11January2008relating to the transparency requirements for issuers of securities

ThisRegulationof11January2008relatingtothetransparencyrequirementsforissuersofsecurities,transposesDirective2007/14/EC of the European Commission of 8 March 2007 laying down detailed rules for the implementation of certain provisions ofDirective2004/109/EContheharmonizationoftransparencyrequirements in relation to information about issuers whose securities are admitted to trading on a regulated market.

Grand-DucalRegulationof8February2008concerningcertaindefinitionsofthe2002Law(now the 2010 Law)

This Regulation sets out the criteria to be considered when assessingwhetheraspecificfinancialinstrumentcanbeconsidered as an eligible asset for investment by a UCITS (i.e., UCIs subject to Part I of the 2010 Law); it is complemented by CSSF Circular08/339.IttransposesCommissionDirective2007/16/ECof 19 March 2007 concerning the eligible assets of UCITS.

Grand-DucalRegulationof1February2010providing details on certain provisions of the amended law of 12 November 2004 on the fightagainstmoneylaunderingandterroristfinancing

ThisRegulationclarifiesprovisionsoftheLawof12November2004asregardsthefightagainstmoneylaunderingandterroristfinancing(AML/CFT).

Grand-DucalRegulationof14July2010relating to the exemption from subscription tax of UCIs (under the 2002 Law (now the 2010 Law)ortheSIFLaw)investinginmicrofinanceinstitutions

This Regulation outlines the criteria to be met for UCIs to be exempt from subscription tax.

Grand-DucalRegulationof29October2010relatingtoimplementingtheLawof27October2010

ThisRegulationimplementstheLawof27October2010implementing United Nations Security Council resolutions as well as acts adopted by the EU concerning prohibitions and restrictive measuresinfinancialmattersinrespectofcertainpersons,entities and groups in the context of the combat against terrorist financing.

Grand-DucalRegulationof29September2012relating to the fees to be levied by the CSSF

This Regulation lays down, inter alia, the CSSF fees applicable to the authorization and supervision of 2010 Law UCIs, SIFs and management companies.

II.6. CSSF Regulations


CSSF Regulation 10-04 published on 24 December2010onthetranspositionoftheCommissionDirective2010/43/EUof1July2010implementingDirective2009/65/ECofthe European Parliament and of the Council as regards organizational requirements, conflictsofinterest,conductofbusiness,riskmanagement and content of the agreement between a depositary and a management company

This Regulation states the implementing measures of the Law of17December2010concerningundertakingsforcollectiveinvestmentasregardsorganizationalrequirements,conflictsofinterest, conduct of business, risk management and content of the agreement between a depositary and a management company.

CSSF Regulation 10-05 published on 24 December2010(asamendedbyCSSFRegulation 11-04) on the transposition of the CommissionDirective2010/44/EUof1July2010implementingDirective2009/65/ECofthe European Parliament and of the Council as regards certain provisions concerning fund mergers, master-feeder structures and notificationprocedure

This Regulation states the implementing measures of the Law of17December2010relatingtoundertakingsforcollectiveinvestment as regards certain provisions concerning fund mergers, master-feederstructuresandnotificationprocedure.



CSSF Regulation 12-01 published on 6 September 2012 laying down detailed rules for the application of Article 42a of the Law of 13 February 2007 relating to specialized investment funds concerning the requirements regardingriskmanagementandconflictsofinterest

ThisRegulationclarifiestheriskmanagementandconflictsofinterest requirements of the SIF Law.

CSSFRegulation12-02of14December2012onthefightagainstmoneylaunderingandterroristfinancing

ThisRegulationclarifiesandcompletescertainelementsofLuxembourg’s anti-money laundering and counter terrorist financing(AML/CFT)frameworkandmakescertainexistingprofessional obligations legally binding.

II.7. Commission Regulations


CommissionDirective2007/16/ECof19March2007implementingtheUCITSDirectiveasregardstheclarificationofcertaindefinitions

ThisDirectiveclarifiestheUCITSDirectiveinrelationtotheeligibleassets of UCITS

Commission Regulation (EU) No 583/2010 of1July2010implementingDirective2009/65/EC of the European Parliament and of the Council 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

This Regulation contains rules on the form and content of key investorinformation.DetailedGuidelineswerepublishedbyCESR.

Commission Regulation (EU) No 584/2010 of 1 July2010implementingDirective2009/65/ECof the European Parliament and of the Council as regards the form and content of the standard notificationletterandUCITSattestation,theuse of electronic communication between competent authorities for the purpose of notification,andproceduresforon-the-spotverificationsandinvestigationsandtheexchange of information between competent authorities

This Regulation contains measures on the form and contents ofstandardizednotificationandattestationletters,electroniccommunicationbetweencompetentauthoritiesfornotificationpurposes,proceduresforon-the-spotverificationsandinvestigations and the exchange of information between competent authorities. The implementing measures were published by CESR.



Commission Regulations on short selling and certain aspects of credit default swaps:• CommissionDelegatedRegulation(EU)No

826/2012of29June2012supplementingRegulation (EU) No 236/2012 with regard to regulatorytechnicalstandardsonnotificationand disclosure requirements with regard to net short positions, the details of the information to be provided to the European Securities and Markets Authority in relation to net short positions and the method for calculating turnover to determine exempted shares

• Commission Implementing Regulation (EU) No827/2012of29June2012layingdownimplementing technical standards with regard to the means for public disclosure of net position in shares, the format of the information to be provided to the European Securities and Markets Authority in relation to net short positions, the types of agreements, arrangements and measures to adequately ensure that shares or sovereign debt instruments are available for settlement and the dates and period for the determination of the principal venue for a share according to Regulation (EU) No 236/2012

• CommissionDelegatedRegulation(EU)No918/2012of5July2012supplementingRegulation (EU) No 236/2012 with regard todefinitions,thecalculationofnetshortpositions, covered sovereign credit default swaps,notificationthresholds,liquiditythresholds for suspending restrictions, significantfallsinthevalueoffinancialinstruments and adverse events

• CommissionDelegatedRegulation(EU)No919/2012of5July2012supplementingRegulation (EU) No 236/2012 with regard to regulatory technical standards for the method of calculation of the fall in value for liquidsharesandotherfinancialinstruments

These implementing Regulations clarify certain aspects of regulation (EU) No 236/2012 of 14 March 2012 on short selling and certain aspects of credit default swaps.

CommissionDelegated(EU)RegulationNo231/2013of19December2012supplementingDirective2011/61/EUonexemptions, general operating conditions, depositaries, leverage, transparency and supervision

ThisimplementingRegulationclarifiescertainaspectsofDirective2011/61/EU on exemptions, general operating conditions, depositaries, leverage, transparency and supervision and ensures the direct applicability of detailed uniform rules concerning the operation of AIFM.

CommissionDelegatedRegulation(EU)No148/2013of19December2012supplementing Regulation (EU) No 648/2012 with regard to regulatory technical standards on the minimum details of the data to be reported to trade repositories

ACommissionDelegatedRegulationclarifyingreportingtotraderepositories under the European Market Infrastructure Regulation (EMIR).

CommissionDelegatedRegulation(EU)No149/2013of19December2012supplementing Regulation (EU) No 648/2012 with regard to regulatory technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a tradingvenue,non-financialcounterparties,andriskmitigationtechniquesforOTCderivativescontracts not cleared by a CCP

ACommissionDelegatedRegulationclarifying,inter alia, indirect clearing arrangements, the clearing obligation, access to a trading venue,andriskmitigationtechniquesforOTCderivativescontractsnot cleared by a CCP under EMIR.



Commission Implementing Regulation (EU) No 448/2013 of 15 May 2013 establishing a procedure for determining the Member State of reference of a non-EU AIFM pursuant toDirective2011/61/EUoftheEuropeanParliament and of the Council

This regulation establishes a procedure for determining the Member State of reference of a non-EU AIFM, procedure which differs from the procedure for applying for a passport under Directive2011/61/EU.

Commission Implementing Regulation (EU) No 447/2013 of 15 May 2013 establishing the procedure for AIFMs which choose to opt in underDirective2011/61/EUoftheEuropeanParliament and of the Council

This regulation is meant for AIFM choosing to opt in under Directive2011/61/EUwhichshouldconsequentlyfollowthesameprocedure as that established for AIFM that are obliged to seek authorizationunderDirective2011/61/EU.

II.8. CSSF Circulars


Circular91/75of21January1991onUCIs(asamended by Circular 05/177)

This substantial Circular (16 chapters) complemented the 1988 Law, a precursor to the 2010 Law. Circular 91/75 inter alia:• ExplainsthecriteriabywhichthemeaningofUCIisdefined• Outlinestherulesconcerningthecentraladministrationandthe

depositary• Outlinestherulesapplicabletoredemptionsofsharesorunits

of UCIs• Providescertaindefinitionsanddetailedinvestmentrestrictions• OutlinestherulesapplicabletomultiplecompartmentUCIs

Circular97/136of13June1997(asamendedbyCircular08/348)concerningfinancialreports to be prepared on a monthly and yearly basis

This Circular outlines the requirement for all Luxembourg UCIs to producemonthlyandannualfinancialinformationfortheattentionof the CSSF (previously the IML) and STATEC to be submitted via Centrale de Communications Luxembourg S.A. (now Finesti).

Circular 98/143 of 1 April 1998 (as amended by Circular 04/155) on internal control

This Circular covers the principles of adequate internal control and clarifiestheroleoftheinternalauditfunction.

Circular 02/77 of 27 November 2002 on NAV errors and active breaches of investment restrictions

This Circular establishes rules to be followed in the case of material net asset value (NAV) calculation errors and active breaches of investment restrictions.

Circular02/80of5December2002onUCIswith alternative investment strategies (hedge funds)

ThisCircularsetsoutaframeworkandspecifiesrulesapplicabletoUCIs (not UCITS) which have alternative investment strategies.

Circular02/81of6December2002ontheexternalauditandspecificallytherequirementof a long form report

This Circular introduced the requirement of a long form report for eachUCI(institutionalUCIsareexempted)andspecifiesthetopicsto be addressed.

Circular03/88of22January2003ontheclassification(PartIorPartII)ofUCIsgovernedby the 2002 Law (now the 2010 Law)

ThisCircularclarifiesthedistinctionbetweenUCIsfallingunderPart I or Part II of the 2010 Law.

Circular 03/97 of 28 February 2003 on simplifiedandfullprospectusesandannualandsemi-annual reports

ThisCircularclarifiestheprocedureforthepublicationofsimplifiedandfullprospectusesandannualandsemi-annualreports under the 2010 Law. Such documents are made available electronically by means of a funds registry set up by Centrale de Communications Luxembourg S.A. (now Finesti).

Circular04/146of17June2004ontheprotection of UCIs and their investors against Late Trading and Market Timing practices

ThisCircularclarifiestheprotectivemeasurestobeadoptedbyUCIsandcertainoftheirserviceproviders,fixesmoregeneralrules of conduct for all professionals subject to CSSF supervision and extends the role of the auditor regarding Late Trading and Market Timing.



CSSF Circular 04/155 of 27 September 2004 on the compliance function

This Circular sets out the rules governing the compliance function offinancialentities.

Circular 06/257 of 17 August 2006 on the implementation rules of the Law of 9 May 2006 on market abuse

This Circular describes the main provisions contained in the Law of 9 May 2006.

Circular07/277of9January2007onthenewnotificationprocedureinlinewiththeguidelinesoftheCESRregardingthesimplificationoftheUCITSnotificationprocedure

ThisCirculardrawsattentiontothenewnotificationproceduresand sets out the approach adopted by the CSSF as regards European passports for UCITS following the adoption of the new CESR guidelines.

Circular 07/280 of 5 February 2007 (as amended by Circular 07/323) on the implementation rules of the Law of 9 May 2006 on market abuse

This Circular is a follow-up to Circular 06/257 and provides explanations and guidelines concerning certain provisions of the Law of 9 May 2006 on market abuse.

Circular07/281ontheLawof18December2006 concerning the distance marketing of financialservices

This Circular outlines the essential elements of the Law of 18 December2006concerningthedistancemarketingofconsumerfinancialservices(replacedbytheConsumerCode).

Circular 07/283 of 28 February 2007 on the entry into force of the Law of 13 February 2007 relating to Specialized Investment Funds

This Circular presents a summary of the main elements of the legal framework introduced by the SIF Law.

CSSF Circular 07/290 of 3 May 2007 (as amended by CSSF Circulars 10/451, 10/483, 10/497and13/568)onthedefinitionofcapitalratios pursuant to article 56 of the amended Lawof5April1993onthefinancialsector

ThisCircularcoversthedefinitionofcapitalratiospursuanttoArticle56oftheamendedLawof5April1993onthefinancialsector;itappliestoinvestmentfirmsandmanagementcompaniessubject to Chapter 15 of the 2010 Law which provide investment portfolio management services where such portfolios include one orseveralfinancialinstruments.

Circular07/307of31July2007(asamendedby CSSF Circulars 13/560 and 13/568) on MiFID:Rulesofconductinthefinancialsector

ThisCircularprovidesclarificationregardingcertainprovisionsoftheLawandGrand-DucalRegulation,bothof13July2007,implementingMiFID.

Circular 07/308 of 2 August 2007 providing guidelines for undertakings for collective investment in transferable securities concerning the use of a risk management method, as well as the use of derivative instruments

This Circular provides guidelines to be followed by UCITS (i.e., UCIs subject to Part I of the 2010 Law) in the context of the implementation of a risk management process, the risk limits applicable,theuseoffinancialderivativeinstrumentsandinformation to be communicated to the CSSF. It replaces Circular 05/176.

Circular 07/309 of 3 August 2007 on risk spreading in the context of Specialized Investment Funds

ThisCircularclarifiesthedefinitionofriskdiversificationinthecontext of funds under the SIF Law.

Circular 07/310 of 3 August 2007 on the financialinformationtobeprovidedbySpecialized Investment Funds

ThisCircularsetsoutthefinancialinformationthatfundsunderthe SIF Law must provide to the CSSF on a monthly and annual basis.

Circular 07/323 of 7 November 2007 on the amendment of Circular 07/280 on the implementation rules of the law of 9 May 2006 on market abuse

This Circular amends Circular 07/280 following CESR’s publication of “Level 3 - second set of CESR guidance and information on thecommonoperationoftheDirectivetothemarket”(CESR/06-562b).

Circular08/334of4January2008onencryptionspecificationsforreportingfirms

This Circular provides certain details relating to the encryption methodsforMiFIDandotherreporting.

Circular 08/339 of 19 February 2008 on the Guidelines of the Committee of European Securities Regulators (CESR) concerning eligible assets for investment by UCITS (updated by Circular 08/380)

ThisCircularprovidescriteriaadditionaltothoseinGrand-DucalRegulation of 8 February 2008 to be considered when assessing whetheraspecificfinancialinstrumentcanbeconsideredasaneligible asset for investment by a UCITS (i.e., UCIs subject to Part I of the 2010 Law). It reproduces CESR’s two sets of guidelines:• CESR’s guidelines concerning eligible assets for investment in

UCITS • CESR’s guidelines concerning eligible assets for investment by

UCITS–Theclassificationofhedgefundindicesasfinancialindices



Circular 08/348 of 17 April 2008 concerning changes to Circulars IML 97/136 and CSSF 07/310

ThisCircularmodifiesIMLCircular97/136andCSSFCircular07/310onthefinancialinformationwhichinvestmentfunds(funds under the 2010 Law and SIF Law funds respectively) have to communicate to Finesti (previously CCLux). The delay for communicationofmonthlyfinancialinformationisreducedfrom20 to 10 days.

Circular08/356of4June2008outliningrules applying to UCIs relating to transferable securities and money market instruments

This Circular outlines the rules applicable to UCIs when they employ securities lending transactions, sale with the right of repurchase transactions and reverse repurchase and repurchase agreement transactions.

Circular 08/371 of 5 September 2008 on electronic transmission of prospectuses and financialreportsofUCIsandSIFstotheCSSF

This Circular introduces the requirement to transmit electronically, viathee-filecommunicationplatform,prospectusesandfinancialreports of UCIs to the CSSF.

Circular 08/372 of 5 September 2008 on guidelines for depositaries of Specialized Investment Funds adopting alternative investment strategies, where those funds use the services of a prime broker

ThisCircularclarifiestherulesapplicabletotheSIF’sdepositariesinthespecificcaseofSIFswithalternativeinvestmentstrategiesappointing a prime broker.

Circular 08/380 of 26 November 2008 on guidelines of the Committee of European Securities Regulators (CESR) concerning eligible assets for investment by UCITS

This Circular sets out the CESR Guidelines on eligible assets for investments by UCITS and updates Circular 08/339.

Circular09/423of2December2009onelectronic transmission to the CSSF of long form reports and management letters

ThisCircularoutlinestheproceduresandtechnicalspecificationsfor the electronic transmission of UCI management letters and long form reports.

Circular 10/437 of 1 February 2010 on guidelines concerning the remuneration policies inthefinancialsector

This Circular implements European Commission Recommendation 2009/384/EConremunerationpoliciesinthefinancialservicessector of 30 April 2009 and is applicable to all entities subject to CSSF supervision.

Circular10/467of1July2010onelectronictransmissionoffinancialinformationtobetransmitted to the CSSF on a periodic basis by management companies subject to Chapter 13 of the 2002 Law (now Chapter 15 of the 2010 Law) and modifying certain periodic tables

This Circular outlines the technical requirements relating to electronictransmissionoffinancialinformationtotheCSSFbyChapter15managementcompaniesandmodifiestheperiodicreporting templates, as referred to in CSSF Circular 12/546.

Circular10/495of9December2010relatingtotheentryintoforceoftheLawof27October2010onthefightagainstmoneylaunderingandterroristfinancing

This Circular highlights the entry into force of the Law of 27 October2010whichenhancestheanti-moneylaunderingandcounterterroristfinancinglegalframework,organizesthecontrolsof physical transport of cash entering, transiting through or leaving Luxembourg, implements United Nations Securities Council resolutions and acts adopted by the EU.

Circular11/498of10January2011relatingtothe entry into force of the 2010 Law and CSSF Regulations 10-4 and 10-5

This Circular outlines certain implementation measures adopted by Luxembourg with respect to the 2010 Law.

Circular 11/503 of 3 March 2011 relating to the obligations applicable to the transmission andpublicationoffinancialinformationandrelated deadlines

This Circular acts as a reminder on the obligations applicable tothetransmissionandpublicationoffinancialinformationandrelateddeadlinesgivencertaindeficienciesnotedbytheCSSF.

Circular 11/509 of 15 April 2011 relating to thenewnotificationprocedurestobefollowedby a UCITS governed by Luxembourg law wishing to market its units in another Member State of the European Union and by a UCITS of another Member State of the European Union wishing to market its units in Luxembourg

ThisCircularclarifiesthepracticalandtechnicalproceduresthatUCITSmustfollowforcross-bordermarketing–i.e.,thenotificationprocedures to be followed by a Luxembourg UCITS intending to market its units in another Member State of the European Union and by a UCITS of another Member State of the European Union wishing to market its units in Luxembourg.

Circular 11/512 of 30 May 2011 on the main regulatory changes in risk management for Luxembourg UCITS

ThisCircularclarifiestheriskmanagementrequirementsapplicable to Luxembourg UCITS management companies and Luxembourg domiciled UCITS (including self-managed UCITS) including:• The main regulatory changes in risk management following

publicationofCSSFRegulation10-4andESMAclarifications• FurtherclarificationsfromtheCSSFonriskmanagementrules• Adefinitionofthecontentandformatoftheriskmanagement

process to be communication to the CSSF



Circular11/519of19July2011onRiskanalysisregardingthefightagainstmoneylaunderingandterroristfinancing(AML/CFT)

This circular provides details on CSSF requirements on the application of Article 3 (3) of the Law of 12 November 2004 onthefightagainstmoneylaunderingandagainstfinancingof terrorism and on the risk analysis to be carried out by credit institutions.

Circular11/528of15December2011onthe abolition of the transmission to the CSSF of suspicious transaction reports regarding potential money laundering or terrorist financing

ThisCircularrepealspoint137ofCircular08/387onthefightagainstmoneylaunderingandterroristfinancingandpreventionoftheuseofthefinancialsectorforthepurposeofmoneylaunderingandterroristfinancing.

Circular11/529of22December2011onriskanalysisregardingthefightagainstmoneylaunderingandterroristfinancing(AML/CFT)

This Circular provides details of the CSSF’s requirements on the application of Article 3(3) of the Law of 12 November 2004 on thefightagainstmoneylaunderingandterroristfinancing,asamended,andontheriskanalysistobecarriedoutbyfinancialsector entities subject to supervision by the CSSF (except banks).

Circular 12/536 of 27 March 2012 on guidelines of the European Securities and Markets Authority on systems and controls in an automated trading environment

This Circular transposes ESMA’s guidelines on systems and controls in an automated trading environment.

Circular12/539of6July2012ontechnicalspecificationsregardingthesubmissionto the CSSF of documents under the Law on prospectuses for securities and general overview of the aforementioned law

This Circular: • Sets out the European context of the Prospectus Law, the major

amendmentsintroducedbytheLawof3July2012totheregulations governing prospectuses, the three regimes set up by the Prospectus Law for the approval of prospectuses, as well as thecompetencesandmissionsoftheCSSFinthisfield,and

• SpecifiesthetechnicalproceduresregardingsubmissiontotheCSSFofdocumentsfortheapproval,notification,filingorcommunication regarding offers of securities to the public and admissions of securities to trading on a regulated market.

• Replaces Circular 05/226

Circular12/540of9July2012onnon-launched compartments, compartments awaiting reactivation and compartments in liquidation

This Circular covers both compartments under the 2010 Law and the SIF Law. Shares or unit classes within compartments are not covered.

Circular12/545of1October2012ontheentryintoforceofthelawof21July2012on mandatory squeeze-out and sell-out of securities of companies currently admitted or previously admitted to trading on a regulated market or having been offered to the public

This Circular outlines the main provisions of the Law on mandatory squeeze-out and sell-out of securities of companies currently admitted or previously admitted to trading on a regulated market or having been offered to the public, and describes the squeeze-outandsell-outprocedures,thenotification,publicationandcommunication requirements, and the role of the CSSF. It also includestheformtobeusedfornotificationtotheCSSF.

Circular12/546ofOctober2012asregardsthe authorisation and organisation of the Luxembourg management companies subject toChapter15oftheLawof17December2010 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 oftheLawof17December2010relatingtoundertakings for collective investment

TheCircularclarifiesrequirementsapplicabletoChapter15management companies and self-managed investment companies, inter alia,onshareholders,ownfunds,BoardofDirectorsandsenior management, central administration and internal control, external audit, delegation, program of activities. It also covers requirements applicable to management companies which carry out collective portfolio management activities and management of portfoliosofinvestmentsonaclient-by-clientbasis.Itclarifiestheapplication of the principle of proportionality.

Circular12/548of30October2012(asamended by Circular 13/565) on the entry into force of Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps and details on certain practicalaspectsofnotification,disclosureandexemptionprocedures,asmodifiedbyCSSFCircular 13/565

This Circular covers provides practical details and guidance in relation to: • Thenotificationordisclosureofsignificantnetshortpositionsto

the CSSF• The exemption for market making activities and primary market

operations • The publication, by ESMA and by the CSSF, of relevant

information in application of the Regulation


II.9. BCL Circulars


BCL Circular 2013/231 and CSSF Circular 13/564of28March2013onmodificationofthe statistical data collection for money market funds and non-money market funds

The main Luxembourg Central Bank (BCL)/CSSF Circular covering its monthly and quarterly information reporting requirements.

II.10. ESMA guidelines



Circular 12/549 of 9 November 2012 ontechnicalspecificationsregardingthesubmission to the CSSF of documents under the law on prospectuses for securities for offers to the public of units or shares of Luxembourg closed-end undertakings for collective investment and/or admissions of units or shares of Luxembourg closed-end undertakings for collective investment to trading on a regulated market.

ThisCircularoutlines,amongothers,technicalspecificationsregarding the submission to the CSSF of different types of documents.

Circular13/556of16January2013ontheentry into force of CSSF Regulation No 12-02 of 14December2012onthefightagainstmoneylaunderingandterroristfinancing-repealofCirculars CSSF 08/387 and CSSF 10/476

This Circular covers the entry into force of CSSF Regulation 12-02 on AML/CFT and repeals Circular 08/387, as amended.

Circular 13/559 of 18 February 2013 on ESMA’s guidelines on ETFs and other UCITS issues

This Circular implements ESMA’s guidelines on ETFs and other UCITS issues in Luxembourg.

Circular 13/560 of 19 February 2013: Addition of an Annex IV to Circular CSSF 07/307, transposing the guidelines of the European Securities and Markets Authority (ESMA) concerning Chapter 6 - Suitability test - of Circular 07/307

This Circular implements ESMA’s Guidelines on certain aspects of theMiFIDsuitabilityrequirementsinLuxembourg.

Circular13/567of27June2013ondeficientor non-satisfactory AML/CFT regimes

This Circular, issued in light of Financial Action Task Force (FATF) statements regarding jurisdictions whose AML/CFT regime:• Hassubstantialandstrategicdeficiencies• Isnotmakingsufficientprogressinremedyingthedeficiencies• Is not satisfactory


Guidelines concerning eligible assets for investment by UCITS, CESR256, March 2007

These Guidelines clarify the investment and borrowing rules applicabletoUCITS.Theywereclarifiedby:• Amendments made by CESR in September 2008• EligibleassetsforinvestmentbyUCITS–Theclassificationof

hedgefundindicesasfinancialindices,CESR,July2007

Eligible assets for investment by UCITS – The classificationofhedgefundindicesasfinancialindices,CESR,July2007

These guidelines clarify ESMA’s Guidelines concerning eligible assetsforinvestmentbyUCITSinrelationtotheclassificationofhedgefundindicesasfinancialindices



Guidelines for the prudential assessment of acquisitions and increase of holdings in the financialsectorrequiredbyDirective2007/44/EC,CESR,CEBSandCEIOPS,December2008

ThesejointGuidelinesdefinecooperationarrangementsinordertoensureanadequateandtimelyflowofinformationbetweensupervisors. They also establish an exhaustive and harmonized list of information that proposed acquirers should include in their notificationstothecompetentsupervisoryauthorities.

GuidelinesonacommondefinitionofEuropeanmoney market funds, ESMA (previously CESR), May 2010

TheseGuidelinessetoutacommondefinitionofEuropeanMoneyMarket Funds aligned with investor expectation and aimed at improving investor protection.

ESMA Guidelines on risk management:• Risk management principles for UCITS, CESR,

February 2009• Guidelines on risk measurement and

the calculation of global exposure and counterpartyriskforUCITS,CESR,July2010

• Guidelines to competent authorities and UCITS management companies on risk measurement and the calculation of global exposure for certain types of structured UCITS, ESMA, April 2011

These Guidelines, relevant to risk management, are directly applicable in Luxembourg.

ESMA guidelines on the KII:• Guidelines on the methodology for the

calculation of the synthetic risk and reward indicatorintheKIIDocument,CESR,July2010

• Guidelines on the methodology for calculation oftheongoingchargesfigureintheKIIDocument,CESR,July2010

• Guidelines on the selection and presentation of performance scenarios in the KII document forstructuredUCITS,CESR,December2010

• Guide to clear language and layout for the KII document,CESR,December2010

• Template for the KII document, CESR, December2010

Guidelines on the KII.

Guidelines on systems and controls in an automated trading environment for trading platforms,investmentfirmsandcompetentauthorities, ESMA, February 2012

These Guidelines cover organizational requirements for investment firmsandregulatedmarketsandmultilateraltradingfacilities.These guidelines were transposed by CSSF Circular 12/536.

GuidelinesonMiFID:• GuidelinesoncertainaspectsoftheMiFID

suitabilityrequirements,ESMA,July2012• GuidelinesoncertainaspectsoftheMiFID

compliance function requirements, ESMA, July2012

These Guidelines are designed to address a number of issues observedregardingcompliancewithMiFIDsuitabilityrequirementswith respect to investment advice. These Guidelines focus on the responsibility of the compliance function and on organizational requirements (applicable to investmentfirmsandbanks).

Guidelines on ETFs and other UCITS issues, ESMA,December2012

These Guidelines cover: • UCITSusingefficientportfoliomanagementtechniquessuch

as securities lending, sale and repurchase agreements and purchase and resale agreements

• SpecificcategoriesofUCITS:ETFs,indextrackingUCITS(including leveraged index tracking UCITS), UCITS entering into totalreturnswapsandUCITSinvestinginfinancialindices

ESMA guidelines on AIFM: • ESMA Guidelines on sound remuneration

policiesundertheAIFMD,February2013(2013/201)

• ESMA Guidelines on key concepts of the AIFMD,May2013(2013/600)

• ESMA Guidelines on reporting obligations under Article 3 and Article 24 of the AIFMD(Consultationpaperatthetimeofwriting)

TheseGuidelinesonremunerationpoliciesrequiredbytheAIFMDcover scope of application, proportionality principle, AIFM which are part of a group, impact of variable remuneration on the AIFM, governance roles in relation to remuneration, risk alignment and internal and external disclosure.These Guidelines aim to ensure common, uniform and consistent applicationoftheconceptsinthedefinitionof“AIF”undertheAIFMDbyprovidingclarificationoneachoftheseconcepts.These draft guidelines at the time of writing cover, among others, the AIFM obligations in relation to reporting to national competent authorities (NCAs).


II.11. VAT Circulars


VATCircular723of29December2006 ThisCircularconfirmsthatinvestmentvehicleswhosemanagement is VAT exempt by virtue of Article 44(1)(d) of the Luxembourg VAT Law have the status of “taxable persons” for VATpurposesandalsospecifiesthescopeoftheVATexemptmanagement services by excluding the control and supervisory services rendered within the framework of depository services. This Circular entered into force on 1 April 2007.

VAT Circular 723bis of 30 April 2010 ThisCircularclarifiescertainelementsofCircular723.

II.12. Luxembourg Stock Exchange


Rules and regulations of the Luxembourg Stock Exchange(updatedinJuly2012)

This rulebook is split into three main sections. Part 1 covers the admission of securities to trading on the securities markets of the LuxembourgStockExchange,andadmissiontoitsofficiallist.Part2 details the prospectus requirements, and Part 3 lists the market rules of the Luxembourg Stock Exchange.

II.13. CSSF Q&A, Press Releases and Newsletters


CSSF Press Release of 19 September 2008 introducing a ban on naked short sales and of 29 September 2008 clarifying the prohibition

These Press Release cover the ban on uncovered (naked) short sales of shares or any other instrument giving rise to an exposure to the issued share capital of a credit institution or insurance undertaking traded on a regulated market, whether on own account or on behalf of clients.

CSSF Newsletter No. 122 of March 2011 This Newsletter introduces the requirement to indicate transaction costs in the annual report of UCITS.

CSSF Newsletter No. 130 of November 2011 This Newsletter introduces the requirement to included a paragraph relating to the exercise of the rights of investors towards the UCI in the UCI prospectuses.

CSSF Press Release 12/16 of 20 April 2012 entitled Specialized Investment Funds: Entry into force of the Law of 26 March 2012 and information to provide to the CSSF

This Press Release concerns the implementation of appropriate riskmanagementsystemsandtheriskslinkedtoconflictsofinterest, respectively.

CSSF FAQ entitled Key Investor Information Document–FrequentlyAskedQuestions,updatedJuly2012

ThisCSSFFAQclarifiesspecificquestionsinrelationtotheKII.

CSSFPressRelease12/29of31July2012entitled UCITS: Publication of the document “Questions and Answers: Risk Measurement and Calculation of Global Exposure and Counterparty Risk for UCITS” by ESMA and furtherCSSFclarifications

This Press Release covers the requirements in relation to leverage disclosed in the prospectus and annual report by UCITS determining global exposure as per Article 42(3) of the law of 17 December2010throughaValue-at-Risk(VaR)approach.



CSSFPressRelease12/45of31October2012entitled UCI and promoter

This Press Release covers the abolition of status of “promoter” of UCITS and Part II UCIs which are managed by a UCITS (Chapter 15) management company. It also indicates that the CSSF will reconsider the subject of “promotership” following transposition oftheAlternativeInvestmentFundManagersDirective(AIFMDirective).

CSSF Press Release 12/46 of 23 November 2012entitledOpinionbyESMAwithregardto investments in open ended funds subject to Article50(2)(A)oftheUCITSDirective(“TrashRatio”)

This Press Release covers the Luxembourg implementation of ESMA’sOpinionentitledArticle50(2)(a)ofDirective2009/65/EC,November 2012.

CSSFPressReleases13/02of10January2013 and 13/12 of 6 March 2013 to all Luxembourg advisers of undertakings for collective investment referred to in the law of 17December2010orofspecializedinvestmentfunds referred to in the Law of 13 February 2007 (the “Advisers”)

These Press Releases cover the authorization of investment advisers to Luxembourg UCIs.

CSSF FAQ entitled Master/Feeder Structures, June2013

ThisFAQcoversfinancialreportinginthecontextofmaster-feederstructures.

CSSF FAQ concerning the Luxembourg Law of 12July2013onalternativeinvestmentfundmanagersaswellastheCommissionDelegatedRegulation(EU)No231/2013of19December2012,June2013,updatedinJuly2013

The CSSF’s FAQ covers:• AIF and AIFM in scope of the AIFM Law• AIFM application for authorization or registration • The application of the AIFM Law to existing and future

Luxembourg management companies and internally managed AIF

• The relationship between AIFM and credit institutions and investmentfirms

• The legal forms of AIF• DelegationbyAIFM• Transitional provisions for AIFM and AIF• Scope of authorized activities of AIFM• Depositaryaspects• Cooperation agreements signed between Luxembourg and third

countries

CSSF Press Release 13/36 entitled Guidance in relation to regulation (EU) No 345/2013 (EuVECA) and regulation (EU) No 346/2013 (EuSEF), August 2013

This Press Release provides guidance for managers who wish to obtain the designations European venture capital fund (EuVECA) or European social entrepreneurship fund (EuSEF).

InadditiontotheformalpressreleasesandFAQ,theCSSFalsoprovidesclarificationofitssupervisoryexpectations in its annual reports – for example, its annual reports of 2009 and 2012.

II.14. ESMA Q&A and opinions


ESMA Questions and Answers on A Common DefinitionofEuropeanMoneyMarketFunds,February 2012

This Q&A is designed to help management companies and competent authorities by providing clarity as to the content of CESR’sguidelinesonaCommonDefinitionofEuropeanMoneyMarket Funds, inter alia, in relation to ratings, calculation of the weighted average maturity and weighted average life.

Questions and Answers on Risk Measurement and Calculation of Global Exposure and CounterpartyRiskforUCITS,ESMA,July2012

Thispaperprovidesclarificationon• Hedging strategies • DisclosureofleveragebyUCITS• Concentration rules• Calculation of global exposure for funds of funds



ESMA Questions and Answers (Q&A) document entitledKeyInvestorInformationDocument(KIID)forUCITS,September2012

ESMA Q&A on the requirements to produce a KII, provide the KII to investors, and disclosures in the KII.

ESMAOpinionentitledArticle50(2)(a)ofDirective2009/65/EC,November2012

ESMA opinion on the inclusion of UCIs in the “trash ratio”.

ESMA Questions and Answers on Implementation of the Regulation on short selling and certain aspects of credit default swaps(2ndupdate),January2013

The Q&A covers, inter alia, scope, transparency of net short positions, calculating the net short position, net short positions when different entities in a group have long or short positions orforfundmanagementactivities,handlingofnotificationanddisclosure of net short positions, uncovered short sales and uncoveredsovereignCDS.

ESMA Questions and Answers: ESMA’s GuidelinesonETFsandotherUCITSissues,July2013

This FAQ covers• Information to be included in the prospectus• UCITS ETF label and secondary market• Efficientportfoliomanagementtechniques• Financial derivative instruments• Collateral management• Financial indices• Transitional provisions

ESMAOpiniononpracticalarrangementsforthelatetranspositionoftheAIFMD,August2013

ESMA’sopinioncoverstheexerciseoftheAIFMDirectivepassportsfor cross-border marketing of AIF and cross-border management of AIF in host Member States which have not yet transposed the AIFM Directive.

II.15. ALFI publications


ALFI report entitled Fair Value Pricing and ArbitrageProtection,October2004

The report aims to provide practical guidance on the prevention of late trading and market timing in the fund industry.

ALFI interpretations and recommendations entitledTheEuropeanSavingsDirective,June2005

The paper covers, inter alia, the concept of paying agent in the context of the fund industry, requirements of a paying agent, distributions and capital gains treated as interest payments, look through principle, role of Luxembourg paying agents and treatmentofspecifictransactions.

ALFI guidance entitled calculation of amortised cost vs market value deviation for funds requiring such assessment according to their prospectus, February 2009

This guidance covers the conditions under which sub-3 month paper may be valued at amortized cost price.

ALFINewsflashentitledSidepockets–Fast-track procedures, March 2009

Thisnewsflashoutlinesthefasttrackprocedurefortheauthorization of side pockets covering pre-requisites, side-pocketing options, information to be provided to the CSSF and authorization.

ALFI guidance on the UCITS borrowing principles, August 2009

TheguidanceclarifiespracticalapplicationoftheUCITSborrowingrestrictions.

ALFI Best practice guidelines for depositary banks:• In relation to the safekeeping of assets from

UCITS funds held through the traditional custody network

• In relation to the safekeeping of assets from UCITS funds not held through the traditional custody network September 2009

ALFI Best practice guidelines for depositary banks in relation to the safekeeping of the assets of UCITS.

ALFI report entitled Swing Pricing, March 2011 This report presents the results of a survey of swing pricing practices and updated swing pricing guidelines, originally released in 2006.



ALFI Position Paper on the CSSF Regulation No 10-4: Treatment of subscription and redemption ordersunderUCITSIV,January2012

This ALFI Position Paper is to outline ALFI’s recommendations by way of providing Best Market Practice Guidelines on the treatment of subscription and redemption orders.

ALFI guidelines entitled Real Estate Investment Funds: Best Practices - Financial Reporting, March 2012

These guidelines for real estate investment funds (REIF) cover property valuation, valuation uncertainty, accounting, net asset valuecalculation,financialstatementsanddisclosures,specificvehicles, organization of the calculation of the NAV of a Fund of REIF (FoREIF), and the impact of increased valuation uncertainty on fund NAV production.

ALFI guidelines entitled Real Estate Investment Funds:BestPractices–Depositary,March2012

These guidelines for depositaries of real estate investment funds (REIF) cover, inter alia, the role of the depositary of REIF, appointment and removal, duties (safekeeping and oversight), and practical implementation of the depositary’s role.

ALFI guidelines entitled Risk Management guidelines, updated March 2012

These guidelines include a best practice approach to the organization of the risk function of a UCITS management company or UCITS investment company, provide guidance on the risk monitoring of functions outsourced/delegated by a management company or investment company and include an industry work paper on collateral management.

ALFI Recommendation on the Risk management systemforSpecializedInvestmentFunds,June2012

The document outlines proposals on how market participants may establish and document an adequate risk management system for SIFs, covering the risk management function, and risk identification,measurementandmonitoring.

ALFIKIIDocumentQ&AonUCITSIVimplementation project, September 2012

This updated Q&A, which represents the view of the ALFI Working group on KII, covers questions relating to :• CommissionRegulation(EU)No583/2010of1July2010

implementingDirective2009/65/ECasregardskeyinvestorinformation 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 InformationDocument

• CESR’s guidelines on the methodology for calculation of theongoingchargesfigureintheKeyInvestorInformationDocument

ALFI Islamic Funds - Collection of best practices for setting-up and servicing Islamic funds, December2012

These guidelines cover legal aspects of Luxembourg Shariah or Islamic law funds, fund set-up, administration, depositary and custody, and eligibility of Shariah compliant instruments in a UCITS context.

ALFI guidelines entitled UCITS Liquidity Risk Management, March 2013

These guidelines outline principles of liquidity risk management for UCITS funds, elements of a sound liquidity risk framework and approaches for measuring liquidity risk (market and funding risk).

ALFI guidelines entitled Principles for Sound StressTestingPractices,June2013

These guidelines focus on stress testing in the context of UCITS, covering, inter alia, use of stress testing in UCITS risk governance, stresstestingmethodologiesandscenarioselection,specificrisksof focus, reporting and management actions.

ALFI Code of Conduct for Luxembourg InvestmentFunds,updateJune2013

This objective of the updated Code of Conduct is to provide Boards ofDirectorswithaframeworkofhigh-levelprinciplesandbestpractice recommendations for the governance of Luxembourg investment funds and of management companies, where appropriate.

Practice and Recommendations aimed at reducing the risk of money laundering and terroristfinancingintheLuxembourgFundIndustry, published by ALFI, in association with ABBL,ALCOandALRiM,issuedin2006andupdatedJuly2013

The updated Practices and Recommendations provide guidance onarisk-basedapproachinrelationtocustomeridentificationand transaction monitoring, in line with international standards, which includes the Financial Action Task Force (FATF) “40 Recommendations” updated in February 2012. They also provide a methodology for assessing the equivalence of legal and regulatory know your customer (KYC) requirements of foreign jurisdictions by comparing them to FATF standards.

ABBLandALFIDepositaryBankForumGuidelines and Recommendations for Depositaries:OversightDutiesandCashMonitoringforAIFs,July2013

These guidelines and recommendations cover the regulatory requirementsapplicabletotheoversightdutiesandcashflowmonitoring for AIF, and practical implementation of these requirements.

450 | Appendix III – Withholding Tax Rates Applicable to Luxembourg UCIs

Appendix IIIWithholding Tax Rates Applicable to Luxembourg UCIs

450 | Appendix III - Withholding Tax Rates Applicable to Luxembourg UCIs

Appendix III – Withholding Tax Rates Applicable to Luxembourg UCIs | 451

III.1. Introduction

This Appendix provides information on the withholding tax (WHT) rates applicable to the different types of income received by Luxembourg UCIs.

Theinformationprovidedhereinisasimplifiedsummarypreparedduringthefirsthalfof2013,andissubjecttofrequent changes and exceptions. Further information can be found in EY’s Global Withholding Tax Reporter (GWTR)257.

It is essential that tax advisers be contacted in order to obtain complete and up-to-date information before making investment decisions.

III.2. Double taxation treaties

Onlycertaindoubletaxationtreaties(DTTs)signedbyLuxembourg are applicable to Luxembourg UCIs. For further information, see Section 13.3.3.1..

257 See www.globaltaxreporter.com


Argentina (1) The general WHT rate for dividends is 0%. However, in the case of dividend payments in excess of the taxable income of the distributing company (with certain adjustments), such excess will be subject to a 35% WHT.

(2) A 0% WHT rate applies to interest on corporate bonds provided certain requirements are met (e.g., public offering). Otherwise,15.05%WHTwillbeappliedwheninterestderivesfromcorporatebondsregisteredincountrieswithwhich Argentina has signed Mutual Treaties for Investment Protection, provided registration in Argentina, pursuant to Law 23576, is made within two years following issuance. Luxembourg and Argentina have signed such a Treaty for Investment Protection. 35% WHT will apply to interest on corporate bonds in other cases.

(3)Regardingthesaleofshares,bondsandothersecurities,thereisanexemptionforforeignbeneficiariesestablishedbyDecree2284/91.

Australia (1)A0%WHTrateappliesonfrankeddividends(paidoutofprofitsonwhichcorporatetaxhasbeenpaid).Otherwisetherate is 30%.

(2) Where an Australian State or Federal Government (or Government authority) or resident company raises funds, by the issue of bonds (or certain other debt instruments similar to bonds) which satisfy a public offer test and certain other conditions, an exemption is available which will reduce WHT on interest to 0%.

(3)Disposalsbyforeignresidentsofnon-portfolio(10%ormore)associateinclusiveinterestsinAustralianorforeignentitiesare subject to Australian capital gains tax at a rate of tax up to 45% (depending on the legal form of the immediate investor and the ultimate investor if the immediate investor is respected by the Australian tax authorities as a trust or a partnership) if more than 50% of the market value of the entity’s assets is attributable to Australian real estate property.

Austria (1)TheAustrianInvestmentFundActdefinesa“foreigninvestmentfund”asanyforeignentitywhich“investsaccordingtothebasicprinciplesofriskdiversification”(exceptionsapplyforcertainPrivateEquityFunds).

Luxembourg investment funds can either be: (1) non- tax transparent investment companies: (SICAVs - variable capital investmentcompaniesandSICAFs-fixedcapitalinvestmentcompanies);or(2)transparentmutualfunds:FCPs-fondscommunsdeplacement.Luxembourginvestmentfundsbeingengagedintradingofadiversifiedportfolioshouldqualifyas an investment fund from the Austrian tax perspective.

Austrian dividends are generally subject to 25% withholding tax which must be withheld at source and paid to the tax officebytheAustriandistributingentity;where10%canbeclaimedbackunderAustrianInvestmentFundGuidelines(regardlessofDTTrates)andtherefundclaimoftheremaining15%maybefiledonthebasisofEUnondiscriminationlaw (free movement of capital) provided certain conditions are met.

a)Refundof10%underAustriandomestictaxlawandDTTprovision

Austrian Investment Fund Guidelines provide that a refund of 10% of Austrian dividend withholding tax is possible if the following conditions are simultaneously met: • Foreigninvestmentfundistreatedasanentityinitscountryofresidenceandhasthereforereceivedacertificateof

tax residence issued by the competent tax authorities• Foreign investment fund is able to prove or at least to demonstrate in a credible and conclusive manner to which

extent the Austrian capital yields are earned by eligible unit holders / investors. Eligible unit-holders/investors are residents of countries with which Austria has concluded a double taxation convention which, in the given context especiallywithregardtodividends,iscomparablewiththeOECDModelTaxConvention(attestationofholders)

• Investors / unit holders of the foreign investment funds who hold at least 10% of the investment fund are disclosed and haveprovidedanoriginalcertificateofresidenceintheirownname

SICAVandSICAF:IfLuxembourginvestmentcompanies(SICAVsandSICAFs)areabletoobtainacertificateofresidence in Luxembourg and the unitholders are resident in the countries with which Austria has concluded double tax conventions, Luxembourg SICAVs and SICAFs would be eligible to claim the refund of Austrian WHT of 10%.

FCP:IfLuxembourgmutualfunds(FCPs)arenotabletoobtainacertificateofresidenceinLuxembourgbuttheunitholders are resident in the countries with which Austria has concluded double tax conventions the individual unitholdersmayseektreatybenefitsonanindividualbasis.

Country of investment

Type of income

Dividends %Interest Capital gains on sale of

securities %Corporate bonds % Government bonds %

Argentina 0/35 (1) 0/15.05/35 (2) 0 0 (3)

Australia 0/30 (1) 0/10 (2) 0/10 (2) 0/45 (3)

Austria 0/15/25 (1) 0 0 0

III.3. Withholding tax rates



Type of income



Austria (cont’d) 0/15/25 (1) 0 0 0

Azerbaijan 10 10 10 0

Bahrain 0 0 0 0

Barbados 15 (1) 15 0 (2) 0

Belarus 12 0/10(1) 0/10 (1) 0/12/15 (2)

Austria (cont’d)

b) EU-Refund of the additional 15% based on free movement of capital

Generally foreign investment funds cannot make claims for the refund of the 15% of Austrian dividend withholding tax. However,EU-reclaimsfiled(undertheprincipleofnon-discrimination)maybesuccessfulincertaincases.

AnFCPwouldnotbeabletoreceiveataxresidentcertificatebeingatransparententityfromaLuxembourgtaxperspective, therefore only SICAVs and SICAFs could be eligible for the refund of 15% which may be granted if the following requirements are simultaneously met:• TheSICAV/SICAFreceivesacertificateofresidenceinLuxembourg• TheAustrianWHTcannotbecreditedinthestateofresidenceanditisconfirmedinwritingbytheforeigntax

authority• The SICAV / SICAF is comparable with an Austrian corporation

c) Filing and timing limitations

Thereisadistinctioninfilingtaxrefundclaimsdependingonthenumberofunitholders(investors)andthesizeoftheholding:• Fundswherethenumberofinvestorsis100ormoreshouldfile:(i)aclaimonbehalfofthefund;and(ii)the

estimationwithrespecttotheinvestorseligiblefortreatybenefits• Funds where the number of investors is 100 or more and where certain investors holding 10% or more of the fund’s

unitsshouldfile:(i)aclaimonbehalfofthefund;(ii)theestimationwithrespecttotheinvestorseligiblefortreatybenefits;(iii)thecertificateofresidencewithrespecttoeachinvestorholding10%ormoreofthefundunits

• Fundswherethenumberofinvestorsrangingfrom10to99shouldfile:(i)aclaimonbehalfofthefund;(ii)thecertificateofResidencewithrespecttoall(every)investors

• Fundswherethenumberofinvestorsrangingfrom1to9shouldfile:aclaimonbehalfofeachinvestorindividually

NeverthelesstheDeclarationofwidely-heldforeigninvestmentfundshouldbeattachedtotheclaimsinallcases.

AccordingtoAustriandomesticlawthelimitationforfilingtherefundclaimsisfiveyears.UntilDecember2013reclaimsfortheyears2008-2013canbefiledwiththetaxauthoritiesincharge.

Barbados (1)Dividendspaidtonon-residentsoutofforeignsourceincomearenotsubjecttoWHT.

(2) While the rate of tax to be withheld in respect of interest payments to non-residents is 15%, regulation 90(2) of the Barbados Income Tax Regulations 1969 (as amended) provides that no amount is to be withheld as tax from any amount payabletoanon-residentpersonasinterestonbonds,debentures,orstockoftheGovernmentbeneficiallyownedbythat non-resident.

Belarus (1) The 0% rate applies to interest on government securities, issued by the Ministry of Finance, bonds of local authorities, bonds of the National Bank of the Republic of Belarus, bonds of Belarusian banks (under certain conditions) and corporatebondsissuedfrom1April2008until1January2013undercertainconditions.The10%rateappliesinothercases.

(2) The 0% rate applies to capital gains from the sale of government securities, issued by the Ministry of Finance, bonds of local authorities, bonds of the National Bank of the Republic of Belarus, bonds of Belarusian banks and corporate bonds issuedfrom1April2008until1January2013undercertainconditions.The12%rateappliestocapitalgainsfromthe sale of shares in the capital of Belarusian companies. The 15% rate applies to capital gains from the sale of other securities.



Type of income



Belgium 0/15/25 (1) 0/25 (2) 0/15/25 (2) 0

Bermuda 0 0 0 0

Bolivia 12.5 12.5 12.5 12.5

Brazil 0 15 0/15 (1) 0/15/25 (2) (3)

British Virgin Islands 0 0 0 0

Brunei 0 15 15 0

Belgium (1) The rates of WHT on dividends from Belgian companies are as follows:

Type of Belgian company Type of share Luxembourg SICAV/SICAF

LuxembourgFCP

Ordinary 25% 25%

Real estate investment company (VBEVAK/SICAFI) All 15/25%* 15/25%*

Public private equity investment company (Private PRIVAK/PRICAV Privé)

All 0%**/25% 0%**/25%

Private equity investment company (PRIVAK/PRICAV) All 0%**/25% 0%**/25%

Otherinvestmentcompanies(BEVEK/SICAV,BEVAK/SICAF,VBS/SIC)

• DividendsderivingfromBelgiandividendsreceivedbyinvestmentcompanies

All 25% 25%

• All other dividends All 0%*** 25%

* DividendsdistributedbyaBelgianrealestateinvestmentcompanyaresubjecttoareducedwithholdingtaxrateof 15%, provided that at least 80% of the real estate is used for housing purposes and is located in the European Economic Area. However, the threshold is reduced from 80% to 60% with respect to dividends paid in 2013 and 2014 by a real estate investment company that was entitled to an exemption from withholding tax before 31 December2012.

** DividendsfromcapitalgainsonsharesrealizedbytheinvestmentcompanyareexemptfromWHT.

*** DividendsdistributedbyaBelgiancorporatefundthatdonotderivefromBelgiandividendsreceivedbythefundareexempt in the hands of a Luxembourg SICAV and subject to 25% WHT when paid to a Luxembourg FCP (assuming that the FCP is not claiming relief for the account of the unitholders but rather for its own account).

(2) An exemption from WHT is available to a Luxembourg investment company (i.e., not an FCP) under domestic law in respect of interest paid on a registered bond provided the company has not allocated the bond to a Belgian establishment and is entered in the bondholder’s register during the entire coupon period as owner or usufructuary of the bond. If WHT has been applied at source, the non-resident investor may claim a refund of the WHT relating to the interest accrued during the period he owned the registered bond.

An exemption from WHT is equally available to a Luxembourg investment company (and also an FCP, the units of which are not tradable in Belgium and which have not been issued pursuant to a public offering in Belgium) in respect of debtsecuritiesheldintheX/Nsystem(dematerializedGovernmentdebtsecurities,certificatesofdeposit,treasurycertificatesandprivatebondsinglobalbearerform).

15%isthereducedratewhentheDTTcanbeapplied.

Brazil (1) Federal Government bonds are taxed at 15%. However, Federal Government bonds acquired after 16 February 2006 are taxed at 0%. The exemption is not applicable for residents of low tax jurisdictions. Luxembourg is not included in the low tax jurisdiction list.

(2) Gains realized by investors, investing in Brazil in accordance with Resolution of the Central Bank of Brazil 2.689/00, upon sale or exchange transactions carried out in Brazilian stock, futures or commodities exchanges are currently exempt from income tax. Residents of low tax jurisdictions and non-residents not located in a low tax jurisdiction but investing in the Brazilian capital market without complying with Resolution 2.689/00 are subject to the same tax treatment as Brazilian residents (i.e., Brazilian residents are generally subject to 15% WHT on the gain derived from listed securities). Luxembourg is not included in the low tax jurisdiction list.

Gains from unlisted securities are subject to a 15% capital gains tax (residents of low tax jurisdictions are subject to a 25% capital gains tax on the sale of unlisted securities).

(3) Earnings of investment funds (FIP) distributed abroad are exempt from income tax, provided that certain requirements are met. For instance, the earnings received by the foreign investor do not represent more than 40% of the total earnings oftheFIP,ortheforeigninvestordoesnotholdmorethan40%ofthetotalquotasissuedbytheFIP.Thebenefitisnotapplicable if the investor is located in a low tax jurisdiction.



Type of income



Bulgaria 0/5 (1) 0/10 (2) 0/10 (2) 0/10 (3)

Canada 25 0 (1) 0 0 (2)

Cayman Islands 0 0 0 0

Chile 10/18.75/35 (1) (6) 4/10 (2) (6) 4/10 (6) 0/10/20/35 (3) (4) (5) (6)

Bulgaria (1) AnexemptionfromWHTwasintroducedasof1January2009fordividendpaymentstotaxresidentcompaniesandotherlegalentitiesofEU/EEAMemberStates.Effectivefrom1January2010theWHTreliefdoesnotapplyincaseofadeemeddividend,i.e.,hiddenprofitdistribution.

(2) Interest income on bonds, which are tradable on a regulated stock exchange, is not subject to WHT in Bulgaria.

(3) AsofJanuary2009,gainsrealizeduponsale(disposal)ofsecuritiesthrougharegulatedstockexchangeinanEU/EEAMember State are not subject to capital gains tax in Bulgaria.

Canada (1) Witheffectfrom1January2008,arm’slengthoutboundinterestpaymentstoresidentsofallcountriesareexemptfromWHT, other than payments of participating debt interest. Interest payments to related persons are deemed not to be at arm’s length.

(2) Tax is applicable on the capital gain from the sale of “taxable Canadian property” (e.g., land, shares of Canadian private corporations).ThedefinitionoftaxableCanadianpropertyhasbeennarrowedbychangesannouncedinthebudgetapplicableasof4March2010.Thenewdefinitionnolongerincludesthesharesofcorporationsandcertainotherinterests that, within the previous 60 months, do not derive their value principally from real or immovable property situated in Canada, Canadian resource property and timber resource property, or interests in such properties. As a consequence,anon-residentwillnolongerbesubjecttoCanadiantaxorfilingrequirementsonmostdispositionsofshare investments in private or public corporations, regardless of the application of a relevant treaty or the level of ownership, occurring after 4 March 2010. In the case of publicly traded shares there is a further test, such that even in the case where the shares do derive their value principally from real or immoveable property in Canada, Canadian resource property or timber property, such shares should only be taxable Canadian Property where the non-resident in combination with any non-arm’s length persons, holds 25% or more of the shares of a class. For Canadian tax purposes related persons are deemed not to be at arm’s length.

Chile (1) The WHT rate on dividends paid to non-residents is 35% less the imputation credit for the corporate income tax paid at source (credit may vary between 0% and 20%).Through Law 20.630 of 2012, the Corporate Tax rate was permanently increased to 20%, thus effective withholding on the net dividend should be equivalent to 18.75%. In any case the overall effective tax burden for an equity investment in Chile remains at 35%.

(2) For corporate bonds in the case of foreign investors, the 4% withholding rate applies with certain limitations – subject to a 3:1 debt to equity ratio – when the creditor is considered as a related party to the Chilean debtor. Creditor and debtor willbeconsideredasrelatedwhen,(i)eitherpartyhas10%ormoreoftheotherparty’sstockorprofits,(ii)whenbothcreditoranddebtorareunderacommonshareholderwhopossesses10%ormoreofthecapitalorprofitsofboth,(iii)when the loan is guaranteed with cash or cash equivalents by a third party (i.e., certain back-to-back structures), or (iv) whenthecreditorisdomiciledinajurisdictionqualifiedasataxhavenbytheChileanTreasury.ThislimitationdoesnotapplyiftheChileandebtorisabankoranentitywhoseactivityhasbeenqualifiedasfinancialinnaturebytheChileanMinistry of Finance.

(3) Capital gains derived from the sale of shares (not bonds) issued by a listed corporation with a stock market presence in either a Chilean stock market authorized by the Chilean Securities Commission, or in a tender offer regulated by Title XXV of the Chilean Securities Law, will be tax exempt. This is provided the stock was acquired on a stock market, or in a tender offer regulated by Title XXV of the Chilean Securities Law, or in an initial offering of stock issued upon incorporation or capital increase, or on a convertible bond exchange.

(4) Capital gains obtained by foreign funds that qualify as a “Foreign Institutional Investor” from the sale of stock in listed corporations that have a stock market presence or bonds or other debt securities issued by either Chilean corporations, the Chilean Central Bank or the Government, executed in the stock market or in a tender offer regulated by Title XXV of the Chilean Securities Law or any other system authorized by the Chilean Securities Commission, will be exempt from capital gains taxes. However, such Foreign Institutional Investors have to comply with a number of requirements in order tobenefitfromthisexemption.



Type of income



Chile (cont’d) 10/18.75/35 (1) (6) 4/10 (2) (6) 4/10 (6) 0/10/20/35 (3) (4) (5) (6)

China 5/10 (1) (2) (3) 10 (1) 0 (1) 0/10 (4)

Chile (cont’d)

(5) All other capital gains derived from the sale of shares are subject to a 20% income tax (rate increased by LAW 20.630 of 2012) provided that all of the following requirements are met:• The seller has held the shares for at least one year• The seller must not be habitually engaged in the sale and purchase of shares• The sale is made to an unrelated party

AlltheseconceptsaredefinedbyChileanRegulationsandrulings.

A35%incometaxonthegainwillapplyifanyoftheserequirementsarenotsatisfied.

(6) Law No. 18.657 introduced the possibility for foreign investment funds and Foreign Institutional Investors to elect to be taxed on the basis of the net results derived from their investment activities in Chile at a 10% rate upon remittance. Special requirements have to be met to opt for this regime. In addition, a local management company or a local representative is required. The capital gains tax exemption discussed in note (4) above applies without regard to this special regime. This regime applies not only to dividends and interest derived from investments in shares of securities, but also on any gain obtained by the fund from its authorized investments.

China (1)LuxembourgSICAVsandSICAFsqualifyfortheapplicationoftheDTTbetweenthePeople’sRepublicofChina(PRC)andLuxembourg.TheDTTrateondividendsis10%.SubjecttocomplyingwiththefilingrequirementsprescribedinGuoshuifa (2009) No. 124, 5% WHT rate on dividends applies if i) Luxembourg SICAVs and SICAFs directly hold at least 25% of the equity interest in the PRC company during the 12 month period prior to the receipt of the dividends and ii) the LuxembourgSICAVsandSICAFsqualifyasthebeneficialownersofthedividends.

TheDTTrateandnormalrateoninterestfromcorporatebondsis10%.Interestfromgovernmentbonds(i.e.,bondsissuedbytheMinistryofFinance)isexemptfromPRCWHTunderdomesticPRCtaxregulations.PursuanttotheDTTbetween the PRC and Luxembourg, interest arising in China and derived by the Luxembourg Government, a local authority thereoforbyanyresidentofLuxembourgwithrespecttodebt-claimsguaranteed,insuredorindirectlyfinancedbytheLuxembourg Government, a local authority thereof, shall be exempt from PRC WHT.

(2)UndertheCorporateIncomeTax(CIT)LawanditsDetailedImplementationRulestheWHTrateondividenddistributionsis10%.

(3)DividendsreceivedbyforeignenterpriseinvestorsfromA-shares(onlyQualifiedForeignInstitutionalInvestor(QFIIs)andqualifiedstrategicinvestorsarepermittedtoinvestinA-shares),B-sharesandoverseaslistedsharesofPRCcompaniesaresubject to 10% PRC WHT rate according to tax circular Guoshuihan (2009) No. 394, subject to the terms and conditions of theapplicableDTT.

(4) Under the CIT Law, capital gains derived by foreign enterprise investors from the buying and selling of equity interest/shares in PRC companies are subject to 10% PRC WHT. However, PRC WHT on gains derived by foreign investors from the trading of A-, B- and overseas listed shares (including H- shares) of PRC companies whose purchase and sale are both conducted on public exchanges is currently not being enforced by the PRC tax authorities pending further guidance to be issued by the PRC State Administration for Taxation.

AccordingtotheDTTbetweenthePRCandLuxembourgandGuoshuifa(2010)No.75,gainsonthedisposalofequityina PRC company, the property of which principally consists directly or indirectly of immovable property situated in the PRC during a prescribed period (provisionally 3 years) prior to the disposal of the PRC equity, will be subject to PRC WHT. The WHT rate is 10% under the CIT Law.

AccordingtotheDTTbetweenthePRCandLuxembourg,gainsonthedisposalofequityinaPRCcompanywillbesubjectto PRC WHT if the transferor has ever held 25% or more of the PRC company’s total equity. The WHT rate is 10% under the CIT Law.

Capital gains derived by a Luxembourg tax resident enterprise from the disposal of other securities (e.g., government bonds,corporatebonds)maybeexemptfromWHT,subjecttocomplyingwiththefilingrequirementspursuanttoGuoshuifa (2009) No. 124.

Intheabsenceofspecifictaxrules,capitalgainsderivedfromthetradingofA-shares(bynonQFIIs)andB-sharescouldpotentially be subject to PRC Business Tax and Local Levies at 5.6 %. That said, the PRC tax authorities have not been actively enforcing Business Tax on such gains.

Caishui(2005)No.155specificallyprovidesthatgainsderivedbyQFIIfromthebuyingandsellingofPRClistedsecuritiesare exempt from PRC Business Tax, subject to further guidance to be provided by the Ministry of Finance and/or State Administration of Taxation in the future.

Effective from 19 September 2008, purchasers, inheritors and grantors of A-shares and B-shares are not subject to PRC StampDutywhiletransferorsofA-sharesandB-sharesaresubjecttoPRCStampDutyat0.1%onthetransfervalue.

ThesaleofprivatePRCequityissubjectto0.05%PRCStampDutypayablebyboththesellerandbuyer.



Type of income



Colombia 0/25/33 (1) 14/25/33 (4) 0/14/25/33 (2) 0/10/14/25/33 (3) (4)

Costa Rica 5/15 (1) 15 (2) 0/15 (3) 0/30 (4)

Croatia 0/12 (1) 0 0 0 (2)

Colombia (1) A rate of 33% applies if the company paying the dividend has not paid income tax at the corporate level. For foreign capital portfolio investments, dividends are subject to a 25% rate.

In the event of companies whose shares are traded on the stock exchange, distribution of shares (in kind) or the capitalization of retained earnings exceeding the portion that do not constitute taxable income or capital gain, will be deemed as non taxable income or capital gains [in accordance with the calculation provided by the Tax Code in sections 48 and 49 (Section 36-3 of the Tax Code)]

(2)GenerallyinterestongovernmentbondsisnotsubjecttoWHTwhenthebeneficiaryisanon-resident.Howevereachcaseshouldbereviewedseparately(Section218oftheColombianTaxCode).Otherwise,a33%WHTrateapplies.

Interest on bonds acquired through a foreign capital portfolio investment are subject to a 14% tax withheld by the custodian that manages such an investment in Colombia (administrative expense can be deducted), to the extent that the investorisnotlocatedinataxhavencountry.Otherwise,theWHTratewillbe25%.

(3) Realized gains from the sale of shares are taxed at 33%, if the holding period was less than two years, or if they are treatedastradingassetsbytheseller.Otherwise,a10%rateapplies.

No income or capital gain will be taxed on the sale of shares if they are listed on Colombian stock exchanges, and they aretransferredbyoneshareholder(realbeneficiary)andthesharestransferreddonotrepresentmorethan10%ofthecompany’stotalsharesinthesamefiscalyear(Section36-3oftheColombianTaxCode).

Iftheshareswereacquiredandsoldbyaforeigncapitalportfolioinvestmentinthesamefiscalyearandthesoldsharesrepresent more than 10% of the company`s total shares, the exemption does not apply. Thus an income tax return is requiredtobefiledbythecustodian.ARegulationisexpectedtoconfirmthatforforeigncapitalportfolioinvestmentsarateof14%or25%isapplicableasLaw1607of2012needstobeclarified.

Gains derived from the sale of bonds in a secondary market are considered as interest.

(4) Bonds and debt securities issued directly by a Colombian issuer, but traded abroad, are deemed as non Colombian and thus non taxable income or capital gains arise. Please note that currently no regulations have been provided to determine the scope of this new provision. In addition, it is unclear whether interest derived from these debt securities will be taxable or not, as no regulation has been issued.

Costa Rica (1) The general WHT rate on dividends paid to non-residents is 15%. The Costa Rican Income Tax Law (ITL) provides a 5% WHT on dividends derived from stock dealt on a local stock exchange.

(2) The general WHT rate on interest payments to non-residents is 15%. However, the Costa Rican ITL provides a reduced 8% WHT on interest payments derived from corporate bonds dealt on a local stock exchange or if the bonds were issued byaqualifiedfinancialinstitution.However,thisreducedrateonlyappliestodomiciledentitiesorpersons.Therefore,interest payments to non-residents derived from corporate bonds dealt on a local stock exchange should be subject to the general 15% WHT.

(3) The general WHT rate on interest payments to non-residents is 15%. The Costa Rican ITL provides a reduced 8% WHT on Government bonds registered on a local stock exchange and no WHT on bonds issued in local currency by the Banco PopularydeDesarrolloComunalandbytheNationalFinancialSystemforHousingProjects.Likewise,investmentsderivedfromthenon-for-profittrustcreatedbyLawNo.7044willnotbesubjecttoWHT.However,the8%reducedrate only applies to domiciled entities or persons resident in Costa Rica. Therefore, interest payments to non-residents derived from such bonds should be subject to the general 15% WHT, except for bonds issued in local currency by the aforementioned entities.

(4) Capital gains are taxable if they originated from the transfer of depreciable assets, for a higher amount than that stated in the accounting records, according to the rules of depreciation, or from the sale of non-depreciable assets in the ordinary course of a trade or business. Accordingly, if an entity’s main trade or business is selling securities, any income derivedtherefrom,wouldbesubjecttoincometaxat30%.Otherwise,0%wouldapply.

Croatia (1)Asof1March2012aWHTof12%appliesondividendsandsharesinprofitspaidtoforeignlegalentities.AreducedWHTrateortaxexemptioncanbeachievedbyapplicationofprovisionsoftheDTTbetweenCroatiaandthecountryofresidenceoftherecipientofdividends/sharesinprofitprovidedthatacertainadministrativeprocedureisfollowed.

Since1July2013CroatiaisanEUMember.Therefore,noWHTshouldapplyondividendpaymentstoshareholders(legal entities) in other EU countries provided that the shareholder has held at least a 10% equity stake in the company paying the dividends for an uninterrupted period of 24 months.

(2) There is no separate capital gains tax in Croatia. Capital gains earned by Croatian corporate income taxpayers from sales of securities are subject to 20% corporate income tax. However, in case an entity realizing capital gains in Croatia does not have a taxable presence in Croatia (i.e., is not registered as a corporate income tax payer in Croatia), such capital gains would not be taxed in Croatia.



Type of income



Curaçao (former Netherlands Antilles) 0 0 0 0 (1)

Cyprus 0 0 0 0/20 (1)

Czech Republic 15/35 (4) 0/15/25/35 (1) (4) 0/15/25/35 (2) (4) 0/5/19 (3)

Curaçao (former Netherlands Antilles)

Asper10October2010,theNetherlandsAntilles,whichconsistedoffiveislandterritoriesintheCaribbeanSea(namelyCuraçao, Bonaire, Sint Maarten, Saba and Sint Eustatius), has been dissolved. Upon dissolution of the Netherlands Antilles the three island territories, Bonaire, Sint Eustatius and Saba have become part of the Netherlands as extraordinary overseas municipalities.CuraçaoandSintMaartenhavebothbecomeautonomouscountrieswithintheDutchKingdom.TheformerNetherlands Antilles tax legislation remains applicable in Curaçao, with the understanding that where the tax legislation states “Netherlands Antilles” it should read “Curaçao”.

(1) The zero tax rate applies assuming that the Curaçao tax laws on taxation of saving income (which represent the equivalentoftheEUTaxationofSavingsIncomeDirective)donotapply.Severalnon-EUjurisdictions(theso-calleddependent territories and third countries) including Curaçao have undertaken to adopt “equivalent measures” to the EU TaxationofSavingsIncomeDirective.TheCuraçaocommitmenttoundertakeequivalentmeasuresresultedinalaw(in2006) on the introduction of a WHT on interest payments made by paying agents established in Curaçao to individuals resident in one of the member states of the EU. The scope of the law is not limited to interest income generated at the fund level paid to investors by way of current distributions, but it also covers redemptions of funds that hold a threshold amount of assets in debt claims. The WHT applies for the duration of a transitional period and the WHT rate is 35% from 2011.

Cyprus (1) If a Luxembourg UCI sells shares of a company which owns immovable property situated in Cyprus, capital gains tax at a rate of 20% is payable on the gain as far as it relates to the immovable property. No capital gains tax shall be triggered in case the shares are registered on a recognized stock exchange.

Czech Republic

(1) AWHTrateof15%appliestocorporatebondsissuedonorafter1January1998;arateof25%appliestocorporatebondsissuedbefore1January1998.Interestfrommortgagebondsissuedafter1January1995isexemptfromWHT.Interestfrommortgagebondsissuedintheperiod1January2006–31December2007isexemptonlywhenproceedsfrom mortgage bonds are used solely for providing loans for housing purposes (the prospectus must include obligation of theissuertocomplywiththisrule).Interestfrommortgagebondsissuedonorafter1January2008issubjectto15%WHT. In addition, interest from bonds issued by Czech tax residents abroad is exempt from WHT.

(2)AWHTrateof15%appliestoGovernmentbondsissuedonorafter1January1998.Arateof25%appliestoGovernmentbondsissuedfrom1January1997to31December1997.A0%rateappliestoGovernmentbondsissuedbefore1January1997.Inaddition,interestfrombondsissuedbytheCzechRepublicabroadisexemptfromWHT.

(3) Capital gains realized by non-resident entities on either of the following represent Czech-source income and are therefore subject to taxation in the Czech Republic:• The sale of securities/bonds (regardless of whether issued by a Czech tax resident or by a Czech tax non-resident

company) to a Czech tax resident or Czech permanent establishment of a Czech tax non-resident; in other words the status of the buyer is crucial (contrary to the second point)

• The sale of shares (in the form of either securities or share interest/participation) in a Czech tax resident company irrespective of the tax residence of the buyer

If the capital gain is subject to taxation in the Czech Republic, the purchaser is obliged to withhold a tax security at the rate of 1% in the case of investment instruments (e.g., securities, bonds) and of 10% in other cases. A Czech tax non-resident purchaser with no Czech permanent establishment is not obliged to withhold the tax security. Nevertheless, suchsecurityisnotrequiredtowardsEU/EEAtaxresidents.SincethistermisnotdefinedintheCzechlegislation,itmight be arguable whether this applies to investment companies and mutual funds as well. Based on the Treaty on the functioning of the EU, it can be argued that the exemption from the tax security withholding obligation shall be applicable in these cases; however, the practical approach of the Czech Financial Authorities is not yet known. In case one assumes that there would be no security tax, companies are still subject to a standard corporate income tax.

The corporate income tax would be 5% or 19% applicable on the difference between the selling price and the acquisition value of the securities. The corporate income tax rate of 5% is applicable under certain conditions only. If the conditions arenotfulfilledandproperlyproventotheCzechTaxAuthorities,the19%corporateincometaxrateapplies.

Thereisanobligationtofileacorporateincometaxreturnwithin3monthsoftheendofthecalendaryear.

(4)Asof1January2013,35%WHTisappliediftheCzechsourcedincome(subjecttowithholdingtax)ispaidtoapersonwho is not a tax resident in either (i) a EU/EEA country or (ii) a country that has an effective tax treaty or an effective agreement on exchange of information in tax matters concluded with the Czech Republic.

Theterm“ataxresidentofa(foreign)country”isnotdefinedintheCzechtaxlaw.Itis,thus,notsufficientlyclearifthetax residency should be tested solely based on the foreign tax law or if the respective tax treaty should be taken into account. As a result, there is a risk that a 35% WHT would apply on the income.



Type of income



Denmark 15/27 (1) 0 0 0

DominicanRepublic 10 (1) 10 (2) 10 (3) 0/29 (4)

Ecuador 13 (1) 22 0/22 (1) 0 (2)

Egypt 0 20 20 0

Estonia 0 (1) 0/21 (2) 0 0/21 (3)

Finland 0/5/15/18.38/24.5/30 (1)

0 0 0

Denmark (1)Byexchangeofletterson30December2005and15February2006theDanishandLuxembourgtaxauthoritieshaveagreedthatLuxembourgSICAVsandSICAFsarecoveredbytheDTTbetweenDenmarkandLuxembourg.Thelocaltaxauthoritieswillissueacertificateofresidenceasproof.

ThegeneralWHTrateis27%ondividends,butastherateaccordingtotheDTTis15%,SICAVsandSICAFsmayreclaim12%.FCPsareconsideredtransparentand,asaresultthereof,theycannotobtainDTTbenefits.

Dominican Republic

PursuanttoLaw253-12aboutthe“ReinforcementoftheGovernmentTaxCollectionCapabilityforSustainableDevelopment”enactedon9November2012,thewithholdingtaxexemptiononprofitsresultingfrominvestmentsmadeinfixedinstrumentsandotherinvestmentsplacedintheDominicanSecuritiesMarketdulyapprovedbytheSecuritiesSuperintendencestatedbyto Law 19-00, was eliminated.

(1) Thisrateiseffectiveasofthefiscalyear2012.ThePursuantLawdoesnotallowthattheWHTcanbeusedasacredittooffset against a company´s corporate income tax as it was the enactment of the law before.

(2) The WHT rate on interest paid to non-residents is 10%.

(3) Interest derived from Government bonds issued under Section 11 of Law No. 104-99 and Section 9 of Law 172-03 is not subject to withholding tax. Interest paid abroad derived from other Government bonds should be subject to the general 10% withholding tax, unless the exemption from the withholding tax is established under a special law.

(4) Capital gains derived from the transfer of Government bonds issued under Section 11 of Law No. 104-99 and Section 9 of Law 172-03 should not be subject to taxation. Capital gains derived from other securities should be subject to 29% tax, unless the exemption from withholding is established under a special law.

Ecuador (1) Interest on Ecuador Government bonds is subject to tax at 0%. Interest from other issuers is subject to tax at 22%.

OndividendsreceivedbyaLuxembourgfund(aswellasfromanyothertaxhaven)13%WHTwillbeapplied.

(2) Ecuador does not have a tax on capital gains. The sale of securities is not subject to tax.

Estonia (1) No WHT is applied on dividends paid by an Estonian resident legal person to any shareholder regardless of the nature of the shareholder.

(2) The WHT is applied on interest in case the payment is considered to be between the associated parties and the interest paidsignificantlyexceedstheamountofinterestpayableaccordingtomarketconditionsonsimilardebtobligations.TheWHT rate applied on interest amounts exceeding the fair market interest is 21%.

(3) Income tax is charged if the transferred holding is a holding in a company, contractual investment fund or other pool of assets whose property, at the time of the transfer or during a period of two years before the transfer, more than 50% was directly or indirectly made up of immovables or structures as movables located in Estonia and in which the non-resident had a holding of at least 10% at the time of the transfer. An income tax rate of 21% is applicable if the capital gain from the sale of securities is taxable.

Finland (1)LuxembourgSICAVsandSICAFsshouldqualifyfortheDTTbetweenFinlandandLuxembourg.FCPsareingeneraltreatedasflowthroughentities.BasedontheprovisionsoftheDTT,theWHTrateisreducedfrom30%,24.5%or18.38%(the statutory WHT rate of 18.38% is applied under certain conditions to dividends paid to corporate bodies that are resident in EU/EEA countries with relevant agreement on exchange of information available) to 15% or 5%. In principle, the24.5%WHTrateappliestoFCPsunlesstheunitholdersthemselvesareabletoclaimthereducedrateundertheDTT.

There is an exception concerning dividends for nominee-registered shares, paid to residents of tax treaty countries. If sucharecipientisnotidentified,butthepayer,onthedayofthepayment,knowsthehomecountryoftherecipientand the payer has carefully examined that the tax treaty applies to the recipient of the income, tax at source at the 15% rate can be withheld, unless the tax treaty requires a higher rate. It is also required that the foreign intermediary of the dividend is registered in the Foreign Custodian (Intermediary) Register kept by the Finnish Tax Administration.


France (1) The Amended Finance Bill for 2011 increased the WHT rate on dividends distribution from 25% to 30%. The second amended Finance Bill for 2012, published on 17 August 2012, states that no WHT should be applied on dividends sourced from French entities and paid to foreign UCITS on the basis of a comparability analysis of the foreign investment funds. If the amount is paid into an account based in a non-cooperative state or territory within the meaning of French Tax Code, the WHT increases to 75% (percentage increased by the amended Finance Bill for 2013).

(2) Where the recipient is a non-French resident, a 0% WHT rate applies to interest on corporate bonds issued on or after 1 January1987.

(3) Where the recipient is a non-French resident, a 0% WHT rate applies to interest from French Government bonds issued on orafter1January1987.

(4) Capital gains realized upon the disposal of shares in a French company, where the Luxembourg UCI owns or has owned at anytimewithinafive-yearperiodprecedingthesale,directlyorindirectly,shareswhichentitleitto25%ormoreoftheprofitsoftheFrenchcompany,maybesubjectto45%WHTasfrom1January2013(75%incasethesellerisestablishedinaNCST(NonCooperativeStatesandTerritories)whateverthepercentageofsharesinthecapital).SpecificFrenchtaxrules may be applicable to gains relating to shares/units in qualifying real estate companies/vehicles. As a general rule, the sale of shares in a French real estate company should be subject to 33.33% WHT.

Georgia (1) The tax rate for dividends under the Tax Code of Georgia (TCG) is 5%. Nevertheless, according to the Tax Treaty with Luxembourgthetaxrateis0%ofthegrossamountofthedividendsifthebeneficialownerisacompanywhichholdsdirectly or indirectly at least 50% of the capital of the company paying the dividends and has invested in the capital of the company paying the dividends more than €2,000,000 or its equivalent in the Georgian currency, and 5% of the grossamountofthedividendsifthebeneficialownerisacompanywhichholdsdirectlyorindirectlyatleast10%ofthecapital of the company paying the dividends and has invested in the capital of the company paying the dividends more than €100,000 or its equivalent in the Georgian currency. Notably, whenever the tax rate of the Tax Treaty is above the domestic rate the latter rate applies.

(2) The tax rate for the interest income according to the TCG is 5%. However, according to the Tax Treaty with Luxembourg interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that otherStateifsuchresidentisthebeneficialowneroftheinterest.

(3) The tax rate for the interest income according to the TCG is 0%. Similarly according to the Tax Treaty with Luxembourg interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that otherStateifsuchresidentisthebeneficialowneroftheinterest.

(4)Thereisnoseparatecapitalgainstax.Realizedcapitalgainsareincludedinthetaxableprofitsandaresubjecttotaxatthe regular corporate tax rate which is 15%. Non-resident companies having no permanent establishment in Georgia will beliabletoregisterwiththelocaltaxauthorities,tofiletheirprofittaxdeclarationandpayprofittaxonincomereceivedfrom the sale of securities at the rate of 15%. However, if a non-resident company sells the securities through a brokerage company (a legal entity having a license of brokerage activities in Georgia), then the latter is liable to withhold tax at 15% upon transferring the gain from the sale of securities to the seller. Thus, in this case a non-resident company will have no tax obligation in Georgia, as the gain from the sale of securities was already taxed at the source. Nevertheless, according to the Tax Treaty with Luxembourg such gain will be taxable only in the State of a non-resident seller.

Germany (1)LuxembourgSICAVsandSICAFsshouldqualifyfortheDTTbetweenGermanyandLuxembourg.TheWHTrateisreducedfrom 26.375% to 15% (reduction or refund forms are to be submitted). In principle the 26.375% rate applies to FCPs unlesstheunitholdersthemselvesareabletoclaimthereducedrateundertheDTT.

Greece (1)TheWHTrateondividendsorprofitscapitalizedordistributedbydomesticcorporateentities(i.e.GreekSAs,Ltds,CooperativesandPCs),isdecreasedfrom25%to10%.Thistaxisexhaustiveforforeignbeneficiaries.TheaboveprovisionappliestodistributedprofitsapprovedbyaGeneralAssemblyoranyothercompetentcorporatebodyasof1January2014onwards.RelieffromtheaboveWHTisavailableincasesofapplicableDTTorbyapplicationoftheEUParentSubsidiaryDirective.

(2) The tax rate of interest income, applicable to Greek treasury bills and bonds as well as corporate bonds, is increased from10%to15%WHT.Thisprovisionincludesinterestpaidorcreditedasof1January2013,evenifthesecuritieshavebeenrenewed.Theaboveprovisionsarenotexpectedtoapplytoforeignresidentbeneficiaries,whoareinanycaseexempt from Greek WHT on bond interest (State or corporate) - by virtue of domestic legislation (i.e. irrespective of any DTTprotection).

(3) In pursuance to L.4110/2013, the 5% tax applicable on the transfer value of non-listed shares is substituted by a 20% tax imposedoncapitalgainsresultingfromthesaleofshares.Theaboveappliesforsharesacquiredasof1July2013.Inaddition,capitalgainsresultingfromthesaleoflistedsharesacquiredasof1July2013byindividualsorlegalentitieswill be subject to a 20% tax, which will be exhaustive for foreign tax residents. A 0.2% transaction tax, which is applicable to the sale of shares listed on a stock exchange, will continue to apply.


Type of income



France 0/30/75 (1) 0 (2) 0 (3) 0/33.33/45/75 (4)

Georgia 0/5 (1) 0/5 (2) 0 (3) 0 (4)

Germany 15/26.375 (1) 0 0 0

Greece 10 (1) 0 (2) 0 (2) 5/20 (3)



Type of income



Guernsey N/A N/A N/A N/A

Hong Kong 0 (1) 0 (2) 0 0/10 (3)

Hungary 0 (1) 0 (1) 0 (1) 0 (1) (2)

Iceland 5/15/18(1) 0/10 (2) 0/10 (2) 0/10/18 (3)

India 0 (1) (2) 5/10/20/30/40 (3) 5/10/20/30/40 (3) 0/10/15/20/30/40 (4)

Honk Kong (1) According to the current tax regulation in the People’s Republic of China (PRC), resident enterprises in the PRC should, in distributing dividends for 2008 or any year hereafter to non-resident enterprises holding their H-shares (shares in PRC enterprises listed in the Hong Kong stock exchange), withhold corporate income tax for such dividends at a tax rate of 10%.

IftheLuxembourgUCIisqualifiedasaLuxembourgtaxresidentforLuxembourg-PRCDTTpurposes,theLuxembourgUCIholdingH-sharesofanyPRCresidententerprisecan,afterreceivingthedividends,fileanapplicationandprovidesupportingdocumentationtotherelevanttaxauthoritiesprovingthattheyareeligibletoenjoythebenefitundertheDTT.

The relevant tax authorities should refund the difference between the tax levied and the tax payable calculated at a tax ratespecifiedintheDTTafterexaminingandverifyingsuchmattertobeaccurateandcorrect.

(2) According to the current PRC tax rules, interest in respect of corporate bonds obtained by foreign investors sourced from thePRCshallbesubjecttoWHTat10%,subjecttoanyreductionorexemptionundertherelevantDTT.Thetaxshouldbewithheld and remitted by the enterprise that pays the interest when it is paid or when it is due to be paid to the foreign investors.

(3) Under the current PRC tax law, technically speaking, Luxembourg UCIs or foreign investors that derive income from the transfer of H-shares of the mainland PRC companies in the Hong Kong stock exchange should be subject to 10% PRC WHT on capital gains. However tax treaty concessions may be available upon approval from the PRC tax authority. Whereas there is currently no strict enforcement on collection if both purchase and sales of H-shares are through the Hong Kong Stock Exchange, thus far, detailed administration rules are still being drafted by the PRC State Administration of Taxation.

Hungary (1) For UCIs operating as a partnership (or in any other non-corporate form, for example a Luxembourg FCP), further analysisshouldbecarriedouttoconfirmthatfromaHungariantaxperspectivetheUCIisnotviewedastransparentandthe payment is not regarded as being made to the individual shareholder of the UCIs.

(2)IncaseasaleismadeonanEU/EEAorOECDMemberStatestockexchange,thereisnoWHTevenifthesellerisanindividual.

Iceland (1) DividendincomeissubjecttoWHTof18%.LuxembourgishentitieshowevercanapplyforareductionofWHTbasedonArt.10,par.2oftheDTTbetweenIcelandandLuxembourg.Thereducedrateis5%ifthebeneficialownerisacompany(other than a partnership) which holds directly at least 25% of the shares. The reduced rate is 15% in all other cases.

(2) Interest from bonds is subject to WHT of 10%. Luxembourgish entities however can apply for an exemption from WHT basedonArt.11,par.1oftheDTTbetweenIcelandandLuxembourg.

(3) Capital gains on sale of shares are subject to 18% WHT. Luxembourgish entities however can apply for an exemption from WHTbasedonArt.13par.4oftheDTTbetweenIcelandandLuxembourg.ProfitsfromtheinvestmentsintobondsandotherdebtsecuritiesaredefinedasinterestaccordingtoIcelandiclawandsubjectto10%WHT.

India (1) Dividendsdeclared,distributedorpaidbyadomesticcompanyareexemptfromtaxinthehandsoftherecipientshareholder. However, a tax of 16.2225% (base rate of 15% plus surcharge of 5% and education cess of 3%) is payable on suchdistributedprofitsbythedomesticcompany.

(2) As in case of dividends, income received in respect of units of equity-oriented Indian mutual funds (i.e., funds that invest more than 65% of their investible funds in equity shares of domestic companies) or the Unit Trust of India is exempt from tax in the hands of the recipient. However, in respect of schemes other than equity-oriented, the mutual fund is required to pay tax on income distributed to its unitholders. This tax rate is 32.445% (base rate of 30% plus surcharge of 5% and education cess 3%) regardless of the type of fund which distributes the income (money market fund, bond fund etc.).

(3) In general, interest received on debt incurred (by the domestic company) in a foreign currency is taxed at 20%. Interest onbondsissuedinaccordancewithcertainnotifiedschemes,suchastheForeignCurrencyConvertibleBondsandOrdinaryShares(throughDepositoryReceiptMechanism)SchemeandtheForeignCurrencyExchangeableBondsScheme 2008, is taxed at 10%. Interest on bonds not falling within the above categories is taxed at 40% in respect ofcorporateinvestorsand30%inrespectofnon-corporateinvestors.Interestreceivedfromanotifiedinfrastructuredebt fund is taxable at 5%. Further interest paid by Indian companies on money borrowed in foreign currency on or after1July2012butbefore1July2015bywayofissueoflongterminfrastructurebondsasapprovedbytheCentralGovernment of India is taxed at 5%. The tax rates mentioned above need to be increased by surcharge and education cess, which is 2% and 3%, respectively, for foreign investors.



Type of income



India (cont’d) 0 (1) (2) 5/10/20/30/40 (3) 5/10/20/30/40 (3) 0/10/15/20/30/40 (4)

Indonesia 20 (1) 20 (1) 20 (1) 0/0.1/0.5/5/20 (2) (3)

India(cont’d)

(4) Foreign investment funds usually invest in India under the portfolio investment scheme as Foreign Institutional Investors (FII).However,investmentsmayalsobemadeundertheForeignDirectInvestmentroutesubjecttotheregulationsprescribed in this regard. The following tax rates are applicable for capital gains on sale of securities:

Nature of security and period of holding FII NON-FII

Corporate/Non-Corporate

A) Securities sold on a recognized stock exchange

1. Capital gains on sale of securities held for more than 12 months before sale 0% 0%; 0%

2. Capital gains on sale of securities held for less than 12 months before sale 15% 15%; 15%

B) Securities sold otherwise than on a recognized stock exchange

1. Capital gains earned on sale of securities held for more than 12 months before sale(refer note 1)

10% 10%/20%; 10%/20%

2. Capital gains earned on sale of securities held for less than 12 months before sale 30% 40%; 30%

Note 1:In case of non-resident, capital gains on sale of unlisted securities is taxable at 10%.Note 2: The above tax rates are exclusive of surcharge and education cess.

Securities bought/sold on a recognized stock exchange are subject to a levy of Securities Transaction Tax (STT). STT is leviedonthevalueoftransactioninrespectofspecifiedsecurities.

The existing rates of STT are as follows:

Particulars STT to be collected

from

STT (%)

Units of equity-oriented mutual funds (sale of the mutual fund)

Seller 0.25

Deliverybasedtransactioninequitysharesorunitsofequity-orientedfund(buyerandsellereach to pay 0.125% STT)

Seller and buyer

0.1

Non-delivery based transaction in equity shares or units of equity-oriented fund Seller 0.025

Indonesia (1) TheIndonesianDirectorGeneralofTax(“DGT”)issuedin2009rulestocombatperceivedtaxtreatyabuse.TheserulesprovidetheDGT’sopiniononthemeaningof“beneficialownership”.Theregulationsprovidethatforanentitywhichisnotabank,aninstitutionwhosenameisexpresslystatedintheDTT,orapensionfund(theestablishmentofwhichisinaccordancewiththeprovisionsoflegislationinIndonesia’sDTTpartnercountryandconstitutingtaxsubjectinIndonesia’sDTTpartnercountry),andwhichisnotlistedonastockexchange,sixtestsmustbesatisfiedfortherenottobe“treatyabuse”andfortherecipienttobetreatedasthebeneficialowner.Pertheregulations,acompanyinreceiptofIndonesian income (including dividends, interest and royalties) must meet all of the following conditions to obtain treaty protection:• TheestablishmentofthecompanyintheDTTpartnercountry,orthepurposeofthetransactionstructureisnotsolely

toenjoytheDTTbenefits• Thebusinessactivitiesaremanagedbyitsownmanagementwhichhassufficientauthoritytoconductthetransaction• The company has its own employees• The company has active business/economic activities• Income that is sourced from Indonesia is taxable in the recipient country• The company does not use more than 50% of the total income to carry out its obligation (other than normal business

expenditures) to other parties in the form of interest, royalty or other fees

TheDGThasclarifiedthatallsixtestsmustbesatisfiedwheretherelevanttreatyarticle(e.g.,dividends,interestandroyaltiesintheIndonesia-Luxembourgtreaty)requiresbeneficialownershipoftheincome.Iftherelevantarticledoesnotrequirebeneficialownership(e.g.,thecapitalgainsarticle),onlytestonemustbesatisfied.

ItmaybedifficultforSICAVs,SICAFsandFCPstosatisfyallofthesixtests.InthiscasethedefaultWHTratemaylikelyapply. For dividends and interest paid to non-residents this rate is 20%.



Type of income



Indonesia (cont’d) 20 (1) 20 (1) 20 (1) 0/0.1/0.5/5/20 (2) (3)

Ireland 0 (1) 0 (2) (3) 0 0 (4)

Isle of Man 0 0 0 N/A

Indonesia(cont’d)

Thisregulationwasintroducedtogetherwitharegulationcoveringtheadministrationofaccesstotreatybenefits.InsummarytheIndonesiantaxauthoritiesdemandthatnon-residentrecipientsofincomecompleteaspecialCertificateofDomicileformdesignedbyDGTwhichiscommonlyknownasaDGTForm.Onceanincomerecipientdisclosesthatany of the six above-listed tests is failed, the Indonesian tax authorities will deny treaty protection for the income. Some foreigntaxauthoritiesmaybeunwillingtocertifythenewCertificateofDomicileform.Insomesituations,therefore,itis permitted to use the foreign authority’s form (with conditions). If the documentation is not received by the Indonesian withholder in a timely way, the default rate of 20% will apply.

Inordertoapplytreatybenefits,thewithholdingagentwillrelyontherepresentationandthecompetentauthority’scertificationassetoutintheDGTForm.Oncetheformssubmittedalongwiththewithholdingagent’staxreturns(thesubmissionoftheformisrequiredbytheregulation),theverificationoftruthfulnessandthecontentoftheformwillbesubjecttoIndonesianTaxOfficereview.However,itisnotclearonhowtheTaxOfficewillverifytheanswerstothesixtest-questions and assess what action to be taken thereafter.

(2) If sold on the Indonesian stock exchange there is a tax on the sale price of 0.5% on founder shares and 0.1% on all other publiclylistedshares.Thesaleofnon-listedsharesofanIndonesiancompanybyanon-residentissubjecttofinalWHTat5%ofgrosssalespriceunlessotherwisestipulatedbyaDTT.

Undertheregulationsdiscussedabove,thetestsforaccesstotreatybenefitsarelessonerousforcapitalgainsasthereisnobeneficialownerrequirementintherelevantarticle.ThereforeinmostcasesSICAVs,SICAFsandFCPsshouldnotbe subject to Indonesian tax on disposal of shares. Practically, the 0.1% and 0.5% taxes for listed and founder shares will still be payable, but there should be no 5% tax on disposal of unlisted shares.

(3) Under domestic law as well as the Indonesia-Luxembourg treaty, discounts and gains on sale of bonds will be deemed to be interest. For the reasons set out above, treaty protection is unlikely to be available for Indonesian interest income received by a UCI and accordingly a WHT rate of 20% will apply for gains on disposal of bonds.

Ireland (1) 0% tax withheld for both SICAVs and SICAFs (and in practice for FCPs also) if one of the following criteria is met:• TheUCIisresidentfortaxpurposesinLuxembourg(acertificateoftaxresidencefromtheLuxembourgtaxauthorities

is required) and not under the control of Irish residents • TheUCIisultimatelycontrolledbypersonsresidentinanEUMemberStateorcountrywithwhichIrelandhasaDTT

(Relevant Territory) and is not under the control, whether directly or indirectly, of a person(s) who is not resident• The principal class of shares of the UCI is substantially and regularly traded on a stock exchange in Ireland, on one or

more than one recognized stock exchange in a Relevant Territory or on such other stock exchange as may be approved by the Minister of Finance

Appropriate documentation must be in place before the dividend is paid. This is in various forms prescribed by the Revenue Commissioners. These forms are available on the Revenue website “www.revenue.ie.”

Even if the above conditions are not met, SICAVs and SICAFs (and in practice FCPs) may be able to reclaim tax withheld undertheDTTbetweenIrelandandLuxembourg(filingofform,whichincludescertificateoftaxresidence,isrequired).

(2) The following are exempt from WHT: • Interest on quoted Eurobonds • Interest on bonds issued under the authority of the Minister for Finance with the condition that interest be paid

without deduction of tax • Interest paid by a company in the ordinary course of its trade or business to a company resident in a Relevant Territory

wheresuchinterestis,ingeneral,subjecttotaxinthatjurisdiction,orexemptfromthechargetotaxundertheDTTbetween Ireland or Luxembourg, or an Irish domiciled collective investment scheme, in the ordinary course of its trade or business, to a company resident in a Relevant Territory

(3)UndertheDTTbetweenIrelandandLuxembourgtheWHTrateoninterestis0%(payerofinterestmayrequirecertificateof tax residence in order to obtain upfront exemption).

(4) Gains arising from the sale of unquoted shares in companies that derive the greater part of their value from immovable property in Ireland are subject to Irish capital gains tax at the rate of 33%. The non-resident is required to pay this tax liabilityandfileataxreturnunderIreland´sselfassessmentrules.

WHT at the rate of 15% may apply where the sales consideration exceeds €500,000. The amount of the WHT is 15% of the total sales consideration and the tax is deducted by the purchaser and paid to the Irish tax authorities. The tax may becreditedagainstthefinaltaxliabilityofthenon-resident.Anyexcesswillberefunded.



Type of income



Israel 5/10/15/25/30 (1)(2) 0/10/25 (3)(4) 0/10/25(4)(5) 0/25 (6)

Italy 20 (1) 0/20 (2) 0/12.5 (3) 0 (4)

Israel (1) In accordance with the Israeli domestic law, the standard dividend WHT rates applicable to overseas shareholders (with no Israeli permanent establishment) are as follows:• 5% on dividend paid by an “Israeli Holding Company” to an overseas shareholder• 15%ondividenddistributedoutofprofitsthatweresubjecttocertaindomestictaxincentivesschemes• 30% on dividend distributed by an unlisted company to shareholders holding 10% or more of the Israeli company• 25% in all other cases

(2)TotheextenttherecipientisentitledtoclaimtheIsrael-Luxembourgtaxtreatybenefits(shouldbeexploredonacasebycase basis) and follows the procedural requirements, the WHT rates may be reduced as follows:• 5%ondividendssourcedfromstandardtaxableprofitswhichisdistributedtoaLuxembourgcorporateshareholder

holding 10% or more of the Israeli company• 10%ondividenddistributedoutofprofitsthatweresubjecttoalowercorporateincometaxrateinaccordancewith

certain domestic tax incentive schemes, to a Luxembourg corporate shareholder holding 10% or more of the Israeli company

• 15% on all other dividends distributed to Luxembourg resident shareholders

(3) In accordance with the Israeli domestic law, the standard interest WHT rate applicable to interest paid by an Israeli resident to a foreign body of persons is 25% (various rates may apply to foreign individuals). However, an exemption from WHT could be sought by non Israeli residents under certain conditions, if one of the following conditions is met:• The interest is paid on corporate debentures traded on the Tel Aviv Stock Exchange • TheCommissionerhasapprovedthattheinterestispaidonaloanwhichservedforcertaindefinedpurposes(in

general, for the development of the Israeli economy)• The interest is paid to the foreign resident on a bank deposit

(4) To the extent Luxembourg’s creditors is entitled to claim the Israel-Luxembourg tax treaty the standard interest WHT rate may be reduced to 10% (provided that the procedural requirements are met).

(5) Interest relating to certain types of long term government bonds should be paid to foreign residents free of interest WHT. However, interest paid to a foreign body of persons on short term government bonds (less than 13 months) is subject to the standard 25% interest WHT rate (unless a tax treaty relief can be sought).

(6) In general, capital gains derived by non Israeli residents from sale of Israeli securities (other than securities which constitute rights in real estate) should be exempt from tax in accordance with the Israeli domestic law (certain investments made in the past may not enjoy the exemption). However, this general exemption does not apply to capital gains derived from a sale of short term government bonds. If the capital gains are not exempt under the Israel-Luxembourg tax treaty exemption or under the Israeli domestic law, then the standard 25% corporate income tax shall apply.

Italy (1) The WHT rate on dividends from ordinary shares paid to a non-resident EU corporate investor is 1.375% and 20% forotherinvestors(startingfrom1January2012theWHTwasreducedfrom27%to20%).AstheSICAVs/SICAFspresumablycannotbequalifiedas“liabletocorporateincometax”inLuxembourg,thelower1.375%ratewouldnotapply with respect to those entities. Also, as SICAVs/SICAFs are not subject to income tax, reduction of the basis of the DTTbetweenItalyandLuxembourgshould,inprinciple,notbeapplicable.

(2) The exemption applies only with respect to interest on bonds issued by banks and listed companies whose shares are traded on regulated markets or on multilateral trading platforms of EU or EEA countries allowing an adequate Exchange of Information with Italy (so called “white listed countries”) and paid to foreign investors resident/established in white listed countries. The same exemption applies to bonds issued by unlisted companies, if the bonds are traded on regulated markets or multilateral trading platforms of EU or EEA white listed countries.

SinceLuxembourgisoneofthesecountries,theLuxembourgUCImustprovidethefinancialintermediarypayingtheincomewithaspecificself-certificationofresidenceinordertobenefitfromtheexemption.IftheUCIdoesnotsubmitthiscertificateofresidence,theWHToninterestwillbeleviedattherateof20%.

(3)TheexemptionappliesonlyiftheLuxembourgfundprovidesaspecificself-certificationofresidencetothefinancialintermediarypayingtheincome.IftheUCIdoesnotsubmitthiscertificateofresidence,theWHToninterestwillbelevied at the rate of 12.5%.



Type of income



Italy (cont’d) 20 (1) 0/20 (2) 0/12.5 (3) 0 (4)

Ivory Coast 0/10/12/18 (1) (2) (3) 0 0 0/25 (4)

Jamaica 33.33 (1) 33.33 33.33 (2) 0 (3)

Japan 7//20 (1) 0 (2) 0 (3) 0 (4)

Jersey 0 (1) 0 N/A 0

Italy (cont’d)

(4) Gains derived by a non-resident from the disposal of shares listed either on an Italian or foreign stock exchange (a stock exchangeofanOECDcountry)andwhichdonotrepresentaqualifiedparticipation(i.e.,nomorethan2%ofvotingrightsor 5% of share capital) are out of the scope of taxation in Italy. Accordingly, capital gains should be exempt from WHT in Italy, if the Luxembourg UCI provides proof that it is not a resident in Italy.

Gainsfromthedisposalofunlistedsharesnotrepresentingaqualifiedparticipation(i.e.,nomorethan20%ofthevotingrights or less than 25% of the capital of a non stock-exchange-listed company) are exempt from taxation in Italy if realized by foreign investors resident in countries allowing an adequate Exchange of Information with Italy. Since Luxembourg isoneofthesecountries,inordertobenefitfromtheexemption,theLuxembourgUCIwouldberequiredtosubmitaspecificself-certificationofresidencetothefinancialintermediarypayingtheincome.

In both cases described, a capital gains tax at a rate of 20% applies if the UCI does not provide the required documentation.

Capitalgainsderivedfromthedisposalofsharesthatrepresentaqualifiedparticipationaresubjecttoacorporatetaxof27.5% on 49.72% of the gain, for an effective tax rate of 13.67%.

Ivory Cost (1)10%rateappliestolistedcorporations.Otherwisetherateis12%.

(2)Therateis18%wheredistributedprofitswereexemptfromcorporatetax.

(3)ProfitsdistributedbyinvestmentcompaniesareexemptfromWHT.

(4) Capital gains on the sale of securities are taxable at the local corporate tax of 25%. There is an exemption where it was decided to reinvest the amount of the capital gains plus the price of the securities by acquiring assets in a three-year period, there is no WHT applicable to capital gains.

Jamaica (1)TheIncomeTaxActspecifiesaWHTrateof33.33%.Dividends(preferredandordinaryshares)paidtonon-residentshareholdersbyJamaicanresidententities(whetherornotthecompanyislistedontheJamaicaStockExchange)attractWHT at the appropriate rates. The dividend WHT rate is generally 33.33% for payments made to corporations that are resident in non-treaty countries.

(2) Certain Government bonds that are sold to overseas brokers are not subject to WHT on interest, but these bonds are specificallystatedasbeingtax-freewhenissued.

(3)Jamaicadoesnothaveacapitalgainstax.Thereishoweveratransfertaxthatappliestothesaleofcertainsecurities.Since 1 April 2013 the transfer tax rate was increased from 4% to 5%. The stamp duty rate is 1%. Stamp duty is generally appliedtothetransferofsecurities(notincludingsecuritiesissuedbytheGovernmentofJamaica)heldinaJamaicancompany.

Japan (1)From1January2013to31December2013,7.147%(2.1%oftheoriginalWHTratewillbeimposedasaspecialtaxforrecovery from the great earthquake) WHT rate will apply and thereafter, 15.315% WHT rate will apply for dividends from listedshares.Fordividendsonunlistedshares,20.42%WHTrateappliessince1January2013.

(2) A rate of 0% applies if certain conditions are met:• ThecorporatebondmustberegisteredundertheJapanesebookentrysystem• The investor needs to pass through certain procedures

(3) A rate of 0% applies if certain conditions are met.

(4) Foreign corporations are not taxed on capital gains from the sale of shares unless the gain is derived from a transfer of shares similar to a transfer of business. Additionally, capital gains derived by non-residents or foreign corporations from the sale of stock or other comparable rights in a company which derives at least 50% of its value directly or indirectly fromrealpropertyinJapanwillbesubjecttoJapanesetax(ascomparedto0%taxoncapitalgainsonsecurities,asdescribed above).

Jersey (1) ThegeneralWHTrateis0%.However,distributionsfromcertainJerseycompaniesmaycarryadeemedtaxcreditof10%or20%inrelationtounderlyingJerseytaxpaid.



Type of income



Korea 22 (1) 15.4 (1) (2) 15.4 (1) (2) 0/22/24.2 (2) (3)

Latvia 0(1) 0 (2) 0 (2) 0 (3)

Liechtenstein 0 (1) 0 0 0

Lithuania 0/15 (1) 0/10 (2) 0/10 (3) 0

Korea (1) Under the Korean domestic tax law, dividends and interest are generally subject to WHT in Korea at the rate of 22%, with the exception of interest stemming from bonds issued by the Korean Government and Korean domestic corporations, which are subject to WHT at the rate of 15.4%.

(2) Foreign currency denominated bonds and securities (with some conditions under the Tax Incentive Limitation Law (TILL)) issued outside of Korea by the Korean Government and Korean domestic corporations are exempt from taxes on interest income and capital gains, respectively. In the case of the transfer of securities other than equity shares, the capital gains are not subject to Korean tax unless they are sold to a Korean resident (either individual or corporation).

(3) A0%WHTrateappliestosecuritieslistedontheKoreanstockexchangeorKOSDAQprovidedthenon-residentcompanyand its related parties have not owned 25% or more of the Korean company’s equity at any time during the year of the share transferdateandtheprecedingfivecalendaryears,andthesecuritiesaresoldonKOSDAQ.Otherwise,thecapitalgainsaresubject to WHT at the rate of the lower value of either 22% of the net capital gain or 11% of the sales price.

Capital gains arising from the sale of shares in a real property holding company (RPHC) are treated the same as capital gains arising from the sale of real estate assets. In this regard, at the time of sale, a buyer must withhold the capital gains tax from a seller at either 22% of net capital gains or 11% of total proceeds, whichever is lesser, and pay it to the tax officenolaterthanthe10thdayofthefollowingmonth.Then,aseller(inthecaseofacorporation)mustfileaseparatecorporate tax return and pay any additional tax at the normal corporate tax rate (currently 11% up to KRW 200m, 22% up toKRW20band24.2%thereafter)afterclaimingadeductionofWHTalreadypaidtothetaxofficeagainstthecorporatetax payable.

Therefore, in effect, there is only one level of tax imposed at the 24.2% regular corporate tax rate. There is a transfer tax of0.3%ofthetransferredpriceifthesecuritiesaresoldonKOSDAQand0.5%ifthesecuritiesareunlistedoritisaprivatesale for the listed shares.

TheKoreanMinistryofStrategyandFinanceissuedataxrulinginMay2011andOctober2011onthetreatyeligibilityof Luxembourg investment companies. According to tax rulings, it provides that such SICAVs/SICAFs and FCPs are not eligiblefortreatybenefitspursuanttoArticle28oftheKorea/Luxembourgincometaxtreaty.TherulingsmayleadtoSICAVs/SICAFs and FCPs being subject to the higher domestic WHT rate instead of the reduced treaty rate based on the current position of the tax authorities.

Latvia (1) Asof1January2013,aWHTrateof0%isapplicabletoalldividendpaymentswithoutspecificrequirementsorrestrictions, except for payments to persons established in low-tax and tax free countries or territories and except for payments to individuals.

(2) Interest payments to unrelated companies are not subject to WHT. A WHT rate of 10% is applicable to the interest paymentsbetweenrelatedparties.Asof1January2014,aWHTrateof0%willbeapplicableonanyinterestpaymentswithoutspecificrequirementsorrestrictions,exceptforpaymentstopersonsestablishedinlow-taxandtaxfreecountriesor territories and except for payments to individuals.

(3) The transfer of shares generally is not subject to WHT in Latvia. In case of sale of shares in a Latvian company the assets of which consist of more than 50% of real estate, 2% WHT shall be withheld from the amount of consideration on the sale of respective shares. The sale of EU or EEA publicly-traded securities is not subject to the above mentioned WHT.

Liechtenstein (1) Thedistributionofreservesthatalreadyexistedon31December2010(so-calledoldreserves)aresubjecttoa4%coupontax.AsthereisaDTTbetweenLuxembourgandLiechtensteinthedistributionofoldreservesmaybefreeofcoupontaxunder certain conditions.

Lithuania (1) According to the Law on Corporate Income Tax (CIT), in general 15% WHT shall be applied on dividends paid by a Lithuanian company to another Lithuanian or a foreign company. However, the participation exemption rule, which states that dividends shall not be subject to WHT if the recipient holds no less than 10% of the shares of the payer of the dividends for an uninterrupted period of at least 12 months, could be applied.

DividendspaidtoLuxembourgmutualfundswhichdonothavethestatusofalegalentityandwhichcorrespondtothecriteria set in the Lithuanian law on collective investment vehicles, are not subject to taxation.

(2) In case interest is paid to Luxembourg mutual funds (FCPs), the rate of WHT on interest is 10%. Interest on Lithuanian corporatebondsisnotsubjecttoWHTifthesebondswereissuedbefore1January2002.

In case interest is paid to Luxembourg investment companies (SICAVs or SICAFs) no WHT on interest is applied.

(3) In case interest is paid to Luxembourg mutual funds (FCPs), the rate of WHT on interest is 10%. Interest on Government bondsissuedbytheLithuanianGovernmentisnotsubjecttoWHTifthebondsareissuedininternationalfinancialmarkets i.e., bonds registered in foreign securities depositaries. Interest on bonds issued by the Lithuanian Government, municipalitiesorinternationalfinancialinstitutions,ofwhichLithuaniaisamember,arenotsubjecttoWHTiftheagreementsontheissuanceofthesesecuritieswereconcludedbefore1January2003.

In the case of interest paid to Luxembourg investment companies (SICAVs or SICAFs) no WHT on interest is applied.



Type of income



Luxembourg 15 0 0 0

Macedonia 10 10 0/10 (1) 0 (2)

Malaysia 0 0/10 (1) (2) 0/10 (1) (2) 0 (3)

Malta 0 (1) 0 (2) 0 (2) 0 (3)

Mauritius 0 0/15 (1) 0/15 (1) 0 (2)

Macedonia (1) A 0% rate is applicable only for debt instruments issued and/or guaranteed by the Macedonian Government or the Central BankoftheRepublicofMacedoniaregardlessofwhethertheyareprovideddirectlyorthroughfinancialinstitutions/consultants/banks acting as agents of the Government of the Republic of Macedonia. In all other cases the WHT rate is 10%.

(2) Capital gains are not subject to WHT (i.e., income from capital gain is not stipulated within the income subject to WHT).

Malaysia (1) Interestfromcertainspecifiedbondsorsecuritiesmaybeexemptfromtax.Inparticular,interestderivedfromsecuritiesand bonds issued or guaranteed by the Malaysian Government and received by a unit trust or a listed closed-end fund is generally exempt from tax. In applying this exemption, the unit trust or the listed closed-end fund need not be incorporated, resident or listed in Malaysia.

Also, interest on securities issued by the Government and received by a company, which is not resident in Malaysia and do not have accrued interest through a permanent establishment in Malaysia, is exempt from tax.

(2) If the interest is subject to Malaysian WHT, in order to apply the reduced treaty rate of 10%, the Fund would need tosubstantiatethatitisaLuxembourgtaxresidentandwouldneedtoobtainataxresidencycertificatefromtheLuxembourg tax authorities.

(3) Malaysia has a limited capital gains tax regime known as ‘Real Property Gains Tax’ (“RPGT”) which would apply in certain circumstances. As we have assumed that the securities above are issued by the Malaysian Government directly or by listed companies to the fund, RPGT would not apply.

Malta OnthebasisthattheLuxembourgUCIisneitherincorporatednoreffectivelymanagedinMalta,theUCIisneitherresidentnordomiciled in Malta. The UCI can only be liable to Maltese tax on income arising in Malta (source basis of taxation).

The Luxembourg UCI would generally not be subject to WHT, except in particular instances (in particular, when distributions from Maltese companies from their “untaxed account” are made to the non-resident UCI who is in turn owned and controlled directly or indirectly, or acts on behalf of, an individual who is ordinarily resident and domiciled in Malta).

(1) Malta operates the full imputation system with respect to the taxation of dividends. The taxation of dividends at the level of the shareholder may also vary according to whether the income out of which the dividends were distributed was taxedattheleveloftheMaltesecompany.Dividendsreceivedbythenon-residentUCIwillnotattractanyWHTupontheirdistribution; the tax paid at corporate level will be imputed to the level of the shareholder and no further tax will be due. To ease the administrative burden, the Income Tax Act also provides non-residents the possibility of avoiding declaring such dividend income from local companies.

(2) Interest, discounts, premiums or royalties accruing to or derived by any person not resident in Malta is not subject to tax in Malta (even if the UCI is licensed under the Investment Services Act, on the assumption that the UCI has more than 85% ofitsassetssituatedoutsideMalta,theUCIwouldbeclassifiedasanon-prescribedUCI,withtheconsequencethatallitsincome will remain exempt other than income from immovable property situated in Malta and certain investment income).

(3) Capitalgainsarisingfromthesaleofsecuritiesinacompanywhichisnotapropertycompany,benefitfromanexemptionunder 12(1)(c)(ii) of the Income Tax Act on the basis that the transferor is a person not resident in Malta (and is not owned and controlled directly or indirectly by, nor acts on behalf of, an individual or individuals who are ordinarily resident and domiciledinMalta).ApropertycompanyisdefinedinArticle2oftheIncomeTaxAct(“ITA”)as:

“a company which owns immovable property situated in Malta or any real rights thereon or a company which holds, directly or indirectly, shares or other interests in any entity or person, which owns immovable property situated in Malta or any real rights thereon where 5% or more of the total value of the said shares or other interests so held is attributable to such immovable property or rights:

Provided that where a company, entity or person carrying on a trade or business owns immovable property situated in Maltaoranyrealrightsthereon,consistingonlyofafactory,showroom,warehouseorofficeusedsolelyforthepurposeofcarryingonsuchtradeorbusiness,suchcompany,entityorpersonshall,forthepurposeofthisdefinition,betreatedas not owning immovable property if not more than 50% of the value of its assets consist of immovable property situated in Malta or any rights over such property and it does not carry on any activity the income from which is derived directly or indirectly from immovable property situated in Malta.”

Mauritius (1)InterestpaidtoanonresidentissubjecttoWHTattherateof15%asfrom1January2013.NoWHTappliesifthepayerofthe interest is a bank or a non-bank deposit taking institution. Additionally, no WHT applies if the payer is either a company that holds a Category 2 Global Business License under the Financial Services Act 2007 (“FSA 2007”) or a company that holds a Category 1 Global Business License under the FSA 2007 and the interest is paid out of its foreign source income.

(2) Capital gains tax has been repealed as from 4 November 2011.



Type of income



Mexico 0 (1) 4.9/10 (1) (2) 025/40 (3)

4.9/10/30 (4)

Mexico TheDTTbetweenMexicoandLuxembourgprovidesthatnobenefitsareapplicabletoLuxembourginvestmentfunds,sotheMexican statutory WHT rate applies to payments made to Luxembourg funds.

(1) ThereisnodomesticWHTondividends.Distributionsmadetoshareholdersinexcessofpreviouslytaxedearningsaresubject to corporate income tax at 30% on a grossed up basis, resulting in an effective tax rate of 42.86% during 2013; in2014thecorporateincometaxrateisscheduledtobereducedto29%,thusadistributioninexcessaftertax,profitsshould be subject to an effective tax rate of 40.85%. The corporate income tax rate is scheduled to be further reduced to 28% in 2015. Thus the effective tax rate for an excess distribution should reduce to 38.89%. This tax is imposed on the distributing company rather than the shareholder. Therefore, there is no treaty relief. Under current Mexican tax rules, a credit is allowed for the excess distribution tax against the distributing company’s annual corporate income tax in the year of distribution and the two subsequent years (a total of three years).

(2) Interest paid to a non-resident entity from publicly traded corporate bonds is subject to a 4.9% WHT if certain requirements are met (otherwise the rate is increased to 10%). Further, if the bond is issued by a bank or broker dealer resident in a non-treaty jurisdiction the WHT rate will be 10%.

The WHT rate on interest is 30% during 2013 (this rate is scheduled to be reduced to 29% in 2014 and to 28% as from 2015andonwards)ifthebeneficialownersofmorethan5%oftheinterestonadebtinstrumentdirectlyorindirectly,individually or jointly with related parties, are: • Holders of more than 10% of the issuer’s voting shares, directly or indirectly, individually or jointly with related parties;

or • Entities where the issuer, directly or indirectly, individually or jointly with related parties owns more than 20% of the

shares

(3) Capital gains from the sale of Mexican shares derived by a non-resident investor are subject to WHT in Mexico. The WHT is determined using one of the two alternative methods: • 25% on the gross sale proceeds • 30% on net gain (this rate is scheduled to be reduced to 29% in 2014 and to 28% as from 2015)

The net gain method is only available to taxpayers who are not considered as resident in a preferential tax regime or a territorialtaxregimeasdefinedunderMexicanlawandcertainadministrativerequirementsaremet.

Under the Mexican income tax law, a 40% capital gain rate could apply if the investment fund is not subject to tax and treatedasaninvestmentinalowtaxjurisdictionordeemedtobenefitfromaspecialregime.

Under a temporary rule the 40% rate only applies to related party transactions. If a tax haven fund sells shares in a private Mexican company to a related party, the applicable tax should be 40% on the gross proceeds. There is a withholdingobligationifthebuyerisMexican;otherwise,thetaxhavenfundmustfileataxreturnwithin15daysofthetransfer.

Furthermore, for transfers of publicly traded shares through a stock exchange, the capital gain is exempt. The capital gains exemption is eliminated for shareholders who, directly or indirectly, hold more than 10% of the shares of the Mexican listed company and transfer 10% or more, under one or more simultaneous or consecutive transactions within a two-year period. Shareholders owning more than 10% may transfer less than 10%, over a two year period, and still avail themselves of the capital gains exemption.

If a fund owns an interest of more than 10% in a public issuer and trades 10% or more through the stock exchange, the exemption would not apply and the applicable tax according to the temporary rule would be 5% on the gross proceeds or 20%onthegain.Thefinancialintermediaryorbrokerdealerisrequiredtowithholdtheapplicabletax.

(4) Mexican tax law generally treats capital gains realized on the sale on Mexican publicly traded debt instruments (i.e., sales price reduced by the original issue price) as interest which is subject to WHT if the buyer is a Mexican resident. The generalWHTrateis30%.TheWHTrateisreducedto4.9%forqualifiedpubliclytradeddebtinstrumentsandto10%fornonqualifiedpubliclytradeddebts.Generally,thesaleofMexicandebtinstrumentsbetweennon-residentsisnotsubjectto Mexican WHT.



Type of income



Moldova 6/15 (1) 0/12 (2) 0 (3) 6 (4)

Morocco 10 (1) 10 0 0(2)

Netherlands 15 0/15 (1) 0 0

New Zealand 0/15/30 (1) 0/15 (2) 0 (2) 0 (3)

Nigeria 10 0 (1) 0 0

Moldova (1) Generally a 6% WHT applies to dividends paid to non-residents. A 15% rate applies on those dividends that are paid for fiscalyears2008until2011.

(2) Interest on corporate bonds is not taxable until 2015, provided that the bonds are issued for a period of more than three years.Otherwisethe12%WHTisapplied.

(3)Interestonstatesecuritiesisnottaxableuntil1January2015.

(4) As a general rule capital gains from the sale of securities should be subject to a WHT of 12%. Since only 50% of the capital gain is subject to WHT, the effective WHT rate on capital gains is 6%.

Morocco (1) TheDTTbetweenLuxembourgandMoroccoprovidestaxationofdividendsatthefollowingrates:• 15% standard rate• 10% for companies which hold at least 25% of the capital of the company which pays the dividends

The Moroccan Tax Code provides a 10% WHT for dividends. Thus, this favorable rate will apply in case of dividend payment from a Moroccan corporate to a Luxembourg fund

(2) Capital gains are taxable at the standard rate of 30% in case of investments in real estate companies.

Netherlands ItisassumedthattheLuxembourgUCIisnontransparentfromaDutchtaxperspective.WhenaUCIholdsa5%ormoreinterestinaDutchcompany,capitalgainsonshares,hybridloansandcorporatebondsaregenerallysubjectto25%Dutchcorporate income tax. Also the income received on such instruments (interest and dividends) would then be subject to 25% Dutchcorporateincometax.

(1)TheWHToninterestoncorporatebondswhichareconsideredashybridloansunderDutchtaxlawisequaltothedividend WHT rate (i.e., 15%) because in that case the interest is considered a dividend.

New Zealand

(1) A 15% WHT rate will generally apply where a company pays a cash dividend which has full imputation credits attached, or to the extent imputation credits are passed on to foreign investors through the payment of supplementary dividends under the foreign investor tax credit regime. A 0% WHT rate applies if fully imputed dividends are paid to foreign investorswhoholddirectvotinginterestsofatleast10%orifaDTTreducestheirtaxratebelow15%.A0%WHTratealsoappliestonon-cashdividendstotheextenttheyarefullyimputed.Otherwise,therateis30%.NoWHTappliestodividends paid by “multi-rate PIEs” (previously called “portfolio tax rate entities”), and dividends paid by “listed PIEs” (previously called “portfolio listed companies”) are subject to WHT at the normal rates only to the extent they have imputation credits attached.

(2) A 0% WHT rate applies where an approved issuer pays a levy of 2% on interest payments in respect of registered securities. All Government stock transactions have been approved as registered securities and the Reserve Bank is an approved issuer. This levy may be reduced to 0% for interest payments made on or after 7 May 2012 on certain public widelyheldbonds.Otherwise,therateis15%.

(3) Capital gains on the sale of bonds/shares are generally not taxable unless the investor is considered to be in the business of dealing in shares/bonds or the particular bonds/shares were acquired with the dominant purpose of resale. If the gains are subject to tax, the tax rate would be 28%.

Nigeria (1) Witheffectfrom2January2012interestearnedoncorporatebondsisexemptfromtax.



Type of income



Norway 25 (1) (2) 0 0 0

Oman 0 0 0 0

Panama 5/10/20 (1) (2) 5 0 (2) 5/10 (2)

Norway (1) SICAV

TherehasbeenuncertaintyinthepastastowhetherornotaSICAVqualifiesfortheexemptionfromNorwegianWHTon dividends paid by a Norwegian company to the SICAV. The Norwegian Ministry of Finance appeared to take the point ofviewthataSICAVisnotaresidentinLuxembourgundertheDTTbetweenNorwayandLuxembourg,asaSICAVinprinciple is not subject to tax in Luxembourg.

Based on a letter of 29 September 2009 from the Norwegian Ministry of Finance, Norway should acknowledge a 0% dividend WHT rate to a SICAV based on Norwegian domestic tax law. This is however only applicable provided the SICAV operates as a genuine security fund. It is the account holder of the Norwegian company that distributes the dividends that decides on the applicable dividend WHT rate.

IncasetheaccountholderappliesahigherWHTratetheSICAVmayclaimarefundoftheWHTbyfilinganapplicationtothetaxoffice,theCentralTaxOfficeforForeignTaxAffairs(COFTA).

(2) FCP

DividendsdistributedtoanFCPwillasastartingpointbesubjectto25%WHT.However,accordingtoaletterof3November 2011 from the Norwegian Ministry of Finance, the rate should be zero provided all of the investors in the FCP qualify for the full participation exemption according to Norwegian domestic tax law, i.e., all of the investors must be companies genuinely resident within the EU/EEA. In case one of the investors does not qualify for the full participation exemption, the WHT of 25% may be refunded, as follows:• A company tax resident and genuinely established in the EU/EEA – full refund of WHT• AnindividualresidentintheEU/EEA–refundlimitedtotheDTTWHTrate• AcompanyoranindividualpersonresidentinaDTTcountryoutsidetheEU/EEA–refundlimitedtotheDTTWHTrate

In practice, it is assumed that the account holder of the company paying the dividend to an FCP would levy a 25% WHT, and that the unitholder must apply for a refund. The FCP may apply for the refund if it has a power of attorney.

Panama (1) An increased WHT rate of 20% applies in the case of dividends paid on bearer shares.

(2) Capital gains derived from the transfer of bonds, shares, quotas and other securities issued by legal entities are subject to income tax at a rate of 10% on the gain, but a 5% WHT applies on the gross transaction amount.

Capital gains derived from the transfer of shares (or other forms of participation) of a Panamanian company should be considered local source income regardless of where the transaction takes place and if the company has operations within the territory of Panama or has assets located in Panama. Capital gains tax may even apply if the disposition of the shares is made indirectly, for example by selling the shares of a foreign holding company.

Buyers are required to withhold and deposit 5% of the purchase price paid to the seller with the tax authorities. This amount must be remitted to the tax authorities within ten days from the date the withholding obligations arise.

Sellershavethealternativeofconsideringthe5%WHTtobethedefinitiveandfinaltaxorcomputingtheactualnetgainandpayingtaxatarateof10%onthegain.The5%withheldwillbecreditedagainstthefinal10%capitalgainstaxliabilitydetermined.ProfitsfromthesaleofsecuritiesissuedbycorporationswhichhavetaxableincomeinPanama,orcapitalassetslocatedinPanama,aretaxableasordinaryincome.Profitsfromthesaleofsecuritiesissuedbycompaniesregistered with the National Securities Commission and traded on the Panamanian Stock Exchange are tax exempt; in these cases the interest is also exempt.

ProfitsfromthesaleofGovernmentsecuritiesaswellastheinterestarealsotaxexempt.

ProfitsfromthesaleofsecuritiesissuedbycorporationswhichhavetaxableincomeinPanama,orcapitalassetslocatedinPanama, are taxable with the capital gains tax as described above.



Type of income



Peru 4.1 (1) 0/4.99/30 (2) 0 (3) 5/30 (4)

Philippines 15/30 (1) 20/30 (2) 20/30 (3) 0/5-10 (4)

Peru (1) Dividendsincashdistributedtonon-residententitiesorindividualsaresubjecttoa4.1%WHT.

(2) Interest obtained on bonds issued by a Peruvian corporation by means of a public offer and pursuant to requirements established in the Peruvian Market Securities Law before 11 March 2007 are considered as tax exempt. As from 1 January2011,interestderivingfromcorporatebondsissuedsince11March2007willbesubjecttoa4.99%or30%WHT.

(3) Interest and capital gains derived from bonds issued by the Peruvian Government (i) within the legal frame of the Supreme DecreeNo.007-2002-EF;(ii)underaspecialprogramcalledProgramadecreadoresdeMercadooranyothersimilarprogram which substitutes it, and (iii) in the International Market since 2002, as well as the interest and capital gains derived from liabilities of the Peruvian Central Bank are exempted from tax on a permanent basis.

(4) Since1January2010,capitalgainsarisingfromthetransferofsecuritiesaresubjecttoa5%or30%taxrate,dependingon the following conditions: • If the transfer is performed within the country, the applicable tax rate is 5%. A transfer is considered as performed

within the country if the securities are listed in the Securities Public Register and are transferred through the Peruvian StockExchange.Asfrom1January2011,thePeruvianclearinghouse,“Cavali”,willactasthewithholdingagentinany transaction of Peruvian securities made through the Lima Stock Exchange

• If the transfer is performed abroad, the applicable tax rate is 30%. A transfer is considered as performed abroad if the securitiesarenotlistedorifthesecuritiesaretransferredOTC(over-the-counter).Inthesecases,aWHTwillonlyapplyiftheacquiringentityisaPeruvianentity.Otherwise,thesellerwillpaythetaxdirectly

The Peruvian Law establishes in certain cases a special procedure for calculating the tax cost for securities acquired before1January2010.

Philippines (1) DividendspaidbyaFilipinocorporationtoaforeigncorporationthatisnotengagedintradeorbusinessinthePhilippinesare generally subject to a WHT of 30% on the gross amount of dividends. The tax must be withheld by the Philippine corporation and remitted to the tax authority. The tax rate may be reduced to 15% if the country of domicile of the foreign corporation does not impose tax on offshore dividends or allows a credit for tax deemed paid in the Philippines equivalent to 15%, which represents the difference between the 30% regular income tax and the 15% tax on dividends (pursuant to the amendments to the Tax Code of 1997 introduced by Republic Act No. 9337).

(2)Investmentsbynon-residentforeigncorporationsincorporatebondsmaybeclassifiedasforeignloansunderSection28(B)(5)(a)ofthe1997TaxCode.AnyinterestincomederivedthereinshallbesubjecttoafinalWHTof20%.UnderRevenue Regulations No. 4-75, foreign loans refer to loan contracts including all debt items, whether in kind or in cash, which are payable in foreign currency or in kind entered into by a Filipino resident, corporate or otherwise, with a non-resident. If the bonds are not considered foreign loans (e.g., because they are not payable in foreign currency), the interest incomeis,from1January2009,subjecttoa30%finalWHT.

Section 32(B) (7) (g) of the 1997 Tax Code provides that “Gains realized from the sale or exchange or retirement of bonds, debenturesorothercertificateofindebtednesswithamaturityofmorethanfiveyears”shallbeexcludedfromthegrossincome. Thus, the gains derived from these investments may be exempt from income tax.

In this regard, the courts and the tax authority have ruled that the term “gain” does not include “interest”. Hence, interest on long-term bonds are not covered by the exemption under Section 32(B)(7)(g) of the 1997 Tax Code.

(3)InterestordiscountsonGovernmentsecuritiesaresubjectto20%finalwithholding(income)tax;suchtaxiswithheldby the Government agency concerned at the time of original issue or upon periodic coupon payments. If Government securities are not considered foreign loans under Revenue Regulations No. 4-75 because they are payable in Philippine Peso,theinterestincomeissubjecttoa30%finalWHT.

(4) Shares of domestic corporations that are listed and traded on a local stock exchange are exempt from income tax but subject to the stock transaction tax of 0.5% of gross selling price or gross value in money of the shares of stocks sold, bartered, exchanged or disposed of. Under Revenue Regulations 6-08, the tax due shall be assumed and paid by the seller or transferor through the remittance of the stock transaction tax by the seller or transferor’s broker. The net capital gains realized during the taxable year from the sale, barter, exchange or other disposal of shares of stock in a domestic corporationnotthroughoroutsideofthelocalstockexchangeshallbesubjecttocapitalgainstaxof5%onthefirstP100,000and10%inexcessofP100,000andthecorrespondingcapitalgainstaxreturnisrequiredtobefiledandthe capital gains tax to be paid within 30 days from the date of sale. However, an annual consolidated capital gains tax returnisalsorequiredtobefiledwhereincapitalgainsandcapitallossesfromthesaleofsharesofstockinaPhilippinecorporation during the year are consolidated and any excess capital gains tax paid may be refunded.

Thesale,transferorexchangeofsharesindomesticcorporationsisgenerallysubjecttodocumentarystamptax(DST)at the rate of P 0.75 on each P 200.00 or a fractional part thereof of the par value of the shares sold, transferred or exchanged. However, under Section 199 of the Tax Code, as amended in 2004 by Republic Act No. 9243 and in 2009 by Republic Act No. 9648, the sale, barter or exchange of shares of stock listed and traded through the local stock exchange shallbeexemptfromDST.RepublicActNo.9648removedthe5yearlimitontheexemptionfromDSTonthesale,barteror exchange of shares of stock listed and traded through the local stock exchange under Republic Act No. 9243.



Type of income



Poland 0/5/15/19 (1) (2) 0/5/10/20 (1) (3) 0/20 (1) (4) 0/19 (1) (5)

Poland ForeigninvestmentfundsmaybenefitfromPolishCITexemption.TheexemptionappliestoUCIsestablishedinanEUMemberStateotherthanPolandorinanothermemberstateoftheEEA,whichfulfillallofthefollowingconditions:• They are subject to taxation on their total income in the state in which they have their residence, irrespective of the source

of that income • Their exclusive area of activity is collective investing of funds gathered through public or non-public offering of their

participation titles, in securities, money market instruments and other property rights• Theycarryontheiractivityunderapermitissuedbythecompetentauthoritiessupervisingthefinancialmarketofthe

stateoftheirresidence,orthecarryingonoftheirbusinessrequiresanotificationtothecompetentauthoritiessupervisingthefinancialmarketofthestateoftheirresidenceinthecasewhenboththefollowingconditionsaremet:• They carry on their business in the form of a closed-end collective investment institution• Based on their incorporation documents, their participation titles are not offered in a public offering or admitted to

trading on a regulated market, or released in an alternative trading system, and may be acquired also by individuals solely if those individuals acquire participation titles of not less than €40,000 on a one-off basis

• Theirbusinessisdirectlysupervisedbythecompetentauthoritiessupervisingthefinancialmarketofthestateoftheirresidence

• They have a custodian safekeeping their assets• They are managed by entities who carry on their activity under a permit issued by the competent authorities supervising

thefinancialmarketofthestatewherethoseentitieshavetheirresidence

If the above conditions are met, the exemption applies to all types of income (including dividends, interest and capital gains).However, corporate entities, unincorporated organizational units and individuals who are entrepreneurs making the interest and dividend payments to the foreign UCI may apply the tax exemption only if the UCI:• Documentsitstaxresidencewithacertificateoftaxresidency• Submitsawrittenstatementthatitisthebeneficialownerofthesumspaidbytheremitterandthatitfulfillstheconditions

enumerated above

AssumingthataLuxembourgUCIqualifiesfortheaforementionedexemptionfromPolishcorporateincometax,noPolishCIT(including WHT) should be due on income received by such a fund in the form of Polish sourced dividends, interest and capital gains.

However, if a Luxembourg UCI does not meet the aforementioned criteria for exemption, CIT rates on income received by a Luxembourg UCI should be as follows:

(1)ItmaybearguedthatLuxembourgSICAVsandSICAFsqualifyfortheapplicationoftheDTTbetweenPolandandLuxembourg.InordertobenefitfromtheDTTprotectiontheyshouldpresenttheirLuxembourgtaxresidencycertificatetothePolishWHTremitter.Therearecertaindoubtsastowhethertheinvestmentfundsinquestionmaybeclassifiedas“liabletotax”andthereforewhethertheyqualifyfortheDTTprotection.

Luxembourg FCPs should be regarded as tax transparent from the Polish tax perspective and therefore such entities are not likely to be treaty protected.

IfnoDTTprotectionisavailable,thestandardPolish20%WHToninterest,19%WHTondividendsand19%CIToncapitalgainsapplies.

(2)Thelower5%DTTrateisapplicabletothedividendpaidouttoacompanybeingaLuxembourgtaxresidentwhichholdsatleast25%ofsharesinthesharecapitalofthecompanypayingoutthedividend.The15%DTTrateappliesinanyothercaseswherethedividendispaidouttoaLuxemburgentityprotectedbyDTT.ThestandardPolishWHTrateondividendsis19%(applicablewherethereisnoDTTprotection).IftherecipientqualifiesfortheParent-Subsidiaryexemption(mainconditionsare: 10% shareholding and 2-year holding period etc.), it should be applied accordingly.

CurrentchangesbasedontheProtocoltoDTT:

(2)Thelower0%DTTrateisapplicabletothedividendpaidouttoacompany(otherthanapartnership)beingaLuxembourgtax resident which holds at least 10% of shares in the share capital of the company paying out the dividend for at least uninterrupted period of 24 months.

(3)Thelower0%DTTrateisapplicabletointerestpaidoutonbankcredits(loans).The10%DTTrateisapplicabletotheinterestthataroseinPolandandpaidouttoanentitylocatedinLuxemburgandprotectedbyDTT.PleasenotethatwheretherecipientqualifiesfortheInterest-RoyaltyDirectiveexemption,the5%WHTrateshouldapply(0%WHTisapplicabletopaymentsmadestartingfrom1July2013).UnderthedomestictaxlawsofPoland,thestandardPolishCITrateoninterestpaid on corporate bonds is 20%.


Poland(cont’d)


(3)The5%DTTrateisapplicabletotheinterestthataroseinPolandandispaidouttoanentitybeingtaxresidentinLuxemburgandprotectedbyDTT.

(4) Interest paid under the government bonds, which are “bonds offered on foreign markets” (within the meaning of Polish law) earned by non-residents are exempt from taxation in Poland. The standard Polish WHT rate on interest paid on government bonds which do not fall under the exemption is 20%.

(5) If Luxembourg SICAVs and SICAFs are considered Luxembourg tax residents, capital gains earned by them should be exempt fromtaxationinPolandunderArticle13oftheDTT.ThisrelatesalsotocapitalgainsfromthesaleofsharesinPolishrealestatecompanies.IfSICAVsandSICAFsarenotprotectedbytheDTT,thereisariskthatthecapitalgainsrealizedbythemupon the sale of Polish securities may be considered as derived in Poland and therefore subject to regular 19% CIT. The issue of when the gains are considered as derived in Poland is not clearly regulated in Polish tax law and therefore requires a case-by-case analysis. Under the domestic tax laws of Poland, capital gains recognized upon a sale of government bonds, which are considered as “bonds offered on foreign markets” (within the meaning of Polish law) earned by non-residents are exempt from taxation in Poland. The standard Polish CIT rate on interest paid on government bonds which do not fall under the exemption is 19%.


(5)RealestateclausehasbeenintroducedtothePolish-LuxembourgDTT.Consequently,thecapitalgainsfromthesaleofshares in the Polish companies whose value is derived in more than 50% directly or indirectly from immovable property located in Poland will be subject to taxation in Poland.

Additionally, Poland will apply the tax credit method to the tax on income such as dividends, royalties and interest or capital gains which was paid in Luxembourg taxed in Poland.

Portugal (1)IfLuxembourgUCIsqualifyfortheapplicationoftheDTTbetweenPortugalandLuxembourg,therateondividendsshoulddecreasefrom25%(domesticrate)to15%(DTTrate).

(2) Interest on Portuguese corporate bonds registered in a clearing system recognized by the Portuguese Securities and Exchange Commission (except bonds of a monetary nature, namely short-term debt with maturity less than one year) and paid to non-residents (except non-residents domiciled in offshore jurisdictions, other than central banks or governmental agencies,ornon-residentsheldformorethan20%byresidententities)areexemptfromWHTinPortugal.Otherwisetheratesare25%(domesticrate),10%,15%(DTTrates).TheDTTrateapplicableoncorporatebondsis10%ifthepayingentityconsidersinterestascorporateincometaxdeductibleandpaysittoafinancialestablishmentresidentinanothercountryand 15% in other situations.

(3) Interest on Government bonds registered in a clearing system recognized by the Portuguese Securities and Exchange Commission (except bonds of monetary nature, namely short-term debt with a maturity of less than one year, but including Treasury Bills) and paid to non-residents (except non-residents domiciled in offshore jurisdictions - other than central banks or governmental agencies - or non-residents held for more than 20% by resident entities) are exempt from WHT in Portugal. OtherwisetheWHTratesare25%(domesticrate),10%,15%(DTTrates).

(4)CapitalgainsonPortuguesecorporatebondsandGovernmentbondsbenefitingfromtheinteresttaxexemptiondescribedin(2) and (3) above are exempt from taxation in Portugal.

Inothercases,capitalgainsarisingfromthesaleofsharesandbondsareexemptfromtaxduetotheDTT.IftheDTTdoesnot apply, capital gains are exempt from taxation in Portugal, with the following exceptions: the non-resident holds more than 25% of the resident entities; the non-resident company obtaining the gain is resident in a country/territory included on the “black list” issued by a Ministerial order of the Finance Minister; the capital gain arises from the sale of a participation in the equity capital of a resident company whose assets are composed of more than 50% in real estate properties located in Portugal or the sale of a participation in the equity capital of a company that has a domain relationship over a resident company whose assets are composed of more than 50% in real estate properties located in Portugal.


Type of income



Poland (cont’d) 0/5/15/19 (1) (2) 0/5/10/20 (1) (3) 0/20 (1) (4) 0/19 (1) (5)

Portugal 15 (1) 0 (2) 0 (3) 0 (4)


Qatar (1) Thenewincometaxlaweffectivefrom1January2010statesthat“Interestandreturnsonpublictreasurybonds,development bonds and public corporation bonds” are exempt from tax. The Executive Regulations (Regulations) added that theinterestandreturnsonthesebondsshallincludeprofitsfromthedisposalofsuchbonds.

WHT shall apply on the interest payments subject to the important exceptions enumerated in the Regulations, which are as follows:• Interest on deposits in the state• Interest on bonds and securities issued by the state and public authorities, establishments and corporations owned wholly

or partially by the state• Interestontransactions,facilitiesandloanswithbanksandfinancialinstitutions• Interestpaidbyabranchinthestatetotheheadofficeortoarelatedpartyoftheheadofficeoutsidethestate

The following transactions therefore appear to be subject to WHT of 7%:• InterestpaidbyasubsidiarycompanyinQatartogroupaffiliates• Interest on notes and bonds issued by institutions that are not wholly or partly owned by the Qatari Government and are

notissuedtoorpaidbyabankorfinancialinstitutions

(2) Gains arising from disposal of shares of companies resident in Qatar or listed on the Qatar Exchange are generally subject to tax at the prevailing corporate income tax rate of 10%. As outlined above, gains from the sale of public treasury bonds, development bonds and public corporation bonds are not subject to tax in Qatar.

Romania (1) LuxembourgSICAVsandSICAFsmayqualifyforthebenefitsoftheDTTbetweenRomaniaandLuxembourgifthesefundscanprovidetheRomanianpayerwithcertificatesoftaxresidencyfromtheLuxembourgtaxauthorities.ThedomesticRomanianWHTrateis16%bothondividendsandoninterestreceivedbynon-residentshareholders(startingfrom1July2010,includingoninterestearnedfromcurrentaccounts/onsightdepositsinRomanianbanks).Since1January2011,dividends paid by a Romanian company to a legal entity resident in the EU/EFTA (European Free Trade Area) are subject to thestandardWHTrateof16%(unlesstaxtreatyprovision/EUParent-SubsidiaryDirectiveapply–seefootnote(2)).Interestand/ordividendspaidbyaRomaniancompanytopensionfunds(asdefinedaccordingtotheregulationsoftheEU/EFTAMember states) are exempt from WHT.

(2) TheDTTratesare15%ondividends(reducedto5%fordirectholdingsofatleast25%).

AspertheprovisionsoftheEUParent-SubsidiaryDirectiveimplementedintheRomanianFiscalCode,dividendspaidbyaRomanianlegalentityoralegalentityhavingitsregisteredofficeinRomaniasetupaccordingtotheEuropeanlegislationto a legal entity resident in another EU/EFTA Member State, or to a permanent establishment of an entity from another EU/EFTA Member State which is situated in another EU/EFTA Member State are exempt from tax if the foreign legal entity who isthebeneficialownerofthedividendcumulativelymeetsthefollowingconditions:• HasoneofthelegalformsspecificallymentionedbythelawandothercompaniesconstitutedunderLuxembourglaw

subject to Luxembourg Corporate Tax• IsaresidentoftherespectiveEU/EFTAMemberStateandisnot,withinthemeaningofaDoubleTaxationConventionon

Income and Capital concluded with a third state, considered to be resident for tax purposes outside the EU/EFTA• Issubjecttoprofitstaxortoasimilartax(accordingtotherespectiveEU/EFTAMemberStatelegislation)withoutbeing

exempt• Holds at least 10% of the share capital of the Romanian legal entity for a minimum period of 2 years, ending on the date

when dividends are paid

Moreover,inordertobenefitfromsuchexemption,theRomanianlegalentitypayingthedividendmustbeboth:• A company established according to Romanian law and takes the form of a joint-stock company, partnership limited by

shares or limited liability company

• SubjecttoprofittaxaccordingtotheRomaniantaxlegislationwithoutoptionsorexemptions

(3) Romania levies a 16% WHT on interest paid to non-resident companies unless the rate is reduced under a tax treaty or the ECInterest&RoyaltiesDirective.TheDTTratesare10%oninterestiftherecipientisthebeneficialowneroftheinterest.TheinterestWHTisreducedto0%iftheLuxembourgentitiesqualifyasfinancialinstitutions.


Type of income



Qatar 0 0/7 (1) 0 0/10 (2)

Romania 0/5/15/16 (1) (2) 10/16 (1) (3) (4) 0 (4) 0/16 (5)


Romania (cont’d)

(4) Starting1July2010,theWHTexemptionappliesonlytointerestongovernmentbonds.Fromthisdateonwards,intereston debt instruments or securities traded on a regulated stock market issued by a Romanian legal entity (e.g., corporate bonds)issubjecttoa16%WHTrateinRomania.Additionally,starting1January2012,incomefromtransactionswithderivatives used for performing risk management operations in respect of risks associated to public debt is also exempt from WHT.

Starting1January2011,interestpaymentsmadetoanassociatedcompanyofanotherEU/EFTAMemberStateortoapermanent establishment situated in another EU/EFTA Member State of an associated company of an EU/EFTA Member StateareexemptfromWHTundertheprovisionsoftheEUInterest&RoyaltiesDirectiveimplementedintheRomanianFiscalCode(ifthebeneficialowneroftheserevenuesholdsatleast25%ofthesharecapitaloftheRomaniancompanyfor an uninterrupted period of two years ending on the date of interest payment).

(5) Based on the domestic Romanian law, capital gains obtained by a foreign entity from disposal of shares held in a Romanianlegalentityaresubjecttodomesticcorporateincometaxatarateof16%.However,undertheDTT,suchcapital gains from the disposal of shares should be taxable only in Luxembourg (note that the domestic Romanian law’s definitionof“immovableproperty”wouldnotincludeshares).WhereacertificateoftaxresidencyfromtheLuxembourgtaxauthoritiescanbeprovidedbyLuxembourginvestmentfunds,themorefavorabletreatmentprovidedbytheDTTshould apply. The following income is exempt from tax on income obtained from Romania by non-residents:• Income derived by non-resident collective placement bodies without legal personality from the transfer of participation

titles and/or securities held directly or indirectly in a Romanian legal entity• Income derived by non-residents from the trading on foreign capital markets of participation titles and/or securities

held in/issued by a Romanian legal entity

EvenifnocapitalgainstaxwaspayableinRomaniaundertheDTT,thenon-residententityreceivingthecapitalgainwouldtechnicallyhavetosubmitaprofittaxreturninRomania(viaataxrepresentative)declaringzerotaxpayable.

Russian Federation

(1) The general WHT rate applicable to interest (coupon) income is 20%. The following reduced WHT rates could be applied to the interest (coupon) income on the following types of the bonds:i. 15% on interest (coupon) on state bonds of countries – participants of the Union State (currently Russia and Belarus)

and on Russian federal state, regional state and municipal securities (other than the securities which are mentioned in sections (ii) and (iii) below), where the conditions of the issue and circulation thereof provide for the receipt of income in the form of interest (coupon). The Tax Code establishes a rate of 15% in relation to interest income on mortgage-backedbondsissuedafter1January2007andincomeearnedbythesettlorofthetrustmanagementofamortgagepoolwhichisreceivedonmortgagecertificatesissuedbyamortgagepoolmanagerafter1January2007.Itisnotclear from the Russian Tax Code whether interest (coupon) income on non-municipal and non-state mortgage backed bondsissuedafter1January2007maybesubjecttothereducedtaxrateof15%.Thereisariskthatthestandardrate of 20% would apply to such bonds in practice.

ii. 9%oninterestonmunicipalsecuritiesissuedforaperiodofnotlessthanthreeyearsbefore1January2007,forinterestonmortgage-backedbondsissuedbefore1January2007andforincomeearnedbythesettlorofthetrustmanagementofamortgagepoolwhichisreceivedonmortgagecertificatesissuedbyamortgagepoolmanagerbefore1January2007.ItisnotclearfromtheRussianTaxCodewhetherinterest(coupon)incomeonnon-municipalandnon-statemortgagebackedbondsissuedbefore1January2007maybesubjecttothereducedtaxrateof9%.There is a risk that the standard rate of 20% would apply to such bonds in practice.

iii.0%oninterestonstateandmunicipalbondswhichwereissuedupto20January1997inclusivelyandonbondsofthe 1999 State currency funded loan which were issued upon the novation of series III bonds of the State domestic currency loan which were issued for the purpose of achieving the conditions required for the settlement of the domestic currency debt of the former USSR and the domestic and foreign currency debt of the Russian Federation.

iv. New provisions in the Russian tax legislation envisage that a Russian payer of income is released from the obligation to withhold tax, i.e. from the obligation to act as a tax agent, from payments to foreign entities in the form of interest (coupon) under traded bonds issued by Russian entities in accordance with foreign legislation (direct foreign market access) and Russian federal state, regional state and municipal securities. Importantly, these legislative changes do not provide exemption from Russian WHT to the foreign interest income recipients. However no Russian WHT should arise, since there is neither a mechanism nor obligation for a non-resident to calculate and pay such tax independently.

v. OtherchangesintheRussiantaxlegislationenvisagethataRussiandepositaryshouldactasataxagentincaseofpayment of income in favour of a foreign nominee holder in respect of issuance securities with mandatory centralized safekeepingforwhichissueregistration(currentlyallstatesecurities)andISINassignmenttookplaceafter1January2012, provided that such securities are recorded on one of the following depositary accounts opened by a Russian depositary:• Depositaryaccountofaforeignnomineeholder• Depositaryaccountofaforeignauthorizedholder


Type of income



Romania (cont’d) 0/5/15/16 (1) (2) 10/16 (1) (3) (4) 0 (4) 0/16 (5)

Russian Federation 15 9/15/20 (1) 0/9/15 (1) 0/20 (2) (3)


Russian Federation (cont’d)

Foreign nominees and foreign authorized holders are obliged to provide to a Russian depositary within three working days information on persons who receive income on securities comprising the following details in relation to each of those persons (information disclosure rules differ for funds which are collective investment vehicles as compared to other funds):• Category (physical person or legal entity)• Full name of organization or physical person• Number of securities of a Russian issuer• Place of tax residency of person in question• The basis for the application of tax concessions in relation to income on securities

The receipt of information by a depository is a basis for application of WHT rates established by the Russian tax legislation. If this information is not provided to a depositary, or is not provided in full, income on the securities in question will be subject to tax at source at the “punitive” rate of 30 % irrespective of the category of person receiving income on securities. Literally this special WHT regime should apply to foreign nominees and foreign authorized holders of Russian federal state, regional state and municipal securities. However it is expected that the Tax Code could be changed to eliminate a collision with the other rules providing that tax agents should not withhold tax on interest on such securities.

(2) Income from the sale of shares which are not recognized as exchange-traded in the organized market (in accordance with Russian tax legislation) and participant interest in Russian organizations whose assets consist of more than 50% in immovable property located in the territory of the Russian Federation (the “property-rich shares”), and from the sale of financialinstrumentsderivedfromsuchsharesaresubjecttoRussianWHTattherateof20%.Capitalgainsderivedfromthe disposal of non property-rich shares (participant interest) or property-rich shares which are recognized as exchange-traded on the organized market (in accordance with the Russian tax legislation) are not subject to Russian WHT. There is a special exemption for capital gains received as a result of the sale of property-rich shares on foreign stock exchanges on which such shares are circulated. Such capital gains are not subject to Russian WHT. Where WHT applies, the WHT rate is 20% on the gains calculated as the difference between the amount of sales proceeds and the duly documented acquisitionexpenses,providedthebasiscostofthesharesacquiredisconfirmedbyprimarydocumentspresentedtothetax agent prior to payment of income; otherwise, the whole amount of revenue is taxed at the rate of 20%.

(3) Generally, capital gains realized by foreign entities from the sale of debt securities should not be subject to Russian WHT, since the sale of debt instruments is not explicitly referred by the Russian tax legislation to Russian-source income that should be subject to taxation. However, there is a risk that the portion of sales proceeds attributable to interest (coupon) accrued on such securities over the period of their holding of them by the foreign legal entity is subject to income tax withholding at domestic rates depending on the type of the debt security (please refer to comments set out in footnote (1) above), even if the disposal results in a capital loss.

Saudi Arabia

(1) In practice, it may not be permissible for a Luxembourg UCI to invest in a Saudi Arabian publicly held entity. However, under the new Capital Market Law currently being implemented, this is expected to change.

(2) In accordance with the tax regulations, 5% WHT is payable on payments of interest and dividends paid by resident entities to non-residents.

(3) Capital gains arising on sale of unlisted securities are subject to corporate tax at a rate of 20%.

(4) Capital gains arising on the sale of securities that are listed on the Saudi stock exchange and that were acquired after 30 July2004areexemptfromtax.

Serbia (1) WHT is applicable to payments made by Serbian residents to non-residents. With respect to the taxation of capital gains, pleasenotethataccordingtochangesintheSerbianCorporateProfitsTaxLaw,whichareinforceasof27March2010,a 20% capital gains tax on the sale of Serbian real estate, intellectual property and capital participations between two non-residents has been introduced.


Type of income



Russian Federation (cont’d)

15 9/15/20 (1) 0/9/15 (1) 0/20 (2) (3)

Saudi Arabia 5 (1) (2) 5 (1) (2) 5 (1) (2) 0/20 (1) (3) (4)

Serbia 20 (1) 20 (1) 20 (1) 20 (1)


Singapore (1) Interest payments to non-residents (with no permanent establishment in Singapore) are generally subject to 15% WHT withcertainexceptionsincludinginterestpaidonqualifyingdebtsecurities(“QDS”)andqualifyingprojectdebtsecurities(“QPDS”)whichareexemptfromWHTupto31December2013and31December2017respectively.

(2) A WHT rate of 0% applies to certain Government bonds.

(3) Capital gains are not taxable, but whether the gain arising from the sale of securities is a capital gain will generally dependonwhethertheselleriscarryingonabusinessoftradinginsecurities.Duetothenatureoftheactivitiesofafund entity, its income from buying and selling investments is generally viewed to be revenue in nature and hence may be subject to Singapore income tax. However, if a non-resident fund does not carry on a trade or business in Singapore, and does not have any permanent establishment (e.g. a Singapore fund manager) in Singapore, its trading income would not generally be taxed in Singapore in practice.

Subject to certain exceptions, gains derived by a company from disposal of ordinary shares in an investee company duringtheperiod1June2012to31May2017(bothdatesinclusive)arenottaxableinSingaporeifimmediatelypriortothedateofsharedisposal,thefundhadheld,legallyandbeneficially,atleast20%oftheordinarysharesintheinvestee company for a continuous period of at least 24 months.

Slovakia (1)Distributionofdividends(i.e.,profitaftercorporatetaxation)relatedtoprofitfrom2004onwardsisnotsubjecttoanytaxation in Slovakia.

(2)TheWHTrateshownisthenormalrateof19%andnottheDTT(signedbetweenLuxembourgandCzechoslovakia)rateof0%,asitisconsideredthattheDTTisinfactnotappliedinSlovakia.

(3) Income from Government bonds and bonds of the National Bank of Slovakia denominated in foreign currency and issued before31December2003isexemptfromSlovakincometax.IncomefromStatebondsissuedandregisteredabroaduntil 28 February 2009 is also exempt from Slovak taxation. Income on which the exemption does not apply has to be declared in a regular tax return and is subject to a 23% tax rate. Income from Government bonds paid to taxpayers not established for business purposes, the National Property Fund of the Slovak Republic and the Slovak National Bank is subject to 19% withholding tax.

(4) The 19% tax guarantee applies in case of sale income paid to Slovak tax non-residents or their permanent establishments inSlovakiaiftheincomeisnotsubjecttoWHT.Thetaxguaranteeof19%maybeeitherconsideredasfinal,orthesubmissionofataxreturnmaybeconsidered.From1January2007thetaxguaranteehasbeencancelledforentitiesfrom the EU, but only those which are subject to taxation (on worldwide income) in an EU Member State.

Slovenia (1)AccordingtotheDTTbetweenSloveniaandLuxembourg,theWHTrateof5%appliesiftheholderowns25%ofissued/outstanding capital. In all other cases, a statutory 15% WHT rate is applicable. Under certain conditions, the EU Parent-SubsidiaryDirectivecouldalsobeappliedtoreducetheWHTto0%.

(2) IftherecipientoftheinterestisabeneficialowneroftheinterestandtheconditionssetbytheDTTarefulfilled,theWHTrateof5%appliesaccordingtotheDTT;inothercases,thestatutory15%WHTrateisapplicable.Undercertainconditions,theEUInterest-RoyaltyDirectivecouldalsobeappliedtoreducetheWHTto0%.

(3) Taxes shall not be calculated, withheld, and paid in the case of payments of interest arising from debt securities issued by a company incorporated under the legislation applicable in the Republic of Slovenia, if: • The security cannot be converted to an equity instrument (or does not contain the holders’ option by way of which an

exchange for an equity security could be achieved, if the issuer of debt security is a bank), and• The securities are listed on a regulated securities market or are traded on a multilateral trading system in an EU

MemberStateorinaOECDmembercountry,exceptfordebtsecuritiesissuedforthepaymentofdamagesunderthelaw regulating denationalization

(4) According to the Slovenian Corporate Income Tax Act, WHT is not levied on interest paid on the basis of securities issued by the Slovenian Government.

(5) Capital gain realized on sale of securities by a foreign entity is not taxable in Slovenia, unless it is achieved through a permanent establishment in Slovenia (in such a case the capital gain would be allocated to the permanent establishment and the 17% general corporate income tax rate would apply). Please note that the corporate income tax rate should be reduced to 15% by 2015 (whereby the rate of 16% is set for 2014 and the rate of 15% should apply from 2015 onwards).


Type of income



Singapore 0 0/15 (1) 0/15 (2) 0 (3)

Slovakia 0 (1) 19 (2) 0/19/23 (2) (3) (4) 0/19 (4)

Slovenia 0/5/15 (1) 0/5/15 (2) (3) 0 (4) 0 (5)


South Africa

(1) A 15% dividend tax applies to dividends paid with effect from 1 April 2012. The tax is applied to both non-resident and certain resident shareholders. Under the Luxembourg/South Africa double tax treaty, the rate may be reduced to 5% wherethebeneficialownerisacompanywhichholdsatleast25%ofthecapitalofthecompanypayingthedividend.

(2)WHToninterestwillapplyfrom1July2013withadefaultrateof15%.IntermsoftheSouthAfrican/LuxembourgDTTinterestarisinginSouthAfricaisonlytaxableinLuxembourg,unlesstheLuxembourgresidenthasapermanentestablishment in South Africa in which case the interest will be taxable in South Africa.

(3) AbsentaDTT,interestongovernmentbondsisexemptfromtheinterestWHT.

(4) Tax on capital gains will apply to immovable property, which includes “property rich shares”. Property rich shares are shares representing directly or indirectly more than 20% of the equity in any entity in which at least 80% of the market value is attributable either directly or indirectly to immovable property situated in South Africa and to any asset of a permanent establishment of the non-resident through which a trade is carried on in South Africa. If the sale attracts South African Capital Gains Tax, in the case of a company, 66.6% of the gain will be included with effect from 1 March 2012 and taxed at a rate of 28% (i.e., an effective tax rate of 18.6%).

WHT is withheld from payments made to non-residents in respect of the sale of immovable property situated in South Africa.Asdiscussedabove,thedefinitionof“immovableproperty”includesequitysharesinpropertyrichcompanies.WHT would therefore be payable on the sale of shares in a property rich company if the shareholders are non-residents. The WHT is calculated on the gross proceeds (i.e., before taking into account the base cost or any expenses relating totheasset).TheWHTisanadvancepaymentofthecompany’sannualtaxliabilityandthefinaltaxliabilitywillbedeterminedatyearendwhenthecompany’staxreturnisfiled.IncertaininstancestheWHTcanbereduceduponapplication to the local Revenue authorities. The WHT rate applicable to companies is 7.5%.

Spain (1) LuxembourgUCIsmayenjoythereducedrateprovidedforintheLuxembourg/SpainDTT,providedthattheLuxembourgUCIisabletoobtainataxcertificateissuedbytheLuxembourgtaxauthoritiesstatingitstaxresidenceinLuxembourgaccordingtothedefinitionprovidedforintheDTT.

Notwithstanding the above, for dividends obtained from 2010 onwards, UCITS are eligible for a WHT refund up to the amount withheld exceeding the taxation that would have been borne by a Spanish UCITS fund on similar income (currently1%),providedthattheyareabletoobtainacertificateoftheLuxembourgsupervisingauthoritystatingthatthey are UCITS compliant.

AccordingtoFinalProvisionNo.4ofRoyalDecree20/2011,of30December2011,thewithholdingrateapplicabletodividendshasbeentemporarilyincreasedfrom19%to21%.Thismeasureiseffectivefrom1January2012until31December2013.

(2) As a general rule, interest and capital gains of Spanish source obtained by European investors are tax exempt, unless (i) theyarisefromequitieswhichrepresentaninterestequaltoorhigherthan25%,(ii)theEuropeanjurisdictionqualifiesasataxhaven(followingthenewProtocoltotheDTTsubscribedbyLuxembourgandSpain,Luxembourginvestmentvehicles can no longer qualify as such) or (iii) the interest or capital gains are attributable to a Spanish permanent establishment.

However, there is a tax exemption on capital gains arising from listed securities if obtained by an investor resident in a countrywithwhichSpainhassignedaDTT,thatprovidesanexchangeofinformationclause,asdoestheLuxembourg/SpainDTT,whichisapplicabletothenon-residenttaxpayer.

ThetaxstatusofanEUorDTTinvestorshouldbeaccreditedbywayofageneralcertificateoftaxresidenceinLuxembourg.

Moreover, interest (which includes coupon payments and capital gains arising from the transfer or redemption of a debt security) arising from certain preference shares, Government bonds and listed debt securities issued by credit entities, by securitization funds and by listed non-credit entities, are all tax exempt provided that the foreign investor may state that it is not a Spanish tax resident investor.

Otherwisea21%taxburdenwouldapply,regardlessofthereducedtaxrate/exemptionprovidedforintheDTT.


Type of income



South Africa 15 (1) 0 (2) 0 (2) (3) 0/7.5 (4)

Spain 21 (1) 0 (2) 0 (2) 0 (2)



Type of income



Sweden 30 (1) 0 0 0

Switzerland 35 0/35 (1) 35 0

Taiwan 20 15 (1) 15 (1) 0 (1)

Thailand 10 (1) 15 (1) 0 (2) 0/15(3)

Trinidad and Tobago 5/10 (1) (2) 15 (1) 15 (1) 0

Tunisia 0 (1) 7.5/10 (2) 7.5/10 (2) 30 (3)

Sweden (1) From1January2012,thereweresignificantchangestotheSwedishtaxationregimeforinvestmentfunds.Thenewrules imply that the taxation of Swedish investment funds has been abolished; instead the investors are taxed on an annual basis.

From1January2012thereisalsoanadditionaldomesticexemptionfromWHTintroducedinSweden.Accordingtothisnew rule, WHT should not be triggered on dividends to foreign investment funds within the EEA or foreign investment funds resident in states with which Sweden has an agreement on exchange of information on tax matters, under the assumption that the foreign investment fund is equivalent to a Swedish investment fund. The applicable law covering the Swedish investment funds is based on UCITS.

The Swedish Tax Agency has issued a statement according to which the following funds should with certainty qualify for the exemption:• FundsestablishedinaccordancewiththeUCITSDirective,andnon-UCITSfundswhichhavebeenauthorizedbythe

Swedish Financial Supervisory Authority to market their shares or units in Sweden

Forotherfundsanassessmentonacasebycasebasishastobemadeinordertodetermineifthefundfulfillsthecriteria for being equivalent to a Swedish investment fund and thus should be exempt from WHT.

Switzerland (1) ThereisnoSwissWHTleviedoninterestpaymentsinconnectionwithcorporateloans.Specificrulesapplytoawiderange of creditors.

Taiwan (1) ProvidedthattheLuxembourgUCIdoesnothaveafixedplaceofbusinessorabusinessagentinTaiwan,theWHTrateon the interest income from corporate bonds and government bonds is 15% and the Alternative Minimum Tax (“AMT”) will not apply to the Luxembourg UCI. Capital gains on sales of securities will be tax exempt under the Income Tax Act and not applicable under the AMT.

Thailand (1) WhileitisnotyetcertainwhethertheratesincludedintheDTTbetweenThailandandLuxembourgwillbeappliedtoLuxembourgSICAVs/SICAFs,theDTTandnon-treatyratesondividendsandinterestareboth10%and15%respectively.

(2) According to Thai tax law, a 0% WHT rate applies to interest paid from Government Bonds to non-resident companies.

(3) There is no Thai tax on capital gains from the disposal of securities between non-Thai residents. The WHT of 15% may, however,bepayableifthebuyerisaThairesidentandthesellerisanon-ThairesidentwhodoesnotbenefitfromDTTprotection.TodeterminewhetherthesellerhasDTTprotection,theThaiauthoritieslookattheregisteredownerratherthanthebeneficialowner.Nocapitalgainstaxiswithheldwherethetransactioniscarriedoutthroughandinthenameofanon-Thaibrokerin,forexample,SingaporeorUK,inaccordancewiththeDTTbetweenthesecountriesandThailand.

Trinidad and Tobago

(1)TheWHTratesshownarethenon-treatyratesasthereappearstobeuncertaintyregardingtheapplicationoftheDTTsigned between Luxembourg and Trinidad and Tobago.

(2) The 5% WHT rate applies to dividends paid to corporations owning 50% or more of the voting rights of the distribution company. The 10% rate applies to other dividends.

Tunisia (1)Dividendsaretaxedat0%becausedomesticTunisianlawexemptsdividendsfromWHT.(TheDTTbetweenLuxembourgand Tunisia provides for a different rate.)

(2) The WHT rate on interest on bonds is 10%; however, this rate becomes 7.5% if the following conditions are met:• Thebond(loan)isguaranteedbyaforeignGovernmentorbyanon-residentfinancialinstitution• Itsdurationisaminimumoffiveyears

(3) In accordance with domestic law, capital gains realized by non-residents are taxable at the rate of 30% for companies and 10% for individuals. The WHT rate is levied based on capital gains calculated on the difference between the sales price and the acquisition price diminished by the incurred expenses for the shares sale/acquisition including the share premium.

The WHT tax charge calculated could not exceed in all cases 5% of sales price of the shares for companies and 2.5% for individuals.

Non-residentcompaniesorindividualsmaychoosetofileanannualcapitalgaintaxreturntoenablethedeductionofanyeventual capital loss from the capital gain and request refund of the surplus of the WHT performed if there is any.

ByreferencetotheDTTbetweenTunisiaandLuxembourg,capitalgainsonsecuritiesareonlytaxableinthecountryofresidence, for instance Luxembourg.



Type of income



Turkey 0/15 (1) (2) 0/3/7/10 (2) (3) (4) (5) 0/10 (2) (3) 0/10/32 (2) (3) (4)

Ukraine 15 0/15/19 (1) 0/15/19 (2) 0/15/19 (3) (4)

Turkey (1) Therateis0%iftheUCIhasaPermanentRepresentative(PR)inTurkey.Otherwise,theapplicableWHTrateis15%.However, if the dividend distribution was made to the grandfathered portfolio of the non-resident investment fund which hasapermanentrepresentativeinTurkey,thewithholdingrateis0%.Ontheotherhand,ifthedistributionwasmadetoa second portfolio (new portfolio in dual system), the WHT rate is 15%.

(2) Neither capital gains nor interest income derived from Eurobonds are subject to WHT. These gains will not be declared.

(3)Effectivefrom1October2010,incomederivedfromcertainsecuritiesissubjectto0%WHTforresidentcorporations(joint stock companies, companies limited by shares and limited companies) and non-resident corporations (joint stock companies, companies limited by shares and limited companies and foreign corporations which are determined by the Ministry of Finance to be of similar nature to investment funds and investment trusts established according to the Capital Markets Code) and 10% for resident and non-resident real persons and corporations other than those mentioned above. The regulation in question does not cover dividend income.

The determination of the non-resident investors who will be regarded as similar in nature to mutual funds and investment trusts established in Turkey is determined as follows in the communiqué No. 277: “… all non-resident institutional investors such as limited liability partnerships, sovereign funds, funds owned by administrations and establishments and investment institutions which are operating in Turkey exclusively to derive income and capital gains from securities and other capital markets instruments and to exercise rights relating to these, would be deemed as tax payers similar to the mutual funds and investment trusts established under the provisions of the Turkish Capital Market Code No. 2499.”

(4) Unless the shares and private sector bonds were issued through the intermediation of banks or intermediary institutions, the interest income of private sector bonds will be subject to WHT at the rate of 10% and the applicable tax rate for capital gains of shares and private sector bonds will be a total of 32% (20% corporate income tax + 15% withholding on remaining).

(5) The following withholding rates are applicable for interest income derived from private sector bonds (corporate bonds) issued outside of Turkey by Turkish resident companies:• 10% if the maturity is up to 1 year• 7% if the maturity is between 1 year and 3 years• 3% if the maturity is between 3 year and 5 years• 0% if the maturity is 5 years or longer

Ukraine (1) Income on corporate bonds: i. Interest-only bearing bonds:

• The 0% WHT rate applies to interest on state-guaranteed debt securities, or debt securities guaranteed by a local municipality, if the securities are sold or placed to non-residents outside of Ukraine through authorized non-resident agents

• The 15% WHT rate applies to the amount of interest in other casesii. Bonds with discount income only:

• The 0% WHT rate applies to discount on state-guaranteed debt securities, or debt securities guaranteed by a local municipality, if the securities are sold or placed to non-residents outside of Ukraine through authorized non-resident agents

• The 19% WHT rate applies to the amount of discount in other casesiii. Bonds combining both interest and discount income:

• The 0% WHT rate applies to discount on state-guaranteed debt securities, or debt securities guaranteed by a local municipality, if the securities are sold or placed to non-residents outside of Ukraine through authorized non-resident agents

• The 15% WHT rate applies to the amount of interest on the bonds placed on different conditions from the above

Regardingdiscountsonthebondsplacedunderconditionsdifferentfromtheabove,thereisaconflictbetweendifferent provisions of the legislation, in particular: • The 15% WHT rate applies to, inter alia, the amount of discount income payable to non-residents, although • The 19% WHT rate applies to the difference between the face value of the bond payable to non-residents by the

issuer and the price of the bond’s acquisition at the primary or secondary stock market

It is considered that there is more likelihood of substantiating the applicability of the 15% rate.

Non-residents may acquire or sell both corporate and Government discount bonds only through a permanent establishment in Ukraine or a Ukrainian resident acting as an agent of such non-resident. In theory, this requirement may be applied to the transactions on acquisition and sale of interest-bearing bonds as well.



Type of income



Ukraine (cont’d) 15 0/15/19 (1) 0/15/19 (2) 0/15/19 (3) (4)

United Arab Emirates 0 0 0 0

Ukraine (cont’d)

(2) Income on Government bonds: i. Interest-only bearing bonds:

• The 0% WHT rate applies to interest on state securities and municipality bonds, if sold (placed) to non-residents out of the territory of Ukraine by non-resident authorized agents

• The 15% WHT rate applies to the amount of interest on state securities or municipality bonds placed under conditions different from the above

ii. Bonds with discount income only: • The 0% WHT rate applies to the amount of discount income on state securities, municipality bonds, if sold (placed)

to non-residents out of the territory of Ukraine through non-resident authorized agents• The 19% WHT rate applies to the amount of discount income on state securities or municipality bonds placed under

conditions different from the above

The legislation does not describe the taxation pattern applicable to interest/discount with regard to the cases where the interest/discount is payable by the issuer on bonds purchased on the secondary market.

iii. Bonds combining both interest and discount income: • The 0% WHT rate applies to the amount of discount or interest income on state securities, municipality bonds, if

sold (placed) to non-residents outside of the territory of Ukraine through non-resident authorized agents• The 15% WHT rate applies to the amount of interest on the bonds placed on different conditions from the above• Regardingdiscountsonthebondsplacedunderconditionsdifferentfromabovethereisaconflictbetweendifferent

provisions of the legislation, in particular: • The 15% WHT rate applies to the amount of the discount income payable to non-residents, although • The 19% WHT rate applies to the difference between the face value of the bond payable to non-residents by the

issuer and the price of the bond’s acquisition on the primary or secondary stock market

It is considered that there is more likelihood of substantiating the applicability of the 15% WHT rate.

(3) Capital gainsi. Capital gains on Government bonds (of any of the types as mentioned above) including external Government bonds

sold (placed) to non-residents out of the territory of Ukraine by non-resident authorized agents, as well as capital gains on corporate bonds: • The 15% WHT rate applies to interest-bearing bonds. It is considered that there is a high likelihood of substantiating

the application of the 15% rate to capital gains on interest-free (discount) bonds, although the authorities might try to apply the 19% rate attributing the capital gains to a permanent establishment through which the sale of the bonds is conducted

• If both the seller and the purchaser are non-residents of Ukraine and settlements are abroad, no WHT applies due to the lack of a withholding mechanism. Such settlements, however, can create a currency control exposure for the purchaser, except when external Government bonds are concerned

ii. Capital gains on shares: the 15% WHT rate applies. If both the seller and the purchaser are non-residents of Ukraine and settlements are abroad, no WHT applies due to the lack of a withholding mechanism. Such settlements, however, can create a currency control exposure for the purchaser.

(4) Excise tax on disposal of securities

Atransfertax(calledaspecialexcisetax)onalienationofsecuritieshasbeenintroducedstartingJanuary2013.Thistax is levied on the seller of securities (including non-residents of Ukraine) and is administered by a tax agent. Ukrainian traders in securities are supposed to act as tax agents for the majority of cases. The tax basis is the contract value of securities (and not the capital gain). • Operationswithsecuritieslistedonastockexchangearetaxedat0%,andoutsideofstockexchange–at0.1%rateof

the transaction value • Operationswithsecuritiesnotlistedonastockexchangearetaxableattherateof1.5%ofthetransactionvalue

Tax exemptions apply, so applicability of excise tax should be considered case by case. To name a few, alienation of state and municipal securities, state-guaranteed securities, shares of private joint stock companies, corporate rights other than securities, as well as alienation of some types of mortgage bonds are tax exempt.


United Kingdom

(1) Property income distributions made by Real Estate Investment Trusts (REITs) are paid under deduction of the basic rate tax (currently 20%).

(2) Generally, basic tax currently at 20% is deducted at source on all payments by a corporation or local government authority and also on all other payments of UK source interest to a person whose “usual place of abode” is outside of the UK.

(3) Interest paid on quoted Eurobonds is exempt.

(4) The distinction between yearly and short interest is relevant in the context of WHT. Where the interest payable is “short interest” there is no requirement to deduct tax at source. “Short interest” is that paid on a loan/bond with a term less than 365 days. There is a requirement to deduct income tax at source for yearly or annual interest. Yearly interest is that paid on a loan/bond with a term capable of lasting 365 days or more.

(5) Interest on gilts is paid without deduction of income tax unless the registered holder elects for payment with deduction of basic rate tax (currently 20%).

United States of America

(1) It should be noted that a very small number of securities that are publicly traded in the U.S. equities market are, in fact, partnerships for U.S. tax purposes. The tax compliance for an investment in a U.S. partnership is much more complex, andincertaincasesmayrequiretheinvestortofileaU.S.taxdeclaration.

The tax consequences for dividends paid by certain “Real Estate Investment Trusts” (REITs) and certain other U.S. real estate investment entities, and certain gains on sale with respect to such entities and other entities that primarily invest inU.S.realestate,canbemorecomplex,andmayrequiretheinvestortofileaU.S.taxdeclaration.Investorsshouldobtain advice before investing in equity securities of entities that primarily invest in U.S. real estate, although it should benotedthat,thereissignificantreliefforinvestorsholding5%orlessofthesharesofcertainpublicly-tradedREITsandother entities.

(2) BroadexceptionssignificantlylimitthegeneralapplicabilityofU.S.WHTatthe30%rateoninterestincome.Theseexceptions to WHT on interest income are: i. 0% rate applies to interest on corporate and U.S. Government obligations if the obligations are payable within 183

days from the date of issuance. Therefore, short-term U.S. treasury bills, commercial paper, and banker’s acceptances will typically produce income not subject to U.S. WHT.

ii.0%rateappliestointerestonbankdeposits(includingcertificatesofdeposit).iii. Under the “portfolio debt exemption”, interest on obligations (including, but not limited to, U.S. treasury obligations

andotherGovernmentbonds)issuedafter18July1984isgenerallynotsubjecttoU.S.WHT(withcertainexceptions– e.g., related party debt and debt with participating interest) if the obligations are either:• Inregisteredform(e.g.,heldthroughtheDepositoryTrustCompanyorothersuchcentralsecurities

depositories)andthebeneficialowneroftheinterestdulycertifiesitsforeignstatusandtheforeignstatusofanypartnersofthebeneficialowneror

• (For obligations issued before 19 March 2012) not in registered form provided certain restrictions exist intended to prohibit sale to and ownership by U.S. persons (that is, the obligation must be targeted to non-U.S.markets,underwhataregenerallyknownasthe“TEFRAD”rules)

ForsecuritiesheldinonshoreaccountsintheUnitedStates(witheitherU.S.ornon-U.S.institutions),certificationof foreign status would be made on Form W-8BEN for non-U.S. corporations and individuals, and Form W-8IMY for non-U.S. partnerships. For securities held at accounts outside of the United States with institutions (either U.S. or non-U.S.)thathaveagreedwiththeU.S.taxauthoritiestobecome“qualifiedintermediaries”(QIs),foreignstatusmight, in the alternative, be established with “know-your-customer” documentation, as the QI may have agreed with the Internal Revenue Service (IRS).

Since1January2001,non-U.S.partnershipsaretreatedona“look-through”basis.Anon-U.S.partnership(ordinarily, except for a special election, FCPs, SICAVs, and SICAFs would probably not be regarded as partnerships for U.S. tax purposes; on the other hand, a société en nom collectif or a société en commandite might well be apartnershipforU.S.taxpurposes)mustobtainIRScertificatesofforeignstatusfromallofitspartnersandattachthemtoitsownIRScertification,andexplainhowitsincomeistobeallocatedamongthepartners,unlessthe partnership has obtained withholding foreign partnership (WFP) status from the IRS, in which case less documentation is provided to the payer of the income (i.e., the custodian).

iv.0%rateappliesforinterestonobligationsofvariousU.S.statesandtheirpoliticalsubdivisionsandtheDistrictofColumbia (e.g., interest from municipal bonds). Certain limited exceptions apply to this general rule.


Type of income



United Kingdom 0 (1) 20 (2) (3) (4) 0 (5) 0

United States of America 30 (1) 0/30 (2) 0/30 (2) 0



Type of income



United States of America (cont’d) 30 (1) 0/30 (2) 0/30 (2) 0

U.S. Virgin Islands 11 11 11 0 (1)

Uzbekistan 10 (1) (2) 10 (1) 10 (1) 0 (1)

Venezuela 34/50/60 (1) 4.95/32.3 (2) 0 1/5 (3)

Vietnam 0 5/7/10 (1) 5/7/10 (1) 0.1 (2)

United States of America(cont’d)

It should be noted that distributions out of income by a U.S. mutual fund of the usual type are generally treated as dividends for this purpose, and so subject to 30% WHT, even though some or all of the income of the fund might be interest income that could be received directly without WHT. Persons making money market investments in the United States are encouraged to make a thorough enquiry into this issue, especially since the terminology is not always precise. It may not always be immediately clear whether an offered “money market” investment is:• A bank deposit, which is exempt from withholding under the bank deposit rule mentioned above, or • A U.S. mutual fund of the usual type

Certain provisions which make it possible for a U.S. mutual fund of the usual type, which receives income that would be exempt from WHT if it was earned directly, to pay, out of such income, an “interest-related dividend” that would also be exempt from WHT, have been reinstated with retroactive effect, and will continue to apply for mutual fund tax years beginning before 2014. As of 18 February 2013, it is not possible to predict whether these provisions could be extended further.

Recent legislation and IRS guidance would impose a 30% United States WHT on certain payments (including U.S.-sourceinterestbeginningonJanuary1,2014andgrossproceedsfromthesaleorotherdispositionofdebtobligationsofU.S.issuersbeginningonJanuary1,2017)madetoanon-U.S.entitythatfailstodisclosetheidentity of its direct or indirect “substantial U.S. owners” or to certify that it has no such owners, subject to various exceptions.Thisrulewillnotapplytoobligationsoutstandingon1January2014,providedthattheyarenotsubstantiallymodifiedafterthatdate.

U.S. Virgin Islands

(1) Capital gains on sales of securities are not subject to tax if the disposal is done by a non-resident.

Uzbekistan (1) InordertobenefitfromtheDTTbetweenUzbekistanandLuxembourg,certaindocumentsshouldbefiledwiththeUzbekistantaxauthoritiesincludingacertificateofresidenceissuedbytheLuxembourgtaxauthoritiesconfirmingthattherecipientofincomeisresidentinLuxembourgforDTTpurposes.

(2) 5% WHT applies if the owner holds at least 25% of the capital and is a company.

Venezuela (1) DividendsaresubjecttoWHTonincome.Theratesvaryaccordingtotheactivityoftheentitypayingthedividend.For ordinary companies the rate will be 34%, for the mining related enterprises the rate will be 60%, and for the hydrocarbons exploration and exploitation companies the rate will be 50%. The taxable base will be constituted by the financialnetincomeexceedingthenettaxableincomeforagivenfiscalyear.

(2)LoanrelatedinterestissubjecttoWHTatarateof4.95%or32.3%:4.95%ifthebeneficiarycanbedeemedafinancialinstitution in Luxembourg and 32.3%, as the maximum effective rate (taxable base is 95% and it is subject to a progressiverateof15%,22%,and34%)wheninterestispaidtoinstitutionsotherthanafinancialinstitution.Interestother than loan-related, is subject to a progressive rate of 15%, 22%, and 34%. Progressive rates are described in the chart below.

Taxable incomeRate

Exceeding Tax Units Not exceeding Tax Units

0 2.000 15%2.000 3.000 22%3.000 34%

(3)Salesproceedsaresubjectto1%WHTforsecuritiesdealtinontheStockExchange(finaltaxliabilitywillbecoincidenttoamount withheld) and 5% for those that are not. Please note that in this case the gain will be subject to a progressive rate (15,22or34%)andtheamountwithheldwillbecreditedagainstthefinaltaxliability.

Vietnam (1) Bond interest (except for tax-exempt bonds) arisen before 1 March 2012 is subject to WHT at a rate of 10% (even paid on and after 1 March 2012) however interest arisen and paid on and after 1 March 2012 is subject to WHT at a rate of 5% according to local tax regulations (i.e., Circular 60/2012/TT-BTC on Foreign Contractor Tax or FCT). However according totheDTTbetweenVietnamandLuxembourganditsProtocol,thereducedrateof7%maybeapplicable(conditionsapply).

(2)Disposalsofsecurities(includingshares,investmentfundcertificates,bondsexceptfortax-exemptbonds)byaLuxembourg UCI (non-Vietnam resident) are subject to WHT at the deemed rate of 0.1% on the total sales proceeds.


Appendix IVGlossary

IV.1. Introduction

The glossary provides:• Alistofacronymsandabbreviations,the

full meanings and the French translations of terms used in this Technical Guide, where relevant

• AlistofothercommonUCI-relatedtermsused in this Technical Guide in English, with French translations

484 | Appendix IV – Glossary

Appendix IV – Glossary | 485

Acronyms and abbreviations, full meanings and French translations

Abbreviation English Name French Name1915 Law Law of 10 August 1915 on commercial companies, as

amendedLoi de 1915 concernant les sociétés commerciales, telle quemodifiée

1993 Law Law of 5 April 1993 on the Financial Sector, as amended Loidu5avril1993surlesecteurfinancier,tellequemodifiée

2010 Law Lawof17December2010relatingtoundertakingsforcollective investment, as amended

Loi du 17 décembre 2010 concernant les organismes de placementcollectif,tellequemodifiée

ABBL Luxembourg Bankers’ Association Association des Banques et Banquiers, Luxembourg

ABS Asset backed securities

AGM Annual general meeting Assemblée générale annuelle

AGDL DepositGuaranteeAssociation,Luxembourg AssociationpourlaGarantiedesDépôts,Luxembourg

AIF Alternative Investment Fund Fonds d’investissement alternatif (FIA)

AIFM Alternative Investment Fund Manager Gestionnaire de fonds d’investissement alternatif

AIFMD AlternativeInvestmentFundManagersDirective Directivesurlesgestionnairesdefondsd’investissementalternatif

AIFM Law TheLawof12July2013onAlternativeInvestmentFundManagers

Loi du 12 juillet 2013 relative aux gestionnaires de fonds d'investissement alternatifs

ALCO AssociationofLuxembourgComplianceOfficers Association luxembourgeoise des Compliance Officers

ALFI Association of the Luxembourg Fund Industry Association luxembourgeoise des fonds d’investissement

ALRiM Luxembourg Association for Risk Management Association Luxembourgeoise de Risk Management

AML/CFT Anti-money laundering (AML) and counter-terrorist financing(CFT)

Lutteanti-blanchimentdecapitauxetcontrelefinancementdu terrorisme (LAB/CFT)

ARIS Absolute return innovative strategies

BCL Luxembourg Central Bank Banque centrale du Luxembourg

CaA Luxembourg Insurance Supervisory Authority Commissariat aux Assurances

CCLux CCLux Centrale de Communications Luxembourg S.A.

CCP Central counterparty Contrepartie centrale

CDO Collateralized debt obligation

CDS Credit default swap

CEBS258 Committee of European Banking Supervisors

CEIOPS259 CommitteeofEuropeanInsuranceandOccupationalPensions Supervisors

CESR Committee of European Securities Regulators Comité européen des régulateurs des marchés de valeurs mobilières (CERVM)

CIS Collective investment scheme Organismedeplacementcollectif

CIT Corporate income tax Impôtsurlessociétés

CIU260 Collective Investment Undertaking Organismedeplacementcollectif(OPC)

CNAV Constant NAV

CRA Credit rating agency Agence de notation de crédit

258 Now EBA 259 NowEIOPA260 See also UCI



Abbreviation English Name French NameCRD CapitalRequirementsDirective Directivesurlesexigencesdefondspropres

CRF Financial intelligence unit Cellulederenseignementfinancier

CRR Capital Requirements Regulation Règlement sur les exigences de fonds propres

CSD Central securities depositary Dépositairecentraldetitres

CSSF Commission for the Supervision of the Financial Sector Commission de Surveillance du Secteur Financier

CVaR Conditional Value-at-Risk Valeur-sous-risque conditionnelle

DTT Doubletaxationtreaty Convention contre double imposition

EEA European Economic Area Espace Economique Européen

EBA European Banking Authority Autorité bancaire européenne

ECB European Central Bank Banque centrale européenne

ECJ EuropeanCourtofJustice Cour européenne de justice

EEA European Economic Area Espace économique européen (EEE)

EFAMA European Fund and Asset Management Association Association européenne des sociétés de gestion de fonds et d’actifs

EFC EuropeanFundClassification Classificationeuropéennedesfonds

EFCF European Fund Categorization Forum

EGM Extraordinary general meeting Assemblée générale extraordinaire (AGE)

EIOPA EuropeanInsuranceandOccupationalPensionsAuthority Autorité européenne des assurances et des pensions professionnelles

ELTIF European Long-Term Investment Funds Fonds européens d’investissement à long terme (FEILT)

EMIR European Market Infrastructure Regulation European Market Infrastructure Regulation

EPM EfficientPortfolioManagement Gestiondeportefeuilleefficace

ESG environmental, social and governance (responsibilities) (Responsabilités) environnementales, sociales et de gouvernance

ESMA European Securities and Markets Authority Autoritéeuropéennedesmarchésfinanciers

ETF Exchange traded funds Fonds négociés en bourse (FNB)

EU European Union Union européenne (UE)

EuSEF European Social Entrepreneurship Funds Fonds d'entrepreneuriat social européens

EuVECA European Venture Capital Funds Fonds de capital-risque européens

EVT Extreme Value Theory Théorie des valeurs extrêmes

FAQ Frequently asked questions Questions fréquemment posées

FATCA Foreign Account Tax Compliance Act

FATF Financial Action Task Force Grouped’Actionfinancière(GAFI)

FCP Common fund Fonds commun de placement

FDAP Fixed or determinable annual or periodical

FDI Financial derivative instrument Instrumentfinancierdérivé

FSB Financial Stability Board

FTT Financial Transaction Tax Taxesurlestransactionsfinancières

FFI Foreign Financial Institutions

HNWI High net worth individual

IFAC International Federation of Accountants Fédération internationale des comptables

IFRS International Financial Reporting Standards Normesinternationalesd’informationfinancière

IGA Inter-Governmental Agreement

ILA LuxembourgInstituteofDirectors Institut luxembourgeois des administrateurs



Abbreviation English Name French NameILNAS Luxembourg Institute of Normalization, Accreditation,

Security and Quality of Products and Services Institut Luxembourgeois de la Normalisation, de l’Accréditation, de la Sécurité et Qualité des Produits et Services

IML261 Luxembourg Monetary Institute Institut monétaire luxembourgeois

IMMFA Institutional Money Market Funds Association Association des fonds monétaires institutionnels

iNAV Indicative Net Asset Value (iNAV)

IORP InstitutionsforOccupationalRetirementProvision Institutions de retraite professionnelle

IOSCO InternationalOrganizationofSecuritiesCommissions Organisationinternationaledescommissionsdevaleurs(OICV)

IRE Luxembourg Institute of Auditors Institut des réviseurs d’entreprises

IRS Internal Revenue Service

ISA International Standards on Auditing Normes internationales d’audit

ISAE 3402 International Standard on Assurance Engagements (ISAE) 3402, Assurance Reports on Controls at a Service Organization issued by the International Auditing and Assurance Standards Board

ISIN InternationalSecurityIdentificationNumber Numérointernationald'identificationdesvaleursmobilières

KII Key Investor Information Informations clés pour l’investisseur (ICI)

KYC Know Your Customer Connaître son client

LuxFLAG Luxembourg Fund Labeling Agency Association luxembourgeoise de labellisation des fonds d’investissements

LuxGAAP Luxembourg Generally Accepted Accounting Principles Principes comptables généralement reconnus (PCGR) au Luxembourg

LuxSE Luxembourg Stock Exchange Bourse de Luxembourg

MiFID MarketsinFinancialInstrumentsDirective DirectivesurlesMarchésd’instrumentsfinanciers

MBS Mortgage backed securities

MMF Money Market Funds Fonds monétaires

MMI Money market instruments Instruments du marché monétaire

MTF Multilateral Trading Facility Système de négociation multilatéral

NAV Net asset value Valeur nette d’inventaire (VNI)

NCA National competent authority Autorité nationale compétente

NCCT Non-cooperative country or territory Pays et territoires non coopératifs (PTNC)

NFFE Non-financialforeignentity

NPPR National Private Placement Regime Régime national de placement privé

NWT Net worth tax Impôtsurlafortune

OECD OrganizationforEconomicCo-operationandDevelopment Organisationdecoopérationetdedéveloppementéconomiques(OCDE)

OEREF Open-endedrealestatefunds Fonds immobiliers de type ouvert

ORSA OwnRiskandSolvencyAssessment(ORSA)

OTC Over-the-counter Degréàgré

OTF Organizedtradingfacility Système organisé de négociation

PEP Politically exposed person Personne politiquement exposée

PFPV Pension fund pooling vehicles Véhicules Pension Pooling

PRIP Packaged retail investment product Produit d'investissement de détail

PSDC Dematerializationandpreservationserviceprovider Prestataire de services de dématerialistion ou de conservation

PSF Financial sector professional Professionneldusecteurfinancier

261 The predecessor of the BCL and the CSSF



Abbreviation English Name French NameQ&A Questions and Answers Questions réponses

RCS Trade and Companies Register, Luxembourg Registre de commerce et des sociétés, Luxembourg

REIF Real Estate Investment Fund

RMP Risk management process Processus de gestion de risque

RTS Regulatory technical standards Normes techniques de réglementation

S.à r.l. Private limited company Société à responsabilité limitée

S.A. Public limited company Société anonyme

S.C.A Partnership limited by shares Société en commandite par actions

S.C.S. Limited partnership Société en commandite simple

S.C.Sp. Special limited partnership Société en commandite spéciale

S.E. European company Société européenne

SCI Single Commodity Index Indice sur Matière Première Individuelle

SFI Structured Financial Instrument Instrumentfinancierstructuré

SFP Structured Financial Products Produits structurés

SICAF Investmentcompanywithfixedcapital Sociétéd’investissementàcapitalfixe

SICAR Investment company in risk capital Société d’investissement en capital a risque

SICAV Investment company with variable capital Société d’investissement à capital variable

SIF Specialized Investment Fund Fonds d’investissement spécialisé (FIS)

SIF Law Law of 13 February 2007 on Specialized Investment Funds, as amended

Loi du 13 février 2007 sur les Fonds d’Investissement Spécialisés,tellequemodifiée(LoiFIS)

SLA Service level agreement Accord de niveau de service

SME Small and medium-sized enterprises Petites et moyennes entreprises (PME)

SOPARFI Luxembourgfinancialholdingcompany Sociétédeparticipationfinancière

SPV Special Purpose Vehicle Fonds commun de créances (FCC)

SRRI Synthetic Risk and Reward Indicator Indicateur de risque et de rémunération

STATEC Central Service for Statistics and Economic Studies Service central de la statistique et des études économiques

T2S Target2-Securities

TER Total expense ratio Total des frais sur encours

TID Taxable income distributed Bénéficesdistribuésimposables

TIS Taxable income per share Bénéficeparactionimposable

TRS Total Return Swap

UCI Undertaking for Collective Investment Organismedeplacementcollectif(OPC)

UCITS Undertakings for Collective Investment in Transferable Securities

Organismesdeplacementcollectifenvaleursmobilières(OPCVM)

US United States of America Etats-Unis d’Amérique

VaR Value-at-Risk Valeur-sous-risque

VNAV Variable Net Asset Value

VAT Value Added Tax Taxe sur la valeur ajoutée (TVA)

WHT Withholding tax Retenued’impôtàlasource


Other common UCI-related terms, and French translations

English Name French NameAdministrator Administration

Approved statutory auditor262 Réviseur d’entreprises agréé

Compartment Compartiment

Cooperative company Société coopérative

Cooperative company organized as a public limited company Société coopérative organisée sous la forme d’une société anonyme

Depositary Dépositaire

Distributor Distributeur

Domiciliationagent Agent domiciliataire

Management company Société de gestion

Master-feeder Maîtres-nourricier

OfficialGazette Mémorial

Paying agent Agent payeur

Private portfolio manager Gérant de fortunes

Promoter Promoteur

Registrar Agent teneur de registre

Repurchase agreement (Repo)Repurchase transactionSale with right of repurchase transaction

Achat de titre à réméréOpérationsdemiseenpensionOpérationàréméré

Reverse repurchase agreement (Reverse repo) Vente de titre à réméré

Securities lending Prêt de titres

Securities borrowing Emprunt de titres

Short selling Vente à découvert

Subscription tax Taxe d’abonnement

Transfer agent Agent de transfert

Unlimited company Société en nom collectif

262 In this Technical Guide, we use the term “independent auditor”


Appendix VEY asset management related publications

This Appendix lists a selection of recent EY asset management related publications and newsletters.

Contact

This Technical Guide, the publications listed in this Appendix and many others are available on the EY website, www.ey.com/luxembourg, or by contactingtheMarketingDepartment:+352421247547

EY publications• New European regime for long-term funds proposed –

August 2013InJune2013,theEuropeanCommissionproposedanewpan-European regime for European long-term investment funds (ELTIF). ELTIF will invest primarily in companies and projects (such as infrastructure projects) that need long-term capital, offering institutional and private investors across Europe the opportunity to make longer term commitments to assets. This publication outlines the ELTIF proposal and provides an EY perspective.

• Risk Management for Asset Management Survey 2013 – July2013EY’s risk management for asset management 2013 survey offers a revealing insight into the unique set of challenges currently confronting our industry’s risk management professionals. In comparing the views of more than 54 heads ofriskandchiefriskofficersatmanyofthemostrecognizedtraditional and alternative asset managers in the UK and continental Europe, the survey provides indications about the future development of the continued evolution and strategic importanceoftheriskfunctionforassetmanagementfirms.

• Introducing the EuVECA and the EuSEF - European venture capitalandsocialentrepreneurshipfund–June2013In March 2013, the European Union approved two regimes creating EU labels (“designations) for investment funds investing primarily in small and medium sized enterprises: - Regulation on European Venture Capital Funds (EuVECA)- Regulation on European Social Entrepreneurship Funds

(EuSEF)This publication provides an overview of the two regimes.

• AIFM in a box - Your next step in implementing the AIFM Directive–June2013This publication outlines how EY can support AIFM on the journey from designing the target operating model to identifying compliance gaps and embedding AIFM in the day-to-day operations.

• AIFMDirectiveQ&A-Marketinginvestmentfundsbynon-EuropeanmanagerstoEuropeaninvestors–June2013FromJuly2013,non-EUmanagerswillnolongerbeabletoraise capital from European investors as they did in the past. This Q&A answers some of the key questions asked by non-EU managers about raising capital from EU investors in the future.

• Compliancemanagementforassetmanagement–June2013The 2012 Regulatory Compliance Survey – the fourth in the series–hasbeenissuedjustoverfiveyearssincethefirsttremorsthattriggeredtheglobalfinancialcrisisof2008.

• EY Eurozone Forecast – Summer 2013The EY Eurozone Forecast is a quarterly overview of developments across the Eurozone and the 17 individual member states. The forecast uses the ECB model and governmental statistics to offer insight into the issues that affect the region’s governments and businesses. TheEYEurozone:Outlookforfinancialservicesusesthismacroeconomic overview to provide a comprehensive forecast for the region’s banks, asset managers and insurers. Both forecastsareproducedinco-operationwithOxfordEconomics,a leading independent forecasting and research institute.

490 | Appendix V – EY asset management related publications

Appendix V – EY asset management related publications | 491

• TheDecumulationAgenda-EMEIAAssetManagementViewpointSeries - May 2013Demographicagingandincreasinglongevityarehighlightingshortcomings in post retirement investment markets around the world.Discussionswithclients,coupledwithourownresearch,haveconvinced us that asset managers have a unique opportunity to createvaluebyfillingthisgap.EYbelievesthatinnovativeportfolioproducts developed in partnership with insurers offer asset managers the greatest chance of success. In our view, decumulation markets representamajorstrategicopportunityforindividualfirmsandtheasset management industry as a whole.

• Your bridge between Europe and China: Luxembourg – February 2013This publication sets out why Chinese asset managers should choose Luxembourg as their “hub” to distribute their funds to European and international investors.

• LuxembourgthegatewayforIslamicfinanceandtheMiddleEast–February 2013Luxembourg is already recognized as a leading European center forIslamicfinanceandMiddleEasterninvestment.ThispublicationoutlineswhyLuxembourg’sinternationalfinancialcenterisperfectlyequipped to address the needs of both conventional and Sharia-compliant investment funds and investment structures.

• TheimpactoffinalFATCAregulationsontheAssetManagementindustry – February 2013ThefinalForeignAccountTaxComplianceAct(FATCA)regulationsreleasedon17January2013attempttocreateatargetedrisk-basedapproachtoFATCAtoreducetheoperationalburdenonfinancialinstitutions.

• European ETFs: the game changer for growth in asset management – February 2013The European market for exchange-traded funds (ETFs) has grown steadily in size and importance in recent years. To better understand thisimportantmarket,betweenJulyandSeptember2012EYconducted face-to-face interviews with more than 30 industry participants, including promoters representing more than 90% of the European ETF industry’s total assets.

• Second generation outsourcing in the asset management industry – December2012In this paper, we explore outsourcing market development in the asset managementindustry,particularlyintheareaofmiddleofficeservices.

• Innovationforassetmanagement-2012survey–December2012Ourfirstinnovationsurveyfortheindustryreportsseedcapitalisbecoming scarcer while most innovation budgets remain focused on fixedincomeandequityproducts.

• Finding Common Ground

EY’s 6th annual survey of the global hedge fund market – November 2012Despiteincreasingregulatoryrequirementsforhedgefunds,only10%of investors feel that regulations effectively protect their interests, and 85% of investors do not believe these requirements will help prevent thenextfinancialcrisis,accordingtothesurvey.

The survey includes responses from 100 of the largest hedge fund managers in the world and 50 major institutional investors with more than US$715 billion in assets (US$190 billion of which is allocated to hedge funds).

• Internalaudit’sroleinthenewassetmanagementera–October2012Theregulatorychangesimpactingthefinancialservicesindustryrequire increased governance and reporting obligations from asset managers who have experienced a relatively light touch in the past.

• Cross-border management of UCITS – Enhancing your operating model – September 2012SincetheimplementationofUCITSIV,managementcompaniesbenefitfrom a “passport” which enables them to manage UCITS cross-border. A number of asset management groups are considering a cross-border “Super ManCo” model going forward to enhance the group’s operating modelandimproveefficiency.Foreachgroup,theoptimalsolutionwill be unique. This publication outlines the options, the regulatory requirements and key considerations in cross-border management.

EY newsletters and alerts• The Luxembourg Financial Connection for Executives in Financial

Services – March 2013 and September 2013This newsletter covers regulatory, technical, leading practice and marketdevelopmentsinthefinancialservicesindustryfromaLuxembourg perspective. It includes articles written by our experts, and an overview of Luxembourg, EU and international developments, as well as an update on our conference activities and publications.

• Luxembourg Financial Services and AIF Club AlertsExamples of recent issues:• DealingwithlatetranspositionofAIFMD–ESMAopinion(August

2013)• LuxembourgopenforAIFMapplications(June2013)• LuxembourgadoptsAIFMLaw(July2013)• Alternative investment funds: challenging months ahead: European

CommissionreleasesAIFMLevel2(December2012)• FinalGuidelinesfromESMAonUCITS:significantimpactsformany

UCITS(December2012)• LuxembourgboostsManCosubstance:CSSFclarifiessubstance

requirements applicable to UCITS management companies and self-managed investment companies (November 2012)

• Financial Services Alert - European Commission consults on UCITS VI, money market funds and long-term retail UCIs (August 2012)

• CommissionissuesUCITSVproposal(July2012)• Commission proposes key information document for investment

products(July2012)

• Luxembourg Tax AlertExamples of recent issues:• Draftlawonpatrimonialfoundations(August2013)• Luxembourg moving towards enhanced cooperation in taxation and

exchangeofinformation(July2013)• PPGHoldings:CJEUjudgmentontheVATrecoveryofpensionfund

costs(July2013)• Luxembourg: Revised list of investment funds capable of receiving

VATexemptmanagementservices(July2013)• Luxembourg–2013amendedBudgetproposalsadopted(December

2012)• EUFinancialTransactionTaxinJanuary2014?TheCommission’s

revised proposal (March 2013)

492 | Appendix VI – EY investment fund services

VI.1. Introduction

Who we are

In Luxembourg, with over 1,100 professionals, we combine our European and global capability with our local knowledge to deliver a full range of services to meet our clients’ business needs.

OurglobalassetmanagementnetworkencompasseskeyfinancialcentersintheAmericas,Asia-Pacific,EMEIA(Europe,MiddleEast,IndiaandAfrica)andJapancomprising13,500professionals, including over 1,000 partners.

Ourcombinationoftalentandresourcesgivesusthe ability to anticipate and adapt to the rapid and accelerating changes of today’s global economy.

How we support our clients

Being the most globally connected of the Big Four organizations, operating in four integrated regions —theAmericas,EMEIA,Asia-PacificandJapan−enablesourLuxembourgassetmanagementpractice to work effectively on a cross-border basis: • Movingswiftlytobringtogetherthebest

teams to serve our clients, working together on key issues, and leveraging our strengths, capabilities and knowledge irrespective of geographies

• Providingseamless,consistent,high-qualityservicestoourfinancialservicesclientsacrossEMEIA and globally

• Respondingquicklyandeffectivelytomarketdevelopments that impact our clients

• Providingourclientsaccesstoourperspectiveon current and emerging trends, industry issues and regulation

OurLuxembourginvestmentfundservicesincludeaudit, tax and advisory services. In addition to our traditional services, we offer an integrated suite of specialty services designed to meet the needs of the rapidly changing and increasingly complex investment fund industry.

Appendix VIEY investment fund services

492 | Appendix VI - EY investment fund services

Appendix VI – EY investment fund services | 493

AuditEY’s audit approach is based on a thorough examination of your organization’s concerns, needs and expectations. This is developed through an analysis of your internal and external operating environments and close communication with your management team. This results in a knowledgeable auditteamcapableofadvisingyouonyourfinancial,accounting, operating, and administrative challenges.

Ourauditservicesdrawupon:• In-depth reporting and regulatory knowledge and

experience• Best practice insights• Proprietary technology

We provide a tailored but systematic audit framework. We work closely with you in co-developing expectations and identifying risks to provide an audit tailored to your business needs.

Financial accounting advisory Ourfinancialaccountingadvisoryservicesincludeaccounting and regulatory support, as well as accounting governance, processes and controls support:• Financial statement preparation under different

generally accepted accounting principles (e.g., LuxGAAP, IFRS, US GAAP)

• GAAP conversions • Accountingsupportonspecifictechnicalmatters• Consolidation exemption analysis• Accounting governance and compliance support• Accounting process and controls support

Internal control reporting We offer services customized to meet your internal control reporting needs. Whether SSAE 16 or ISAE 3402 examinations or agreed-upon procedures for rating agency agreements, valuation and compliance programs,wewillworkwithyoutofindtheappropriate solution to meet your needs as well as the needs of your user community.

VI.3. Tax services

The Luxembourg tax practice of EY provides professional tax assistance tailored to the unique needsoftheinvestmentfundindustry.Ourtaxprofessionals are knowledgeable and experienced with the varied and specialized facets of investment fund taxation, including fund and organizational structuring, tax minimization planning and tax compliance.

The Luxembourg tax practice offers you:• Local tax and compliance reporting• International tax advice• European tax reporting services• Reviews, evaluations and guidance on the

implementation of tax regulations• Taxefficientstrategiesandplanning

We provide, inter alia:• International tax planning for foreign and domestic

managerswithoffshoreoffices,includingcross-border transactions, withholding tax and transfer pricing

• Tax advice and tax planning for managing the timing and character of direct investment transactions

• Tax planning for tax-exempt investors• Assistance with complex tax and compliance

reporting requirements• Reviewsforenhancingtax-efficiencyasanelement

of a successful trading strategy• Advice on VAT issues relating to the investment

fund industry and assistance with VAT compliance• Tax advice for fund industry professionals

We also offer access to EY’s Global Withholding Tax Reporter (GWTR), a subscription-based service that provides detailed technical information regarding withholding taxes, treaties and procedures in relation to portfolio dividends, portfolio interest and capital gains in over 90 markets. The GWTR, which is tailored totheneedsofglobalfinancialinstitutions,containsvaluable information such as statutory withholding rates, treaty withholding rates and tax relief procedures. The GWTR, a web-based tool, provides monthly updates that are based on quarterly reviews of information. Important tax alerts are e-mailed to licensees between updates. Please visit our sample website, www.globaltaxreporter.com, for more information regarding GWTR.

VI.2. Audit and accounting services


In addition to providing core audit and tax services, EY also offers a suite of specialty services to support our clients enhance their organization’s growth,performanceandefficiencyaswellasriskmanagement, IT effectiveness and compliance in an era of increasing regulatory complexity.

We offer our services to:• Promoters• Management companies• Investment managers• Depositarybanksandsub-custodians• Distributors• Administrators and transfer agents• Specialist providers such as valuers, ,compliance,

risk management and fund information service providers

Current regulatory challenges which impact business and operations include:• Foreign Account Tax Compliance Act (FATCA)• Alternative Investment Fund Managers (AIFM)

Directive• UCITS IV and V• Anti-money laundering and counter-terrorist

financing(AML/CFT)• OTCderivativesregulation,includingEuropean

Market Infrastructure Regulation (EMIR)• Key Investor Information (KII) and Key Information

Document(KID)forPackagedRetailInvestmentProduct (PRIPS)

• MarketsinFinancialInstrumentsDirective(MiFID)-likerequirementsandMiFIDII

Ourmainbusinessandoperationsservicesrelateto:

Strategy and change management

• Assessment of FATCA impact on your entity with regard to strategy, operations, compliance, governance, reporting, withholding capabilities and IT systems, related investments, based on different scenarios

• Assessment of the impacts of UCITS IV, UCITS V andtheAIFMDirectiveonyourentitywithregardto distribution strategy, product range review and reporting

• Supportinthedefinitionofupdatedoperatingmodels and strategic decision making

• Assistance in project management, set-up and definitionofprojectgovernanceframework,duringpreliminary assessment and implementation phases

• Change management

Global fund distribution support

• Market intelligence services• Regulatory intelligence services• Fund registration services including assistance with

thenotificationandmaintenanceofthenotificationwithin the EU of UCITS and AIFs according to the EU-DirectivesandoutsidetheEUaccordingtothelocalregulatory requirements

• Strategic review and restructuring of fund distribution

Information technology and systems

• IT security services: improvement of the operational efficiencyandeffectivenessofthesecurityeffortsby obtaining a clearer understanding of the current state of your information security framework

• IT risk and controls: assistance in the development and implementation of a comprehensive IT risk and control framework, in terms of organization, processes, tools, dashboard and reporting

• Dataanalysisanddatamanagement:assistancetoimprove the execution of your data management and governance activities

• IT internal audit: a cost-effective alternative for the development and execution of an internal audit plan aimed at addressing IT related business risks

• Assessment of IT effectiveness• IT transformation: support in benchmarking and

selection of IT systems, system implementation and system release update, software testing

• Program advisory services: project assessment, assurance and support services to IT change programs (closing the gap between program failure and effective program management and controls)

Operations

• Operatingmodeldesignandreview:designandreview of operational strategy, target operating model design, regulatory feasibility assessment of envisaged operating models, target operating model implementation

• Benchmarking of operational excellence and operationalexcellenceimprovement(identificationand implementation of process improvements)

• Service provider selection and assessment support: request-for-proposal management (set-up of short/long-list of providers, request for proposal (RFP) questionnaire set-up, RFP distribution and RFP answers collection and analysis or second opinion on work performed) and service-level agreement (SLA) and key performance indicator (KPI) set-up and review

• Process transformation or organization change: support in set-up of business process management, policies and procedures

VI.4. Advisory, global fund distribution and investigation and dispute services

Appendix VI – EY investment fund services | 495

• Business analyst work: analysis of new requirements,businessandfunctionalspecificationsof To-Be, Testing of To-Be

• Pre and post merger integration: operational due diligence (mapping of products, services, processes, systemsandrisks),mergerbenefitanalysis(analysisof related operational costs and potential savings in different set-ups/situations)

• Programme and project management: operate projectmanagementoffice(projectlead,workstreamlead,projectmanagementoffice(PMO)support)duringe.g.,merger,carve-out,outsourcing, integration, business migration, IT change projects or perform assessment and monitoring of project services

Risk and quantitative services

• Coach-my-risks program designed for senior management and control functions

• Valuation services including pricing model review andOTCderivativevaluation

• Risk management process review for UCITS and SIFs• Quantitative services in relation to:

• Market risk (e.g., global risk exposure, portfolio hedging, leverage calculation)

• Credit risk (e.g., internal rating system, default transition matrices, concentration risk)

• Counterparty risk (e.g., exposures aggregation)• Liquidityrisk(e.g.,cash-flowmodeling,LVaR,

swing pricing)• Operationalrisk(e.g.,riskandcontrolself-

assessments, SSAE/ISAE reports, key risk indicators, third party delegation/oversight delegation model)

• Riskappetiteandriskprofilesdefinition• Riskreportingtemplatedefinition

• Model validation (VaR, stress-testing and back testing)

• Synthetic risk and reward indicator (SRRI) model validation and calculation

Third party reporting

• Assurance that your company is operating IT systemsandprocessesaswellasfinancialcontrolsaccording to your objectives and your third party contractual commitments and obligations. For example:• SOC-1:assurancereportsoncontrolsataservice

organizationbyutilizingdefinedstandardssuchas ISAE 3402, SSAE 16 and CSAE 3416

• SOC-2andSOC-3:internationallyrecognizedattestation reports on the AICPA Trust criteria for availability,security,confidentiality,privacyandprocessing integrity

• ISO27001/27002:certificationprovidedbasedontheInternationalOrganizationforStandardization over the Information Security Management System (ISMS) standard

• AgreeduponProcedures:reportoffindingsbasedonspecifiedcontrols

AML/CFT, fraud investigation and dispute services

• Assessment of your entity's fraud, money laundering,OfficeofForeignAssetsControl(OFAC)and Foreign Corruption Practice Act (FCPA) risk exposure

• Assessment of your entity's anti-fraud and AML/CFT measures against market practices

• Implementation and improvement of preventive measures such as a code of ethics, anti-fraud policies, procedures and tools, whistle-blower policiesandprocedures,OFACmonitoringtools,FCPA processes, and training

• Transaction forensic services, including pre-acquisition assistance, portfolio and business partneridentificationandacquisitionsupport,post-acquisition dispute role

• Analysis of suspicions or allegations of fraud, bribery, unethical behaviors, money laundering andterroristfinancing(e.g.,suspectfinancialperformance, whistleblower, biased calls for tenders, etc.) and, if need be, assessment of the impact of fraud

• Assistance in case of regulatory investigations, includingOFACandFCPAlook-backexercises

Internal audit

• Partial or full sourcing to our teams of internal audit execution: preliminary business risk assessment, set-up of the tri-annual internal audit plan, drafting of annual working programs, execution of tests and controls, preparation of annual reports

• Collaboration between your existing teams and ourqualifiedconsultantstoprovideexpertiseonregulatorymattersandleadingpractices.Onbehalfof your internal audit function, one-off projects on key issues you are facing in daily business (e.g., cash flowmanagementandbreaches)

Compliance

• Review of compliance with current and future regulatory requirements (e.g., UCITS V, AIFM, EMIR)

• SupportingimplementationofMiFID-likerequirements

• SupportinthepreparationofapplicationfilesforsubmissiontotheLuxembourgfinancialsector supervisory authority (Commission for the Supervision of the Financial Sector – CSSF)

• Review and assurance on KII production and management

VI.4. Advisory, global fund distribution and investigation and dispute services


Fund and management company structuring

• Feasibility analysis of your project, including confirmationofeligibilityoftargetassets/investments,minimumriskdiversificationrequirements and other investment restrictions

• Support in the determination of the most appropriate regulatory regime, fund or management company type and legal form and features for your project

• Supportinthedefinitionoftheorganizationalmodelof the investment fund, its management company and/or managing entity and service providers

• Supportinthedefinitionofthecorporategovernance model, internal organization and controls

• Support in the drafting/review of the constitutive documents, offering documents, subscription documents and agreements for the fund and its management company and/or managing entity (where applicable)

• Support in the selection of service providers (e.g., depositary, central administration) and review of service agreements

• Support in the preparation/submission of an applicationfiletotheCSSFandthroughouttheregulatory approval process

• Support on regulatory matters relating to the usual ongoing business of your fund, its management company and/ or managing entity in Luxembourg

Fund marketing

• Support in the marketing of your fund, including the preparation of commercial documentation, analysis and the determination of the target investors’ universe

Fund restructuring

• Assistance with the merger, demerger and/or liquidation of funds, compartments or classes, including amendment to fund documentation and liaising with supervisory authorities

• Assistance with the creation of new compartments or classes, including amendment to fund documentation and liaising with supervisory authorities

• Support in the change of depositary/central administration, including liaising with service providers and supervisory authorities

Fund and management company migration

• Feasibility analysis of your migration project, including the determination of the most appropriate option offered to migrate your fund

• Presentation and pre-approval of the intended migration by the home and host country supervisory authorities and local service providers

• Assistance with amendments to fund documentation and service provider contracts

• Support in the preparation and submission of an applicationfilewiththehostcountrysupervisoryauthority and assistance throughout the regulatory approval process

• Support in the planning and execution of the fund/ management company migration (project management support, process alignment support, testing support)

Fund listing

• Feasibility analysis and determination of the listing process and requirements

• Support in the preparation and submission of anadmissionfilewiththelocalstockexchangeauthority and assistance throughout the listing approval process

• Support in the selection of local listing agent, calculation agent and other service providers

Michael Ferguson, Asset Management Leader +352 42 124 8714 [email protected]

Olivier Coekelbergs, Private Equity Leader +352 42 124 8424 [email protected]

Michael Hornsby, Real Estate Leader +352 42 124 8310 [email protected]

Alain Kinsch, Country Managing Partner +352 42 124 8355 [email protected]

Audit

Bernard Lhoest, Financial Services Assurance Leader +352 42 124 8341 [email protected]

Ted Anderson +352 42 124 8792 [email protected]

Nicolas Bannier +352 42 124 8132 [email protected]

Christian Brüne +352 42 124 8718 [email protected]

Jean-Marc Cremer +352 42 124 8304 [email protected]

Gaël Denis +352 42 124 8782 [email protected]

Bruno Di Bartolomeo +352 42 124 8493 [email protected]

René Ensch +352 42 124 8373 [email protected]

Yves Even +352 42 124 8379 [email protected]

Nadia Faber +352 42 124 8706 [email protected]

Michel Feider +352 42 124 8797 [email protected]

Christoph Haas +352 42 124 8305 [email protected]

Olivier Jordant +352 42 124 8161 [email protected]

Kerry Nichol +352 42 124 8975 [email protected]

Isabelle Nicks +352 42 124 8347 [email protected]

Jean-Michel Pacaud +352 42 124 8570 [email protected]

Sylvie Testa +352 42 124 8775 [email protected]

Christophe Wintgens +352 42 124 8402 [email protected]

Advisory

Olivier Maréchal, Financial Services Advisory Leader +352 42 124 8948 [email protected]

Laurent Denayer, Financial Services Risk Management Leader +352 42 124 8340 [email protected]

Kai Braun, Alternatives Advisory Leader +352 42 124 8800 [email protected]

Denis Costermans +352 42 124 8949 [email protected]

Patrice Fritsch +352 42 124 8950 [email protected]

Bernd Henninger +352 42 124 8272 [email protected]

Pascal Vaucouleur +352 42 124 8951 [email protected]

Mathieu Volckrick +352 42 124 7014 [email protected]

Tax

Dietmar Klos, Financial Services Tax Leader +352 42 124 7282 [email protected]

Michel Lambion, Financial Services VAT Leader +352 42 124 7158 [email protected]

Nicolas Gillet, Transfer Pricing Leader +352 42 124 7524 [email protected]

Christian Daws +352 42 124 7196 [email protected]

Koenraad De Witte +352 42 124 7495 [email protected]

Katrin Lakebrink +352 42 124 7298 [email protected]

Sylvie Leick +352 42 124 7242 [email protected]

Anabela Lourenço Marques +352 42 124 7068 [email protected]

Adam Miller +352 42 124 7147 [email protected]

Omid Mohebati +352 42 124 7033 [email protected]

Maria Scherer +352 42 124 7279 [email protected]

Yannick Zeippen +352 42 124 7362 [email protected]

Accounting Services

Bob Fischer, Accounting Compliance and Reporting Services Leader +352 42 124 7526 [email protected]

Thierry Bertrand, Financial Accounting Advisory Services Leader +352 42 124 8845 [email protected]

Fraud Investigation and Dispute Services

Gérard Zolt, Fraud Investigation and Dispute Services Leader +352 42 124 8508 [email protected]

Global Fund Distribution (EY GFD) Services

Laurent Denayer, Global Fund Distribution Leader +352 42 124 8340 [email protected]

Rafael Aguilera +352 42 124 8365 [email protected]

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EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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