Luxembourg regulator changes its policy about UCITS investing in other UCI

In its press release 18/02 of 5 January 2018 (the Press Release), the Luxembourg supervisory authority for the financial sector (Commission de surveillance du secteur financier – CSSF) informs about a change of policy regarding Luxembourg UCITS investing in other UCI (the Non-UCITS).1

According to the past CSSF policy, Luxembourg UCITS were allowed to invest in a non-UCITS ETF if the Luxembourg UCITS ensured that the non-UCITS ETF effectively complied with the criteria for other UCI set out in articles 2(2) and 41(1)(e) of the 2010 Law, even if the offering documents of such non-UCITS ETF granted possibilities which were not equivalent to requirements applicable to UCITS.

Since 5 January 2018, the CSSF requires that Non-UCITS in which Luxembourg UCITS invest, fulfill all the conditions laid down in the 2010 Law and Directive 2009/65/EC (UCITS Directive) for UCITS eligible investments. These imply in particular (emphasis added):

  1. that the sole object of the Non UCITS is the collective investment in transferable securities and/or in other liquid financial assets referred to in Article 41(1) of the 2010 Law, of capital raised from the public and which operate on the principle of risk-spreading;
  2. that the Non-UCITS shall be bound by rules on asset segregation, borrowing, lending, and uncovered sales of transferable securities and money market instruments which are equivalent to the requirements of the UCITS Directive in line with article 50(1)(e)(ii) of the UCITS Directive;
  3. the fund rules or instrument of incorporation shall include a restrictionaccording to which no more than 10% of the assets of the UCI can be invested in aggregate in units of other UCITS or other UCIs in line with article 50(1)(e)(iv) of the UCITS Directive.

The CSSF stresses in the Press Release that Non-UCITS shall be prohibited from investing in illiquid assets (such as commodities and real estate) and says that mere compliance in practice with the requirements 2) and 3) above is not sufficient.

Luxembourg UCITS must:

refrain from new investments in Non-UCITS that are not compliant with the new CSSF policy and
if applicable disinvest from such Non-UCITS as soon as possible taking into account the best interests of the investors.

In the first quarter of 2018 the CSSF will contact the investment fund managers which have invested in such UCIs to check if they comply with the new policy.

1 The CSSF’s FAQ concerning the Luxembourg law of 17 December 2010 (2010 Law) relating to undertakings for collective investment (FAQ) has been updated to reflect this change.