Fund management regulation

Regulatory framework and authorities

How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

There are two types of funds in Luxembourg: regulated funds (ie, authorised and supervised by the Financial Sector Supervisory Commission (CSSF)) and unregulated funds. Regulated funds are governed by one of the following (product) laws:

  • the Law of 19 December 2010 on undertakings for collective investment (the UCI Law);
  • the Law of 15 June 2004 on the investment company in risk capital (the SICAR Law); and
  • the Law of 13 February 2007 on specialised investment funds (the SIF Law).

Unregulated funds are governed by either the Law of 23 July 2016 on reserved alternative investment funds (the RAIF Law), or, to the extent that they qualify as alternative investment funds (AIFs) within the meaning of the Law of 12 July 2013 on alternative investment fund managers (the AIFM Law), and are not organised under any of the product laws or the RAIF Law, the Law of 10 August 1915 on commercial companies (the Companies Law).

Fund managers are subject to the UCI Law or the AIFM Law, or both.

Fund administration

Is fund administration regulated in your jurisdiction?

Fund administration is a regulated activity in Luxembourg and either performed by an authorised Luxembourg management company (ManCo) or an alternative investment fund manager (AIFM), or delegated to an administrative agent authorised by the CSSF under the Law of 5 April 1993 on the financial sector (the Financial Sector Law).

Authorisation

What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

When setting up a regulated fund, a prior written application for authorisation must be filed with the CSSF. Following the review of the application file, the CSSF usually asks additional questions or makes comments (or both) and, to the extent that the review phase is successfully completed, informs the applicant that the fund may be established.

Once the regulated fund is established (before a Luxembourg notary or, depending on the legal form of the fund, under private deed) and all agreements with the service providers have been executed, copies of the fund’s constitutive document and fully executed agreements must be filed with the CSSF, together with the final version of the offering document, which shall be submitted to the CSSF for visa. Subject to the satisfactory receipt of all required documents, the CSSF will register the fund on the relevant official list of supervised entities and issue the visa-stamped offering document.

The CSSF supervises regulated funds on a continuous basis. Regulated funds must apply for prior approval with respect to each change in their fund documentation (ie, constitutive document and offering document) or governance (eg, appointment of a new board member or replacement of administrative agent, depositary or portfolio manager).

Unregulated funds do not require prior CSSF authorisation. Once the unregulated fund is established, the Luxembourg manager must inform the CSSF about its appointment as manager of the relevant fund.

A Luxembourg manager must obtain prior authorisation from the CSSF and comply with certain minimum requirements, including in respect of: own funds; appropriate infrastructure and internal governance; authorised shareholding and management; and external audit.

The central administration of a Luxembourg manager must be located in Luxembourg. Managers who wish to provide discretionary management services, besides collective portfolio management, must participate in an investor compensation scheme.

Territorial scope of regulation

What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

Luxembourg law applies when the fund or the manager, or both, are established in Luxembourg, and when investors to whom a fund is marketed are domiciled in Luxembourg.

When management of a regulated fund is delegated to a non-Luxembourg EU manager, prior CSSF approval is required. The same will apply to unregulated funds once the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) (AIFMD) third-country passport under article 38 of the AIFM Law is made available to non-EU AIFMs. A prior notification to the CSSF is required (pursuant to the procedure under article 45 of the AIFM Law) prior to any marketing of a foreign or Luxembourg fund by a non-EU manager to Luxembourg investors.

Acquisitions

Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

Yes. The identity of the shareholders directly or indirectly having a qualifying holding (ie, any direct or indirect holding that represents at least 10 per cent of the capital or of the voting rights or that makes it possible to exercise a significant influence over the management of the company in which that holding subsists) in the manager, as well as the amount of such holding, must be communicated to the CSSF.

When assessing the application, the CSSF takes into consideration the following criteria:

  • professional standing and financial soundness of the applicant shareholder;
  • professional standing and experience of each person responsible for managing the activities of the manager as a result of the acquisition transaction;
  • compliance with prudential and supervisory requirements at group level; and
  • risk of money laundering and financing of terrorism.

Both natural and legal persons are eligible to become shareholders of a Luxembourg manager.

Restrictions on compensation and profit sharing

Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

Yes. Managers must comply with the European Securities and Markets Authority (ESMA) Guidelines on sound remuneration policies under the Undertakings for Collective Investment in Transferable Securities Directive (Directive 2009/65/EC) (the UCITS Directive) and the ESMA Guidelines on sound remuneration policies under the AIFMD, as applicable. In addition, each manager must comply with CSSF Circular 10/437, which applies to all entities subject to CSSF prudential supervision.

The key principles are that the remuneration policy must:

  • promote sound and effective risk management and must not induce excessive risk-taking;
  • be drawn up in such a way as to create an appropriate balance between fixed and variable remuneration components; and
  • when the variable component represents a significant part of remuneration, the payment of a considerable portion of this variable component must be deferred for a minimum period.

Remuneration rules apply to members of the board and staff whose professional activities have a material impact on the risk profile of the firm. Certain information must be made public.

Fund marketing

Authorisation

Does the marketing of investment funds in your jurisdiction require authorisation?

Active marketing of funds to investors in Luxembourg is subject to a prior notification to the CSSF.

What marketing activities require authorisation?

Any direct or indirect offering or placement at the initiative of a manager or on behalf of such manager of units, shares or interests of a fund it manages for or with investors domiciled in Luxembourg requires a prior notification to the CSSF.

Managers authorised under the UCI Law or the AIFM Law, or both, may perform marketing activities without requiring an additional authorisation from the CSSF.

A Luxembourg investment firm (which is not a manager under the UCI Law or the AIFM Law) that intends to distribute units, shares or interests of funds, must request prior CSSF authorisation under the Financial Sector Law.

Territorial scope and restrictions

What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

If investors are located in Luxembourg, the non-EU manager must file a prior notification with the CSSF before marketing its fund in Luxembourg.

If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

In principle, no local entity must be involved in the fund marketing process, except in relation to retail funds. See question 20.

Commission payments

What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

Luxembourg investment firms are subject to inducement rules of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (MiFID II), as transposed under Luxembourg law. In a nutshell, a distributor placing a fund with its clients may receive a commission from the manager or the fund only if:

  • the relevant payment is designed to enhance the quality of the service to the clients;
  • the relevant payment does not impair compliance with the distributor’s duty to act honestly, fairly and professionally in accordance with the best interests of its clients; and
  • the commission is clearly disclosed to the clients.

A distributor that also provides independent investment advice to its clients is, in principle, prohibited from receiving a commission from the fund or its manager.

Retail funds

Available vehicles

What are the main legal vehicles used to set up a retail fund? How are they formed?

There are two types of regulated funds that can be sold to retail investors in Luxembourg:

  • undertakings for collective investment in transferable securities governed by Part I of the UCI Law (UCITS); and
  • undertakings for collective investment governed by Part II of the UCI Law (Part II UCI).

Unregulated funds qualifying as AIFs may also be marketed to retail investors, subject to certain conditions set out in the AIFM Law.

Both UCITS and Part II UCI may be structured as:

  • an investment company with variable capital (SICAV);
  • an investment company with fixed capital (SICAF); or
  • a common fund (FCP).

The share capital of a SICAV is always equal to its net assets and hence no formalities are required to increase or decrease the share capital. The decrease and increase of share capital of a SICAF is subject to formalities laid down in the Companies Law. A UCITS SICAV must take the form of a public limited company (SA) and be formed before a Luxembourg notary.

An FCP is a co-ownership whose joint owners are only liable up to the amount they have contributed and whose ownership rights are represented by units. An FCP has no legal personality and shall be managed by a ManCo, which will draw up and execute the fund’s management regulations.

A retail fund can be set up as a single fund or as an umbrella fund consisting of multiple compartments, each with a different investment policy. The fund and compartments may have an unlimited number of share classes, depending on the needs of the investors. Under certain conditions, cross-investments between compartments are allowed.

Laws and regulations

What are the key laws and other sets of rules that govern retail funds?

The key laws and regulations applicable to retail funds are:

  • the UCI Law;
  • the Companies Law;
  • the AIFM Law;
  • the Financial Sector Law;
  • the Luxembourg Civil Code;
  • Luxembourg laws, regulations and CSSF circulars regarding anti-money laundering (AML) and counter-terrorist financing (CTF);
  • the EU Packaged Retail and Insurance-based Investment Products Regulation (Regulation (EU) No. 1286/2014) (the PRIIPs Regulation);
  • the European General Data Protection Regulation (Regulation (EU) No. 2016/679) (GDPR);
  • CSSF Regulation No. 16-07 regarding out-of-court complaint resolution (if the fund is regulated); and
  • various ESMA guidelines and CSSF regulations and circulars.
Authorisation

Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Regulated retail funds must be authorised and supervised by the CSSF.

Unregulated retail funds qualifying as AIFs do not require the approval of the CSSF, although their AIFM is subject to the supervision of the CSSF or the supervisory authority of its home member state.

Marketing

Who can market retail funds? To whom can they be marketed?

A retail fund may be marketed in Luxembourg to retail investors by its manager or by an authorised distributor (see question 8).

While UCITS avail of the EU marketing passport and can be marketed to retail investors throughout the EU, Part II UCI can be marketed to retail investors in the EU only in compliance with article 43 of the AIFMD.

Managers and operators

Are there any special requirements that apply to managers or operators of retail funds?

Managers of Luxembourg UCITS and Part II UCI must be authorised by the CSSF (or any other EU regulator) before commencing their activity in Luxembourg. EU managers benefit from the EU management passport under the UCITS and AIFMD regimes.

Where a manager envisages marketing the units, shares or interests of the AIFs it manages to retail investors in the territory of Luxembourg, the following restrictions or additional conditions apply:

  • compliance with article 46 of the AIFM Law;
  • compliance with articles 59, 100 and 129 of the UCI Law, if the fund is an open-ended non-Luxembourg EU AIF;
  • compliance with CSSF Regulation No. 15-03 and certain risk-spreading obligations set forth therein; and
  • issuance of a key information document in accordance with the PRIIPs Regulation.
Investment and borrowing restrictions

What are the investment and borrowing restrictions on retail funds?

UCITS are subject to strict rules on:

  • eligible assets;
  • diversification requirements;
  • borrowing, granting loans and short selling; and
  • techniques and instruments relating to transferable securities and money market instruments (MMI), laid down in the UCI Law and specified in the various CSSF and ESMA guidelines.

The UCI Law contains no provisions regarding investment and borrowing rules in respect of Part II UCI. Such rules are specified in CSSF circulars 91/75 and 02/80. There are no restrictions on eligible assets for Part II UCI.

UCITS

Part II UCI

Eligible assets

Restricted to transferable securities admitted or dealt in on a regulated market, certain investment funds, deposits with a credit institution, financial derivative instruments, cash and MMI, subject to compliance with article 41 of the UCI Law.

Prohibited from investing in real estate, commodities and loans. UCITS may not acquire control over an issuing body. Eligibility of the asset must be assessed on a case-by-case basis.

Unrestricted by law.

Certain limitations are applied by the CSSF.

Risk diversification

Strict risk diversification rules are laid down in the UCI Law, such as (non-exhaustive list):

  • maximum 10 per cent in transferable securities issued by the same body;
  • maximum 20 per cent in deposits made with the same body;
  • total value of transferable securities held in the issuing bodies in each of which the UCITS invests more than 5 per cent shall not exceed 40 per cent of the value of its assets;
  • maximum 20 per cent in one other fund and maximum 30 per cent in funds other than UCITS; and
  • global exposure relating to derivative instruments may not exceed the total net value of the UCITS portfolio.

The CSSF imposes the following (less stringent) risk diversification requirements (unless a derogation is granted by the CSSF during the approval process) (non-exhaustive list):

  • maximum 20 per cent in securities issued by one issuer; and
  • maximum 20 per cent in one real estate property.

Borrowing

Not permitted (unless on a temporary basis and subject to restrictions laid down in the UCI Law).

Permitted. Certain restrictions apply (non-exhaustive list):

  • maximum 300 per cent of the value of net assets; and
  • in relation to real estate, maximum of 50 per cent of the value of the property.
Tax treatment

What is the tax treatment of retail funds? Are exemptions available?

Retail funds are subject to an annual subscription tax of 0.05 per cent (or, to the extent that money market funds are concerned, 0.01 per cent) of their net asset value, subject to certain exemptions. Retail funds are exempt from income tax, net wealth tax and withholding tax.

Asset protection

Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Yes. The assets of a retail fund must be entrusted to a local depositary and the fund’s assets must be segregated from the depositary’s assets. The depositary shall be liable to the fund and its investors for the loss by the depositary or by a delegate of financial instruments held in custody. In case of loss of a financial instrument held in custody, the depositary must return a financial instrument of an identical type or the corresponding amount to the fund without undue delay. There is no possibility for the depositary to discharge its liability.

The Law of 27 February 2018 on interchange fees and amending several laws relating to the financial sector provides for the following depositary regime with respect to Part II UCI:

  • Part II UCI marketed to retail investors on Luxembourg territory must appoint a UCITS-compliant depositary, regardless of whether they are managed by a Luxembourg or EU-authorised or registered AIFM or a non-EU manager;
  • Part II UCI managed by a Luxembourg-authorised AIFM whose offering documents expressly forbid the marketing to retail investors on Luxembourg territory may appoint a depositary compliant with the AIFM Law; and
  • Part II UCI managed by a Luxembourg or EU-registered AIFM or by a non-EU manager and whose offering documents explicitly forbid the marketing to retail investors on Luxembourg territory should appoint a depositary bank compliant with the SIF Law.
Governance

What are the main governance requirements for a retail fund formed in your jurisdiction?

Regulated retail funds, following the successful completion of the CSSF examination phase (see question 3), must be registered on the relevant official list of supervised entities held by the CSSF.

Regulated retail funds must apply for prior CSSF approval with respect to any change in their fund documentation (ie, constitutive document and offering document) or governance (eg, appointment of a new board member or replacement of depositary or auditor).

For a retail fund structured as a company, as well as for a management company or an AIFM, there must be a board of directors composed of at least three members, half of which are recommended to be Luxembourg residents.

For externally managed funds, administrative tasks such as accounting, record-keeping, net asset value calculation and the keeping of a register of shareholders or limited partners are in general entrusted with an administrative agent (established in Luxembourg and subject to supervision by the CSSF). When marketing funds to retail investors in Luxembourg, a paying agent must be appointed to ensure that facilities are available in Luxembourg for making payments to shareholders and repurchasing or redeeming shares.

Retail funds must produce key information documents (key investor information document for UCITS and key information document for AIFs) to be provided to retail investors before they invest in the fund. Essential elements of the key information document must be kept up to date.

Reporting

What are the periodic reporting requirements for retail funds?

UCITS and Part II UCI must produce annual and semi-annual reports, in addition to ongoing reporting to the CSSF.

Issue, transfer and redemption of interests

Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

The rules governing the redemption of interests vary depending on the type of fund and its regulatory status. UCITS are obliged to redeem their shares or units at the investor’s request. Part II UCI can, on the other hand, be established as closed-ended vehicles or otherwise restrict the terms on which interests can be redeemed.

Transfer restrictions (including, but not limited to, in respect of the transferee meeting certain eligibility criteria for a certain class of shares) may also be provided for in the fund’s constitutive document. The circumstances for any suspension of share or units issuances or redemptions (or both) shall be provided for in the fund’s constitutive document.

Non-retail pooled funds

Available vehicles

What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Non-retail funds can be organised as:

  • specialised investment funds (SIFs) governed by the SIF Law;
  • reserved alternative investment funds (RAIFs) governed by the RAIF Law;
  • investment companies in risk capital (SICARs) governed by the SICAR Law; or
  • unregulated AIFs governed by the Companies Law and the AIFM Law.
Laws and regulations

What are the key laws and other sets of rules that govern non-retail funds?

See question 23. In addition, key laws and regulations applicable to non-retail funds are:

  • the AIFM Law if the fund qualifies as an AIF;
  • the Companies Law;
  • the Financial Sector Law;
  • the Luxembourg Civil Code;
  • the Luxembourg laws, regulations and CSSF circulars regarding AML and CTF;
  • the GDPR;
  • CSSF Regulation No. 16-07 regarding out-of-court complaint resolution (if the fund is regulated); and
  • various ESMA guidelines and CSSF regulations and circulars.
Authorisation

Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

SIFs and SICARs require prior CSSF approval. RAIFs and unregulated AIFs may be established and marketed without prior CSSF approval. If marketing is intended to be performed based on the AIFMD passport, notification requirements must be met prior to commencing any marketing activity.

Marketing

Who can market non-retail funds? To whom can they be marketed?

Non-retail funds may be marketed by authorised AIFMs on the basis of the AIFMD passport or by authorised distributors on the basis of the MiFID passport. Investors in SIFs, SICARs and RAIFs must qualify as well-informed investors (see question 27). In the European Economic Area (EEA), non-retail funds may be marketed to professional investors within the meaning of the AIFM Law (see question 27).

Ownership restrictions

Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

SIFs, SICARs and RAIFs are reserved to well-informed investors only. Unregulated AIFs may only be marketed under the AIFMD passport in the EEA to professional investors. Well-informed investors are institutional investors, professional investors or any other investor that:

  • has confirmed in writing that it adheres to the status of well-informed investor; and
  • either invests a minimum of €125,000 in the fund, or obtains an assessment certifying its expertise, experience and knowledge in adequately appraising an investment in the fund, made by:
    • a credit institution within the meaning of Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms;
    • an investment firm within the meaning of MiFID;
    • a management company within the meaning of the UCITS Directive; or
    • in respect of a RAIF, an AIFM.

Directors and other persons who are involved in the management of the fund do not need to qualify as ‘well-informed’ in order to invest in the fund.

Professional investors within the meaning of the AIFMD are investors considered to be professional clients (or eligible, upon request, to be treated as such) within the meaning of Annex II of MiFID.

Managers and operators

Are there any special requirements that apply to managers or operators of non-retail funds?

Managers of non-retail funds qualifying as AIFs must be either authorised or registered as AIFMs in the EEA or meet the requirements of a third-country AIFM.

It is of importance to note that, while registered AIFMs are not subject to authorisation under the AIFM Law, they are not entirely exempt from the AIFM Law requirements. They are required to be registered with the CSSF, disclose the AIFs they manage (including their investment strategies) and regularly report to the CSSF the principal instruments in which they trade and relating investment exposures. Registered AIFMs may nonetheless elect to subject themselves to the AIFM Law (especially if they want to benefit from the AIFMD passport).

Tax treatment

What is the tax treatment of non-retail funds? Are any exemptions available?

SIFs and RAIFs (save for RAIFs investing exclusively in risk capital) are subject to an annual subscription tax of 0.01 per cent, subject to certain exemptions. The taxable basis of the subscription tax is the fund’s aggregate net assets as valued on the last day of each quarter. Generally speaking, SIFs and RAIFs are characterised by their tax neutrality, as they are exempt from tax on income or capital gains, as well as from net wealth tax. Any distributions (including dividends and liquidation surpluses) made by a SIF or RAIF to investors are not subject to withholding tax in Luxembourg.

A SICAR can, generally speaking, be described as a tax-neutral vehicle for private equity investments.

The SICAR regime for fiscally opaque entities (such as an SA, a private limited liability company or a corporate partnership limited by shares) follows the ordinary income tax regime. Accordingly, it is subject to corporate income taxes and to specific domestic or treaty exemptions, and should qualify as a resident company for domestic and Luxembourg tax-treaty purposes. However, income from securities, as well as income derived from the transfer, contribution or liquidation thereof (namely, bonds, shares and other transferable securities, as well as negotiable instruments giving the right to acquire the aforementioned securities), is exempt. All other income is fully subject to ordinary Luxembourg direct taxation rules. Fiscally opaque SICARs are subject to a minimum net wealth tax. A SICAR formed as a fiscally transparent common limited partnership (SCS) or a special limited partnership (SCSp) is itself not liable for direct taxation or net wealth tax in Luxembourg. Neither dividends nor liquidation proceeds distributed by a SICAR to investors are subject to withholding tax.

RAIFs investing exclusively in risk capital assets are taxed according to the same tax rules as those applicable to SICARs.

The tax treatment of unregulated AIFs depends on the legal form of the fund. While an SCS or SCSp is fully tax transparent, funds set up under other corporate forms are subject to the general tax regime.

Asset protection

Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

The appointment of a depositary is required for SIFs, SICARs, RAIFs and unregulated AIFs that are managed by authorised AIFMs, and the fund’s assets must be segregated from the depositary’s assets. Unregulated AIFs that are managed by a registered AIFM are not required to appoint a depositary.

The depositary shall be liable to the fund and its investors for the loss of financial instruments held in custody either by him or herself or any third party to whom custody was delegated. In the case of such a loss of a financial instrument held in custody, the depositary shall return a financial instrument of identical type or the corresponding amount to the fund without undue delay. The depositary may contractually discharge itself of its liability under certain circumstances.

Governance

What are the main governance requirements for a non-retail fund formed in your jurisdiction?

Regulated funds, such as SIFs or SICARs, following the successful completion of the CSSF examination phase (see question 3), must be registered on the relevant official list of supervised entities held by the CSSF.

For unregulated funds, such as RAIFs and unregulated AIFs, no prior authorisation from the CSSF is required before their set-up and there is no direct ongoing supervision by the CSSF.

A fund organised as an FCP must be managed by a ManCo or AIFM, which is in charge of the governance of the FCP, under the oversight of the depositary in respect of certain aspects.

If organised as a SICAV or SICAR, the fund is managed by its governing body (ie, board of directors or general partner). In such a case, the fund may either appoint a ManCo or AIFM (ie, be externally managed) or manage itself (ie, internally managed AIF).

Luxembourg funds must have their central administration in Luxembourg.

Reporting

What are the periodic reporting requirements for non-retail funds?

Both SICARs and SIFs must comply with certain disclosure requirements. They must, inter alia, produce an offering document and an annual report that they also need to communicate to the CSSF and to investors. These documents must include the information necessary for investors to be able to make an informed judgement on the proposed investment and the related risks. The annual report must be finalised within six months of the end of the financial period to which it pertains. Although the annual reporting obligations are in line with the common reporting obligations of commercial companies, neither the SICAR nor the SIF are subject to consolidated reporting.

The annual accounts must be audited, furthermore, by a certified Luxembourg independent auditor, which must inform the CSSF of serious violations of the applicable legal provisions or of any facts or decisions that could potentially threaten the continuity of the SICAR or SIF. A SICAR must submit half-yearly financial information to the CSSF. A SIF must submit yearly and monthly financial information to the CSSF.

Although a RAIF is neither subject to any prior regulatory approval nor to any ongoing direct supervision, it must qualify as an AIF and be managed by an authorised AIFM. It must also produce an offering document and an audited annual report.

In terms of reporting requirements, the AIFM Law contains obligations applicable to the manager of any AIF in scope. For SIFs and SICARs, those requirements will apply alongside the specific reporting rules of the SIF Law or SICAR Law that, to a large extent, are in line with the reporting rules of the AIFM Law. The AIFMD reporting framework mainly consists of annual reporting, disclosure to investors and regulators’ requirements. Annual reports must be prepared at least once a year and within six months following the end of the financial year for each Luxembourg AIF managed or marketed in the EU. The annual reports will be audited and provided to investors upon request and to the CSSF. Disclosure requirements entails communication of certain information to be provided to investors before they invest in the fund (generally contained in an offering document). Such information relates, inter alia, to the AIF’s investment strategy and objectives, techniques it may employ and associated risks, the use of leverage and collateral and the procedures for issue and sale of shares, units or interests. Further aspects that need to be disclosed are as follows:

  • the AIF’s valuation procedure and pricing methodology;
  • a description of liquidity risk management and redemption arrangements;
  • a description of all fees, charges and expenses and maximum amounts thereof, which are directly or indirectly borne by the investors;
  • the policy on ensuring fair treatment of investors; and
  • a description of any preferential treatment of investors.

In respect of reporting to the CSSF, a Luxembourg AIFM should regularly report on the principal markets and instruments in which its AIFs trade and is required to disclose certain additional information encompassing, inter alia, the following:

  • the percentage of the AIF’s assets that are subject to special arrangements arising from their illiquid nature;
  • any new liquidity management arrangements;
  • the AIF’s risk management systems;
  • information on the AIF’s main categories of assets; and
  • the results of any stress tests.

Frequency of reporting depends on the amount of assets under management.

Separately managed accounts

Structure

How are separately managed accounts typically structured in your jurisdiction?

Separately managed accounts may be structured as funds of one, or via discretionary investment management agreements with an investment firm.

In practice, funds of one would, in the context of separately managed accounts, be structured either as a single-investor unregulated SCSp or as a dedicated compartment of a SIF or a RAIF.

Key legal issues

What are the key legal issues to be determined when structuring a separately managed account?

The terms for an SCSp, including the duties and indemnification obligations of the manager, will be set out in a partnership agreement, and for a separately managed account, in an investment management agreement, which may both be negotiated by the investor.

Regulation

Is the management or marketing of separately managed accounts regulated in your jurisdiction?

A regulated fund with a dedicated compartment for each investor will usually fall under the scope of the AIFMD (see questions 1 to 6 for fund management). A single-investor SCSp will, in principle, and save if the vehicle is formed as a fully AIFMD-compliant AIF, not qualify as an AIF, subject to a condition that the vehicle has been formed at the express request of the investor (ie, reverse solicitation) and its constitutive document precludes the admission of other investors.

The marketing of funds of one will depend on the AIF status of the relevant fund, the licence and the country of origin of the manager (see questions 7 to 11 for fund marketing).

The management of separately managed accounts is usually deemed discretionary portfolio management, which (save in respect of funds qualifying as AIFs and in respect of which the portfolio management will be done by the relevant fund’s AIFM) is a regulated activity falling within the scope of the Financial Sector Law, implementing MiFID rules.

General

Proposed reforms

Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

On 13 July 2017, ESMA issued an opinion to support supervisory convergence in the area of investment management in the context of the UK withdrawing from the EU, which sets out principles based on the objectives and provisions of the UCITS Directive and the AIFMD, which are applied to the specific case of relocation of entities, activities and functions following the UK’s withdrawal from the EU, under the assumption that the UK will become a third country after this time. It seeks to supplement the principles set out in the cross-sectoral opinion by addressing regulatory and supervisory risks in the area of investment management.

The EU Commission published two legislative proposals on 12 March 2018 regarding:

  • a directive amending both the UCITS Directive and the AIFMD with regard to the cross-border distribution of collective investment funds; and
  • a new regulation on facilitating cross-border distribution of collective investment funds and amending the regulation on European venture capital funds and the regulation on European social entrepreneurship funds.
Public listing

Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

The Luxembourg Stock Exchange (LuxSE) operates via the two following markets: an EU-regulated market within the meaning of MiFID (regulated market) and an exchange-regulated market, designated as the Euro MTF market.

Issuers of securities on the regulated market are subject to the obligations of various European directives that have been implemented under Luxembourg law in terms of prospectus approval and ongoing disclosure obligations. The CSSF is, as a rule, in charge of approving prospectuses for admission to trading on the regulated market. It should, however, be noted that prospectuses of open-ended funds admitted for distribution in Luxembourg are exempted from approval under the Law of 10 July 2005 on prospectuses for securities (the Prospectus Law), whereas prospectuses for closed-ended investment funds will need to be approved by the CSSF in accordance with the provisions of the Prospectus Law. Issuers whose prospectus has been approved in accordance with the Prospectus Law may benefit from the European passport for the admission to trading in more than one EU member state.

The Euro MTF market was launched in order to offer an alternative market to issuers that do not need to comply with EU regulations, in particular when they are not interested in passporting their securities to other EU-regulated markets. Prospectuses for an admission to trading on the Euro MTF market must be drawn up in accordance with the internal rules and regulations of the LuxSE (the Rules and Regulations). In the case of a listing on the Euro MTF market, the LuxSE is in charge of approving the prospectus. However, open-ended funds that are accepted by the CSSF for distribution in Luxembourg, are exempted from additional requirements on prospectuses (ie, a listing can be obtained on the basis of the offering document of the fund as approved by the CSSF).

The LuxSE now also features two dedicated professional segments available on each of the regulated market and the Euro MTF, whereby issuers only targeting professional investors can have their financial instruments admitted to trading. Securities admitted on one of these segments will not be accessible for retail investors, as trading on these segments is only allowed between professional investors.

The ongoing and periodic disclosure requirements applicable to issuers of securities depend on the market where the securities are admitted to trading.

For issuers whose securities are admitted to trading on the regulated market, these obligations mainly arise from the Law of 11 January 2008 on transparency requirements for issuers of securities, as amended (the Transparency Law), the Rules and Regulations and Regulation (EU) No. 596/2014 on market abuse (MAR).

Issuers whose securities are admitted to trading on the Euro MTF market do not fall within the scope of the Transparency Law. However, they will need to comply with the ongoing and periodic obligations detailed in the Rules and Regulations and MAR. Such ongoing and periodic disclosure obligations include, for instance, the provision of annual reports and interim financial statements and the disclosure of all other important information affecting the securities or the issuer. More stringent ongoing obligations apply to companies admitted to trading on the regulated market only.

It is worth noting that the LuxSE now also offers the possibility for issuers to have their securities listed on a specific section of the LuxSE’s official list without being admitted to trading on either the regulated market or the Euro MTF market. The securities official list (SOL) has been designed for issuers looking for visibility and for whom admission to trading is not a prerequisite, and who do not intend to be subject to the regulations related to admission to trading (notably MAR). Ongoing disclosure obligations will in this case be limited to certain communication requirements with regard to the LuxSE only as set out in the applicable SOL rulebook.

Overseas vehicles

Is it possible to redomicile an overseas vehicle in your jurisdiction?

It is possible to redomicile an overseas vehicle into Luxembourg if it is allowed under the law of the country where the overseas vehicle is domiciled.

Foreign investment

Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

Other than the marketing restrictions referred to in question 7, and international financial sanctions, prohibitions and restrictive measures with respect to the fight against terrorist financing, there are no special rules in this regard.

Funds investing in derivatives

Are there any special requirements in your jurisdiction relating to funds investing in derivatives?

Funds may invest in derivatives subject to compliance with the following provisions:

  • article 41 of the UCI Law for UCITS;
  • CSSF circulars 91/75 and 02/80 for Part II UCI; and
  • CSSF circular 07/309 for non-retail funds organised as SIFs and RAIFs (SIF-like).

SICARs may only use derivative financial instruments for hedging purposes.

Funds investing in derivatives must comply with the clearing obligations, reporting obligations and risk and mitigation techniques set out in 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 (EMIR).

CSSF circular 18/698 includes detailed information on the obligations of the Luxembourg managers to monitor compliance with their obligations under EMIR.

Credit institutions, investments firms and trading venue operators shall comply with the provisions set out in Regulation (EU) No. 600/2014 on markets in financial instruments (MiFIR).