In a November 20 2012 opinion of the European Securities and Markets Authority (ESMA) affirmed its understanding of Article 50(2)(a) of the EU Undertakings for Collective Investment in Transferable Securities (UCITS) Directive (2009/65/EC). This article is commonly referred to as the 'trash bucket'.

This formal opinion is the result of differing interpretations of the provision between EU member states. In particular, Luxembourg has applied a liberal interpretation in the past.

Under Article 50(2)(a), UCITS can invest up to 10% of their assets in transferable securities or money market instruments other than those referred to in Paragraph 1 of the same article. Article 41(2)(a) of the Law on Undertakings for Collective Investment of December 17 2010, which transposes the UCITS Directive into Luxembourg law, contains the same provision.

The question at stake is whether, under this rule, UCITS can invest in collective investment undertakings other than those conforming to Article 50(1)(e) of the UCITS Directive.

In its opinion, ESMA clarified that the derogation of Article 50(2)(a) applies not to Article 50(1)(e), but only to subparagraphs (a) to (d) and (h). Consequently, a UCITS can invest only in collective investment undertakings that fulfil the conditions laid out in Article 50(1)(e) of the UCITS Directive (ie, Article 41(1)(e) of the Law on Undertakings for Collective Investment).

In a November 23 2012 press release, the Commission de Surveillance du Secteur Financier (CSSF) - the Luxembourg supervisory authority - adopted the ESMA's position. The CSSF further stated that, as suggested by ESMA, existing UCITS have until December 31 2013 to make their portfolios compliant with the ESMA interpretation, in keeping with the best interests of their investors. Moreover, the CSSF communicated that, as from the date of its press release, all new investments by UCITS must conform with the ESMA interpretation.

For further information on this topic please contact Pierre Reuter at NautaDutilh by telephone (+352 26 12 29 1), fax (+352 26 68 43 31) or email ([email protected]).