Investment Funds in Luxembourg 2012 potx

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: michael.ferguson@lu.ey.com 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 [...]... 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... 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 16 | 1 Luxembourg investment funds Luxembourg investment funds. .. 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... 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... Prime broker Paying agent(s) Paying agent(s) Investment manager Depositary Investment manager Investment adviser Distributors Administrator, registrar, transfer, domiciliation agent 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... 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 “Unitlinked” life insurance products are products which are linked to one or more investment funds, which... Prime broker Paying agent(s) Investment manager Distributors Administrator, registrar, transfer, domiciliation agent Investment adviser Promoter Self-managed investment company Board of Directors Depositary Promoter Investment company Board of Directors Management company Promoter’s own/ Third-party Prime broker Distributors Investment adviser 14 | 1 Luxembourg investment funds Administrator, registrar,... feeders, can be located in different Member States See also Section 3.3.4.1 12 | 1 Luxembourg investment funds 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.. .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”) Capital14... UCITS changing master UCITS (see Section 5.6.2.) 18 | 1 Luxembourg investment funds Luxembourg investment funds 1 Luxembourg investment funds | 19 1 2 Current and future developments This chapter outlines: respect to: 20 | 2 Current and future developments Current and future developments This section focuses on developments related to UCITS These include: remuneration management 2.2.1 European Commission . 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 Funds in Luxembourg – A Technical Guide. 6 | 1. Luxembourg investment funds 1. Luxembourg investment funds  This chapter introduces Luxembourg s investment fund industry.  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