On 5 January 2018, the CSSF updated its Frequently Asked Questions (FAQ) document on the Law of 17 December 2010 (the "UCI Law") in relation to investment by UCITS in other UCIs as per Article 41(1)(e) of the UCI Law on the UCITS' investment policies.

This update is accompanied by a Press Release explaining the CSSF's change in policy.

In this respect FAQ 1.4 which used to explain the requirements allowing UCITS to invest in non-UCITS ETFs has been deleted.

The FAQ 1.4 used to state that:

"Non-UCITS ETFs are eligible investments for UCITS if they effectively comply with all criteria of Articles 2(2) and 41(1)(e) of the Law 2010, notwithstanding that the offering documents of non-UCITS ETFs grant possibilities which are not equivalent to requirements applicable to UCITS.

Given the specificities of each other ETF, an eligibility analysis must be carried out on a case-by-case basis and the UCITS must continuously ensure that the investment rules applied are equivalent to the investment rules applicable to UCITS, for example, via a system of compliance control or a written confirmation of the ETF or of the manager".

As of today, this implies that the CSSF will not accept simple compliance controls or a written confirmation of the ETF or of its manager as eligibility analysis anymore.

The CSSF recalls that under article 50(1)(e) of UCITS Directive, the other UCIs, in order to be eligible for investments by a UCITS:

"(i) shall be prohibited from investing in illiquid assets (such as commodities and real estate) in line with Article 1(2)(a) of the UCITS Directive;

(ii) shall be bound by rules on asset segregation, borrowing, lending, and uncovered sales of transferable securities and money market instruments which are equivalent to the requirements of the UCITS Directive in line with article 50(1)(e)(ii) of the UCITS Directive; mere compliance in practice shall not be considered sufficient;

(iii) the fund rules or instrument of incorporation shall include a restriction according to which no more than 10% of the assets of the UCI can be invested in aggregate in units of other UCITS or other UCIs in line with article 50(1)(e)(iv) of the UCITS Directive; mere compliance in practice shall not be considered sufficient".

Therefore, consequences for UCITS which have invested in other UCIs following the policy laid down in FAQ 1.4 are the following:

  • They have to disinvest from these UCIs as soon as possible taking into account the best interests of the investors;
  • New investments in such UCIs are no more allowed.

The CSSF will contact until 31 March 2018 the investment fund managers which have invested in such UCI to check the compliance with the new policy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.