CSSF Sets Out More Restrictive Policy On UCITS Investment In Non-UCITS Funds

Luxembourg's Financial Sector Supervisory Authority (CSSF) has announced changes to its policy regarding investment by UCITS funds in non-UCITS undertakings for collective investment, amending the guidance contained in its Frequently Asked Questions document addressing the law of December 17, 2010 on undertakings for collective investment.

In the interests of convergence at EU level regarding the UCITS regime, the CSSF now says that UCITS may no longer invest in other UCIs and those that have done so are required to divest their holdings as soon as possible, unless the eligibility of each target fund has been confirmed specifically through case-by-case analysis.

Point 1.4 of the FAQs previously stated that non-UCITS ETFs were eligible investments for UCITS funds if they effectively complied with all criteria of Articles 2(2) and 41(1)(e) of the 2010 legislation, event if the offering documents of non-UCITS ETFs contain provisions regarding investment that are not equivalent to the requirements applicable to UCITS.

However, the CSSF says that given the specific characteristics of each non-UCITS ETF, merely the existence of a system of compliance control, or written confirmation from the ETF or the manager of the fund's eligibility, is no longer acceptable.

The regulator says that for a non-UCITS ETF to be accepted for investment by a UCITS, an eligibility analysis must be carried out in each case, and the UCITS must continuously monitor that the investment rules applied by the ETF are equivalent to those applicable to UCITS.

The CSSF emphasises that to be eligible under article 50(1)(e) of the UCITS directive, non-UCITS funds must be prohibited from investing in illiquid assets such as commodities and real estate, in conformity with Article 1(2)(a) of the UCITS directive.

They must also be bound by rules on asset segregation, borrowing, lending, and uncovered sales of transferable securities and money market instruments that are equivalent to the requirements under article...