The approach to UCIs in Luxembourg is undergoing a radical rethink. Jacques Elvinger and Frédérique Lifrange report

The law of 19 July 1991 concerning undertakings for collective investment (UCIs) was established to allow the formation of UCIs in Luxembourg. As with similar vehicles in other countries, in particular the Spezialfonds under German law, the securities of these UCIs are reserved for one or several institutional investors (institutional UCIs). The law of 1991 thus differs from the laws of 30 March 1988 and 20 December 2002 that govern UCIs, the securities of which are intended to be placed with the public by means of public or private offers.

In all other respects, notably as regards the rules applicable to the operation and monitoring of institutional UCIs, the 1991 law refers to the provisions of the 1988 law, which governs UCIs under Part II of that law (ie non-Undertakings for the Collective Investment of Transferable Securities (Ucits)). The regime applicable to institutional UCIs is therefore similar to the one applicable to UCIs created under Part II of the 1988 law – apart from the possibility of having a single investor.

On the other hand, there is an obligation to restrict shares or units to institutional investors. Further, in light of the fact that institutional investors do not need a similar protection to the one that needs to be assured for retail or private investors, the Luxembourg regulator (Commission de Surveillance du Secteur Financier (CSSF)) is, in practice, more flexible in certain respects, notably regarding diversification rules.

The 1991 law has notably allowed the creation of vehicles reserved for insurance companies or designated for institutional investors wishing to invest in a vehicle dedicated to them. Recently, especially in 2005, growing interest appeared in the creation, under the 1991 law, of UCIs investing in real estate.

The 1991 law, which refers to the 1988 law, is not a self-contained law. It will therefore have to be amended or redrafted by 13 February 2007, after which the 1988 law will be repealed as a result of the transitional provisions included in the 2002 law, which implements the Ucits Directive 85/611/EC, as amended (the so-called Ucits III regime), into Luxembourg law.

This repealing process has now been initiated by the government depositing, on 5 October 2006, a bill on specialised investment funds (SIFs) with parliament.

Specialised investment funds
The 1991 law was drafted for the purpose of ‘supplementing’ the 1988 law. Consequently, rather than being a complete text including all the rules applicable to institutional UCIs, the 1991 law refers to the provisions of the 1988 law.
The bill institutes a self-contained law and, to further distinguish the vehicles created under this new regime from UCIs (the securities of which are intended to be placed with the public) that are governed by the 2002 law, refers to them as SIFs.

Flexibility with respect to eligible assets
Like Part II of the 2002 law, and in contrast to the law of 15 June 2004 relating to the investment company in risk capital, the bill allows significant flexibility with respect to the assets in which SIFs may invest. Accordingly, vehicles investing in all types of assets could be created under the new law. The new regime could therefore be used, inter alia, for the creation of transferable securities funds, money market funds, real estate funds, hedge funds, private equity funds and debt funds.

Maintaining the principle of risk-spreading
Like UCIs governed by the 2002 law (and UCIs currently governed by the 1991 law), SIFs will have to invest in accordance with the principle of risk-spreading. The CSSF could, however, allow a lower level of diversification, as SIFs will be restricted to well-informed investors. It is expected that principles-based investment restrictions will be applicable, rather than quantitative investment restrictions.

Eligible investors
Eligible investors in SIFs comprise, beside institutional investors, professional investors and other well-informed investors who invest a minimum of e125,000 (£83,500) or have an assessment made by a credit institution or another financial sector professional certifying their capability to appraise the contemplated investment and the risk thereof. This means that sophisticated retail or private investors will be allowed to benefit from the new regime.

No requirement for a promoter
In contrast to UCIs, the securities of which are intended to be placed with the public, that are governed by the 2002 law, it will not be required for SIFs to be set up at the initiative of an institutional promoter with significant financial resources approved by the CSSF. Besides, the CSSF will no longer check the financial standing of the investment managers of SIFs, but will focus on the repute and the expertise of the directors of the vehicle in light of the investment policy.
SIFs can be created and start their activities before having received regulatory approval, provided that an application for authorisation is filed with the CSSF within the month following their creation.

Flexible share capital structure
Like UCIs governed by the 2002 law and those currently governed by the 1991 law, the minimum capitalisation for a SIF is e1.25m (£840,000). However, the time period within which this minimum must be reached is extended to 12 months after the authorisation of the vehicle, compared with six months for UCIs under the 2002 law. Except for the fonds commun de placement (like mutual funds), the reference should be the subscribed capital rather than the net assets, but the issue premium can be included.
Furthermore, under the new regime the possibility to issue partly paid shares should be extended to investment companies with variable capital (société d’investissement à capital variable (Sicav)).

Other lighter requirements
Although SIFs are subject to the supervision of the Luxembourg regulator, as is the case for UCIs created under the 2002 law (and UCIs currently governed by the 1991 law), the bill provides for a somewhat less strict regulatory regime. For instance, there is no requirement to publish a semi-annual financial report and the bill does not provide for a specific schedule with respect to the minimum contents of the offering document.
In the same manner as UCIs created under the 2002 law and the 1991 law, SIFs have to appoint a depository, which must be a Luxembourg credit institution or a Luxembourg branch of a foreign credit institution. However, the bill does not require the depository to perform the additional monitoring functions imposed by the 2002 law and the 1991 law in relation to UCIs.

Additional flexibility
Under the bill, Sicavs will not be required to be a limited-liability company, as is the case for Sicavs subject to the 2002 law or the 1991 law. Under the new regime, a Sicav can also be established in the form of a partnership limited by shares, a private limited company or a cooperative set up as a public limited company.
In addition, the conditions and procedures for the issue and redemption of shares or units are relaxed compared with the rules applicable to UCIs governed by the 2002 law or those currently subject to the rules of the 1991 law. In this regard, the bill provides that the conditions and procedures applicable to the issue and, if applicable, the redemption of shares or units is determined in the constitutive documents. As a result, for example, there is no requirement that the issue price be based on the net asset value, as is the case for a Sicav governed by the 2002 law or the 1991 law.

In the same manner as for UCIs governed by the 1991 law, SIFs will be subject to the subscription tax at a rate of 0.01 per cent (compared with 0.05 per cent for most UCIs existing under the 2002 law). In the same manner as the 2002 law, the bill exempts from the subscription tax the portion invested in other Luxembourg UCIs subject to this tax, certain institutional cash funds and pension pooling funds. In respect of the latter, the bill innovates by not requiring (as required by the 2002 law) that the participating pension schemes be of the same group and by permitting individual sub-funds and classes reserved to pension schemes to also benefit from the exemption.

Continuity for UCIs under the 1991 law
Given that there are currently 193 UCIs governed by the 1991 law (CSSF, 5 October 2006), it is important to ensure that these entities may continue their investments with no impact other than formal amendments to their documentation to bring them into compliance with the new regime.
To this end, the bill includes appropriate transitional provisions ensuring continuity for UCIs presently existing under the 1991 law by providing that all UCIs existing under the 1991 law will be automatically subject to the new law (ie will automatically become SIFs) and that all references in the constitutional documents of such UCIs shall be construed as references to the new law.

Jacques Elvinger is a partner and Frédérique Lifrange an associate at Elvinger Hoss & Prusse