UCITS IN LUXEMBOURGEDITION 2014

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UCITS IN LUXEMBOURG

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TABLE OF CONTENTS

INTRODUCTION 7

UCITS UNDER THE 2010 LAW 11

1. DEFINITION 13

2. FORMS OF ORGANISATION 132.1 FCP 132.2 SICAF / SICAV 14

3. INVESTMENT POLICIES 153.1 General investment principles 153.2 Diversification – Investment limits 203.3 Borrowing and granting loans 21

4. MANAGEMENT COMPANIES 224.1 General requirements 224.2 Risk management process 254.3 Management company passport 26

5. DEPOSITORY BANK 29

6. LIABILITY OF MANAGEMENT COMPANY AND DEPOSITORY 30

7. NET ASSET VALUE CALCULATION 30

8. PROSPECTUS AND FINANCIAL REPORTS 31

9. KEY INVESTOR INFORMATION DOCUMENT 329.1 Regulatory framework 329.2 Form 329.3 Content 329.4 Timing, availability and responsibility 339.5 CSSF 33

10. SIMPLIFIED NOTIFICATION PROCEDURE 33

11. MASTER-FEEDER STRUCTURES 3511.1 Feeder and master UCITS 3511.2 Master-feeder application file 3611.3 Liquidation, merger or division of the master UCITS 3711.4 Depositories and auditors 3711.5 Compulsory information and marketing documentation 3811.6 Competent authorities 38

12. MERGERS 3812.1 Introduction 3812.2 Merger techniques 3912.3 Merger procedure 4012.4 Effect of the merger 42

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13. AUTHORISATION AND SUPERVISION 42

14. STOCK EXCHANGE LISTING 42

15. ADDITIONAL CONSIDERATIONS 4215.1 Umbrella funds 4315.2 Fiscal Regulation 4515.3 Corporate matters 4515.4 Confidentiality of investor information and AML regulation 46

16. TAX REGIME 4616.1 Funds 4616.2 Management Company 4716.3 Investors 4816.4 Tax savings directive 4816.5 Value added tax (VAT) 48

CONCLUSION 51

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INTRODUCTION

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Luxembourg was first in implementing directive 2009/65/EC1 on undertakings for collective investment in transferable securities (“UCITS IV Directive”) into national law, underlining the competitiveness of the Luxembourg UCITS “product” in comparison to other investment products within and outside of the EU.

The Luxembourg law of 17 December 2010 on undertakings for collective investment implementing the UCITS IV Directive in Luxembourg entered into force on 1 January 2011 (the “2010 Law”) and was published in the Mémorial A on 24 December 2010.

The 2010 Law replaced most of the provisions of the law of 20 December 2002 on undertakings for collective investment, as amended (the “2002 Law”) on 1 July 2011 and entirely replaced the 2002 Law on 1 July 2012.

The 2010 Law has been amended by the Luxembourg law of 12 July 2013 on Alternative Investment Funds Managers.

The 2002 Law implemented directives 2001/107/EC and 2001/108/EC into Luxembourg law, and entirely replaced the law of 30 March 1988, as amended (the “1988 Law”) as of 13 February 2007.

The 1988 Law, which implemented directive 85/611/EEC on the co-ordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities into Luxembourg law, formed the basis for the Luxembourg fund industry.

The supervisory authority for the financial sector (Commission de Surveillance du Secteur Financier, the “CSSF”) issued two regulations, which supplement the provisions of the 2010 Law.

CSSF regulation N° 10-4 implements directive 2010/43/EC2 on organisational requirements, conflicts of interest, conduct of business, risk management and the contents of agreements between depositories and management companies (“Regulation N° 10-4”).

CSSF Regulation N° 10-5 implements directive 2010/44/EC3 on certain provisions concerning fund mergers, master-feeder structures and notification procedures (“Regulation N° 10-5”).

The CSSF has issued various circulars, regulations and press releases providing further guidance on the implementation of the 2010 Law into national law.

Commission regulations (EU) No 583/2010 and No 584/2010 both of 1 July 2010 provide further information on the key investor document, including key investor information and conditions to be met when providing key investor information or the prospectus in a durable manner other than paper or by means of a website and information on the form and content of the standard notification letter and UCITS attestation.

1 OJ L 302/32, 17/11/2009. Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coor-dination of laws, regulations and administrative provisions relating to undertakings for collective investments in transferable securities (UCITS).

2 Implementing directive 2009/65/EC.3 Implementing directive 2009/65/EC.

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The Luxembourg legislator implemented the UCITS IV Directive into Luxembourg law in a manner that can be described as flexible and as far reaching as possible. By streamlining cross-border marketing and distribution of UCITS within the EU, reducing cost and administrative burden due to granting the EU passport to UCITS managers as well as facilitating cross-border mergers and master-feeder structures, the 2010 Law has strengthened the Luxembourg and European market for UCITS. Further non-UCITS IV related improvements to the 2002 Law were adopted to enhance the general legal framework applicable to the Luxembourg fund industry.

Luxembourg’s early adoption and implementation of the UCITS directives in 1988, 2002 and again in 2010 is evidence of the Grand Duchy’s strong commitment to EU investment funds, and the overall importance of the financial services industry to Luxembourg.

As was the case with the 1988 Law and the 2002 Law, the scope of the 2010 Law is not limited to UCITS.

Luxembourg also transposed the provisions of directive 2007/16/EC as regards the clarification of certain definitions by setting out basic criteria as an aid in assessing whether or not a class of financial instruments is covered by the various definitions set out in the UCITS directives 2001/107/EC and 2001/108/EC into Luxembourg law by a Grand-Ducal regulation of 8 February 2008, which mirrors the provisions of the directive perfectly.

In February 2011 the CSSF launched a new section on its website with information on investment funds in Luxembourg, including information on UCITS IV.

The 2010 Law applies to UCITS-type investment funds (covered by Part I of the 2010 Law) and to its compartments and to other investment funds, which are not eligible for treatment as UCITS (non-UCITS). (Part II of the 2010 Law) For clarification purposes, the term UCITS as used in the 2010 Law refers to the UCITS fund as a whole as well as its compartments.

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UCITS UNDER THE 2010 LAW

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Part I of the 2010 Law applies exclusively to UCITS-type investment funds, and reflects the provisions of the UCITS IV Directive.

1. DEFINITION

The 2010 Law defines UCITS as undertakings (i) the sole object of which is the collective investment in transferable securities4 or in other liquid financial assets set out in article 41(1), of capital raised from the public, and which operate on the principle of risk-spreading, and (ii) the shares/units of which are, at the request of holders, repurchased directly or indirectly out of those undertakings’ assets.

UCITS are prohibited from transforming themselves into non-UCITS.

2. FORMS OF ORGANISATION

The 2010 Law permits the formation of UCITS organised either under the law of contract as collective investment funds, managed by a management company (fonds communs de placement or “FCP”) or under statute as incorporated investment companies (société d’investissement à capital variable).

2.1 FCP

FCPs are undivided collections of transferable securities and/or other liquid financial assets mentioned in article 41(1) of the 2010 Law made up and managed according to the principle of risk-spreading on behalf of joint owners, who are liable only up to the amount contributed by them and whose rights are represented by units intended for placement with the public by means of a public or private offer.

FCPs have no legal personality and must rely solely on their management company to transact their affairs. The management company of a FCP constituted as an UCITS must comply with the provisions of chapter 15 of the 2010 Law.

The net assets of a FCP may not be less than EUR 1,250,000, which minimum may be reached within a period of six months following the FCP's initial authorisation. The 2010 Law also provides that a CSSF regulation may increase this minimum figure up to EUR 2,500,000.5

4 Defined in section 3.1.1 below.5 No such regulation exists at this time.

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2.2 SICAF / SICAV

An investment fund organised as an investment company may have fixed authorised capital (société d’investissement à capital fixe or “SICAF”), or variable capital (société d’investissement à capital variable or “SICAV”).

An UCITS organised as a SICAV is defined as a public limited liability company (société anonyme) organised under Luxembourg law (i) whose exclusive object is to invest its funds in transferable securities and/or in other financial assets mentioned in article 41(1) of the 2010 Law in order to spread investment risks and to ensure for its shareholders the benefit of the management of their net assets, (ii) whose shares are intended to be placed with the public by means of a public or private offer and (iii) whose articles of incorporation provide that the amount of its actual capital shall at all times be equal to the SICAV's net asset value.

An UCITS organised as a SICAF is a company which may be, in principle, incorporated under any one of the forms of commercial companies provided for under the Luxembourg company law of 10 August 1915, as amended (the “1915 Law”) (i) whose exclusive object is to invest its funds in transferable securities and/or other liquid financial assets mentioned in article 41(1) of the 2010 Law in order to spread investment risks and to ensure for its shareholders the benefit of the management of their net assets and (ii) whose shares are intended to be placed with the public by means of a public or private offer provided that the words “société d’investissement” (investment company) appear on all of the SICAF's deeds, announcements, publications, letters and other documents.

By way of example, a SICAF may be created as a Luxembourg limited partnership (société en commandite par actions), the form of which may give to the manager/promoter more effective control over the fund than would be the case if a FCP, SICAV or another corporate form were used.

The articles of incorporation of a SICAV and any amendment thereto must be recorded in a notarial deed drawn up in French, German or English. A deed drawn up in English is no longer required be translated into an official language under the provisions of the 2010 Law.

A SICAV/SICAF that has not designated an authorised management company must have an initial capital of at least EUR 300,000 at the date of its authorisation, which has to reach an amount of EUR 1,250,000 within six months following authorisation. The figures may be increased to EUR 600,000 and EUR 2,500,000 respectively by CSSF regulation.6

If the net asset value of a FCP or SICAV/SICAF falls below 2/3 or 1/4 of the legal minimum capital required, steps must be taken either to (i) submit the question of dissolution of the SICAV/SICAF to its shareholders or (i) compellingly dissolve the FCP.

6 Idem.

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3. INVESTMENT POLICIES

Probably the most significant restrictions from the perspective of fund management are those outlining permissible fund investment policies.

Directive 85/611/EEC allowed for collective investment undertakings investing in transferable securities to be freely marketed throughout Europe. Directive 2001/108/EC extended this freedom to collective investment undertakings investing in other types of financial assets. Directive 2001/108/EC also sets out new investment limits to take account of the new instruments that are allowed for investment, the growth of new portfolio management techniques such as index funds7 and funds-of-funds and the new risks that may arise. Directive 2007/16/EC provides further clarification on the definition of certain financial instruments in which an UCITS may invest.

3.1 General investment principles

Investments of an UCITS fund must consist exclusively of:

(i) transferable securities and money-market instruments dealt in on a regulated market in a Member State; and/or

(ii) transferable securities and money-market instruments traded in another market in a Member State which is regulated, operates regularly and is open to the public; and/or

(iii) transferable securities and money-market instruments admitted to official listing on a stock exchange in a non-EU country (or dealt in regularly in another regulated market which operates regularly and is recognised and open to the public), provided the choice of stock exchange or market has been provided for in the articles of incorporation or management regulations of the UCITS; and/or

(iv) recently issued transferable securities and money-market instruments, provided that the terms of issue contain an undertaking that application will be made for admission to official exchange listing or for trading in another regulated public market, and such admission is secured within one year of issue; and/or

(v) shares/units of UCITS authorised under the UCITS IV Directive or of other undertakings for collective investment within the meaning of said directive provided certain conditions and time limits are met; and/or

(vi) deposits with credit institutions which are repayable on demand or the right to be withdrawn and mature in no more than 12 months; and/or

(vii) financial derivative instruments, including equivalent cash-settled instruments dealt in on a regulated market and/or financial derivative instruments traded over–the-counter (“OTC”) provided certain conditions are met; and/or

(viii) money-market instruments other than those traded on a regulated market provided that the issue or issuer of such instruments is itself regulated for the purpose of protecting investors and savings and provided they are issued or guaranteed by certain categories of issuers.

Each compartment of a multi-compartment UCITS must be regarded as a separate UCITS regarding investment policies.

7 The CSSF no longer assesses the eligibility of each index under Luxembourg laws and regulations. Instead, the CSSF, investment funds or investment fund management companies have to assess the eligibility of any new index and to file the procedure so used with the CSSF. The CSSF may proceed with an ad-hoc assessment of the eligibility of certain indexes.

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Transferable securities

The term transferable securities is defined in article 1(34) of the 2010 Law as (i) shares in companies and other securities equivalent to shares in companies, (ii) bonds and other forms of securitised debt, (iii) any other negotiable securities which carry the right to acquire any such transferable securities by subscription or exchange.

Directive 2007/16/EC clarifies the definition of a transferable security by setting out, inter alia, certain criteria, which if met by a financial instrument mean it can be considered as a transferable security and confirms that, subject to certain criteria being met, shares/units of closed-ended funds can also be considered as transferable securities. This directive was transposed into Luxembourg law by a Grand-Ducal regulation of 8 February 2008 (the “Eligible Assets Regulation”)8, which imposes the conditions of eligibility for transferable securities for investment by UCITS in article 2(1) of the 2010 Law.

3.1.2 Money-market instruments

Money-market instruments are defined as instruments normally dealt on the money market which are liquid and which have a value that can be accurately determined at any time. In derogation from the general rules, an UCITS may invest up to 10% of its net assets in transferable securities and money-market instruments other than those set out in article 41(1) of the 2010 Law.

Directive 2007/16/EC set out the factors used to determine the eligibility of certain categories of money-market instruments dealt in on a regulated market and whether and under which conditions certain categories of money-market instruments fall within the scope of article 41(2)(a) 2010 Law.

Articles 3 and 4 of the Eligible Assets Regulation clarify the criteria “normally dealt in on the money market”, “a value which can be determined at any time” and “liquid” with which money-market instruments must comply in order to become eligible assets.9 Article 5 further clarifies the meaning of “money-market instruments the issue or the issuer of which are themselves regulated for the purposes of protecting the investors or savings”.

3.1.3 Share/units of other funds

When considering whether an UCITS may invest in shares/units of an UCI (other than UCITS) it must make certain that such other UCIs are subject to supervision considered by the CSSF to be equivalent to that laid down in Community law.

Funds domiciled in the EU, USA, Canada, Japan, Hong Kong and Switzerland would all be subject to supervision considered by the CSSF to be equivalent.

On 23 November 2012, the CSSF published a press release concerning the publication on 20 November 2012 of the opinion by ESMA with regard to article 50 (2) (a) of UCITS IV Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities.

8 Published in Mémorial A, No. 19 of 19 February 2008.

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Article 50 (2) (a) of the UCITS IV Directive was transposed into Luxembourg law by article 41 (2) (a) of the 2010 Law and concerns the possibility for UCITS to invest up to ten percent (10%) of their net assets in securities which do not comply with the criteria mentioned at Article 41 (1) of the 2010 Law (“trash ratio”).

Further to the publication of the opinion by ESMA, in circumstances where any UCITS has invested up to 10% of its net assets in open-ended undertakings for collective investment that are regulated and submitted to an equivalent supervision, but which do not respect the conditions of article 41 (1) (e) of the 2010 Law (i.e., which do not provide a level of protection for unitholders which is equivalent to that of a UCITS, and whose business is reported in half-yearly and annual reports to enable an assessment of its assets and liabilities, income and operations over the reporting period, etc.), such UCITS were required to remedy the situation and perform some portfolio adjustments, taking into account the best interests of their investors at the latest by 31 December 2013.

Since 23 November 2012, the CSSF has also prohibited new investments into open-ended undertakings for collective investment which do not comply with the requirements of article 41 (1) of the 2010 Law within the framework of the trash ratio.

3.1.4 Financial derivative instruments

An UCITS shall ensure that its global exposure to derivative instruments does not exceed the total net value of its portfolio. The risk exposure to a counterparty of the UCITS in an OTC derivative transaction may not exceed 10% of its net assets when the counterparty is a credit institution within the EU or subject to equivalent prudential rules or 5% of its net assets in other cases.

On 30 May 2011, the CSSF issued circular 11/512 replacing CSSF circular 07/308 setting out the rules of conduct to be adopted by UCITS regarding the use of financial derivative instruments. The purpose of the rules set out in this circular is to ensure investor protection by ensuring that the risks related to financial derivative instruments are monitored, measured and managed at all times.

The Eligible Assets Regulation further clarifies certain definitions in relation to financial derivative instruments, including “fair value” and “reliable and verifiable valuation”.

Clarification is also given in the Eligible Assets Regulation to the definition of financial indices as underlying assets of financial derivative instruments.

3.1.5 Additional investment principles

In addition, UCITS organised as SICAVs/SICAFs may acquire movable and immovable property, which is essential to the pursuit of their business.

UCITS may hold ancillary liquid assets. According to CSSF circular 91/75, the term liquid assets, includes cash, short-term bank deposits and regularly traded money-market instruments with a residual term not exceeding 12 months. “Ancillary” in this context, means that liquid assets may not in themselves constitute an investment object.

UCITS may not acquire precious metals or certificates representing precious metals.

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3.1.6 Techniques and instruments

The 2010 Law permits an UCITS to employ “techniques and instruments relating to transferable securities and money-market instruments” under the conditions and within the limits laid down by the CSSF provided that such techniques and instruments are used for the purpose of “efficient portfolio management”. When these transactions concern the use of derivative instruments the conditions and limits must be in conformity with the 2010 Law. Under no circumstances shall these operations cause the fund to diverge from its investment objectives as laid down in the articles of incorporation, management regulations or prospectus.

Directive 2007/16/EC sets out further criteria with which such techniques and instruments must comply in order to be suitable for UCITS. The directive provides that such techniques must be economically appropriate in that they are realised in a cost effective way. They must further be entered into with the aim of (i) reduction of risk; and/or (ii) reduction of cost; and/or (iii) generation of additional capital or income for the UCITS with a level of risk which is consistent with the risk profile of the UCITS and the risk diversification rules applicable to UCITS. The risks of such techniques and instruments must be adequately captured by the risk-management process of the UCITS.

Directive 2007/16/EC as implemented in Luxembourg by the Eligible Assets Regulation is further completed by CSSF circular 08/356 of 4 June 2008 as amended by CSSF circular 11/512 of 30 May 2011, which clarifies the conditions and limits under which UCITS are authorised to employ techniques and instruments relating to transferable securities and money-market instruments. The techniques and instruments covered by the circulars are: (i) securities lending transactions; (ii) sale with right of repurchase transactions (“opérations à réméré”) and (iii) reverse repurchase / repurchase transactions (“opérations de prise/mise en pension”). The circulars detail the rules relating to each of the three techniques and instruments, including the publication requirements involved, as well as the limitation of counterparty risk and receipt of an appropriate guarantee.

Furthermore, on 18 December 2012, ESMA published “guidelines on exchange-traded funds and other UCITS issues” (“ETF Guidelines”).

The ETF Guidelines purport to strengthen the investor protection in relation to the specific types of UCITS referred to in these guidelines or the UCITS using the abovementioned techniques. To that extent, the ETF Guidelines require that specific information be indicated in the documentation relating to UCITS ETFs, index-tracking UCITS, and UCITS entering into over-the-counter derivative transactions and efficient portfolio management (“EPM”) techniques. In addition, the ETF Guidelines set out the criteria for financial indices in which the UCITS may invest.

On 18 February 2013, the CSSF published a circular (CSSF circular 13/559), purporting to implement such guidelines in Luxembourg. This circular only provides an outline of the key rules contained in said guidelines.

The following points are to be highlighted:

• When using techniques and instruments, UCITS must disclose this fact to their investors, and provide a detailed description of the risk involved in these activities, including the counterparty risk and potential conflicts of interest, and any impact on the performance of the UCITS.

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• In the event of securities lending, UCITS must ensure that they are able at any time to recall securities that have been lent out or to terminate any securities lending agreement into which they have entered.

• All revenues originating from EPM techniques, net of direct and indirect operation costs (including, for instance, the securities lending agent fees), should be returned to the UCITS only. It is permitted to deduct fees paid to lending agents from the gross revenues arising from EPM techniques, provided that these fees are a normal compensation for the services rendered in connection with the use of EPM techniques. In addition, the payment of such fees and any other direct or indirect operational costs and fees incurred in relation to EPM techniques must be disclosed in the annual report of the UCITS.

• A UCITS entering into a reverse repurchase agreement should ensure that it is able at any time to recall the full amount of cash or to terminate the agreement on either an accrued basis or a mark-to-market basis. In case of a repurchase agreement, the UCITS must ensure that it is able at any time to recall any securities subject to that agreement or to terminate the agreement into which it has entered.

• Where a UCITS enters into a total return swap (TRS) or invests into other financial instruments having similar characteristics, it must comply with the investment restrictions set out in articles 52 to 56 of the UCITS IV Directive.

• In case of management of collateral for OTC financial derivative transactions and use of EPM techniques, all collateral received must satisfy the criteria listed in the guidelines, such as the need to have (i) highly liquid collateral, which are traded on a regulated market or a multilateral trading facility with transparent pricing, (ii) collateral issued by an issuer with a high credit quality, and (iii) collateral which is sufficiently diversified in terms of country, markets and issuers.

• When investing into commodity indices, the UCITS must ensure that those indices consist of different indices. Moreover, a UCITS cannot invest in a financial index which rebalances on an intra-day or daily basis.

• Where the counterparty to a financial derivative instrument can decide on the composition of the underlying or the UCITS’ investment portfolio without the prior consent of the UCITS management company, such counterparty will be considered as having discretion over the composition of the underlying. Therefore, the agreement between the UCITS and the counterparty will be considered as an investment management delegation arrangement and should comply with the UCITS requirements on delegation. This is not the case where the counterparty merely offers advice to the UCITS management company on the composition of the underlying or the UCITS’ investment portfolio and all investment decisions are to be expressly approved by the UCITS management company.

• Tripartite agreements are permitted in the context of the management of collateral for OTC derivative transaction and EPM techniques as long as there is no title transfer and the third party custodian is subject to prudential supervision and not related to the collateral provider.

The ETF Guidelines supersede the guidelines on eligible assets published in March 2007 and updated in September 2008 by CESR.

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3.2 Diversification – Investment limits

With respect to portfolio diversification, the 2002 Law implemented the most permissive requirements of directives 2001/107/EC and 2001/108/EC, taking advantage of the various dispensations from these rules permitted by the directive.

3.2.1 Transferable securities and money-market instruments

In general, an UCITS fund may not invest more than 10% of its net assets in the transferable securities or money-market instruments of a single issuer, subject to an additional restriction that a fund may not invest more than 40% of its net assets in the transferable securities and money-market instruments of issuers in which it has invested more than 5% of its net assets. The 10%-limit may be raised to 35% for transferable securities or money-market instruments issued or guaranteed by a Member State or its instrumentalities, by a non-EU country or by a public international body of which one or more Member States are members. Furthermore, the 10% limit may be raised to a maximum of 25% for certain types of debt securities issued by a credit institution whose registered office is situated in a Member State and which is subject to public supervision (generally, securities whose terms provide for investment of proceeds in net assets sufficient to cover the liabilities created thereunder). If an UCITS invests more than 5% of its net assets in such debt securities issued by one issuer, the total value of such investments may not exceed 80% of the value of the UCITS’ net assets.

The 10% limit may be raised to 20% for investments in shares or debt securities issued by the same entity when the investment policy of the UCITS is to replicate the composition of a certain stock or debt securities index. The relevant index must be recognised as having a sufficiently diversified composition,9 be an adequate benchmark10 and be published in an appropriate manner11. The 20%-limit may be raised to 35% for a single issuer in exceptional market circumstances. The CESR Guidelines and directive 2007/16/EC provide that an UCITS is deemed to replicate the composition of a certain index if its only aim is to replicate the composition of the index.12

The 2010 Law also provides that the CSSF may permit an UCITS to invest up to 100% of its net assets in transferable securities or money-market instruments issued or guaranteed by a single Member State or its instrumentalities, by a non-EU country or by a public international body of which one or more Member States are members. Such authorisation may be granted only if the CSSF considers that the investors of the UCITS enjoy comparable protections to those enjoyed by investors in UCITS complying with the general diversification principles. There is an additional requirement that an UCITS seeking this special treatment invest its net assets in no fewer than six “issues” (or “series”) of sovereign securities, with the securities of any one “issue” limited to no more than 30% of the fund’s net assets. The policies described above are among those that must all be expressly authorised in the fund’s articles of incorporation or management regulations and special disclosures concerning these practices must be made in prospectus.

9 Directive 2007/16/EC provides in article 12(2) that the reference to an index whose composition is sufficiently diversified shall be understood as a reference to an index that complies with the risk diversification rules of article 22a of Directive 85/611/EEC.

10 Directive 2007/16/EC provides that this shall be understood as a reference to an index whose provider uses a recognised methodology which generally does not result in the exclusion of a major issuer of the market to which it refers.

11 I.e. it is accessible to the public and the index provider is independent from the index-replicating UCITS though this latter condition shall not preclude index providers and the UCITS forming part of the same economic group provided that effec-tive arrangements for the management of conflicts of interest are in place.

12 As confirmed in article 12 of the Eligible Assets Regulation.

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3.2.2 Shares/units of other undertakings for collective investment

An UCITS may invest no more than 20% of its net assets in shares/units of a single UCITS or other undertaking for collective investment. For the purposes of the application of this limit, each compartment of a multiple compartment fund is to be considered as a distinct issuer on the condition that the principle of segregation of the commitments of each compartment to third parties is ensured, i.e. that the net assets of a particular compartment may only stand security for the debts and obligations of that compartment. No more than 30% of an UCITS net assets may be invested in undertakings for collective investment that are not UCITS.

Where the fund whose shares/units are to be acquired is an affiliate of the acquiring fund, the 2010 Law imposes the following additional conditions: (i) that no subscription or redemption fees are charged in respect of such investment, (ii) that the prospectus of the UCITS indicates the maximum level of management fees payable by the UCITS and by any other undertaking for collective investment in which it intends investing and (iii) that the annual report indicates the maximum percentage of management fees borne by the UCITS and by any undertaking for collective investment in which it invested.

3.2.3 Deposits

UCITS may not invest more than 20% of its net assets in deposits made with the same body.

3.2.4 General

As a general rule, UCITS may not acquire any shares, which would enable them, either by themselves or together with affiliates, to exercise significant influence over the management of an issuing body.

Moreover, UCITS may acquire no more than 10% of the non-voting shares of the same issuer, 10% of the debt securities of the same issuer, 25% of the shares/units of the same undertaking for collective investment, or 10% of money-market instruments issued by the same issuer. These limits are waived in the case of securities issued by sovereign issuers, or for certain “intermediary” investment vehicles required for the purpose of investing in the securities of issuers located in a particular country or in the case of shares held by one or more investment companies in the capital of subsidiary companies exercising uniquely for their own profit, management, advisory or marketing activities in the country where the subsidiary is established relating to the repurchase of shares/units at the request of investors.

UCITS may not combine investments in transferable securities or money-market instruments issued by, deposits made with and/or exposures arising from OTC derivative transactions undertaken with, a single body in excess of 20% of its net assets.

3.3 Borrowing and granting loans

UCITS may only borrow the equivalent of (i) in the case of investment companies, no more than 10% of its net assets or in case of a FCP, no more than 10% of the value of the fund provided in each case that the borrowing is on a temporary basis, and (ii) no more than 10% of its net assets in the case of an investment company provided that the borrowing is to make possible the acquisition of immovable property essential for the direct pursuit of its business. In this case, these borrowings and those referred to in (i) may not in any case in total exceed 15% of their net assets.

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UCITS may however acquire foreign currency by means of a back-to-back loan.

UCITS are prohibited from granting loans or acting as a guarantor on behalf of third parties. This will not prevent the UCITS from acquiring transferable securities, money-market instruments or other financial instruments, which are not fully paid. UCITS may not carry out “uncovered sales” of transferable securities, money-market instruments or other financial instruments.

4. MANAGEMENT COMPANIES

4.1 General requirements

Chapter 15 of the 2010 Law deals with management companies managing UCITS. The 2010 Law makes the access to the activity of a management company of UCITS subject to the prior approval of the CSSF. CSSF circular 12/546 details the conditions with which UCITS management companies must comply in order to obtain and maintain CSSF authorisation.

The following specific points mentioned in the CSSF circular in relation to the Chapter 15 management companies need to be highlighted:

(a) In accordance with the 2010 Law, Chapter 15 management companies must have a minimum fully paid-up share capital of EUR 125,000.- at the time of their incorporation, plus additional own funds. By way of derogation, CSSF circular 12/546 provides that management companies are permitted to not have up to 50% of the additional own funds (calculated by taking account of the value of the portfolios under management exceeding EUR 250,000,000.-) if they benefit from a guarantee of the same amount given by a credit institution or an insurance undertaking.

(b) There must be at least two persons conducting the business of a Chapter 15 management company. These persons must fulfil the criteria set out in the 2010 Law and CSSF circular 12/546, and amongst other things, be permanently residing in the Grand Duchy of Luxembourg. However, such persons are not prevented from having a residence that allows them to be in Luxembourg on a daily basis. In addition, they must be reachable by the CSSF at all times to furnish any information that may be required from time to time.

(c) The persons conducting the business of the Chapter 15 management company do not need to be employees as long as there is an agreement defining their rights and obligations and that a hierarchical connection exists.

(d) In order to assure the CSSF that the persons conducting the business of a Chapter 15 management company have the possibility to perform their duties in an acceptable, honest and professional manner, despite the exercise of multiple functions, it must be proved that these persons are supported in their daily work by sufficient and qualified personnel working in Luxembourg.

(e) The persons conducting the business of the Chapter 15 management company must constitute an executive committee (comité de direction), each member of which will have specific responsibilities. Such committee is responsible for specific tasks, such as the implementation of strategies and guidelines on central administration and internal governance via written internal policies and procedures, the implementation of proper internal control mechanisms and general investment policy of each UCITS managed by the Chapter 15 management company, etc.

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(f) Each Chapter 15 management company must create a management information sheet, which permits the follow-up on its activity and that of its delegates. Such management information sheet must mention some specific details, namely the outcome of the controls performed on the delegated activities, the reviews in relation to the risk management, the complaints, etc. The management information sheet must be available in Luxembourg.

(g) The administrative centre of Chapter 15 management companies must be located in the Grand Duchy of Luxembourg. This implies that such companies have a sound administrative and accounting organisation, which carries out the proper execution of the operation, their correct and exhaustive recording, etc. To that extent, Chapter 15 management companies must have all the necessary and sufficient human and technical resources in Luxembourg to perform their activities and monitor the delegated functions.

(h) Each Chapter 15 management company must establish a clear procedures’ manual describing its internal organisation, the division of tasks among its personnel, the internal hierarchy, the information exchange process and the controls performed in relation to its delegates.

(i) The compliance and internal audit functions of Chapter 15 management companies cannot be performed by the same person. This principle also applies when the compliance and internal audit functions are delegated to third parties: the supervision of the activities of the delegates will need to be performed by two different persons within each Chapter 15 management company.

(j) CSSF circular 12/546 contains a non-exhaustive list of the functions which can be delegated by Chapter 15 management companies, namely, the collective portfolio management, the risk management, complaints handling, the compliance and internal audit functions, and the operation of the IT system.

(k) CSSF circular 12/546 provides that the delegation of functions by Chapter 15 management companies cannot have as a consequence that these companies become mere “letterbox entities”. Therefore, a minimum substance must be maintained at the registered office of Chapter 15 management companies.

(l) CSSF circular 12/546 creates an additional requirement in case of delegation of function. Chapter 15 management companies are now required to perform a written due diligence, so as to identify the operational risks relating to the delegation and ensure the professionalism of the delegated entity(ies).

(m) The rules concerning the delegation of functions by a Chapter 15 management companies requires that these companies have a sufficient number of qualified employees possessing the necessary expertise to monitor the delegated functions.

(n) The prospectus of the UCITS managed by the relevant Chapter 15 management company must indicate the functions that are delegated to third parties.

(o) If the interests of the investors so require, Chapter 15 management companies can withdraw the mandates given to delegates with immediate effect.

(p) The collective portfolio management function of a Chapter 15 management company can be delegated to entities which are not located in an EU Member State, provided that there is an effective cooperation between the supervisory authority of the third country and the CSSF.

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(q) The possibility to delegate the compliance function of Chapter 15 management companies continues to only apply to those companies whose activity is limited to collective portfolio management.

(r) As a matter of principle, it is not possible for Chapter 15 management companies having branches to delegate their internal audit function to third parties.

Another important topic addressed in CSSF circular 12/546 is that pursuant to the proportionality principle, Chapter 15 management companies are granted some flexibility regarding the implementation of most of the requirements contained in this circular, account being taken of the nature, scale and complexity of their activities (including the number of UCITS and UCIs under management, the size of the delegated activities, etc.). In particular, the proportionality principle is applicable to the compliance, internal audit and risk management functions if the relevant Chapter 15 management companies submit a prior request to the CSSF.

Each file will be analysed on a case-by-case basis on application to the CSSF for authorisation.

Once the management company has been authorised by the CSSF it may, in addition to managing UCITS, manage other collective investment undertakings, which are not covered by the UCITS IV Directive and for which the management company is subject to prudential supervision.

The management company may also manage investment portfolios on a discretionary and client-by-client basis and provide certain ancillary activities such as providing investment advice or safekeeping and administration.

The introduction of the management-company passport by means of the provisions of the 2010 Law now allows management companies of UCITS to be situated either in the home Member State of the UCITS or in another Member State. It is therefore no longer required that a Luxembourg UCITS is managed by a management company located in Luxembourg. The central administration function of the management company is often delegated to a third party service provider specialised in administration. Such same third party service provider may also be the registrar and transfer agent of the UCITS. The delegation of administration is subject to the requirements of the home Member State of the management company or the self-managed investment company.

In order to be authorised, a SICAV/SICAF that has not designated an authorised management company has to fulfil certain additional criteria and file certain information with the CSSF. The authorisation will not be granted unless (i) the application for authorisation is accompanied by an activity programme, which indicates, inter alia, the organisational structure of the SICAV/SICAF and (ii) the SICAV/SICAF has at least two managers of good repute and who are sufficiently experienced in relation to the type of activity carried out by the SICAV/SICAF. The rules set out in CSSF circular 12/546 referred to above also apply to some extent to self managed investment companies falling under Part I of the 2010 Law.

A SICAV/SICAF may only manage the assets in its own portfolio and in no case may it manage assets on behalf of a third party.

The 2010 Law and Regulation No. 10-4 now expressly impose on management companies business conduct and other regulatory rules similar to those already existing for credit institutions and investment firms under the markets in financial instruments directive 2004/39/EC of 21 April 2004 (MIFID).

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In addition, management companies should comply with MIFID if (i) they manage portfolios of investments, including those owned by pension funds, in accordance with mandates given by investors on a discretionary basis, where such portfolios include investment instruments and (ii) provide investment advice on investment instruments.

4.2 Risk management process

The 2010 Law imposes on management companies and self-managed investment companies the employment of a risk-management structure. CSSF circular 12/546, sets out the regulatory framework on risk management applicable to UCITS management companies or self-managed investment companies regarding risk management rules and processes. Circular 12/512 further describes the content and format of the risk management procedure that must be communicated to the CSSF.

Management companies shall assess the risk profile for each UCITS on the basis of the investment policy and strategy, including the use made of financial derivative instruments, in order to choose an appropriate method of calculating global exposure. Regulation No. 10-4 determines the scope of this assessment.

In accordance with the Regulation No. 10-4, management companies shall calculate global exposure by either using the commitment approach or the VaR approach or any of the advanced risk measurement methodologies as may be appropriate. The methodology for the calculation must be determined based on the risk profile of an UCITS.

The CSSF has made a series of recommendations concerning the transparency requirements in relation to leverages disclosed in the prospectus and annual report by UCITS determining their global exposure relating to derivative instruments as per article 42 (3) of the 2010 Law through a Value-at-Risk (VaR) approach.

The approach based on the sum of the notionals is the reference approach for leverage transparency. Therefore, the prospectus and annual report of the UCITS must be calculated as the sum of the notionals of the derivatives used, allowing these UCITS at the same time to complete this information with a leverage calculation based on the commitment approach.

The CSSF also recommended that the calculation of the leverage ratio for UCITS using the VaR approach must comply with some regulatory requirements, such as the monitoring on a regular basis of the level of leverage generated by the UCITS, and the determination of the leverage data which are necessary in order to indicate in the annual report the level of leverage reached during the last financial year.

Beside the calculation of the leverage based on the sum of notionals, the UCITS are allowed to calculate it on the commitment approach.

In respect of the prospectus, UCITS must base the transparency in relation to the leverage in the prospectus on the sum of the notionals. This information can be completed with the leverage determined based on the commitment approach or with other additional explanations.

With regard to the annual report, the CSSF has stated that the information on the leverage must be based on the sum of notionals for each financial year, for the period starting on 1 January 2013. This information must be entirely based on the sum of the notionals at the latest for the financial year closing as at 31 December 2013. This however does not prevent the UCITS to supplement this information with other figures, as those resulting from a calculation based on the commitment approach or with other explanations, respectively.

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Pursuant to article 42(1) of the 2010 Law each management company and self-managed investment company must provide certain information with respect to the risk-management policy in order to identify, measure, manage, control and report on the risks that may be material to an UCITS they manage to the CSSF.

The risk management process must be updated and submitted to the CSSF at least once a year at the closing date of the management company's financial year. In case of significant amendments to the risk management policy, the management company must update and submit the updated version of the risk management process to the CSSF. The risk management process must be submitted to the CSSF in electronic form.

4.3 Management company passport

One important change of the 2010 Law is the introduction of the management company passport, which enables a Luxembourg established and CSSF authorised management company to manage UCITS and provide services it has been so authorised to provide in other Member States. It is therefore no longer necessary for an UCITS to be managed by a management company, which is domiciled in the same Member State as the UCITS itself. Equally, a foreign-established management company may provide management services for an UCITS established in Luxembourg.

The 2010 Law considers a CSSF approved FCP to be a Luxembourg FCP even if its management company is established elsewhere in the EU.

4.3.1 Luxembourg management companies to manage UCITS in other Member States

4.3.1.1 Establishing a foreign branch

A Luxembourg-established management company may carry out its activities for which it has been so authorised by the CSSF in another Member State by establishing a branch in that state.

For establishing a branch, the management company must submit a notification and supporting documents and information to the CSSF.

If the CSSF has no reason to doubt the adequacy of a management company's administrative structure or financial situation, taking into account the activities envisaged, it must communicate that documentation to the competent authorities of the management company’s host Member State within two months of receiving the complete documentation. The CSSF must further inform the management company on such communication.

If the CSSF refuses to communicate the documentation to the authorities of the host Member State, the CSSF shall inform the management company of its reasons for so doing within two months following the receipt of the documentation. A refusal or lack of response by the CSSF entitles the management company to apply to the courts of Luxembourg.

A management company pursuing its activities by way of a branch in a host Member State must comply with the relevant rules of such state. The competent authorities of the host Member State will be responsible for supervising their compliance and must be capable of doing so within two months of receipt of the complete documents.

A branch may be established and start business by the earlier of the receipt of the host Member State competent authorities' respective communication, or after expiration of the two-months period in which such authority prepares for the management company's supervision and compliance.

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The management company must communicate any modification and update on documentation submitted to the CSSF and the competent authorities of the host Member State prior to their implementation.

4.3.1.2 Freedom to provide services

A management company wishing to pursue the activities for which it has obtained CSSF approval for the first time within another Member State under the freedom to provide services must communicate to the CSSF the name of the Member State in which the management company wishes to operate. It must further communicate a program of operations including the activities and services to be performed and a risk-management process description.

The CSSF must within one month of receipt of the relevant documentation communicate that information to the competent authorities of the relevant host Member State.

Following compliance with all requirements, the management company may start its business in the relevant host Member State.13

Any modifications of the operations program must be communicated for approval to the CSSF and the relevant host Member State authorities prior to their implementation.

4.3.1.3 Collective portfolio management on a cross-border basis

A management company authorised under chapter 15 of the 2010 Law pursuing the activity of collective portfolio management on a cross-border basis by establishing a branch or under the freedom to provide services must have its organization comply with the 2010 Law. This includes delegation arrangements, risk-management procedures or reporting requirements. The CSSF is in charge of monitoring compliance and supervising the adequacy of the management company's arrangements and organization.

Management companies authorised under chapter 15 must further comply with the rules of an UCITS home Member State, which relate to the constitution and functioning of the UCITS it manages. Article 116(3) of the 2010 Law specifies those constitutional and functional activities with which a management company must comply.

The management company must also stay in line with the provisions of the articles of incorporation or management regulations and the prospectus of the UCITS and is responsible for adopting and implementing relevant measures.

A Luxembourg-established management company applying to manage an UCITS established in another Member State must submit to the competent authorities of that Member State (i) the written agreement with the depository and (ii) information on delegation arrangements on functions of investment management and administration. If the management company already manages other UCITS of the same type in the UCITS home Member State it needs only refer to the information previously provided to the relevant authorities.

The competent authorities of an UCITS home Member State may request clarification and further information relating to the documents and information on the attestation to be submitted by the CSSF. The CSSF must provide all documents within 10 working days following such request.

13 Notwithstanding article 20 of the UCITS IV Directive and article 54 of the 2010 Law.

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A management company must notify material modifications to the competent authorities of an UCITS home Member State.

A host Member State regulatory authority may take measures in case of non-respect of the host Member State's rules by a management company. If the service provided in the host Member State is the management of an UCITS, the management company's host Member State may require the management company to cease managing that UCITS.

A management company of a Luxembourg-established UCITS authorised under chapter 15 of the 2010 Law wishing to market the shares/units of an UCITS it manages without setting up a branch in a Member State other than Luxembourg, and without providing any other services, is subject only to the provisions of chapter 6. Said chapter sets out the procedure to passport Luxembourg-established UCITS elsewhere in the EU by means of a simplified notification procedure.

4.3.2 Foreign management companies to manage Luxembourg- established UCITS

An UCITS is deemed to be established in Luxembourg if it is authorized by the CSSF in accordance with article 129 of the 2010 Law.

A foreign-established management company may carry out the activities for which it has been authorised by the competent authorities of another Member State in Luxembourg either by establishing a branch or under the freedom to provide services.

The application procedures for establishing a branch or providing services in another Member State are similar for Luxembourg-established and foreign-established management companies.

A management company which pursues the activity of collective portfolio management in Luxembourg on a cross-border basis by establishing a branch or under the freedom to provide services must comply with the rules of its home Member State.

The CSSF is in charge of ensuring compliance of the management company with its obligations set out in the articles of incorporation or management regulations, and the prospectus of the UCITS. The CSSF is further responsible for supervising compliance with duties that a foreign-established management company must adhere to when conducting its business activities in Luxembourg. These include the duty of the foreign-established management company to act honestly, fairly and in the best interest of the UCITS it manages as well as the integrity of the market and to avoid conflicts of interests.

The CSSF may refuse the application of a management company to manage a Luxembourg-established UCITS only in limited circumstances. Prior to an application's refusal, the CSSF must consult the competent authorities of the management company's home Member State.

For statistical purposes, a management company with a Luxembourg branch must report periodically to the CSSF on its activities in Luxembourg.

A management company pursuing its activities in Luxembourg through an establishment of a branch or under the provision of services must provide the CSSF with the information necessary for the monitoring of its compliance with the rules under the CSSF's responsibility that apply to it. The management company must ensure that the CSSF may directly obtain that information.

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The 2010 Law provides provisions on the procedure to pursue in case of a management company's refusal to provide relevant information to the CSSF or to end a breach of the rules under the CSSF's responsibility. The CSSF may take appropriate measures to prevent or penalise further irregularities and prevent the management company from initiating transactions in Luxembourg.

The CSSF may require the management company to cease managing a Luxembourg-established UCITS where the service provided is its management. The withdrawal of such authorisation is within the competence of the authorities of its home Member State.

UCITS management companies that already provided services in other Member States by means of a branch or through the free provision of services had to submit to the CSSF a new application file by 1 June 2011 containing a complete program of activities, setting out the risk management and complaints handling process put in place.

In case of cross-border management, the depository must sign a written agreement with the management company regulating the flow of information that is deemed necessary to allow the depository to perform its functions.

5. DEPOSITORY BANK

Any UCITS must appoint a depository bank to act as custodian of its assets. Such depository must either have its registered office in Luxembourg or be established in Luxembourg, if its registered office is located in another Member State. The directors or managers, as applicable, of the depository must be of sufficiently good repute and sufficiently experienced in relation to the type of SICAV/FCP to be managed.

Depositories must ensure that the sale and redemption of SICAV shares/FCP units, settlement of fund securities transactions, and proper treatment of fund income are carried out in accordance with law and the fund’s management regulations or articles of incorporation. Depositories for FCPs bear additional supervisory responsibilities in light of the close identity between the FCPs' management company and the assets it manages, and the perceived need for additional oversight of the management company’s performance of its functions. Depositories for FCPs are technically responsible for carrying out all operations concerning the day-to-day administration of the assets of a FCP.

In addition to the functions set forth above for all depositories under Luxembourg law, the depository for a FCP is also charged with responsibility for (i) ensuring that the value of the FCP units is calculated in accordance with the law and the FCP’s management regulations, and (ii) carrying out the instructions of the management company, unless they conflict with law or the FCP’s management regulations.

The law provides specifically that in the context of their respective roles the management company and the depository must act independently and solely in the interest of unitholders.

Depositories may delegate some or all of their safe-keeping duties to third parties. This delegation does not affect the depository's liability for the keeping of assets so delegated.

Specific rules apply to cross-border managed UCITS and master-feeder UCITS.

The CSSF must approve the appointment and replacement of the depository.

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6. LIABILITY OF MANAGEMENT COMPANY AND DEPOSITORY

Luxembourg law provides that the management company of a FCP must manage the fund in accordance with the fund’s management regulations, which are required to set forth, inter alia, the fund’s investment policy, its distribution policy, the remuneration and expenses which the management company is empowered to charge to the fund, the fund’s fiscal year, and the procedures for the issuance and redemption of fund units. In so doing the management company must fulfil its obligations with the diligence of a salaried agent, and “shall be answerable” to the unitholders of the FCP for any loss resulting from the non-fulfilment or improper fulfilment of its obligations.

The management company may delegate, under certain conditions, one or more functions to third parties. The delegation of functions will however, have no influence on the liability of the management company or the depository and in no case can the management company delegate its functions in a way that would transform it into a letter-box entity.

For delegating one or more of its functions to a third party the management company must seek the prior authorisation of the CSSF. CSSF circular 12/546 sets out detailed rules about the conditions to be complied with in order to obtain this authorisation. There are specific rules that apply if the function to be delegated is the investment management function.

The 2010 Law imposes liability on the depository for either a FCP or SICAV/SICAF to investors of the fund (and to the management company, for a FCP) for any loss suffered by them as a result of its unjustifiable failure to perform its obligations or its wrongful improper performance thereof. In the case of a FCP, this liability must be first invoked through the management company, but if the management company should fail to take action within a prescribed period, unitholder(s) may directly invoke the liability of the depository.

In the case of depositories for both FCPs and SICAVs/SICAFs, a depository’s liability is not diminished by the fact that it has entrusted to a third party some or all of the assets it holds in custody. Anyone suffering a loss must prove the liability of the depository on the basis of its duty of supervision and establish cause and effect. Following the scandal evolving around the fraudulent investment scheme of Bernard Madoff discovered in 2008, the liability of depositaries of UCITS was subject to discussions throughout Europe. Luxembourg did not change its statutory framework in relation to depositaries’ responsibilities as a consequence.

However, given some uncertainties in the market ALFI issued certain guidelines for Luxembourg depositaries pertaining to delegation of functions to third parties. Such guidelines are of non-binding character however the industry seems to follow them. Lately, the European Commission has initiated hearings pertaining to another legislative measure aiming at creating a coherent depositary responsibility regime throughout the European Union. Such initiative is currently known as “UCITS V” and should be monitored closely in coming months.

7. NET ASSET VALUE CALCULATION

Luxembourg law provides general principles for the calculation of the net asset value of shares/units of an UCITS for purchase or redemption purposes, which in general is equal to the net asset value of the fund divided by the number of shares/units outstanding. The CSSF requires all UCITS funds to determine the issue and repurchase prices of their shares/units “at sufficiently close and fixed intervals”, but at least twice per month.

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On 27 November 2002 the CSSF issued circular 02/77 (replacing circular 2000/8) setting out the minimum rules that fund administrators must follow in the event of an error in the calculation of the net-asset value or non-observance of the investment rules applicable to undertakings for collective investment.

8. PROSPECTUS AND FINANCIAL REPORTS

The 2010 Law outlines certain information, which must appear in the full prospectus for any UCITS established in Luxembourg.

All Luxembourg UCITS subject to the 2010 Law must publish at least an annual and half-annual report. Annual reports must be published in principle within four months of the end of the year to which they relate, and half-annual reports within two months of the end of the period to which they relate. The information required to be included in periodic reports for a Luxembourg investment fund is set out in annex 1, schedule B to the 2010 Law.

All funds subject to the 2010 Law must have their prospectus, annual and half-annual reports published on the electronic reference database of the financial centre maintained by Finesti (integrated into Fundsquare as from July 1st, 2013). In addition all funds subject to the 2010 Law must send their prospectus, annual report and half-annual report in their final definitive forms, electronically to the CSSF. CSSF circular 08/371 of 5 September 2008 sets out the provisions regarding the timing and mechanics of such filings.

All Luxembourg investment funds subject to the 2010 Law are further obliged to submit monthly reports to Finesti (integrated into Fundsquare as from July 1st, 2013) for CSSF purposes providing very basic information about changes in the net-asset value, portfolio value, purchases, redemptions, and distributions.

In its November 2011 newsletter, the CSSF clarified that a new paragraph must be included in the prospectus of UCITS relating to the exercise of the rights of investors towards the fund. Accordingly, investors may exercise their rights directly against the UCITS only if the investor is registered himself and in his own name in the share-/unitholder register of the fund. Investors investing through an intermediary in its own name but on behalf of the investor may not be able to fully exercise their rights directly against the fund. The CSSF explicitly mentions the right of investors to participate in general meetings of the fund and further specifies, that investors are advised to take advise on their rights. The newsletter provides the wording to be so included in the prospectus of the fund.

CSSF circular 02/81 sets out guidelines concerning the tasks of approved auditors of undertakings for collective investment. The approved auditor must prepare a long-form report. The purpose of the long-form report is to report the findings of the approved auditor in the course of its audit concerning the financial and organisational aspects of the fund. The report is not intended to be made available to the public and is issued for the exclusive use by the board of directors or managers of the fund or the management company of the fund as well as the CSSF. Funds whose liquidation or merger by absorption has been decided with immediate effect are exempted from delivering a long-form report.

The complete prospectus and the latest annual and half-annual reports are to be made available without charge to investors who request them. The complete prospectus has to be kept updated.

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9. KEY INVESTOR INFORMATION DOCUMENT

Articles 159 to 163 of the 2010 Law enhance investor protection by introducing a new standardised KIID (Key Investor Information Document), which replaces the simplified prospectus for UCITS funds. The simplified prospectus was widely criticised for being unclear, too long and not enabling investors to make an informed assessment of the investments proposed.

9.1 Regulatory framework

The main EU regulatory framework of KIIDs covers the (i) UCITS IV Directive; (ii) Commission Regulation (EU) No 583/2010 of 1 July 2010 and (iii) CESR Level 3 Recommendations to the EC on the:

• synthetic risk and reward indicator (CESR/10-673);

• methodology for calculation of ongoing charges (CESR/10-674);

• performance scenarios for structured UCITS (CESR/10-1318);

• transition from the simplified prospectus to the KIID (CESR/10-1319);

• language and layout for the KIID (CESR/10-1320); and

• template for the KIID (CESR/10-1321).

CSSF circulars on the KIID supplement the 2010 Law, in particular CSSF circular 11/509 of 15 April 2011, which provides information on the notification procedure on KIIDs.

CSSF press release 11/10 of 1 April 2011 concerns changes in the CSSF visa procedure for Luxembourg UCITS due to the introduction of the KIID.

9.2 Form

A KIID must disclose appropriate, easily comprehensible information about the essential characteristics of a proposed investment allowing investors to make an informed investment decision. The information must be presented in a clear, fair and non-misleading manner, using a concise and non-technical language easily understood by retail investors. The information of a KIID must be consistent with what is stated in the prospectus. A KIID must also allow for comparison with other KIIDs. Incorporations by references are not allowed. The Luxembourg fund association ALFI has established a question and answer document dealing with details pertaining to the content of KIIDs for Luxembourg UCITS.

9.3 Content

The mandatory information, which every KIID must include and which must be kept up-to-date is:

• an identification of the UCITS;

• a short description of the investment objectives and policy;

• a past performance presentation or, if relevant, performance scenarios;

• costs and associated charges;

• a risk-reward profile of the investment, including appropriate guidance and risk warnings in relation to the investment;

• practical information;

• authorization details; and the

• date of publication.

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The KIID of a Luxembourg established UCITS or of an UCITS that markets its shares/units in Luxembourg in accordance with chapter 7 of the 2010 Law, must clearly state the words “key investor information” in English, French, German or Luxembourgish on top of the document.

A KIID's identification section must state the title, an explanatory statement advising investors to read the KIID in order to make an informed investment decision by investing in the UCITS, the name and identification by code number of the UCITS (including the compartment and share class, if relevant) as well as name of management company, if any.

The KIID must further specify where, how and in which language investors may obtain additional information relating to the proposed investment.

9.4 Timing, availability and responsibility

KIIDs constitute pre-contractual information and must be provided to investors in good time before the subscription of shares/units in an UCITS. A KIID may be made available to investors in a durable medium or, alternatively, by means of a website. Upon request, a hard copy of the KIID must be delivered free of charge to the relevant investor. An up-to-date version of the KIID must be published on the website of an investment company or management company.

To ensure comparability, KIIDs shall be used without alterations or supplements, except translations, in all Member States where an UCITS is notified to market its shares/units in accordance with article 54 of the 2010 Law.

The directors or managers of an investment company or management company are responsible for the drafting and publishing of KIIDs.

Management companies must provide investors with the KIID for each share class of a UCITS, respectively for each share class of each compartment of the UCITS (in case of umbrella UCITS), they manage.

9.5 CSSF

The CSSF is the competent authority to ensure compliance of a KIID with the provisions of the 2010 Law. The CSSF has the power to withdraw any KIID and may in particular do so in case of non-compliance of the KIID with the 2010 Law.

All UCITS must submit to the CSSF the initial KIID and any subsequent amendments to the KIID.

In its press release 11/10, the CSSF stated that it will not apply any visa on the KIIDs of UCITS confirming that the CSSF has read the prospectus and has no objection to its publication. The CSSF considers that the KIID format and content are sufficiently detailed in the relevant EU documentation to allow market participants to prepare the KIID.

10. SIMPLIFIED NOTIFICATION PROCEDURE

A new streamlined procedure based on regulator-to-regulator communication allows a Luxembourg established and supervised UCITS, or any of its compartments, to swiftly market its shares/units in any other Member State. Similar rules apply to UCITS of another Member State wishing to market their shares/units in Luxembourg.

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In order to distribute its shares/units cross-border within the EU, an UCITS must submit a notification letter and supporting documents to the CSSF for each host Member State in which the UCITS intends to market its shares/units. The notification letter must include information on arrangements made for marketing shares/units and share/unit classes in the relevant host Member State.

The supporting documents to be submitted to the CSSF include the latest version of (i) the CSSF visa stamped prospectus, (ii) management regulations or consolidated articles of incorporation as a single document, (iii) the published audited annual report and unaudited half-annual report, (iv) the KIID in a language or translation accepted by the host Member State competent authorities and (v) the CSSF attestation letter which the CSSF delivered to the UCITS together with the last stamped prospectus.

CSSF circular 11/509 of 15 April 2011 and its appendices set out the practical guidelines and technical specifications in relation to the notification procedure.

An UCITS must submit the notification file electronically to the CSSF. Submission may be by direct filing of the documents on the CSSF website. Alternatively, an UCITS may submit the documents by using a CSSF approved system based on channels as described in CSSF circular 08/334. An UCITS must submit all documents to the CSSF in form of a single zip file.

The CSSF further recommends Luxembourg-established UCITS to consult the website of the competent authorities of the relevant host Member State on the laws, regulations and administrative provisions, which are specifically relevant to the arrangements made for the marketing of shares/units in that host Member State.

The CSSF formally verifies the completeness and compliance with the relevant technical requirements of the notification letter and supporting documents and transmits all documents to the relevant host Member State's competent authority within 10 working days following the date of receipt of all documents, together with an attestation confirming that the UCITS fulfils its obligations under the UCITS IV Directive.

The CSSF immediately and automatically notifies the UCITS on the transmission of the documents to the relevant host Member State competent authority. As from the date of that notification, the UCITS may access the market of the relevant host Member State.

Approval and rejection of an UCITS request to cross-border market and distribute its shares/units is within the exclusive competence of the CSSF. Once granted by the CSSF, the competent authorities of the host Member State are not entitled to review, challenge and/or discuss the merits of that authorisation. The host Member State's competent authorities may, in particular, not request any additional documentation and/or information in addition to that received from the CSSF nor impose any other requirements or hurdles. A host Member State's competent authorities competence is strictly limited to shares/units marketing rules, regulations and administrative provisions subject to national law.

An UCITS must directly notify the relevant host Member State competent authorities either of changes in the information regarding the arrangements intended for marketing set out in the notification letter or the share classes to be marketed prior to their implementation. Changes to the prospectus and/or instrument of incorporation remain subject to prior CSSF approval, which an UCITS must obtain before submitting a written notice of changes to the relevant host Member State authorities.

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An UCITS must provide investors of a relevant host Member State with information and documentation identical to that provided to investors in Luxembourg.

To ensure that facilities are available in Luxembourg for making payments to investors and for repurchasing or redeeming shares/units, foreign established UCITS marketing their shares/units in Luxembourg must appoint a credit institution in Luxembourg.

Where a Luxembourg established UCITS markets it shares/units in a non-Member State and that non-Member State is party to the Agreement on the EEA and the instruments relating thereto, articles 53 to 57 of the 2010 Law on the notification procedure apply within the prescribed limits of such agreement.

11. MASTER-FEEDER STRUCTURES

Pre-UCITS IV, the CSSF admitted the creation of a master-feeder structure where both master and feeder funds were Luxembourg investment funds and also where the feeder fund was a Luxembourg fund and the master fund a foreign fund. Such structure were however accessible only to feeder funds falling under part II of the 2002 law and needed to be analysed by the CSSF on a case-by-case basis. In the case of foreign master funds, for example, the CSSF had to be satisfied that such fund was regulated by a competent authority and subject to equivalent protection and risk diversification rules as Luxembourg funds.

UCITS IV now also introduced master-feeder structures for UCITS funds.

Master-feeder structures allow for a Luxembourg-established UCITS feeder fund to feed its assets into an UCITS master fund established in Luxembourg or another Member State.

11.1 Feeder and master UCITS

A feeder UCITS is an UCITS, or its compartments, which is authorized to (i) invest at least 85% of its net assets in shares/units of a master UCITS or its compartments and (ii) hold up to 15% of its net assets in (a) ancillary liquid assets, and/or (b) financial derivative instruments which may be used solely for hedging purposes and/or (c) movable and immovable property essential to the direct pursuit of its business, if the feeder UCITS is an investment company.

A master UCITS is an UCITS, or its compartments, which (i) has at least one feeder UCITS among its investors, (ii) is not itself a feeder UCITS and (iii) does not hold shares/units of a feeder UCITS.

If a master UCITS has at least two feeder UCITS among its investors, the master UCITS has the choice of raising capital from other investors. If a master UCITS offers shares/units to investors in its home Member State and to investors of feeder UCITS established in host Member States only, the rules on cross-border marketing of the UCITS IV Directive do not apply to the master UCITS.

An investment by a Luxembourg-established feeder UCITS in an existing master UCITS, which exceeds the limit of investing more than 20% of its net assets in the same UCITS requires prior CSSF approval.

A feeder UCITS must effectively monitor the activities of a master UCITS.

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11.2 Master-feeder application file

If the feeder and master UCITS are both established in Luxembourg, the feeder UCITS must produce and submit to the CSSF an application file, the mandatory items of which are:

(i) information of activity pursuing UCITS referred to in article 83 of the 2010 Law, if applicable;

(ii) a depository information-sharing agreement, if the feeder and master UCITS have engaged different depositories; and

(iii) an auditor information-sharing agreement, if the feeder and master UCITS have engaged different auditors.

In all other cases, the application file must, in addition, include the following items of the feeder and master UCITS:

(i) the articles of incorporation and management regulations;

(ii) the prospectus;

(iii) the KIID; and

(iv) the agreement setting out all information and documents that the master UCITS must provide to the feeder UCITS to enable it to meet all requirements of the 2010 Law.

Where only the feeder UCITS is established in Luxembourg and the master UCITS in another Member State, a feeder UCITS must further submit to the CSSF an attestation by the competent authorities of the master UCITS home Member State that the master UCITS is an UCITS, or UCITS compartment, which is not itself a, nor holds shares/units of, a feeder UCITS. All documents must be submitted in English, French, German or Luxembourgish.

Upon transmission of the application file, the CSSF must approve or disapprove the feeder UCITS investment in the master UCITS within 15 working days following submission of the complete file. If the file is rejected, the CSSF must give reasons for rejecting. The CSSF must grant approval of the application file if the feeder UCITS, including its depository, auditor and the master UCITS comply with all requirements of chapter 9 of the 2010 Law.

A feeder UCITS may invest in the shares/units of a master UCITS more than 20% of its net assets only once the agreement ensuring that the master UCITS provides all documents and information to the feeder UCITS so as to enable the feeder UCITS to ensure its compliance with the provisions of the 2010 Law and the best interests of its investors is effective. The feeder UCITS must obtain the approval by the CSSF prior to the investment.

This agreement may be replaced by rules of internal procedures ensuring comparable compliance with the 2010 Law, where the feeder and master UCITS are managed by the same management company.

Where a master UCITS temporarily suspends the repurchase, redemption or subscription of its shares/units, each of its feeder UCITS is entitled to do the same with its shares/units within the same timeframe as the master UCITS.

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11.3 Liquidation, merger or division of the master UCITS

11.3.1 Liquidation

The liquidation of the master UCITS triggers the liquidation of the feeder UCITS, except where the CSSF either approves (i) the investment of at least 85% of the feeder UCITS net assets in shares/units of another master UCITS or (ii) the amendment to its articles of incorporation or management regulations so as to enable the feeder UCITS to convert into a non-feeder UCITS.

Following the notification by the master UCITS of all its investors and the CSSF on its binding decision to liquidate, a master UCITS may liquidate after three months of such notification at the earliest. Specific rules apply to compulsory liquidations.

11.3.2 Merger and division

A merger of a master UCITS with another UCITS triggers the liquidation of the feeder UCITS, except where the CSSF grants approval to the feeder UCITS to (i) continue to be a feeder UCITS of the master or another UCITS resulting from the master UCITS merger or (ii) invest at least 85% of its net assets in shares/units of another master UCITS not resulting from the merger or (iii) the amendment to its articles of incorporation or management regulations so as to enable the feeder UCITS to convert into a non-feeder UCITS.

For a merger to become effective the master UCITS must at least 60 days before the proposed effective merger date provide all investors and, if applicable, the CSSF, with information referred to, or comparable with that referred to, in article 72 of the 2010 Law. This includes in particular appropriate and accurate information on the merger so as to enable investors to make an informed judgement of the impact of the merger on their investment.

A master UCITS must enable a feeder UCITS to repurchase or redeem all shares/units in the master UCITS before a merger or division of the master UCITS becomes effective, except where the CSSF has granted the feeder UCITS continuation as a feeder UCITS of the master or another UCITS resulting from the merger or division.

The same rules that apply to mergers of master UCITS apply to divisions of master UCITS into two or more UCITS.

11.4 Depositories and auditors

If a master and feeder UCITS have different depositories, the depositories must conclude an information-sharing agreement. The feeder UCITS may not invest in the master UCITS until such an agreement is effective. Articles 24 and 25 of Regulation No° 10-5 set out the content of the information-sharing agreement and provisions on the choice of law.

Specific provisions apply to auditors of master and feeder UCITS.

The CSSF published on 24 June 2013 a document containing the answers to a series of frequently asked questions pertaining to the reports to be produced.

In particular, some questions relate to the disclosure of the aggregate charges of a master UCITS and a feeder UCITS in the annual report of the feeder UCITS, pursuant to article 82(2) of the 2010 Law.

The document also contains specific questions relating to the ad hoc report to be prepared by the approved auditor (réviseur d’entreprises agréé) of a feeder UCITS, according to article 81(2) of the 2010 Law.

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11.5 Compulsory information and marketing documentation

Article 82 of the 2010 Law sets out compulsory information that a feeder UCITS must include in its prospectus, annual and half-yearly report in addition to the information provided in Schedule A of Annex 1 and Schedule B of Annex 1.

Upon request, a feeder UCITS must deliver a paper copy of the prospectus, annual and half-yearly report of a master UCITS to investors free of charge.

A feeder UCITS must disclose in any relevant marketing communication that it permanently invests at least 85% of its net assets in shares/units of a master UCITS.

11.6 Competent authorities

The information duties of the CSSF on decisions, measures and observations of non-compliance with certain provisions of the 2010 Law vary with the domicile of the feeder and master UCITS.

A Luxembourg-established master UCITS must inform the CSSF immediately of any and all feeder UCITS investing in its shares/units. If a feeder UCITS is established in another Member State, the CSSF must inform the competent authorities of the feeder UCITS home Member State of such investment.

If a master and feeder UCITS are both established in Luxembourg, the CSSF must immediately inform the feeder UCITS of any decision or measure taken against the master UCITS in case of its non-compliance with relevant legal requirements, or its management company, auditor, or depository. If the feeder UCITS is established in another Member State, the CSSF must similarly inform the competent authorities of the feeder UCITS home Member State. If the master UCITS is established in a Member State other than Luxembourg, and the feeder UCITS is Luxembourg established, the CSSF must inform the feeder UCITS of any such decision or measures taken against the master UCITS that are communicated to it.

12. MERGERS

12.1 Introduction

UCITS IV introduces a legal framework for domestic and cross-border mergers of Luxembourg-established UCITS and their compartments. UCITS are entitled to merge as either absorbing or absorbed UCITS in a merger and regardless of whether the UCITS are constituted as FCP or SICAV.

Domestic mergers are mergers between UCITS established in the same Member State where at least one of the involved UCITS is notified for cross-border marketing of its shares/units in another Member State pursuant to article 93 of the UCITS IV Directive.

Cross-border mergers are mergers involving UCITS, which are established in at least two different Member States, at least one of which must be established in Luxembourg.

The provisions of chapter XIV of the 1915 Law are expressly excluded for mergers under the 2010 Law, an exclusion, which was not foreseen in, and goes beyond the scope of, the UCITS IV Directive.

Another provision of the 2010 Law that goes beyond transposing the UCITS IV Directive submits to said Law mergers between Luxembourg-established UCITS where none of the involved UCITS has been notified for cross-border marketing of its shares/units in another Member State pursuant to article 93 of said directive.

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Luxembourg non-UCITS are outside of the scope of the 2010 Law and thus not allowed to merge cross-border using the UCITS IV merger techniques.

12.2 Merger techniques

The 2010 Law offers three types of merger techniques, all of which apply to mergers of UCITS and their compartments.

12.2.1 Merger by absorption

In a merger by absorption, at least one UCITS transfers all its assets and liabilities to an existing absorbing UCITS at the moment of its dissolution without liquidation in exchange for the issue to its investors of shares/units of the absorbing UCITS and possibly a maximum 10% cash payment of the net asset value of those shares/units.

12.2.2 Merger by incorporation

A merger by incorporation is identical to the merger by absorption except that at least two merging UCITS transfer all their assets and liabilities to a newly created receiving UCITS.

12.2.3 Merger by amalgation

In a merger by amalgation, at least one merging UCITS transfers all its net assets to (i) another compartment of the same UCITS, (ii) a receiving UCITS, which is either already in existence or newly created or (iii) to another compartment of another UCITC. In all three scenarios, the merging UCITS continues to exist until its liabilities have been fully discharged.

12.2.4 Effective merger date

A Luxembourg-established UCITS must designate a competent party to determine the effective date of the merger with another UCITS. UCITS established in corporate form must so designate in their articles of incorporation either the shareholders at a shareholders’ meeting, in which case the quorum and majority requirements must be specified therein, the board of directors or managers or, if applicable, the management board. For UCITS established as a FCP, it is within the remit of the management company of the UCITS to determine the effective merger date, unless their management regulations provide otherwise in which case the quorum and majority requirements must be specified therein.

Where the instrument of incorporation or management regulations are silent on the approval by the investors on the merger with another UCITS, any merger must be approved by the management company in case of a merger of UCITS established as a FCP, and by the meeting of shareholders deciding by simple majority of the votes cast by shareholders present or represented at the meeting in case of UCITS established in corporate form.

In case of mergers where an UCITS ceases to exist, the effective merger date must be recorded by notarial deed.

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12.3 Merger procedure

12.3.1 Merging UCITS established in Luxembourg

The CSSF must approve the merger of a Luxembourg-established merging UCITS. The merging UCITS must submit to the CSSF a merger file consisting of:

• the common draft terms of the proposed merger duly approved by the merging and receiving UCITS;

• the up-to-date version of the prospectus and the KIID of the receiving UCITS, if it is established in another Member State;

• the statement of each depository of a Luxembourg-established merging and receiving UCITS confirming that they have verified compliance of certain common merger draft terms with the 2010 Law and the UCITS articles of incorporation or management regulations. If the receiving UCITS is established in another Member State, the verification by the depository of the receiving UCITS is different;

• information on the proposed merger that the merging and receiving UCITS intend to provide to their respective investors.

(i) Receiving UCITS established in Luxembourg

If the merger file is complete and the receiving UCITS is established in Luxembourg, the CSSF must review the potential impact of the proposed merger on investors in order to determine whether appropriate information is provided. The CSSF may ask for clarification of the information to be provided to the investors of the merging UCITS and for modification of such information by the receiving UCITS within 15 working days upon receipt of the complete merger file.

(ii) Receiving UCITS established outside of Luxembourg

If the merger file is complete and the receiving UCITS is established outside of Luxembourg, the CSSF must immediately submit a copy of the complete merger file to the competent authorities of the receiving UCITS home Member State. Both authorities must review the potential impact of the proposed merger on investors in order to determine whether appropriate information is provided.

The CSSF may ask for clarification of the information to be provided to the investors of the merging UCITS whereas the home Member State competent authorities of the receiving UCITS may ask the receiving UCITS for modification of such information within 15 working days upon receipt of the complete merger file. Within 20 working days of a modification notification, the receiving UCITS home Member State authorities must indicate to the CSSF their satisfaction or dissatisfaction with such modification.

If the CSSF considers that the merger file is incomplete, it must request additional information within up to 10 working days upon its receipt.

A proposed merger must be authorized by the CSSF if the merger complies with the provisions of article 67(6) of the 2010 Law.

The CSSF must inform the merging UCITS within 20 working days of submission of the complete merger file information whether or not it has authorized the merger. If the receiving UCITS is established outside of Luxembourg, the CSSF must inform the competent authorities of the receiving UCITS of its authorisation of the proposed merger.

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12.3.2 Merging UCITS established outside of and receiving UCITS established in Luxembourg

Where the merging UCITS is domiciled outside of Luxembourg, the CSSF must receive all documents contained in the merger file except of an up-to-date version of the prospectus and KIID.

The merger-impact analysis and modification requests as set out above must be observed.

The CSSF specified the practical terms of the merger procedure in Regulation No. 10-5 of 22 December 2010 transposing Commission Directive 2010/44/EU of 1 July 2010 implementing Directive 2009/65/EC. The regulation widely mirrors the provisions of the Commission Directive.

12.3.3 Third-party control

Depositories of Luxembourg-established merging and receiving UCITS must verify the compliance of the (i) identification of the merger type and the UCITS involved, (ii) the envisaged effective merger date and (iii) the asset transfer and share/unit-exchange rules with the 2010 Law and the UCITS articles of incorporation or management regulations.

Authorized independent auditors engaged by a Luxembourg-established merging UCITS must draw up a validity report validating the (i) asset valuation criteria and liabilities valuation criteria on the exchange-ratio calculation date, (ii) per share/unit cash payments and the (iii) exchange-ratio calculation method and actual exchange-ratio determination at the date for calculating that ratio.

A copy of the validation report of the auditor must be made available on request and free of charge to the investors of the merging UCITS and to their competent authorities.

12.3.4 Right to receive appropriate and accurate information on the merger

Following CSSF authorisation the merging and receiving UCITS must provide their investors with appropriate and accurate information on the proposed merger so as to enable them to make an informed judgement of the impact thereof on their investment. This information must be provided at least 30 days before the final date for the repurchase, redemption or conversion requests of shares/units.

If a merging or receiving UCITS has been registered for marketing in other Member States, the information must be provided in one of the official languages of the relevant UCITS host Member State, or in a language approved by its competent authorities. The UCITS required to provide the information is responsible for preparing the translations.

12.3.5 “Share/Unit-exit right”

Following their notification on a CSSF-authorised proposed merger, investors of Luxembourg-established merging and receiving UCITS may request the repurchase, redemption or conversion of their shares/units into those of another similar UCITS managed by the same, or by an entity linked to, the management company without charge. Investors may exercise their rights at least 30 days prior to the final share/unit repurchase, redemption or conversion request date. The right ceases to exist five working days before the exchange-ratio calculation date.

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Where the protection of investors so requires, the merging and receiving UCITS may temporarily suspend the subscription, redemption or conversion of its shares/units. The CSSF may equally order such a suspension.

12.4 Effect of the merger

The effective date of the merger is the date as determined in the common merger draft terms, which must be after the approval, as the case may be, by the investors of the merging or receiving UCITS. Completion of the merger must be published and notified to the CSSF as well as any other competent authority involved in the merger.

Following a merger by absorption or by incorporation all assets and/or liabilities of a merging UCITS are transferred to the receiving UCITS or its depository. The investors of the merging UCITS receive shares/units in the receiving UCITS and possibly a maximum 10% cash payment of the net-asset value of those shares/units. The Luxembourg-established merging UCITS ceases to exist on the date of entry into effect of the merger.

In case of a merger by amalgation the net assets of the merging UCITS are transferred to a receiving UCITS or its depository and the investors of the merging UCITS receive shares/units in the receiving UCITS. A Luxembourg-established merging UCITS continues to exist until all its liabilities have been discharged.

Except if the UCITS has not appointed a management company, the legal, advisory and administrative costs associated with a merger, its preparation and completion may not be borne by the merging or receiving UCITS, nor their investors. They must be borne by the management company and/or the promoter.

13. AUTHORISATION AND SUPERVISION

The CSSF is vested with all supervisory and investigative powers, which are required for the due performance of its functions. Article 147(2) of the 2010 Law lists some of those supervisory and investigative powers of the CSSF, among the most severe of which are the request by the CSSF to cease a practice that is contrary to the provisions adopted in the 2010 Law, the temporary prohibition of exercising professional activities of professionals subject to the 2010 Law or the withdrawal of the authorisation granted to an UCITS or other UCI, a management company or a depository.

14. STOCK EXCHANGE LISTING

For certain institutional investors, the stock exchange listing of the shares/units of an investment fund may be an important factor in determining whether they will be permitted to purchase them. Consequently, it may be desirable to seek exchange listing of the shares/units of an investment fund.

The law of 10 July 2005 on prospectuses for securities, as amended, (the “Prospectus Law”) which implements directive 2003/71/EC does not apply to open-ended funds, only to funds of the closed-end type, thus it does not apply to UCITS.

15. ADDITIONAL CONSIDERATIONS

The UCITS IV Directive creates a great conformity of regulation throughout the EU with respect to those particular types of investment funds that qualify as UCITS. However, as mentioned above, the UCITS IV Directive does not provide

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a common EU regulatory framework for all aspects of investment fund operations, which are left to regulation at the Member State level. It should be pointed out that the characteristics of Luxembourg law discussed below apply equally to UCITS and non-UCITS funds, unless explicitly indicated otherwise.

15.1 Umbrella funds

Luxembourg law permits the formation of multiple compartment funds, which are usually called “umbrella” funds. These are funds organised either as collective investment funds or investment companies, with a multitude of compartments within one single entity. This offers the opportunity to investors to choose within one single fund amongst a multitude of currencies or assets. Furthermore, after having invested in one compartment, the investor may easily switch between one or several compartments of the same umbrella fund.

The 2010 Law permits multi-compartment UCITS to arrange for one compartment of such fund to invest in another compartment of the same fund subject to certain requirements. The investment is further subject to the provisions of the articles of incorporation (SICAV/SICAF) or management regulations (FCP) and the prospectus of the UCITS.

Rules applicable to umbrella funds, contained in both the 2010 Law and CSSF circular 91/75, may be summarised as follows, depending on whether they are organised as collective investment funds or investment companies:

15.1.1 Collective investment funds (FCPs)

• the different compartments of the fund must have a collective generic denomination and a single management company which determines the investment policies and their application to the relevant compartments through a single board of directors or managers of the management company;

• the custody of the assets of the different compartments of the fund must be ensured by a single depository who may however utilise, to the same extent as in respect of funds with a single portfolio, correspondents in different geographic regions;

• each compartment may have its own management regulations;

• the supervision of the fund must be carried out by a single auditor;

• unitholders shall in principle, subject to reasonable limits, be able to switch from one compartment to the other without payment of commissions;

• the management regulations must indicate the currency in which the combined position of the fund is expressed and which is obtained by aggregating the financial positions of all the compartments in the fund;

• the certificates or other documents evidencing the rights of unitholders may only differ on the designation of the respective compartments in respect of which they are issued;

• the issue and repurchase of units attributable to each compartment must be carried out at a price obtained by dividing the net-asset value of the corresponding compartment by the number of outstanding units in such compartment.

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15.1.2 Investment companies

• the net-asset value of a share is calculated on the basis of the net-asset value of the compartment in respect of which the share is issued; the value of shares of the same company shall therefore necessarily differ from one compartment to the other;

• however, each share gives the right to one vote within the exercise of voting rights and shall participate equally in the decisions to be taken in general meetings; the articles of incorporation should distinguish between decisions affecting all shareholders and which are to be considered in a single general meeting and decisions only affecting specific rights of shareholders of one compartment and which are to be considered in the general meeting of one compartment;

• every company must have a share capital represented by shares. This implies that there be a single share capital denominated in a single currency, the nominal or accounting par value and the annual accounts being expressed in that same currency. Whereas the share capital of an umbrella investment company must be denominated in a single reference currency, the net-asset value of each compartment is denominated in the currency of the relevant compartment.

Although an umbrella fund constitutes a single legal entity, in respect of the relations between investors, each compartment shall be treated as a single entity with its own funding, capital gains and losses, expenses, etc., unless a clause included in the constitutional documents of the UCITS provides differently. The assets of one specific compartment of a multiple compartment undertaking for collective investment may only stand security for the debts and obligations of that compartment, unless the articles of incorporation or the management regulations of the undertaking for collective investment provide otherwise. Article 181(5) of the 2010 Law further specifies that the rights of investors and creditors of a particular compartment are limited to the assets of that compartment, unless the instrument of incorporation or management regulations contain a clause to the contrary.

The investment and borrowing restrictions must be complied with inside each compartment with the exception of those restricting the holding of securities of a single issuer, which also apply to the different compartments taken together.

Finally, as regards more particularly the minimum EUR 1,250,000 net assets requirement it is considered that this condition is complied with if the umbrella fund reaches minimum net assets of EUR 1,250,000 in respect of all its compartments taken together within a period of six months following its authorisation.

CSSF circular 12/540 relates to non-launched compartments, compartments awaiting reactivation and compartments in liquidation.

When a compartment is not launched or awaiting reactivation, it will have eighteen months from the date of the approval letter sent by the CSSF to be launched, and eighteen months from the date on which it became inactive to be reactivated.

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If the compartment has not been launched or reactivated before the end of the eighteen-month period:

(a) if the compartment is no longer mentioned in the prospectus/offering document of the relevant fund, the CSSF will consider the proposed launching of the compartment as abandoned;

(b) if the compartment is still mentioned in the prospectus/offering document of the relevant fund, it must be removed from this prospectus/offering document at its next update, which must take place no longer than six months after the end of the eighteen-month period, and the marketing documents must be adapted.

15.2 Fiscal Regulation

The most significant disparities resulting from regulatory matters “beyond the scope of” the UCITS IV Directive are those arising from the differing fiscal requirements applied to investment funds by the various EU countries. A comparative analysis of proposed jurisdictions for organising an investment fund is beyond the scope of this memorandum, but generally requires consideration of the fiscal rules of:

• the jurisdiction where the fund is to be organised,

• the country or countries where the fund intends to invest,

• the country or countries in which the fund offers and sells its shares, and

• the eventual EU law and ECJ case law implications.

All of these matters are further complicated by the applicability (or inapplicability) of double taxation treaties to particular types of fund income or activity.

Purely from a fund perspective, Luxembourg offers a favourable tax regime for investment funds. For the description of this regime, see section 16 of this memorandum. Taking into account the perspective of the individual investor (whose own country seeks to tax his investment in an investment fund), there will also in many instances be opportunities to adapt the fund structure for enhanced tax treatment at investor level.

15.3 Corporate matters

The articles of incorporation of SICAVs and any amendment thereto may now be drafted either in English, French or German and, if drafted in English, no translation into French or German is any longer required when filing the notarial deed containing the resolutions on the amendments to the articles with the Luxembourg register of commerce and companies (Registre de Commerce et des Sociétés).

In derogation from article 73 of the 1915 Law, no copy of the annual accounts and other related documents must be attached to the notice convening the annual general meeting to be sent to registered shareholders of a SICAV. The convening notice must instead indicate where shareholders may inspect these documents and that all documents will be sent to shareholders upon request.

A SICAV's board of directors or managers may furthermore fix in the convening notice a record date as the date for determining shareholders' attendance, voting and participation rights as well as quorum and majority requirements at a general meeting of shareholders. The record date is the fifth day preceding the general meeting of shareholders at midnight (Luxembourg time). The rights of shareholders to attend a meeting and to exercise the voting rights attaching to their shares are determined in accordance with the shares held by shareholders at the record date.

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A new provision on multi-compartment UCITS allows a compartment to invest in another compartment of the same entity subject to certain requirements. The investment is further subject to the provisions of the articles of incorporation or management regulations and the prospectus of the UCITS.

15.4 Confidentiality of investor information and AML regulation

The Management Company of a Luxembourg investment fund (or the Board of Directors of the self-managed SICAV) must ensure that investors in a Luxembourg UCITS fund comply with know-your-customer laws and regulations under Luxembourg law. Such regulations and laws inter alia require full identification of the beneficial owner of the shares / units issued by a fund.

Such function may be delegated to a third party service provider (e.g. registrar agent). However, the overall responsibility for this verification will remain with the Management Company or the self managed SICAV.

16. TAX REGIME

16.1 Funds

16.1.1 Registration duty

Incorporated UCITS are submitted, at the time of their incorporation, to a non-recurring registration duty of EUR 75.

16.1.2 Annual subscription tax (“taxe d'abonnement”)

16.1.3 General tax rate

UCITS are subject to an annual subscription tax of 0.05% calculated and payable quarterly on their aggregate net asset value at the end of the relevant quarter.

16.1.4 Reduced tax rate

The annual subscription tax is reduced to 0.01% for (i) funds invested solely in money-market instruments; (ii) funds solely invested in deposits with credit institutions; and (iii) individual compartments of multiple compartment funds and to individual classes of units/shares created inside one fund or inside a compartment of a multiple compartment fund, provided that the units/shares are reserved for one or more institutional investors.

Money-market instruments for the purpose of article 174(2)(a) of the 2010 Law means “any debt securities and instruments, irrespective of whether they are transferable securities or not, including bonds, certificates of deposits, deposit receipts and all other similar instruments, provided that at the time of their acquisition by the relevant undertaking, their initial or residual maturity does not exceed twelve months, taking into account the financial instruments connected therewith, or the terms and conditions governing those securities provide that the interest rate applicable thereto is adjusted at least annually on the basis of market conditions”.

The CSSF has also accepted that funds whose weighted average residual maturity of the portfolio does not exceed twelve months are also eligible for such reduced tax rate of 0.01%.

The CSSF shall establish a list of investment funds fulfilling the requirements to benefit from the reduced rate of 0.01%.

Registration on this list must be expressly requested from the CSSF.

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Registration is subject to the following conditions:

(i) the requesting undertaking must have as its exclusive object either the collective investment in money-market instruments and the placing of deposits with credit establishments or the collective placing of deposits with credit establishments; and

(ii) the prospectus of the applying undertaking specifically indicates its investment policy;

(iii) the request must be accompanied by relevant documents evidencing the composition of the portfolio of the relevant fund, or compartment.

These conditions apply equally to the individual compartments of a multiple compartment UCITS.

16.1.5 Exemptions

UCITS, compartments of multiple compartment UCITS and share classes are exempt from subscription tax provided:

(i) the shares/units are reserved for institutional investors;

(ii) they invest exclusively in money-market instruments or deposits with credit institutions;

(iii) the weighted residual portfolio maturity is 90 days or less ; and

(iv) they benefit from the highest possible ranking delivered by a recognised rating agency.

If different classes of shares exist within a fund, or its compartments, only those shares that are reserved to institutional investors may benefit from the exemption.

The subscription tax exemption also applies to exchange-traded funds (or their compartments) whose securities are listed or regularly traded on at least one stock exchange or other regulated market and whose sole purpose is to track the performance of an index.

Further exempt from subscription tax are funds, or their compartments, whose main objective is the investment in microfinance institutions. A Grand-Ducal regulation of 14 July 2010 lays down the conditions and criteria for this exemption.

Funds that hold a microfinance label from the Luxembourg Fund Labelling Agency a.s.b.l. (LuxFLAG) are automatically exempt from subscription tax and funds not holding the LuxFLAG microfinance label may be exempt provided that their investment policy requires that at least 50% of their net assets must be invested in one or more microfinance institutions within the meaning of article 2 of the above-mentioned Grand Ducal regulation.

Assets that were invested in other Luxembourg funds, which have already been subject to subscription tax, are exempt for purposes of computing the subscription tax.

16.2 Management Company

Fund management companies established in Luxembourg (in the form of a corporate, resident entity) will be subject to Luxembourg corporate income tax and net worth tax at standard rates. Their taxable base may however typically be reduced by different types of deductions.

Additionally, fund management services supplied in Luxembourg are exempt from VAT.

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16.3 Investors

Investors are not subject to any capital gains, income, withholding, estate, inheritance or other taxes in Luxembourg (except if they are domiciled, resident or have a permanent establishment in Luxembourg). Non resident investors are not subject to tax in Luxembourg on any capital gains realized from January 1, 2011 upon disposal of their investment.

16.4 Tax savings directive

On 3 June 2003 the European Union adopted Council Directive 2003/48/EC (the “Tax Savings Directive”). The Tax Savings Directive has been implemented in the Grand Duchy of Luxembourg by the law of 21 June 2005, with effect as of 1 July 2005. Pursuant to the Tax Savings Directive, Member States of the EU are required to provide to the tax authorities of other Member States details of payments of interest and other similar income made by a paying agent to an individual in another Member State. However, in view of certain structural differences, whereas 25 Member States now apply exchange of information, Austria and the Grand Duchy of Luxembourg instead apply a withholding tax system to interest payments at a rate of 35%.

The withholding tax exclusively applies to interest, defined broadly. Dividends and capital gains are excluded. Since investment funds may distribute dividends or redeem shares or units that economically constitute interest (e.g. dividends paid by money-market funds), certain dividend distributions and the redemptions of shares or units made by investment funds are assimilated to interest payments and hence are subject to withholding tax. This assimilation depends upon the status of the investment fund and the nature of the income generated by it.

All the distributions and redemptions by Luxembourg based investment funds are potentially in the scope of the Tax Savings Directive, with very limited exceptions.

Investment funds that are in the scope on the basis of their status, will be out of scope (no obligation to withhold a tax) or in the scope (obligation to withhold a tax) depending on the percentage of the assets of the investment fund invested in debt-claims. Basically, the withholding tax applies unless the investment fund is able to report the nature of its investments and of income arising therefrom so as to demonstrate conclusively that it does not fall within such scope.

16.5 Value added tax (VAT)

The Luxembourg tax authorities in circular no. 723 of 29 December 2006 have expressly recognised that all investment funds are VAT taxable persons (it being understood that in the case of a FCP the management company is the VAT taxable person). The consequence of this is that Luxembourg VAT (and the below exemptions) will be applicable under the reverse charge mechanism where a Luxembourg-based fund receives services from suppliers in other EU member states.

The following services to Luxembourg investment funds are exempt from VAT:

(i) portfolio management functions and administration functions such as those set out in annex II of the 2010 Law under the heading “Administration”;

(ii) investment research and advice;

(iii) administrative and accounting services provided by a third party on the condition that they constitute a distinct whole together with the portfolio management and administration functions and are as such specific and essential for the management of the fund;

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Given the breadth of this exemption, investment funds and their management companies will in most cases derive an almost 100% exempt turnover. For that reason Circular 723 denies them the possibility to deduct the input VAT they might have borne on non-exempt services.

With regard to the services provided by a depository to an investment fund, supervisory services as defined in articles 17(1), 18(2), 33(1) and (3) of the 2010 Law for UCITS are liable to Luxembourg VAT at a reduced rate of 12%. A depository must therefore, when invoicing a Luxembourg investment fund, prepare an invoice, which differentiates between the fees payable for exempt services and the fees payable for the taxable services.

Services relating solely to the provision of equipment and technical assistance such as the setting up of an IT system are also subject to VAT, this time at the normal 15% rate.

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CONCLUSION

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Luxembourg has an extensive and highly developed regulatory structure for investment funds that nevertheless offers great flexibility and unique opportunities for investment fund organisers.

The 2010 Law makes possible the creation of funds in Luxembourg using a variety of corporate structures and featuring a broad range of investment possibilities. To the extent that such funds are UCITS the advantage of being able to market such funds in other Member States has been further extended.

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For further information feel free to contact the following persons:

Alex SCHMITT: aschmitt@bonnschmitt.net

Corinne PHILIPPE: cphilippe@bonnschmitt.net

Marcus PETER: mpeter@bonnschmitt.net

Christine MARC: cmarc@bonnschmitt.net

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BONN & SCHMITT is a full service commercial law firm that practices all aspects of business law, with special expertise in:

CorporateCorporate LawMergers and AcquisitionsCorporate FinanceRestructuring

TaxCorporate and International Tax AdvisoryIndirect Taxes and VATTax LitigationEstate Planning

Banking, Capital Markets and RegulationBanking and Finance Financial Services and RegulationCapital Markets and Securities Laws Structured Finance and Derivatives

Investment Management and Private EquityAsset Management and ServicesInvestment FundsAlternative Investment FundsPrivate Equity

Insurance and ReinsuranceRegulation and LicensingInsurance Policies Linked ProductsProfessional Liability Insurance

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Real EstateReal Estate AcquisitionsReal Estate Investment StructuresProject FinanceEnvironmental Law and Regulation

IP and ITIntellectual Property and TrademarksE-CommerceE-MoneyData Protection

Insolvency and RestructuringLocal Insolvency and ReorganizationCross-Border ProceedingsRealization of Security and CollateralRefinancing and Restructuring of Debt

Employment and BenefitsIndividual Employment LawCollective Employment LawParticipation and Incentive Schemes Litigation

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22-24, Rives de ClausenL-2165 Luxembourg

B.P. 522L-2015 LuxembourgTel: +352 27 855Fax: +352 27 855 855

Visit us at: www.bonnschmitt.net

22-24, Rives de ClausenL-2165 LuxembourgB.P. 522L-2015 LuxembourgTel: +352 27 855Fax: +352 27 855 855E-mail mail@bonnschmitt.net

Visit us at www.bonnschmitt.net

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