Fund management regulation

Regulatory framework and authorities

How (in very general terms) 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, each as amended from time to time:

 

Unregulated funds may be governed by the Law of 23 July 2016 on reserved alternative investment funds, as amended (the RAIF Law) 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, as amended (the AIFM Law).

Luxembourg funds may in addition opt for one of the European labels, each as amended from time to time, offering a marketing passport to the fund’s manager, provided that the relevant regulatory requirements are complied with: 

  • the European long-term investment fund (ELTIF) label subject to the ELTIF Regulation (EU) No. 2015/760; 
  • the European venture capital fund (EuVECA) label subject to the EuVECA Regulation (EU) No. 345/2013; and 
  • the European social entrepreneurship fund (EuSEF) label subject to the EuSEF Regulation (EU) No. 346/2013.

 

Regulated and unregulated funds are also governed by the Law of 10 August 1915 on commercial companies (the Companies Law) to the extent that the above (product) laws (including the RAIF Law) do not derogate from the Companies Law.

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

Fund administration

Is fund administration (support services provided to funds such as book-keeping, preparing reports, trade settlement, etc) regulated in your jurisdiction?

Fund administration is a regulated activity in Luxembourg and either performed by an authorised Luxembourg management company or an alternative investment fund manager, 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 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 for each change in their fund documentation (ie, constitutive and offering documents) 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 for: 

  • own funds; 
  • appropriate infrastructure and internal governance; 
  • authorised shareholding and management; and 
  • external audit.

 

The central administration of a Luxembourg manager must be 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? (Restrict your answers to the regulator with responsibility for oversight of fund management. Do not answer with respect to other agencies, such as the merger control authorities.)

Yes. The identity of the shareholders directly or indirectly having a qualifying holding in the manager (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), 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) (UCITS Directive) and 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.