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.