The main legislation governing operation of funds is the UCITS Law from 1988. The first part of the stated law regulates UCITS compliant funds. UCITS compliant funds are open-ended and compliant with the legislative requirements on eligibility of assets, spreading of risks, prohibition of short selling and leveraging, implementation of a risk management process. They are managed by a management company domiciled in Luxembourg or in another EU country.
The second part of the stated law regulates funds (part II funds), which are excluded from the UCITS regime due to various reasons. Such funds are not fully compliant with all requirements which must be met by UCITS funds.
Luxembourg investment funds are established in one of the two forms: a contractual form or a corporate form. A contractual form is materialized in a Fonds de Commun de Placement (FCF), which is an undivided collection of assets managed by a management company on behalf of joint owners (the so-called unit holders). A FCF is established by a contract between a management company and a depositary bank. The contract includes management regulations. Investors buy units of a specific fund and so become parties to the contract. Each unit represents a right to the undivided collection of assets and the liability of unit holders is limited up to the amount contributed to their units.
A corporate form is materialized in a SICAV – an investment company with variable capital. It is outlined as a requirement in its articles of incorporation that the amount of the capital must at all times be equal to the net asset value of the vehicle. A person purchasing units is becomes a shareholder and is granted corresponding rights (e.g. voting rights at a general meeting).