Investment Funds
in Luxembourg
A technical guide – September 2012
Contents
Foreword 4
1. Luxembourg investment funds 6
1.1. Introduction 6
1.2. Luxembourg’s investment fund industry 7
1.3. Luxembourg’s investment fund solutions 8
1.4. Organization of a UCI 14
2. Current and future developments 20
2.1. Introduction 20
2.2. UCITS 21
2.3. Alternative investment funds 29
2.4. Luxembourg 60
2.5. European Union 66
2.6. United States 80
2.7. International 83
3. UCI structures, regulation and governance 90
3.1. Introduction 90
3.2. Overview 91
3.3. Types of structures of UCIs 91
   
3.5. Minimum capital 102
   
3.7. Governance of UCIs 104
3.8. Criminal and civil liability 106
4. Investment, risk management and valuation rules 110
4.1. Introduction 110
4.2. UCIs under the 2010 Law 111
4.3. SIF Law UCIs 151

4.4. Valuation 153
  
5.1. Introduction 156
5.2. Pre-launch considerations 157
5.3. Authorization 157
5.4. Updates to the application for authorization 160
5.5. Ongoing supervision 161
5.6. Restructuring UCIs 161
5.7. Mergers of UCIs 163
5.8. Authorization of a side pocket 166
5.9. Transfer of foreign UCIs to Luxembourg 167
   
5.11. Dormant compartments 170
6. Management companies 172
6.1. Introduction 172
6.2. Chapter 15 management companies 173
6.3. UCITS management company passport 191
6.4. Chapter 16 management companies 194
6.5. Taxation of management companies 197
7. Investment management and advice 200
7.1. Introduction 200
7.2. Investment management of Luxembourg UCIs 202
7.3. Investment advice provided to Luxembourg UCIs 204
7.4. Luxembourg investment managers and advisers 204
7.5. EU investment managers and advisers 207
7.6. Non-EU investment managers and advisers 208
8. Administration 210
8.1. Introduction 210
8.2. UCITS 211
8.3. Other UCIs and SIFs 215

8.4. Accounting records, calculation of NAV and supporting documentation 216
8.5. Subscriptions and redemptions of shares or units and payment of dividends 217
8.6. Errors, materiality and compensation to investors 231
9. Depositary 238
9.1. Introduction 238
  
9.3. Duties 239
9.4. Conduct of business rules 242
9.5. Liability 242
9.6. Delegation 243
10. Fund documentation and reporting 246
10.1. Introduction 246
10.2. Prospectus of 2010 Law UCIs 248
10.3. Offering document of SIFs 253
10.4. Key Investor Information (KII) of UCITS 253
10.5. Financial reporting for 2010 Law UCIs 258
10.6. Financial reporting for SIFs 265
   
10.8. General meetings 267
10.9. Submission to trade register 267
10.10. Financial information reporting to authorities 268
10.11. Electronic transmissions to the CSSF and publication 270
11. Expenses and taxation 272
11.1. Introduction 272
11.2. Expenses 273
11.3. Taxation 274
11.4. Value added tax (VAT) 284
12. Marketing 290
12.1. Introduction 290
12.2. Information provided to investors before they invest 292

12.3. Marketing Luxembourg UCITS in other EU Member States 293
12.4. Marketing foreign UCITS in Luxembourg 297
12.5. Marketing of other UCIs 299
12.6. Marketing regulations applicable in Luxembourg 300
12.7. Marketing intermediaries 300
13. Stock exchange listing 304
13.1. Introduction 304
13.2. The Luxembourg Stock Exchange (LuxSE) 305
13.3. Procedures for admission to a securities market of the LuxSE 305
13.4. Continuing obligations for issuers of shares or units 307
13.5. Transfer, suspension, withdrawal and delisting 309
13.6. Listing of SIFs 309
Appendices 311
Appendix I – Understanding UCIs 312
Appendix II - Summary of current primary regulations 320
Appendix III - Withholding Tax Rates Applicable to Luxembourg UCIs 334
Appendix IV – Glossary 370
Appendix V – Ernst & Young asset management related publications 374
Appendix VI - Ernst & Young investment fund services 376
Foreword
4 | Foreword

The last 12 months could be described as another year where
nothing much happened, with global assets under management
(“AuM”) remaining at around US$ 54 trillion. A deeper analysis
shows that Europe and the US still make up 80% of the AuM
despite the never-ending focus on Asia. Investment funds’ share
of the global AuM has fallen by around 5% overall, fueling more

value of investment fund regulation. There were, however, some

marginal bright spots: Hong Kong, China and Singapore saw





deposit products. Some segments did comparatively well,
with ETFs reaching around US$ 1.4 trillion and hedge funds
somewhere around US$ 1.8 trillion. In the alternative space,

ongoing lack of credit from the traditional banking sources.

In contrast with what happened in the market, much has

extensively in this publication. Of particular note is the progress
on the Alternative Investment Fund Managers (AIFM) Directive:

intensive preparation for implementation; at the time of
writing, the European Commission was expected to adopt the
implementing measures (“Level 2”) after the 2012 summer
vacation – a little less than a year before implementation in

which will broadly align the UCITS Directive with some of the
key provisions of the AIFM Directive. The Commission has also
recently published a paper providing some insight into the areas
which might be covered by UCITS VI.

Notwithstanding the stagnation of AuM, the asset management

the implementation of the various regulatory reforms will,



and distribution models. This will inevitably lead to the “big”
getting “bigger”. They will, however, still be surrounded by
innovative niche players, some of which will eventually be
absorbed by the “big”. Others will reinvent themselves as
specialist “sub-service” providers and a savvy few will grow into
“big” players themselves.


So where should the regulators and the industry be focusing
their energy over the coming years?
I see the following key themes emerging:
 Protecting and enhancing the “UCITS brand” through:
 Taking concrete steps to make UCITS-like products a more
attractive building block of European pension fund reform
 Proactive engagement with non-EU regulators
 
products from AIFM Directive-compliant managers, similar
to that achieved by UCITS for traditional products, both in
Europe and beyond
 Selling the right products to investors – despite MiFID II,
UCITS IV, KII and other initiatives, the investment fund

investors are truly getting a suitable product at a cost

 Ensuring regulatory reform focuses on investor protection

years, the focus now needs to be on making sure it works
in the interest of investors. This may well entail some brave


but the overriding objective of protecting the interests of the
investors must not be lost along the way
 
be more aware than ever before of investors’ demand for
capital preservation and ultimate outcome for their individual
situation. No regulation will ever achieve this – industry

those of their investors

The purpose of this technical guide is to provide, in a clear and
concise format, an introduction to Luxembourg as a center for
investment funds, the types of funds available and a summary
of the regulations applicable to the formation and operation of
Luxembourg investment funds. It also covers the regulations
applicable to management companies based in Luxembourg,
and provisions applicable to other Luxembourg service
providers.

comments.
Michael Ferguson
Ernst & Young Luxembourg
EMEIA Regulated Funds Practice Leader
Tel: +352 42 124 8714
Email:
Foreword | 5
It is my great pleasure to welcome you to the 2012 edition of our Investment Funds
in Luxembourg – A Technical Guide.
6 | 1. Luxembourg investment funds
1. Luxembourg investment

funds

This chapter introduces Luxembourg’s
investment fund industry and outlines
Luxembourg’s solutions for investment
funds.
1.1.1. What is an investment
fund?
An investment fund (also referred to as an
undertaking for collective investment or UCI) has
the following characteristics:
 
 
collected from the “public” (which may be
restricted to a small circle of investors)
 
the collective investment must be made in
accordance with the principles of risk-spreading
The shares or units of some UCIs may be
distributed to the general public while others are
reserved for certain circles of investors, such

Depending on the structure of the UCI, these
shares or units may be obtained through private
placement, direct distribution, distributors, or
through stock exchanges.
The portfolio of collective investments may
consist of transferable securities and/or other

excessive concentration of investments.

1.1.2. Why set up an
investment fund?
An investment fund can offer investors the
possibility to:
 
 
 
portfolio
 
 
case of investors who are not able to access the
investment directly, for example due to investor

6 | 1. Luxembourg investment funds
1. Luxembourg investment funds | 7
1
Luxembourg
investment funds
 
FCP SICAV Others Total FCP SICAV Others Total
2010 Law
 Part I (UCITS
2
–
European
passport)
1,103 738 0 1,841 446.013 1,316.857 0.000 1,762.870
 Part II
285 292 4 581 80.437 121.043 0.960 202.440
SIF Law (SIFs) 527 886 32 1,445 111.310 137.404 10.455 259.169

Total 1,915 1,916 36 3,867 637.760 1,575.304 11.415 2,224.479
Source: Commission for the Supervision of the Financial Sector – CSSF


established in 1959 and there are now over 3,800 fund vehicles, comprising over 13,400 funds
(single funds and compartments of umbrella funds
1
), with net assets of €2.2 trillion (as at

At the end of 2011, there were 6,440 shares or units of UCIs listed by the Luxembourg Stock
Exchange, of which 6,244 were shares or units of Luxembourg UCIs.

may be attributed to a number of factors such as:
 
 
 
 
 
 
 
at fund and investor levels
 
knowledge of the workforce
 

 
Luxembourg investment funds are authorized and supervised by the Commission for the Supervision
of the Financial Sector (Commission de Surveillance du Secteur Financier – CSSF).
The Luxembourg fund industry has, since 1988, been successfully represented and promoted
by the Association of the Luxembourg Fund Industry (Association Luxembourgeoise des Fonds

d’Investissement - ALFI). Since 2008, LuxembourgforFinance, the agency for the development of the

1
Also known as multiple compartment UCIs – see Section 3.3.2.
2
Undertakings for Collective Investment in Transferable Securities
8 | 1. Luxembourg investment funds


These different entities may create multiple compartments, each with a different investment policy
Luxembourg
(Chapter 15) or
EU UCITS
management
company
***

Luxembourg UCITS management company (Chapter 15)
or
Luxembourg non-UCITS management company (Chapter 16)

UCITS investment

for European
Distribution
Passport – may
be sold to retail
and institutional
investors with
minimum

formalities)

Investment funds (do

Distribution Passport
– includes hedge,

estate funds – may be
sold to both retail and
institutional investors but
subject to each country’s
local distribution rules)





Luxembourg offers an attractive range of solutions for the creation of UCIs. Luxembourg UCIs can be
established under either of the following regimes:
 
The 2010 Law on UCIs (the principal law on UCIs):
 Part I UCITS
 Part II 2010 Law Part II
The Specialized Investment Fund Law (the SIF Law) SIF

The choice of regime and basic structures are presented in schematic form below:

*
Luxembourg
(Chapter 15) or

EU UCITS
management
company
***

Luxembourg UCITS management company (Chapter 15)
or
Luxembourg non-UCITS management company (Chapter 16)

**
Self-managed
****
Have not designated a management company
* Investment funds in contractual form (common funds – FCPs) must have a management company.
 
company or manage themselves.
 
 
1. Luxembourg investment funds | 9
1
Luxembourg
investment funds
The following table outlines the main characteristics of Luxembourg’s three investment fund regimes:
3
Additional restrictions may be included in the constitutional document or prospectus.
4
See Section 3.4.2.
5
Except in the case of a SIF set up as a private limited liability company (S.à r.l.), in which case the maximum number
of investors is 40.

6
Main service providers only listed here; see Section 1.4.2.
7
“Directors” means, in the case of public limited companies and in the case of cooperatives in the form of a public

partner, in the case of private limited liability companies, the manager(s) and in the case of common funds, the


  

Regulated Regulated Regulated
 CSSF CSSF CSSF
 Prior to set-up Prior to set-up Prior to set-up
 Common fund: FCP
Investment company: SICAV
or SICAF
Common fund: FCP
Investment company: SICAV
or SICAF
Common fund: FCP
Investment company: SICAV
or SICAF

3
All All Informed investors
4


No limit No limit No limit
5



No minimum No minimum No minimum
 None None €125,000; less if



Yes Yes Yes
 Yes Yes Yes
 Detailed restrictions Some restrictions 




No detailed restrictions,
must be disclosed
No detailed restrictions,
must be disclosed
No detailed restrictions,
must be disclosed


Generally freely transferable Generally freely transferable Generally freely transferable
subject to informed investor

 Prospectus Prospectus Prospectus or offering
document
 Prospectus, Key Investor

statements


statements
Prospectus or offering

statements

6
UCITS management
company (common fund)
Depositary
Administrator, registrar and
transfer agent
Auditor
Management company
(common fund)
Depositary
Central administration,
registrar and transfer agent
Auditor
Management company
(common fund)
Depositary
Central administration,
registrar and transfer agent
Auditor


Promoter
Investment manager and/or
adviser

Directors of UCI, or of
management company
Depositary
Promoter
Investment manager and/or
adviser
Directors of UCI, or of
management company
Depositary
Directors of SIF, or of
management company
7
Depositary
 Yes Yes Yes
10 | 1. Luxembourg investment funds
The decision as to whether to create a UCI in contractual form (common fund - FCP) or in corporate
form (an investment company, generally a SICAV)
10
is primarily based on tax, operational and
marketing considerations. The following table details the main differences between FCPs and SICAVs:

  



Minimum twice a month Minimum monthly 
reporting purposes


NAV

8
NAV
9
Subscription and
redemption conditions laid
down in the constitutional
document

 


 
manager(s)
11
 Transparent (with limited exceptions) Not tax transparent (with limited
exceptions)
 
from certain double taxation treaties
(DTTs)

DTTs
 VATable person (via its management
company)
VATable person
 
in conjunction with depositary

manager(s)
12
and ultimately by investors

13


Unitholders’ meetings are not mandatory for
a common fund
At least one meeting of shareholders must
be held annually

described in more detail in Chapter 3.
Appendix I describes what UCIs are and explains the various types of funds and asset classes.
1.3.1. Traditional investment funds
Traditional funds include:
 
 
 
 
 
Traditional funds may be set up under any of Luxembourg’s investment fund regimes (i.e., as UCITS,
2010 Law Part II UCIs or SIFs) using any of the basic structures mentioned previously.
8
The net asset value per share or unit may be adjusted to incorporate a “swing factor” if swing pricing procedures are in
place (see Section 8.5.7.)
9
Idem
10
See also Section 3.3.
11
In the case of public limited companies and in the case of cooperatives in the form of a public limited company, the

of private limited liability companies, the manager(s).

12
Idem
13
Except in the case of a partnership
1. Luxembourg investment funds | 11
1
Luxembourg
investment funds
1.3.2. Alternative investment funds

class alternative funds and funds of alternative investment funds, will generally be set up either as
2010 Law Part II UCIs or SIFs; any of the basic structures may be used.


UCITS may also, to a limited extent, pursue alternative investment strategies (so-called “alternative
UCITS”).

Capital
14
. Such vehicles, however, are not UCIs and are not covered in this Technical Guide.

Luxembourg vehicles used in combination with alternative investment funds include commercial
companies referred to as SOPARFIs and securitization vehicles. This section provides a brief
description; these vehicles are not further covered in this Technical Guide.
A. SOPARFIs
SOPARFI (Société de Participations Financières) is the name usually given to Luxembourg
companies which have, as their main corporate purpose, the holding of participations in other

subject to the Law of 10 August 1915 on commercial companies, as amended (the 1915 Law).
SOPARFIs are unregulated vehicles which can be set up in any Luxembourg corporate form; the

most common are the public limited company and the private limited liability company.
SOPARFIs are fully taxable Luxembourg companies, subject to corporate income tax, municipal


(EU) Directives. Furthermore, withholding tax (WHT) may be levied on dividends distributed


as follows:
 
exempt from corporate income tax and municipal business tax (i.e., Participation Exemption
regime may apply)
 

 
the SIF is tax transparent)
B. Securitization vehicles

associated with commitments taken or activities carried out by third parties and, in exchange,
issue securities whose return is directly linked to the risks borne. Any tangible or intangible asset
or activity with a reasonable ascertainable value or predictable future stream of revenue can be
securitized.
Luxembourg securitization vehicles are also occasionally used in combination with alternative
investment funds. The Law of 22 March 2004 on securitization, as amended, (the Securitization


14
(Société d’Investissement en capital à risque - SICAR).
12 | 1. Luxembourg investment funds
SPVs can either be set up as corporate entities (sociétés de titrisation), or funds with no legal
personality managed by a management company (fonds de titrisation). These can be set up as

single or multi-compartment vehicles; each compartment can issue several tranches of securities.
The assets of each compartment can be segregated (the protected cell concept). A single
securitization vehicle can be established to carry out an entire securitization transaction, or

the risks, the second one issuing securities to the investors. Multiple layer securitization structures




 
 
unemployment fund surcharge) and municipal business tax; however, in practice SPVs are
generally tax neutral at the vehicle level due to their pure intermediary function as a pool of
assets or risks, and therefore do not have taxable income
 
 
taxation in Luxembourg, including the annual subscription tax
 
 
 
 
1.3.3. Pension Fund Pooling Vehicles (PFPVs)
Pension Fund Pooling Vehicles (PFPVs) can be set up as Luxembourg common funds, which are tax
transparent. PFPVs are also exempt from subscription tax (see Chapter 11 for more information
on taxation and VAT issues related to Luxembourg funds). Thus, Luxembourg offers a regime that


Section 3.3.4.2. on co-management and pooling of assets).
1.3.4. Master-feeder structures
In master-feeder structures, the feeder UCI invests most of its assets in a master UCI. Therefore, the


the manager of the master fund.

UCITS), permitting the pooling of assets. In a UCITS master-feeder structure, a feeder UCITS

derivative instruments for hedging purposes or, in the case of investment companies, property
essential for the direct pursuit of business. An existing UCITS may be converted into a feeder UCITS.
Alternatively an existing UCITS may become a master UCITS. A feeder UCITS may also change its
master. The master, or one or more of the feeders, can be located in different Member States. See
also Section 3.3.4.1

1. Luxembourg investment funds | 13
1
Luxembourg
investment funds
Master-feeder structures may be used by asset managers as a distribution mechanism to
facilitate access to certain markets. For example, some French investors may prefer to invest
in a local UCITS. An asset manager which currently only offers a Luxembourg domiciled UCITS
may take advantage of the UCITS master-feeder provisions and create a French domiciled feeder
UCITS which invests in the Luxembourg master UCITS. This structure will enable the manager to
distribute to such French investors while managing only one portfolio of investments.
1.3.5. Unit-linked products
Luxembourg life insurers are permitted to offer a range of “unit-linked” life insurance products. “Unit-
linked” life insurance products are products which are linked to one or more investment funds, which
may be either:
 
 
 A UCITS, another UCI investing in transferable securities
 An open-ended fund of alternative investment funds (i.e., a fund of hedge funds)
 An open-ended real estate UCI

 
 
 
 
the investor
 Managed by way of a portfolio management mandate, in a similar way to ordinary UCIs
 
 Subject to a minimum investment premium
 
investor
 Managed by way of a discretionary mandate
 

underlying investment fund(s) before they invest.
Luxembourg insurance supervisory authority (Commissariat aux Assurances – CaA) Circular 08/1

covered in this Technical Guide.
14 | 1. Luxembourg investment funds
Investment
adviser
Promoter
Investment
company
Board of Directors
Depositary
Management
company
Promoter’s own/
Third-party
Prime broker

Paying agent(s)
Investment
manager
Distributors
Administrator,
registrar, transfer,
domiciliation agent


Promoter
Depositary
Prime broker
Paying agent(s)
Investment
manager
Distributors
Administrator,
registrar, transfer,
domiciliation agent
Investment
adviser
Self-managed
investment
company
Board of Directors
Promoter
Common fund
Depositary
Management
company

Promoter’s own/
Third-party
Prime broker
Paying agent(s)
Investment
manager
Distributors
Administrator,
registrar, transfer,
domiciliation agent
Investment
adviser


This section outlines the typical organization of a UCI, summarizes the roles of the main service
providers and outlines the factors impacting the choice of organizational model.
1.4.1. Typical organization of a UCI
As part of the formation procedures of a UCI, several service providers must be appointed.
The following diagrams show illustrative examples of the organization of UCIs; other models may be
possible.
1. Luxembourg investment funds | 15
1
Luxembourg
investment funds
1.4.2. UCI service providers
The principal duties of the main service providers are as follows:
A. Promoter or initiator
The creator or initiator of a UCI is generally referred to in Luxembourg as the promoter in the case of

The promoter or initiator is often the investment manager or adviser. It generally plays a role in the


its management company.
In general, the promoter is represented in the governing bodies of the UCI, or is a shareholder of the
management company of a common fund (see also Sections 1.4.3., 3.4.1.2. and 5.3.2.).
B. Management company
A management company is a company that manages undertakings for collective investment (UCIs).
“Management” includes, in general, investment management, administration and distribution. Not

C. Investment manager
The investment manager manages the UCI (or certain of its compartments) with respect to the
investment, divestment and reinvestment of the assets of the UCI. It is a delegate of the UCI or of its
management company. The investment manager is further discussed in Chapter 7.
D. Investment adviser
The investment adviser advises the investment manager, the management company or the UCI itself
with respect to the investment, divestment and reinvestment of the assets of the UCI. It does not
make decisions. The investment adviser is further discussed in Chapter 7.
E. Administrator
The administrator is, inter alia, responsible for keeping the accounting records of the UCI, calculating

the independent auditor. Administration is further discussed in Chapter 8.
F. Registrar and transfer agent
The registrar and transfer agent is responsible for keeping the principal register of shareholders or
unitholders of the UCI, and for arranging for the issue, transfer, allotment, conversion, redemption
and/or purchase of shares or units of the UCI (see also Chapter 8).
G. Domiciliation agent

accommodation and other facilities to the UCI, keeping all correspondence of the UCI, and arranging
payment of bills on behalf of the UCI (see also Chapter 8).
H. Distributor
Distributors are intermediaries who are part of the distribution system set up by the promoter to

perform one of the following:
 
 
See also Section 12.7.1.
I. Nominee
Nominees act as intermediaries between investors and the UCI of their choice (see also Section
12.7.2.).
J. Market maker
Market makers are intermediaries participating on their own account and at their own risk in
subscription and redemption transactions of UCI shares or units (see also Section 12.7.3.).
16 | 1. Luxembourg investment funds
K. Depositary
The depositary is responsible for the supervision of the assets of the UCI, and for the day to day
administration of the assets (receipts, sales, dividends, etc.), based on instructions received

document). The depositary must be a Luxembourg credit institution. It may delegate the actual
holding of the assets (see also Chapter 9).
L. Prime broker
A prime broker is, according to the Alternative Investment Fund Managers (AIFM) Directive, an
entity subject to prudential regulation and ongoing supervision, which:
 

 
services, securities lending, customized technology and operational support facilities
15
(see
Section 9.6.1.)
M. Paying agent
The paying agent arranges for payment of distributions made by the UCI. A paying agent may be


will provide paying agent services. Paying agent is a term used differently in the context of the EU
Savings Directive (see Section 11.3.10.3.).
N. Auditor
réviseur
d’entreprises agréé - see Sections 10.5.5. and 10.6.5.).
1.4.3. Organizational model considerations
The choice of organizational model for the UCI, its management and service providers will depend on
a number of factors, including:
 
 
 
may consider cross-border management
 

A common fund (FCP) has no legal personality and must be managed by an approved management

of Directors of the management company, in conjunction with the depositary, has ultimate control
of the common fund. The management company is responsible for the common fund, including the
appointment and oversight of service providers.
An investment company must appoint an approved management company or designate itself as “self-


for the investment company, including the appointment and oversight of service providers. It may
appoint a management company to manage the investment company, in which case the oversight of

investment company.

and each compartment can have one or more share-classes.
15


1. Luxembourg investment funds | 17
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investment funds
It is also possible to create master-feeder structures. In master-feeder structures, the feeder UCI
invests most of its assets in a master UCI.
The key differences between basic structures of UCIs are summarized in Section 1.3 The basic
structures, multiple compartment and share classes, are described in more detail in Section 3.3
Master-feeder structures are covered in Section 3.3.4.1

Promoters generally set up their own UCIs. However, some investment managers and investment
advisers choose to “rent” a UCI created by a third party. In this case, a new compartment will be
created in a multiple compartment UCI (see Section 3.3.2.) promoted by the third party. The
manager or adviser will be appointed as the investment manager of, or investment adviser to, the
compartment. “Rent a UCI” is generally a market entry strategy.
Promoters who wish to use the services of a management company have the following options:
 
usually holds a majority shareholding in the management company and is represented on the

 
management company

UCITS IV introduced the management company passport which permits UCITS management
companies to manage UCITS cross-border in the EU, both intra-group and as a third party. Cross-
border management may be provided either directly (free provision of services) or via a branch (see
also Section 6.3.).
The Alternative Investment Fund Managers (AIFM) Directive introduces a passport permitting the
cross-border management of alterative investment funds (AIF) (see Section 2.3.2.).

Asset management groups, particularly those operating in multiple jurisdictions, have a number of

options for the management of their UCIs. The optimal model will probably be based on one or a
combination of the following:
 
of UCIs, or converting an existing management company, to a “super ManCo”. Typically “super
ManCos” will manage UCIs cross-border
 
fund ranges. This is the typical legacy structure existing today
 
Under this model, one third party “super ManCo” or multiple third party management companies
are appointed rather than setting up group management companies



The Alternative Investment Funds Managers (AIFM) Directive will facilitate the development of
similar models for the management of alternative investment funds (AIF) – for example, a “super
AIFM” will be able to manage AIF cross-border. Furthermore, a single entity may be authorized to
manage UCITS and AIF facilitating, inter alia, the development of a “super ManCo & AIFM” (see
also Section 2.3.2.)
18 | 1. Luxembourg investment funds

Management companies have, in general, the choice between local and cross-border service
providers, including administrators; the management company is subject to its home Member State

In general, asset management groups may choose service providers in:
 
 
 
An asset management group may therefore choose between different service provider models:
 
 

from a central location
 
one in each host Member State
 
serve different UCITS
1.4.4. Restructuring a UCI
Asset management groups may decide to restructure UCIs for a variety of reasons including, inter
alia, optimization of operating models, cost reduction, economies of scale, and focusing on certain
target investor markets.
Typical types of restructuring of UCIs include:
 
 Conversion of Luxembourg UCIs: 2010 Law UCIs into SIFs and vice versa (see Section 5.6.1.)
 Conversion of an existing UCITS to a feeder UCITS (see Section 5.6.2.)
 A feeder UCITS changing master UCITS (see Section 5.6.2.)
 
 
 
 
 
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20 | 2. Current and future developments
2. Current and future
developments

This chapter outlines:
 
respect to:

 
 
 
 
 
 
 
20 | 2. Current and future developments
2. Current and future developments | 21
2
Current and future developments

This section focuses on developments related to UCITS. These include:
 
remuneration
 
 
management
 
 
2.2.1. European Commission UCITS V proposal


Directive (Directive 2009/65/EU) as regards depositary functions, remuneration policies and
sanctions – generally known as “UCITS V”.
The UCITS V proposal follows the Commission’s Consultation on the UCITS depositary function and on
the UCITS managers’ remuneration issued in December 2010.


topics (called “Level 2 measures”).

The proposed amendments on the depositary and managers’ remuneration are broadly in line with
the provisions of the Alternative Investment Fund Managers (AIFM) Directive (see Section 2.3.2.).


The appointment of the depositary must take the form of a written contract. The depositary contract
must, inter alia
perform its functions.

depositary is appointed.
Eligible entities

 
 
16


account of clients
16
The Markets in Financial Instruments Directive (MiFID) – Directive 2004/39/EC, as amended
22 | 2. Current and future developments
Duties of the depositary
The obligations of the depositary are:
 
 
 
The depositary is permitted to delegate safekeeping duties, but not any other duty.
The depositary must act honestly, fairly, professionally, independently and in the interest of the
UCITS and its investors.
The Level 2 measures are expected to clarify the depositary’s duties.
Monitoring and oversight

The depositary has a number of oversight roles in ensuring that:
 
operations:
 
cancellation)
 
 
 
usual time limits
 
with applicable law and the UCITS rules or instruments of incorporation


 
are received
 
 
cash of the entity with which the cash account is opened, or the depositary’s own cash, is booked
on the same account
Safekeeping

which can be held in custody and those relating to other assets.
The depositary must hold in custody:
 
account, in accounts which are segregated (i.e., separately from the depositary’s own assets) and
opened in the name of the UCITS (or of the management company acting on behalf of the UCITS),

 
For all other assets of the UCITS, the safekeeping duty of the depositary is limited to verifying


the UCITS (or to the management company acting on behalf of the UCITS). The assessment of
ownership is determined on the basis of all information and documentation regularly provided by the
UCITS or the management company, or any external evidence the depositary can rely on.
Provision of information to competent authority

the management company’s home Member State, and the competent authority of the UCITS home
Member State, to make available to them all information which it has obtained while undertaking its
duties and which may be necessary for the competent authority of the UCITS or of the management
company to carry out their duties under the Directive.
Liability


instruments held in custody by the depositary itself, or by a third party to whom custody had been
2. Current and future developments | 23
2
Current and future developments


type or the corresponding amount from the depositary, without undue delay.

held in custody is considered to be “lost”.
However, the depositary is not liable if it can prove that the loss has arisen as a result of an external

despite all reasonable efforts to the contrary.
The Level 2 measures are expected to clarify this exception.
Other losses
The depositary is also liable to the UCITS and its investors for all other losses incurred as a result of
negligent or intentional failure to properly perform its obligations pursuant to the Directive.
Delegation of safekeeping
Conditions for delegation

The depositary may delegate safekeeping duties to a third party if it can demonstrate that:
 

 
ongoing monitoring of:
 
 

 
 
complexity of the assets which have been entrusted to it
 


in its possession
 

depositary
The Level 2 measures are expected to clarify this segregation obligation.
 

 
A third party delegate may in turn sub-delegate these tasks, provided that the same conditions are
met.
The prospectus of the UCITS must include information on any safekeeping function delegated by the

delegations, as well as any material changes thereto.


apply, under strict conditions. In this case, the UCITS (or the management company on behalf of the


to such local entity, and investors of the relevant UCITS must be duly informed of this delegation
(including the legal constraints and circumstances of the third country and the circumstances
justifying the delegation) prior to their investment.
Delegation and liability
The depositary’s liability is not affected by delegation.
24 | 2. Current and future developments


that:
 
 
documents of the UCITS it manages
 

of interest
 
The policies and practices must cover those categories of staff whose professional activities have a

 
 
 
 
senior management and risk takers
The management body of the management company must adopt and periodically review the general
principles of the remuneration policy, and is responsible for its implementation. There must be at
least annual, central and independent internal reviews of compliance with remuneration policies and
procedures.
Staff engaged in control functions must be compensated in accordance with the achievement of
the objectives linked to their functions, independent of the performance of the business areas they

control.

manage, their internal organization and the nature, the scope and the complexity of their activities



remuneration committee must exercise independent judgment. It must be chaired by, and composed
of, non-executive Directors
17
.

to their size, internal organization and the nature, scope and complexity of their activities. The
principles include, inter alia:
 
a combination of the assessment of the performance of the individual and of the business unit or
UCITS concerned and of the overall results of the management company; when assessing individual

 
of the UCITS managed by the management company
 

 

 
appropriate in view of the life-cycle and redemption policy of the UCITS concerned and is correctly

The European Securities and Markets Authority (ESMA) is expected to adopt Level 3 guidelines
on sound remuneration policies.
17
Members of the management body

2. Current and future developments | 25
2
Current and future developments
The annual report of the UCITS must disclose:
 

UCITS
 

2.2.2. ESMA guidelines on ETFs and other UCITS issues

Guidelines on ETFs and other UCITS issues as well as a
Consultation on recallability of repo and reverse repo arrangements
impact a wide range of UCITS:
 
repurchase agreements (repos) and purchase and resale agreements (reverse repos)
 



 Guidelines on ETFs and other UCITS issues
rules on repo and reverse repo agreements, will become effective two months after publication on


12 additional months to comply.

The overall objective of the paper is to increase investor protection by strengthening the applicable

in regulatory practices. The publication follows ESMA’s consultation paper on ETFs and other UCITS
issues

The guidelines apply to UCITS management companies, self-managed UCITS and to their relevant
regulators.
The following is an overview:


 
 

 
EPM, the identity of entities to which such costs and fees are paid and any relationship with the
management company or depositary
 
returned to the UCITS
 Ability, at any time, to recall securities lent out or to terminate any securities lending agreement
entered into
 
management process in order to ensure that they are able to comply, at any time, with their
redemption obligations