CSSF Press Release 18/02 – Change of regulatory practice

Investment by UCITS in other UCIs including non UCITS-ETFs

On 5 January 2018 the CSSF announced in a press release (the “Press Release”) that they are rescinding their standing position in relation to the assessment of the eligibility criteria of non-UCITS open-ended ETFs and other UCIs (the “Target UCI”) in accordance with Article 41(1)(e) of the Luxembourg Law of 17 December 2010 relating to undertakings for collective investment (the “2010 Law”).

The CSSF’s new position (the “New Position”) in the Press Release provides that compliance with the eligibility criteria for a Target UCI (detailed below) needs to be assessed on the basis of the restrictions contained in the Target UCI’s constitutional documents. Mere compliance in practice by the Target UCI is no longer sufficient.

To be an eligible investment for a UCITS, a Target UCI has to comply with eligibility criteria laid down in Article 41(1)(e) of the 2010 Law which include the following:

1. (i)    It must only invest in UCITS eligible assets;
2. (ii)  It must be subject to equivalent rules on segregation, borrowing, lending and uncovered short selling, and
3. (iii) Its constitutional documents must restrict investments in other funds to 10% of its net assets.

The CSSF previously considered, in the context of non-UCITS ETFs, that notwithstanding the content of the Target UCI’s constitutional documents, its units could be deemed, on a case-by-case basis, as an eligible investment for a UCITS if (i) the Target UCI effectively complies with the above criteria and (ii) a continuous compliance monitoring is ensured. On this basis, UCITS were permitted to invest, inter alia, in US ETFs whose constitutive documents permitted borrowings, investments in money market funds and reinvestment of cash collateral in money market funds to such an extent that their constitutive documents did not necessarily comply with the aforementioned eligibility criteria. This is now no longer permitted.

New investments in Target UCIs that are not compliant with the New Position are no longer allowed from the date of the Press Release.

As from the date of the Press Release, those UCITS having units of Target UCIs in their portfolios which are not compliant with the New Position shall divest them as soon as possible taking into account the best interests of the investors. The CSSF announced that they will contact the managers of those UCITS by 31 March 2018 to check compliance with the New Position.

To reflect the foregoing, the CSSF has revised their Frequently Asked Questions (“FAQ”) concerning the 2010 Law by removing the previous FAQ 1.4 and publishing a revised version 5 of the FAQ dated 5 January 2018.

For the avoidance of doubt, the foregoing does not apply to investments in structures that have characteristics such that (for being closed-ended funds for example) they do not qualify as UCI under the UCITS rules but as traditional issuers whose shares qualify as “transferable securities” under the UCITS rules (and not as units of UCIs). This is not frequently the case, however, in relation to traditional US ETFs.