Circular 25/901 also applies to undertakings for collective investment subject to Part II of the law of 17 December 2010 on undertakings for collective investment in transferable securities, as amended (“Part II UCIs” and the “2010 Law” respectively). This article concentrates on the changes to the regime applicable to Part II UCIs.
Scope
The circular applies to all Part II UCIs other than closed-ended funds or compartments authorised before entry into force, or Part II UCIs with the ELTIF, MMF, EuVECA or EUSEF label.
Investment limits
The 2010 Law provides that Part II UCIs are funds set up with the intention of spreading risk. However, as noted in the circular, the concept of risk spreading is not defined. Previously its interpretation was based on quantifiable investment limits expressed as a maximum percentage applied to a predefined calculation basis (in principle the assets or commitments to subscribe). A different calculation basis may be used if justified to and accepted by the CSSF.
Investment limits in Part II UCIs are now to be applied based on investor sophistication. For Part II UCIs reserved to well-informed or professional investors we refer you to the limits set out in Part II of our series of articles (relating to SIFs).
For those Part II UCIs which may be marketed to unsophisticated retail investors the following investment limits apply:
- Up to 25% of its assets or commitments to subscribe may be invested in:
- One and the same entity or person, subject to the same existing exemption for securities issued or guaranteed by an OECD Member State or certain other authorities or institutions.
- One and the same undertaking for collective investment or other investment vehicle subject to the same existing exemption for UCIs that apply the same or stricter risk spreading.
- One and the same other assets. Assets whose economic viability is closely linked such that they form a single economic entity are not considered distinct assets.
- Short sales may not result in the fund or compartment holding a short position in securities issued by the same entity representing more than the 25% limit referred to above.
- When using financial derivative instruments, the fund must ensure comparable risk-spreading through appropriate diversification of underlying assets. Counterparty risk not cleared by a clearing institution or mitigated by collateral must be limited having regard to counterparty quality.
- Up to 50% of its assets may be invested in one and the same infrastructure investment. An infrastructure investment may consist in the acquisition of such asset or the exposure to it.
Each compartment of an undertaking for collective investment may be considered as a distinct undertaking for the purposes of the foregoing limits. This principle now extends to compartments of other investment vehicles and securitisation undertakings, provided segregation of liabilities is ensured.
It is now expressly provided that when using intermediary vehicles, investment limits apply to the underlying investments, not the vehicles themselves.
The CSSF may grant further derogations based on duly motivated justification or require compliance with additional investment restrictions for specific investment policies.
Ramp-up and wind-down periods: new clarity
The circular introduces detailed provisions on ramp-up and wind-down periods not previously addressed. We refer you to Part II of our series of articles as the same provisions apply to SIFs.
Borrowing limits
Where securities of the Part II UCI or a compartment thereof are reserved for well-informed or professional investors, no borrowing limits apply; such funds may set their own maximum borrowing limit.
If the fund is marketed to unsophisticated retail investors, borrowing must, in principle, not exceed 70% of the assets or commitments to subscribe.
The circular clarifies that temporary borrowing arrangements that are fully covered by capital commitments are, in general, not regarded as borrowings. The same applies, in principle, to any debt security issued by the fund whose income is linked to the performance of the assets in the portfolio.
The maximum borrowing limits must be set out in the offering document.
CSSF Circular 02/80 which set out borrowing limits for certain types of Part II UCIs and the provisions of Circular IML 91/75 applicable to Part II funds, including provisions relating to borrowing, are repealed.
Techniques and collateral management
Part II UCIs may use techniques to manage their portfolio more efficiently. The guidance in the circular on such use applies equally to SIFs and Part II UCIs. Please refer to Part II of our series of articles.
The circular repeals CSSF circular 08/356 on the use by UCIs of techniques and instruments relating to transferable securities and money market instruments.
Enhanced transparency requirements
The same transparency rules applicable to the SIF apply to Part II UCIs that are not marketed to unsophisticated retail investors. The circular however provides for extensive additional disclosure requirements when a fund is marketed to unsophisticated retail investors:
Where a fund intends to invest in undertakings for collective investment or other investment vehicles, this possibility must be expressly mentioned in the offering document. Where the fund is marketed to unsophisticated retail investors and intends to invest more than 25% of its assets or commitments to subscribe in such entities it must expressly provide for this in the offering document specifying that a risk-spreading comparable to or stricter than that provided in the section on Investment Limits above is ensured at the level of the target entity.
If the fund invests significantly in private investments, the offering document must contain a warning stating that the investment in the fund may imply a high level of risk, that it is only suitable for persons able to bear that risk, and that the average subscriber is advised to invest only a portion of their sums allocated to long term investments. If, in addition, the life of the fund or the period during which the investors cannot exit, exceeds or could exceed ten years, the offering document must include a warning that the fund may not be suitable for investors that are unable to maintain a commitment over such period of time.
Extensions
See Part I of our series of articles.
Conclusion
The demand for exposure to private assets by the retail sector continues to mean the Part II UCI is a relevant and needed tool. As such this comprehensive modernisation of the regulatory framework and bringing together of the various rules in one text is to be welcomed. The different rules applicable to those funds offered to professional investors and those offered to non sophisticated retail investors shows a sensible and practical approach by the CSSF to authorising and supervising these funds going forward.
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