The Luxembourg supervisory authority, the Commission de Surveillance du Secteur Financier (“CSSF”), changed its policy regarding investments by Luxembourg undertakings for collective investment in transferable securities (“UCITS”) in undertakings for collective investment which do not qualify as UCITS (“UCIs”) in its Press Release 18/02, which it issued on 5 January 2018.
Pursuant to the law of 17 December 2010 relating to UCIs, as amended (the “2010 Law”), UCITS may invest in UCIs, subject to the latter’s complying with certain criteria, including complying with a prohibition on investing in illiquid assets, limiting investments in other funds to 10% of their assets and complying with rules on asset segregation, borrowing, lending and uncovered sales of transferable securities and money market instruments. In practice, this meant that such a UCI should have all the characteristics of a UCITS without actually being one.
The CSSF took a flexible approach in interpreting this provision when it included in the first version of its Frequently Asked Questions concerning the 2010 Law (the “FAQs”) that non-UCITS exchange-traded funds (“ETFs”) were eligible investments for UCITS if they effectively complied with all the criteria set out in the 2010 Law, even if the offering documents of such ETFs granted possibilities that were not equivalent to the relevant requirements. At the time, the CSSF required that eligibility analyses be carried out on a case-by-case basis. The UCITS were expected to continuously ensure that the investment rules applicable to the ETFs were equivalent to the ones applicable to UCITS, as evidenced, for example, via a system of compliance control or a written confirmation thereof by the ETF or its manager.
In October 2017, the European Securities and Markets Authority (“ESMA”) issued its 2018 Work Programme promoting a supervisory convergence of the National Competent Authorities’ practices in the application of the EU legislation, and specific attention was drawn to the investment fund legislation, including a review of the current ESMA guidelines on ETFs and other UCITS issues.
As a consequence, the CSSF changed its policy, and any investment by a UCITS in a UCI (including ETFs) must be in strict compliance with the requirements of the 2010 Law (mere compliance controls or a written confirmation no longer being acceptable); investments in UCIs based on the CSSF’s past approach are no longer allowed. UCITS that had invested in UCIs on the basis of the FAQs must disinvest from these UCIs at soon as possible, taking into account the best interests of the shareholders.
In line with its new policy, the CSSF issued an updated version of its FAQs where the relevant provision has been deleted.
The CSSF will contact by 31 March 2018 the investment fund managers that have invested in such UCIs to confirm compliance with the new policy.
