Key implications for investment limits, borrowing and funds

CSSF Circular 25/901: Modernising the Regulatory Framework for SIFs, SICARs and Part II UCIs

On 19 December 2025, as part of a broader effort towards modernisation, clarification and simplification of existing rules, the Commission de Surveillance du Secteur Financier (CSSF) has issued Circular 25/901 which repeals and replaces a certain number of long standing circulars (including CSSF 02/80, 06/241, 07/309 and parts of IML 91/75) applying to specialised investment funds (SIFs), risk capital funds (SICARs) and Part II UCIs, thus marking a significant step in modernising and consolidating the regulatory framework applicable to Luxembourg’s alternative investment fund landscape.

Alongside Circular 25/901, the CSSF also published a “Compilation of the key concepts and terms used in the field area of investment funds other than UCITS and MMFs and explanations on how the CSSF defines and understands them” used in alternative investment fund regulation. This compendium document explains how the CSSF interprets common industry concepts in the context of SIFs, SICARs and Part II UCIs. Although not itself a binding regulatory text, it serves as an invaluable reference for industry participants and supervisors alike, facilitating clearer communication and technical dialogue with the regulator. The glossary is structured around four main (but non exhaustive) areas:

i. Investment policy concepts
ii. Strategies and asset classes
iii. Investment methods
iv. Subscription and redemption models

Background and Rationale

Over recent years, Specialised Investment Funds (SIFs), Investment Companies in Risk Capital (SICARs) and Undertakings for Collective Investment subject to Part II of the Law of 17 December 2010 (Part II UCIs) have demonstrated strong innovation and variety of structures. However, the existing regulatory framework, spread across multiple CSSF circulars issued over the years, struggled to align with evolving market practices or the needs of industry participants. To address this concern, Circular 25/901 consolidates, replaces and updates a mosaic of CSSF circulars (including CSSF Circular 02/80, 07/309, 06/241 and parts of IML 91/75), creating a single and coherent document structured by thematic areas of regulation. In essence, the CSSF’s approach in issuing Circular 25/901 is underpinned by several objectives:

• Consolidation of Guidance: Circular 25/901 brings together previously fragmented guidance into a single reference document that can be more easily updated and extended as market practices evolve;
• Clear and Consistent Terminology: Enhancing clarity by standardising definitions and terminology across the SIF, SICAR and Part II UCI spheres, making supervision and compliance expectations more predictable and transparent;
• Alignment with Market Practices and EU Regulations: The updated framework better reflects operational realities and aligns with relevant European regulations where appropriate, without fundamentally altering the legal regime for these fund types;
• Pro-Investor and Competitiveness Perspective: The new circular seeks to strengthen investor protection while enhancing Luxembourg’s attractiveness and competitiveness as a domicile for alternative investment funds; and
• Principles-Based rather than Prescriptive Rules: Where feasible, the CSSF reframes certain requirements around general supervisory principles rather than overly detailed rules, reducing the need for frequent updates and supporting flexibility.

In addition to the need to consolidate the patchwork of circulars, the CSSF wanted to adopt a variable geometric regulatory approach depending on the investor profile (i.e. unsophisticated retail investors versus professional and well informed investors). This approach was also deemed necessary in the context of the so called “retailization of alternative investment funds”. It is worth noting that the Circular does not apply to alternative investment funds authorized as ELTIFs.

Main Features

1. Investment and Borrowing Limits:

Circular 25/901 provides updated and more precise guidance on investment policies, particularly in relation to risk-spreading requirements applicable to SIFs and Part II UCIs.

The different rules for Part II UCIs, previously set out in CSSF Circular 02/80, and SIFs, previously set out in CSSF Circular 07/309 are replaced by a single and harmonised regime that distinguishes no longer on the basis of fund type, but on the basis of investor type:

• Funds or compartments whose securities may be marketed to “unsophisticated retail investors”, which is defined as a retail investor as defined in the AIFM Law and who does not meet the criteria of a “well-informed investor” as defined in the SIF Law or the SICAR Law (“Retail AIFs”), and
• Funds or compartments whose securities are reserved to well-informed investors or professional investors (“Non-Retail AIFs”)

For Retail AIFs, the main rules can be summarised as follows:

• Not more than 25% (instead of 20% previously for Part II UCIs, and 30% for SIFs) of its assets or commitments can be invested in a single entity or person (except for securities issued or guaranteed by an OECD member state or certain other public entities), one or the same undertaking for collective investment or investment vehicle, or other asset.
• By derogation to the foregoing, not more than 50% of its assets or commitments in any one and the same infrastructure investment.
• Borrowing for investment purposes must, in principle, not exceed 70% of the assets or commitments. This excludes temporary borrowing arrangements that are fully covered by capital commitments of investors (e.g. commitment liquidity facilities) as well as debt securities issued by the fund or compartment whose income is linked to the performance of the assets in its portfolio.

For Non-Retail AIFs, the main rules can be summarised as follows:

• Not more than 50% (instead of 20% previously for Part II UCIs, and 30% for SIFs) of its assets or commitments can be invested in a single entity or person (except for securities issued or guaranteed by an OECD member state or certain other public entities), one or the same undertaking for collective investment or investment vehicle, or other asset.
• By derogation to the foregoing, not more than 70% of its assets or commitments in any one and the same infrastructure investment.
• No hard limits on borrowing for investment purposes.

Circular 25/901 also provides for certain derogations, including:

• A ramp-up period during which the fund or compartment is allowed to build up its portfolio, and which must in principle be limited to 12 months for funds or compartments, the main purpose of which is to invest in UCITS eligible assets, or 4 years for funds or compartments making private investments;
• A wind-down period not subject to risk-spreading requirements is, in principle, only allowed for funds or compartments making private investments. No hard limit is set in terms of duration.

In both cases, the fund or compartment must not be exposed to excessive risks or conflicts of interest during these periods when the investment limits do not apply.

Circular 25/901 further clarifies how concentration limits should be assessed in practice, including in the context of indirect investments, fund-of-fund structures and derivative exposures. At the same time, Circular 25/901 confirms the CSSF’s discretion to grant derogations from certain risk-spreading requirements where justified by the nature of the investment strategy and the profile of the targeted investors, thereby preserving flexibility for sophisticated or specialised fund structures.

What it means in practice:

• Circular 25/901 innovates by creating a level playing field in terms of investment and borrowing limits between Part II UCIs and SIFs, when they are structured as Non-Retail AIFs.

2. Refined Interpretation of Risk Capital for SICARs:

For SICARs, Circular 25/901 places renewed emphasis on the proper understanding and justification of the “risk capital” concept. It clarifies that qualifying investments must involve a genuine element of entrepreneurial risk that goes beyond mere market risk, and be made with the intention of contributing to the development of the target undertaking.

Whilst there are no major recalibrations to the concept of risk capital, the CSSF uses this occasion to clarify certain specific cases, such as investments in listed securities where the investment is associated with a particular development criterion. The CSSF also emphasizes that, whilst active involvement in the management of the target entity is not the sole determining factor, a certain degree of control or supervision typically remains an important indicator that an investment qualifies as risk capital. Such value creation can be achieved through a broad range of measures such as structuring, restructuring, launch, modernisation, research or prospection or more generally by promoting any measures likely to increase or improve the allocation of resources to create value.

Finally, Circular 25/901 also strengthens disclosure expectations by requiring SICARs to clearly explain in their offering documents how their investments meet the risk-capital criteria, including aspects such as value creation, holding periods and exit strategies. While confirming that SICARs are not subject to statutory risk-spreading requirements, the CSSF acknowledges that diversification rules may be included on a voluntary basis in the fund documentation.

What it means in practice:

• SICAR eligibility increasingly needs to be demonstrated, not merely asserted – in the application file, but also in the prospectus which must include a description of the three constitutive elements of risk capital: the value creation strategy, the dominant risk factors and the exit strategy.
• SICAR sponsors must pay attention to ensure that their value proposal, including the development strategy, is well-defined before going to market.

3. Enhanced Transparency and Disclosure Standards:

Circular 25/901 reinforces the importance of clear and comprehensive disclosure to the investors of Part II UCIs, SIFs and SICARs, notably as far as investments, subscriptions, redemptions and borrowings are concerned.

At the level of the investments, the CSSF provides notably that if a fund or compartment invests in undertakings for collective investment or other investment vehicles, this must be mentioned explicitly in the sales document. If the fund or compartment of a Retail AIF intends to invest more than 25% of its assets or commitments in an undertaking for collective investment or other investment vehicle, these target funds must be subject to at least equivalent risk spreading requirements.

At the level of the subscriptions and redemptions, Circular 25/901 repeats the default rule of IML Circular 91/75 that open-ended Part II UCIs must in principle offer a redemption facility on a monthly basis but allows that in certain cases the investment policy of the fund or compartment may justify a lower frequency. Circular 25/901 also specifies that the subscription and redemption frequency must not necessarily coincide and requires more detailed disclosures in case of deferral of redemption orders (so-called “gating”), including whether non-executed parts of redemption orders will or will not receive priority over new redemption orders and what NAV will apply to those.

At the level of other information, Circular 25/901 provides that, if the life of a fund or compartment exceeds ten (10) years, the sales document must contain a warning that the fund or compartment may not be suitable for investors who are unable to commit their capital over such an extended period of time. Circular 25/901 also allows up to a maximum of three (3) one (1) year extensions to the initial lifetime of a fund or compartment, if such extensions are necessary to allow the investments to reach their full potential. In exceptional circumstances, the CSSF may grant a derogation from this limit.

Fund documentation must accurately describe investment strategies, risk-spreading principles, borrowing arrangements and other material features. Particular attention is given to subscription and redemption mechanics, with Circular 25/901 expressly recognising commitment-based subscription models commonly used in private market strategies. By addressing these models explicitly, the CSSF aligns its supervisory guidance with established alternative investment market practices. Further guidance is also provided on liquidity management mechanisms.

What it means in practice:

• Enhanced transparency requirements for fund documents set a new market standard.
• Fund sponsors will have to factor in certain of these requirements (e.g. maximum 3 x 1 year extension of the lifetime) in fund structuring exercises.
• In line with the level playing field between Part II UCIs and SIFs, Circular 25/901 allows for both the creation of closed-ended Part II UCIs, and open-ended Part II UCIs with reduced redemption frequencies for illiquid strategies.

Scope of Application and Transitional Provisions

Circular 25/901 entered into force on 19 December 2025. From that date, it supersedes CSSF Circulars 02/80, 06/241 and 07/309, as well as Chapters G and I of IML Circular 91/75. In addition, Chapter H of IML Circular 91/75 and CSSF Circular 08/356 will cease to apply to Part II UCIs.
For funds that were authorised prior to the entry into force of CSSF Circular 25/901, the pre-existing rules remain applicable, although the management bodies of those funds (at the exclusion of closed-ended funds or compartments) are invited to consider whether and to what extent they can apply the new rules going forward.