UCITS - undertakings for collective investment in transferable securities

An Undertaking for Collective Investment in Transferable Securities (UCITS) is an investment fund that meets the criteria laid down by Directive 2009/65/EC, as amended, and benefits from a passport which enables it to be sold cross-border into any other EU Member State.

Investors

UCITS funds can be sold to all types of investors.

Promoter

The promoter of a UCITS must be a regulated entity with sufficient financial resources.

Legal framework

The European Union recently reviewed the legislative framework for UCITS. The UCITS IV Directive provides that Directive 85/611/ECC, as amended, was repealed with effect from 1 July 2011, without prejudice to the obligations of the Member States relating to the time limits for transposition into national law and application of the Directive. The Luxembourg law implementing the UCITS IV Directive into national law (Law of 17 December 2010) provides that the previous legislation (Law of 20 December 2002, as amended) will be repealed with effect from 1 July 2012 (except Articles 127 and 129 which have already been repealed with effect from 1 January 2011). As from 1 July 2011, all UCITS are governed by the Law of 17 December 2010. However, funds created before this date are allowed to use their simplified prospectus instead of the key investor information document until 1 July 2012.

 

European legislation:

 

Level 1 Directive:

Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS)

 

Level 2 Regulations (which are directly applicable):

  • Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards key investor information and conditions to be met when providing key investor information or the prospectus in a durable medium other than paper or by means of a website

  • Commission Regulation (EU) No 584/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards the form and content of the standard notification letter and UCITS attestation, the use of electronic communication between competent authorities for the purpose of notification, and procedures for on-the-spot verifications and investigations and the exchange of information between competent authorities

 

Level 2 Directives (which have to be transposed into national law):

  • Commission Directive 2010/42/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards certain provisions concerning fund mergers, master-feeder structures and notification procedure
  • Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company 

 

National legislation

 

Implementation of UCITS IV into Luxembourg law:

  • Part I of the Law of 17 December 2010 relating to undertakings for collective investment (French version)
  • CSSF Regulation N° 10-04 transposing Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company
  • CSSF Regulation N° 10-05 transposing Commission Directive 2010/44/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards certain provisions concerning fund mergers, master-feeder structures and notification procedure
  • CSSF Circular 11/498 on the entry into force of the law of 17 December 2010 relating to undertakings for collective investment and CSSF Regulations No 10-04 and No 10-05 on implementing measures
  • CSSF Circular 11/508: New provisions applicable to Luxembourg management companies subject to Chapter 15 of the Law of 17 December 2010 relating to undertakings for collective investment and to investment companies which have not designated a management company within the meaning of Article 27 of the Law of 17 December 2010 relating to undertakings for collective investment
  • CSSF Circular 11/509: New notification procedures to be followed by a UCITS governed by Luxembourg law wishing to market its units in another Member State of the European Union and by a UCITS of another Member State of the European Union wishing to market its units in Luxembourg
  • CSSF Circular 11/512: Presentation of the main regulatory changes in risk management following the publication of CSSF Regulation 10-4 and ESMA clarifications;
    - Further clarifications from the CSSF on risk management rules;
    - Definition of the content and format of the risk management process to be communicated to the CSSF

Previous legislation applicable to Luxembourg UCITS (which will be repealed with effect from 1 July 2012, except Articles 127 and 129 which have already been repealed with effect from 1 January 2011):

 

Eligible assets and risk diversification requirements

 

The Law of 2010 contains the basic investment rules for UCITS (transferable securities, money market instruments, bank deposits, UCITS funds, other UCIs, financial derivative instruments, ancillary liquid assets). Uncovered short sales and borrowings are not permitted.

The definition of eligible assets has been further clarified by:

  • Commission Directive 2007/16/EC of 19 March 2007 implementing Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards the clarification of certain definitions
  • Committee of European Securities Regulators (CESR) guidelines concerning eligible assets for investment by UCITS (March 2007, updated September 2008)
  • Luxembourg Grand-Ducal Regulation of 8 February 2008 relating to certain definitions of the amended law of 20 December 2002 on undertakings for collective investment and implementing Commission Directive 2007/16/EC of 19 March 2007 implementing Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertaking for collective investment in transferable securities (UCITS) as regards the clarification of certain definitions.
  • CSSF Circular n° 08/339: Guidelines of the Committee of European Securities Regulators (CESR) concerning eligible assets for investment by UCITS (as amended by CSSF Circular n° 08/380).
  • Detailed risk diversification is required pursuant to articles 42 to 52 of the Law of 2010. The risk management function is regulated based on CSSF Circular n° 07/308.

Circulars issued by the CSSF complement the regulatory framework by clarifying the implementation different legal provisions governing supervised entities. Moreover, the CSSF publishes prudential rules relating to specific activities and gives recommendations regarding financial activities.

IML Circular n° 91/75 clarifying certain aspects of the UCI legal framework. 

 

Legal form

A UCITS may take the legal form of a common fund (FCP – fonds commun de placement) or may be constituted as an investment company (SICAV – Société d’investissement à capital variable or SICAF – Société d’investissement à capital fixe). The FCP has no legal personality and thus must be managed by a management company. The SICAV/SICAF can either appoint a management company or designate itself as “self-managed”.

These different entities may 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 respectively may have an unlimited number of share classes, depending on the needs of the investors to whom the fund is distributed.

All three entities must be open-ended.

 

Capital requirements

The net assets of an FCP may not be less than EUR 1,250,000. This minimum must be reached within a period of six months following its authorisation.

The minimum capital of a self-managed SICAV/SICAF may not be less than EUR 300,000 at the date of authorisation. The capital of any SICAV/SICAF must reach EUR 1,250,000 within a period of six months following its authorisation.

 

Authorisation and supervision

A UCITS fund must be authorised by the CSSF before it can start its activities. To this end, the fund has to submit the following documents and information to the Luxembourg supervisory authority: 

  • articles or management regulations, prospectus and key investor information document, as well as the main agreements with service providers;
  • directors of the fund or managers of the management company;
  • choice of depositary bank and auditor;
  • promoter’s experience and financial soundness.

UCITS are supervised by the CSSF and must fulfil detailed reporting requirements.

 

Distribution

Investment funds governed by the UCITS Directive benefit from a European passport, whereby a UCITS fund authorised in one Member State may be marketed in the other EU Member States subject to notification to the host Member State authorities.

 

Taxation

Investment funds created under the 2010 Law generally pay an annual subscription tax (taxe d’abonnement) of 0.05% of their net asset value on the last day of every calendar quarter. This rate is reduced to 0.01% in the case of money market cash funds and institutional funds, as defined by the Luxembourg tax administration.

Investments in special institutional money market cash funds, special pension funds (including pension pooling vehicles) and funds investing in other funds which are already subject to subscription tax are exempt from subscription tax. The same applies to microfinance investment vehicles and exchange traded funds.

Investment funds incorporated as investment companies are subject to a registration duty of 75 euros at incorporation, in case of modification of the articles of incorporation, as well as transfer of the effective place of management or registered office in Luxembourg. Investment funds set up as FCPs are not subject to this registration duty.

Foreign funds managed by a Luxembourg management company are exempt from Luxembourg taxation. Non-resident investors (including feeder funds) generating revenues from the sale of a holding in a corporate investment fund are no longer subject to taxation in Luxembourg.

 

Service providers

Management company:

A common fund has no legal personality and thus must be managed by a management company. An investment company can either appoint a management company or designate itself as “self-managed”. The Law of 2010 distinguishes between:

  • management companies managing UCITS;
  • other management companies of Luxembourg UCIs;
  • management companies other than those authorised by the competent authorities of another Member State, from a Member State or third countries;
  • exercise of the activity of a management company by multilateral development banks.

The individuals who effectively conduct the business of a management company must be of good repute and be sufficiently experienced in relation to the type of UCITS managed. The management company must have an initial capital of at least EUR 125,000.

Depositary bank:

Luxembourg UCITS must appoint a credit institution as depositary bank, which is responsible for both the safekeeping of assets and the supervision of the fund (and its management company in the case of an FCP).

The individuals who represent the depositary bank must be of good repute and have sufficient experience in relation to the type of UCITS concerned.

Administration:

The administration of a UCITS can be performed by a third party. This concerns the accounting, NAV calculation, keeping of the register of shareholders/unit holders, handling of subscriptions and redemptions, communication with investors and preparation of financial statements.

External auditor:

The fund (SICAV) or its management company (FCP) prepares an annual and semi-annual report. The annual report is audited by an authorised external auditor with appropriate professional experience.

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