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

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

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

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

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

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

They must also be bound by rules on asset segregation, borrowing, lending, and uncovered sales of transferable securities and money market instruments that are equivalent to the requirements under article 50(1)(e)(ii) of the UCITS directive. Simple compliance in practice is no longer considered sufficient.

The non-UCITS fund’s rules or instrument of incorporation must also include a provision stipulating that no more than 10% of its assets in aggregate can be invested in UCITS or other UCIs in compliance with article 50(1)(e)(iv) of the UCITS directive. Again, mere compliance in practice is not sufficient.

As a result, UCITS funds subject to the 2010 legislation that have invested in non-UCITS on the basis of the policy previously set out in Point 1.4 of the FAQs must disinvest from these funds as soon as possible, subject to the best interests of the investors. The CSSF says it will contact fund managers that have invested in such UCIs to check compliance with the new policy by March 31, 2018. In addition, new investments in such funds is no longer allowed unless the new requirements are fulfilled.

The version of the CSSF’s Frequently Asked Questions regarding Luxembourg’s legislation of December 17, 2010 relating to undertakings for collective investment, updated on January 5, 2018, may be viewed at