General introduction to the regulatory framework
Luxembourg’s comprehensive legal and regulatory system lies at the core of its success as an investment fund centre.
The Commission de Surveillance du Secteur Financier (CSSF), a public institution with legal personality and financial autonomy, is entrusted with the supervision of the financial sector.2 It operates under the authority of the Ministry of Finance.
As regards the fund industry, the CSSF is the prudential regulator of IFMs, and of the regulated investment funds they manage. The main duties of the CSSF in this respect include:
- licensing Luxembourg IFMs and regulated investment funds;
- supervising Luxembourg-regulated IFMs and investment funds based on periodic reporting, on-site inspections, and regular or ad hoc requests for information;
- imposing fines and disciplinary sanctions on regulated IFMs and investment funds, and finance professionals; and
- overseeing the marketing of domestic and foreign investment funds in Luxembourg.
In addition to those supervisory duties, the CSSF issues regulations, circulars and guidance papers in accordance with existing laws.
ii Regulations applicable to investment funds
Fund initiators can choose between the following categories of investment funds:
- funds that are subject to a specific regime (product law) or not; and
- regulated or unregulated funds.
The main product laws are:
- the Law of 17 December 2010 on undertakings for collective investments (UCI Law), which implemented EU Directive 2009/65/EC (UCITS Directive);
- the Law of 13 February 2007 on specialised investment funds (SIF Law);
- the Law of 15 June 2004 on investment companies in risk capital (SICAR Law); and
- the Law of 23 July 2016 on reserved alternative investment funds (RAIF Law).
Regulated investment funds
Regulated funds are subject to CSSF supervision and must (or their IFM must on their behalf) be licensed by the CSSF before they start operating.
The CSSF supervises:
- UCITS subject to Part I of the UCI Law;
- other undertakings for collective investment (UCIs) subject to Part II of the UCI Law;
- specialised investment funds (SIFs) subject to the SIF Law;
- investment companies in risk capital (SICARs) subject to the SICAR Law;
- European venture capital funds (EuVECA) subject to Regulation (EU) 345/2013;
- European long-term investment funds (ELTIF) subject to Regulation (EU) 2015/760;
- European social entrepreneurship funds (EuSIF) subject to Regulation (EU) 346/2013;
- pension savings companies with variable capital (SEPCAVs) and pension savings associations (ASSEPs) subject to the Law of 13 July 2005 on institutions for occupational retirement provision (IORPs) (Pension Law); and
- securitisation undertakings subject to the Law of 22 March 2004 (Securitisation Law) when they offer their securities to the public more than three times in a financial year.
UCITS are subject to complex asset eligibility, liquidity and diversification rules. They may only invest in transferable securities and other liquid financial instruments authorised under the UCI Law.
Part II UCIs may in principle invest in all types of assets, subject to diversification requirements and borrowing restrictions. Those rules depend on the assets in which the UCI invests and are further detailed below.
SIFs are not restricted as to their eligible assets either but must in principle comply with a risk-spreading requirement of maximum 30 per cent of their assets or commitments in securities of the same type issued by the same issuer.3 This rule is subject to exceptions and, when appropriately justified, to derogations granted by the CSSF.
SICARs may in principle only contribute their assets to ‘risk capital’, that is, to entities in view of their launch, development or listing on a stock exchange.4 They are not subject to diversification requirements.
Unregulated investment funds
Investment funds that are not subject to CSSF supervision include:
- reserved alternative investment funds (RAIFs) subject to the RAIF Law;
- commercial companies subject to the Law of 10 August 1915 on commercial companies (Companies Law);
- limited partnerships subject to the Companies Law; and
- securitisation undertakings subject to the Securitisation Law, except when they offer their securities to the public on a continuous basis.
RAIFs are in principle subject to the same asset eligibility and risk-spreading requirement as SIFs, except for RAIFs investing in risk capital, which are not subject to diversification rules.
RAIFs must be managed by an external authorised alternative investment fund manager (AIFM) and comply with the requirements of the Law of 12 July 2013 on alternative investment fund managers (AIFM Law).
They benefit from the AIFM Directive5 passport to be marketed to professional investors (and to other investors where permitted) in the EEA.
Standard commercial companies (SOPARFIs)
SOPARFIs are ordinary commercial companies whose purpose is to hold a participation in other companies. While they may take any corporate form available under the Companies Law, in practice they are incorporated as companies with share capital.
SOPARFIs are not subject to any risk-spreading requirements and may invest in any asset class. They may also manage their financial participations and conduct commercial activities that are directly or indirectly connected to the management of their holdings, including the debt servicing of their acquisitions.
Limited partnerships (LPs)
Luxembourg LPs typically take the form of common or special limited partnerships. They are not subject to any risk-spreading requirements or restricted as to the assets in which they may invest.
iii Regulations applicable to IFMsRegulated IFMs
Regulated IFMs include UCITS management companies subject to Chapter 15 of the UCI Law; and authorised AIFMs subject to the AIFM Law.
Commencing business as a regulated IFM in Luxembourg is subject to prior approval by the CSSF. IFMs may apply for authorisation under the UCI Law or the AIFM Law, or both.
Under CSSF Circular 18/698, the application for authorisation must detail, in relation to the IFM, its organisation (shareholding structure, own funds, team and substance); and its operations (internal policies and processes, external control and reporting).
The CSSF reviews in particular the portfolio management and risk management duties, the anti-money laundering procedures, and any delegation arrangements. Once granted, the authorisation as a regulated IFM covers all EEA countries.
Some IFMs established in Luxembourg do not need to seek CSSF authorisation before carrying out the management of a Luxembourg investment fund,6 when they manage either directly or indirectly:
- AIFs that are not leveraged and have no redemption rights for a period of five years, and whose aggregate assets under management do not exceed €500 million; or
- AIFs whose assets under management, including any assets acquired through leverage, do not exceed €100 million.
Those AIFMs must however register with the CSSF, disclose to the CSSF the AIFs they manage and their investment strategies, and report regularly on the investments they hold and their related exposure, and on anti-money laundering matters.
Registered AIFMs do not benefit from the AIFM Directive passport. They may, however, opt to use the European marketing passport regime offered by the EuVECA Regulation or the EuSEF Regulation. The passport under those two regulations only applies if the AIF uses the denomination EuVECA or EuSEF, registers with the competent authority and complies with the applicable regulation.
iv Regulations applicable to depositaries
Under the AIFM Directive and the UCITS Directive, the duties of Luxembourg depositaries in relation to investment funds include:
- safeguarding the assets they have been entrusted with;
- monitoring cash flows, in particular ensuring that all payments made by or on behalf of investors have been received and that all cash of the fund has been booked in cash accounts opened in the name of the fund; and
- overseeing the fund’s operations to ensure that they comply with Luxembourg laws and the constitutional documents of the fund.
Directive 2014/91/EU broadly aligned the role and responsibilities of UCITS depositaries with the regime applicable under the AIFM Directive. Those two regimes, however, differ in that the AIFM Directive allows the contractual transfer of liability from a depositary to a sub-depositary (including a broker acting as sub-depositary) and extended possibilities for rehypothecation of assets.
Investment funds subject to a product law and AIFs managed by an authorised AIFM must appoint a single depositary to supervise and monitor their assets. The appointment and replacement of the depositary of a regulated investment vehicle must be approved by the CSSF.
UCITS and retail Part II UCIs are subject to the UCITS V Directive depositary regime.7 Their depositary must be a credit institution with its registered office in Luxembourg or a Luxembourg branch of a credit institution with its registered office in another EEA country.
Non-retail Part II UCIs are covered by the AIFM Directive depositary regime.8 SIFs, SICARs, RAIFs and other AIFs managed by authorised AIFMs, and internally managed AIFs that are subject to the AIFM Law, are also subject to the AIFM Directive regime. They must appoint a Luxembourg credit institution or a Luxembourg branch of an EEA credit institution, a Luxembourg investment firm, a Luxembourg branch of an EEA investment firm, or – under certain conditions detailed below – a Luxembourg professional depositary of assets other than financial instruments.
Professional depositaries of assets other than financial instruments may only be used by AIFs that have no redemption rights for a period of five years from the date of the initial investments, and either do not invest in financial instruments that must be held in custody in accordance with the AIFM Law (typically real estate funds) or invest in issuers or non-listed companies in order to potentially acquire control over such companies under the AIFM Law (typically private equity and venture capital funds).
v MarketingPre-marketing in Luxembourg
New premarketing rules under Directive (EU) 2019/1160 (CBDD) and Regulation (EU) 2019/1156 (CBDR) apply in Luxembourg since August 2021. Under the new rules, EEA AIFMs that engage in pre-marketing in Luxembourg must notify their home Member State national competent authority (NCA) in the two weeks from commencing premarketing through an informal letter. The NCA will then notify the CSSF. Activities beyond the scope of pre-marketing are considered as marketing and require a marketing notification under Articles 31 and 32 of the AIFM Directive. The CSSF has extended the same rules to non-EU AIFMs pre-marketing AIFs in Luxembourg.
Besides defining pre-marketing, the CBDD and CBDR introduce harmonised requirements for marketing materials and rules for ‘de-notification’. These apply to both UCITS and AIFs.
Marketing of foreign UCITS and AIFs in Luxembourg
Foreign UCITS or AIFMs marketing AIFs to retail investors are no longer required to provide local facilities and appoint local agents in Luxembourg. The IFMs of investment funds marketed to retail investors may now provide facilities for subscriptions, redemptions, and payments and information to investors electronically or by other distance communications.
Foreign AIFs may only be marketed to retail investors in Luxembourg if they apply for marketing authorisation to the CSSF and comply with the rules laid down in CSSF Regulation 15-03.
Marketing of other UCIsForeign closed-ended UCIs
Where a closed-end foreign UCI that does not qualify as an AIF is offered to the public in Luxembourg, a prospectus must be published in compliance with Regulation 2017/1129/EU on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (Prospectus Regulation) and the Law of 16 July 2019 on prospectuses for securities (Prospectus Law).
Foreign UCIs other than the closed-end type
Foreign open-ended UCIs (other than UCITS) must, before engaging in marketing to retail investors in Luxembourg, be authorised by the CSSF under CSSF Regulation 20-10:
- the foreign UCI must apply for a marketing authorisation request and provide the required documents and information;
- subscription and redemption prices must be determined at least once a month; and
- the foreign UCI’s assets must be sufficiently diversified.