Private Equity funds. Venture Capital funds. Hedge funds. Other structures. 2.2 Laws. Retail funds UCITS; non-ucits;

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1 Luxembourg Regulation FUNDS AND FUND MANAGEMENT Type of funds UCITS funds Three classes of funds comply with the definition of UCITS as set out in the EU UCITS Directive 85/611/EEC that was transposed into Luxembourg legislation by Part I of the law of 20 December 2002 on Undertakings for Collective Investment: The Fonds commun de placement en valeurs mobilières (FCP) is a common fund that may invest in transferable securities, money market instruments, units of investment funds, deposits, and financial derivative instruments. This type of fund is somewhat comparable to the unit trust. The fund has no legal personality and must be managed by a management company established in Luxembourg. The Société d investissement à capital variable en valeurs mobilières (SICAV) is a corporate fund that may invest in transferable securities, money market instruments, units of investment funds, deposits, and financial derivative instruments. A SICAV is a limited liability company with variable share capital. The SICAV may either designate an approved management company based in Luxembourg or act as a self-managed investment company. The so-called other UCITS which groups all UCITS not falling under the first categories. These generally take the corporate form of société d investissement à capital fixe (SICAF) where the nominal value of the issued capital does not change. Such companies may, however, repurchase their own shares. Non-UCITS funds The following types of funds, which do not comply with the UCITS directive, are authorized in Luxembourg: Closed-ended funds

2 2 Luxembourg Regulation Funds not investing in transferable securities and money market instruments Real estate funds investing in real estate or real estate rights Private Equity funds Venture Capital funds Hedge funds Funds not marketed in Europe or restricted to non EU citizens Dedicated funds (funds not open to the public). The non-ucits funds are either regulated under Part II of the law of 20 December 2002 (retail funds) or under the law of 13 February 2007 on Specialized Investment Funds that are dedicated to well-informed investors. Both types may adopt the structure of an FCP, a SICAV, or a SICAF as described in the preceding paragraphs. Other structures Luxembourg law also allows for the creation of other investment structures for securitization and asset pooling. 2.2 Laws Retail funds The law regulating investment funds and management companies was passed on 20 December 2002 and applies to UCITS and non-ucits investment funds. The scope of the law covers: UCITS; non-ucits; foreign funds distributed in Luxembourg; management companies of UCITS funds; and management companies of non-ucits funds.

3 3 Luxembourg Regulation Specialized investment funds The law of 13 February 2007 governs specialized investment funds (SIF), which are destined for well-informed investors. The concept of well-informed investor includes institutional investors, professional investors, and other well-informed investors that invest a minimum of EUR 125,000 or are considered as sophisticated retail or private investors. The SIF may invest in all types of assets in accordance with the principle of risk spreading, with a general 30 percent issuer limit investment restriction. There is no requirement for the SIF to be established by an institutional promoter and the investment manager is not subject to regulatory approval. The board of directors, the custodian and the auditor of the SIF are however subject to regulatory approval. The minimum capital for a SIF is EUR 1,250,000. The SIF falls under an adapted regulatory regime, with no requirement to produce a semiannual financial report and no minimum content requirements for the offering documentation. The SIF may be launched prior to obtaining approval from the regulator, with the application for approval to be submitted to the regulator within one month of SIF launch. The SIF must appoint a Luxembourg authorized bank or savings institution as custodian. This could include the Luxembourg subsidiary or permanent establishment of a foreign bank. Other structures On 8 June 1999 Luxembourg introduced a law on international pension funds, creating pension funds in the form of open-ended savings companies (SEPCAV) and pension savings associations (ASSEP). On 22 March 2004, Luxembourg introduced a law that deals with securitization funds. On 15 June 2004 Luxembourg introduced a new law on investment companies in risk capital (SICAR) for private equity and venture capital investments. 2.3 Managers, trustees, and custodians Under Luxembourg s investment fund laws, all Luxembourg based funds are required to have their administration carried out in Luxembourg. Administration covers a wide area of activities including the preparation of the prospectus and financial reports, accounting, issue and repurchase of shares, correspondence, and calculation of the net asset value. These activities may be carried out either by the management company or by a local Luxembourg institution such as a bank under a delegation contract. The management company of an FCP must be located in Luxembourg. It must be incorporated in the form of a public limited company (SA), a private limited company (Sàrl), a co-operative society (SC), or a partnership limited by shares.

4 4 Luxembourg Regulation The shares must be in registered form and the minimum paid up capital must be at least EUR 125,000. If the management company manages UCITS, it has to comply with additional requirements in terms of capital, management, and organization. These requirements derive from the UCITS directive and are transposed in the law of 20 December 2002 and the CSSF (supervising authority) circular 03/108. A SICAV or SICAF is managed by its directors. There is no restriction on their nationality or place of residence. Care must be taken, however, to ensure that if the directors are resident outside Luxembourg, the investment fund is not considered to be resident in a country other than Luxembourg, and thus exposed to a tax liability in the other jurisdiction. If the SICAV/SICAF is a UCITS, it may either designate a management company or be considered as a self-managed SICAV. If it is considered as a self-managed SICAV, additional requirements will apply (management, organization). The directors of a SICAV or SICAF and the management company of an FCP may appoint investment advisers that are resident outside Luxembourg. The custodian of a Luxembourg collective investment fund must be a Luxembourg authorized bank or savings institution. This could include the Luxembourg subsidiary or permanent establishment of a foreign bank. There are no legal restrictions on the fees charged by the manager or the depositary bank either in the case of UCITS funds or non-ucits funds. 2.4 Investment restrictions The investment restrictions for UCITS funds are as set out in the UCITS directive. There are, in addition, special investment rules governing non-ucits and certain types of funds such as hedge funds, commodity, futures, property and venture capital funds. In relation to these types of funds, the investment criteria are defined by the CSSF in circulars. UCITS non-ucits Transferable securities (bonds, Allowed if listed/quoted Allowed shares, money market) Unquoted shares 10% maximum Allowed Movable and real immovable Only for own use Allowed property Precious metals or certificates Not allowed Conditions representing them Options, futures, etc. Allowed Special rules govern financial futures and option funds Liquid assets Allowed Allowed Investment in other funds Allowed if UCITS or Allowed

5 5 Luxembourg Regulation UCITS non-ucits similar (including Hedge Funds) Non-voting stock 10% of non voting stock maximum Defined per Other investment fund 20% of NAV per issuer Defined per New issues Transferable securities of one issuer General rule Unless issued or guaranteed by EU Member State, local authorities or public international body of which at least 1 EU State is a member Unless debt securities issued by a credit institution with registered office in EU subject to particular public supervision Yes provided quoted within 1 year 10% of NAV maximum and total value of transferable securities in each of which it invests more than 5% cannot exceed 40% of NAV 35% of NAV maximum (up to 100% under certain conditions) Special rules govern venture capital funds Defined per Defined per 25% of NAV maximum Defined per 2.5 Borrowings There are restrictions on the power of funds to borrow as follows: UCITS non-ucits General 10% maximum on a temporary basis No fixed limit Determined on a case-by-case basis Specific rules for hedge funds Uncovered short sales Not allowed Allowed Specific rules for hedge funds 2.6 Accounts and prospectus Audited annual accounts have to be issued within four months of the year-end. In addition, un-audited semiannual financial statements must be issued within two months of the half-year end. The SIF must produce audited annual accounts within six months of year-end and there is no obligation to produce

6 6 Luxembourg Regulation semiannual accounts. Statistical information concerning the activities of the fund has to be provided to the CSSF each month. A Luxembourg fund may choose its accounting date freely. Umbrella funds may be denominated in different currencies but consolidation is required for accounting purposes. Financial statements for funds are generally prepared in the currency in which the shares or units are denominated. The law specifies the contents of the prospectus. This includes information on the management company, the custodian, the fund and the investment advisory firm whose services are being used. Information must also be given in relation to the detailed operation of the fund such as share redemption, payments to shareholders etc. The prospectus must be approved by the CSSF in advance of publication. UCITS funds are also required to publish a simplified prospectus. 2.7 Supervision The supervisory authority in Luxembourg is the Commission de Surveillance du Secteur Financier (CSSF), previously the Central Bank of Luxembourg (BCL), previously the Luxembourg Monetary Institute (IML), 110, Route d'arlon, L Luxembourg. It contains a separate department for investment funds with around 125 members of staff, some who have former direct experience of the fund management industry. The normal time period for obtaining approval for a new fund is two to three months but this may take longer if there are nonstandard elements in the proposal. Normally, the services of a Luxembourg based bank together with a local law firm would be used in submitting a new fund for approval. Once approved, the CSSF will continue to be the supervisory authority over the activities of the fund. In particular publicity and marketing materials as well as any changes in agreements have to be vetted. 2.8 Fund ownership There are no specific restrictions on the percentage of units that may be held by any one person or group of persons. However the definition of a UCITS in Luxembourg law refers to capital raised from the public. Whilst there is no definition of what constitutes public, a CSSF circular has defined it as where a collection of funds assigned to collective investment is not restricted to a small circle of persons only. There are no restrictions on the percentage of units to be held by any one person or group of persons in the case of a fund that is not a UCITS. Sub funds or classes of units of UCITS funds may be dedicated to some institutional investors. 2.9 Fund structure UCITS, non-ucits and SIFs may be structured as umbrella funds. Asset pooling structures may also be authorized. Multi-class structures are allowed

7 7 Luxembourg Regulation (for example, distribution/capitalization, hedging, currency, varying fee structures, categories of investors, etc.) 2.10 Stock exchange Where the shares or units of the investment fund are to be quoted on the local Luxembourg Stock Exchange, it is possible to make application for the necessary approval at the same time as approval for the fund is being sought. The requirements for obtaining a listing are not less onerous than those for publicly quoted companies, either in the case of UCITS funds or non-ucits funds. Foreign funds may also be listed on the Luxembourg Stock exchange Bank secrecy Bank secrecy laws exist in Luxembourg but credit institutions and financial professionals are required to provide the authorities with all necessary information and to cooperate fully with the state prosecutor in the context of money laundering investigations. There are strict anti-money laundering laws in Luxembourg that apply both to UCITS funds and non- UCITS funds Fund set-up The creation of a fund in Luxembourg takes from between two to three months on average Foreign funds UCITS situated in other EU Member States that market their units in Luxembourg must comply with the laws, regulations, and administrative provisions in force in Luxembourg in relation to marketing. The UCITS must appoint a banking or savings institution under Luxembourg supervision, for the making of payments to unitholders and for repurchasing units. It must also take measures to ensure that Luxembourg unitholders receive all the information to which they are entitled. It must lodge certain information with the CSSF and may begin to market its units two months after it has lodged that information, unless the CSSF objects. A non-ucits fund located outside Luxembourg may market its units in Luxembourg only if it is subject to permanent supervision in its state of origin by a supervisory authority established by law to ensure protection of investors. It must appoint a banking or savings institution (within the meaning of Luxembourg law on the supervision of such institutions) to ensure that facilities are available in Luxembourg to make payments to unitholders and repurchase units.

8 8 Luxembourg Regulation 2.14 Bearer shares Bearer shares and registered shares are used in Luxembourg Use of the internet Funds domiciled in Luxembourg are actively promoted and distributed via the Internet. Transactions on funds shares or units via the internet are offered by distributors abroad and some major local promoters and funds brokers also. Luxembourg released a law on electronic commerce in KPMG in Luxembourg Vincent Heymans KPMG S.à r.l. 9, allée Scheffer Luxembourg L-2520 Luxembourg Tel Fax vincent.heymans@kpmg.lu The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.