Regulation and supervision of funds

Funds for all types of investors

In line with its reputation as a major fund centre, Luxembourg has created a legislation allowing the offering of regulated fund products to all types of investors.

The retail regime

Since its inception as a fund centre, in the early 1970’s, Luxembourg has turned out to be a platform for funds meant for the “public”, this latter term including virtually all conceivable types of investors. This strong tradition is enshrined in its primary fund legislation, the law of 22 December 2002 on undertakings for collective investment (the “2002 Law”), soon to be fully replaced by an entirely new set of legislation implementing the UCITS IV Directive of 2009 and modernising certain aspects of the 2002 Law: the law of 17 December 2010 on undertakings for collective investment (the “Fund Law”) and two CSSF Regulations of the same date. While the 2002 Law remains into force until 1 July 2012 to allow for certain aspects of the transition of existing fund structures, new structures will be ruled, at the latest as from 1 July 2011, by the Fund Law.

The rules described in this guide are based on the Fund Law.

This essential piece of legislation remains, true to the original Luxembourg UCITS law of 1988, divided in several “parts”.

The first part of the Fund Law regulates funds which are UCITS compliant, that is that they are open-ended and comply with the requirements set by the EU legislator in terms of asset eligibility, risk spreading requirements, prohibition of leveraging and short selling, existence of a strong risk management process, all under the control and responsibility of a highly regulated and supervised management company, in Luxembourg or elsewhere in the EU. These UCITS funds, sold to the public and Luxembourg as “Part I Funds”.

A second part of the Fund Law deals with those funds (known as “Part II funds”) which are excluded from the UCITS regime for reasons which are diverse. Usually, this means that either their investment policy or their risk spreading is not compliant with that foreseen by UCITS; or they use leverage to an extent not permitted by UCITS rules; or they do not actively market their shares to the public in the EU; or finally they are not opened for redemptions as often as the UCITS regime would require.

The well-informed investor regime

Next to the retail regime of the Fund Law exists a fund regime tailored to fit the need of institutional investors. Created by the law of 13 February 2007 on Specialised Investment Funds (“SIF”), this regime (“the SIF Law”) allows a rapid time-tomarket of funds investing into all types of existing assets, with flexible restrictions in terms of risk diversification.

Because of these features, SIFs are by law reserved to “well-informed investors”, i.e. either institutional, large corporate or other investors (including individuals) who are ready to testify that they adhere to the status of well-informed investors and who invest a minimum of EUR 125,000 in the SIF or, alternatively, obtain an assessment from a regulated entity certifying their experience and knowledge in assessing the risk of their investment.