CSSF Circular 25/901: A Simplified And Modernized Framework For Part II UCIs, SIFs And SICARs With Proportionate Protections Per Investor-type

The CSSF's Circular 25/901 (Circular) consolidates and modernizes the supervisory framework for Luxembourg SIFs, SICARs and Part II UCIs. It replaces several longstanding circulars and codifies CSSF expectations across investment limits, risk-spreading, borrowing, efficient portfolio management, disclosures and operational mechanics, with a risk-calibrated approach tied to investor sophistication.

The Circular applies to SIFs, SICARs and Part II UCIs (including compartments), but excludes ELTIFs, MMFs, EuVECA and EuSEF, as well as pre-existing closed-ended funds. It enters into force on December 19, 2025. Open-ended funds authorized by the CSSF before this date may continue to apply their existing rules.

On December 19, 2026, the CSSF issued Circular 25/901, a comprehensive consolidation and modernization of the supervisory framework for Luxembourg SIFs, SICARs and Part II UCIs, to reinforce their attractiveness and competitiveness. The Circular aligns long-standing administrative practice with current market realities and supervisory expectations, clarifies key concepts (including risk-spreading and risk capital), and introduces an investor-type-sensitive approach to investment limits and borrowing. In the related communiqué, the CSSF states that the Circular's purpose is to establish general principles, not detailed rules, to allow justified derogations and to maintain flexibility by adjusting risk to the profile and type of targeted investor.

It repeals:

• CSSF Circular 02/80 on specific rules applicable to Luxembourg UCIs pursuing alternative investment strategies
• CSSF Circular 07/309 on risk-spreading in the context of SIFs
• CSSF Circular 06/241 on the concept of risk capital under the SICAR law
• Chapters G and I of IML Circular 91/75 on Revision and remodeling of the rules to which Luxembourg undertakings governed
• And makes CSSF Circular 08/356 as well as Chapter H of IML Circular 91/75 inapplicable to Part II UCIs, while preserving core principles adapted to today's market practice.

The publication of the Circular is accompanied by the release of a comprehensible non-binding document defining key concepts and terms for the alternative investment sector, whose purpose is to facilitate CSSF exchanges and democratize alternative investment funds for the public by clarifying and using consistent terminology. This compilation is composed of four parts relating to investment policies, strategies and asset classes, investment methods and subscription and redemption models.

Calibration of risk-spreading limits per investor-type

Unsophisticated retail investors vs. well-informed professional investors

The framework distinguishes between products that may be marketed to unsophisticated retail investors and those reserved to well‑informed or professional investors. For the former, the Circular prescribes clear, quantifiable limits to deliver risk‑spreading and constrain leverage. For the latter, constraints are materially relaxed, with room for derogations upon duly justified grounds.

An "unsophisticated retail investor" is a MiFID II retail client who is not a "well-informed investor" within the meaning of the SIF or SICAR laws. In practice, the Circular distinguishes between Part II UCIs reserved to such non-well-informed investors and, on the other hand, Part II UCIs reserved to well-informed investors, SIFs and SICARs.

Commitment or assets calculations basis

The Circular recognizes the commitment‑based model of private funds by allowing investment limits and borrowing thresholds to be calculated by reference to assets of, or commitments to subscribe to, the fund, and allows alternative calculation bases with appropriate justification and CSSF approval.

Diversifications limits

For the first time, the CSSF prescribes general percentage-based limits (by reference to assets or commitments) for Part II UCIs that may be marketed to unsophisticated retail investors.

These include:

• a 25% concentration limit per issuer, per UCI/vehicle, or per single "other asset," subject to exclusions for securities issued or guaranteed by OECD member states (including regional or local authorities) and by EU or international supranational bodies, and for target UCIs/vehicles that are subject to comparable or stricter diversification requirements under their prospectus or issuing document (Offering Document) or governing law
• short-sale exposures are also subject to a 25% limit
• derivative exposures must meet comparable risk-spreading levels through an appropriate diversification of underlying, and uncleared or non-collateralized counterparty risk must be limited having regard to counterparty quality and qualification
• a 50% limit applies per single infrastructure investment.

For funds reserved to well-informed or professional investors, the principal limits are increased to 50% per issuer/UCI/asset and 70% per single infrastructure investment, with the possibility of further derogations upon justification. The CSSF may impose additional restrictions for funds with specific investment policies. The approach provides clarity for multi-asset and private markets strategies while maintaining flexibility.

Compartments may be treated as distinct entities where liability segregation is effective vis-à-vis third parties. Limits look-through intermediary vehicles and apply to the underlying assets.

Ramp-up and wind-down periods adapted to fund strategies

The Circular harmonizes and clarifies the ramp-up periods during which investment limits do not apply.

For liquid/UCITS-eligible strategies, derogations may apply for up to 12 months following launch (in principle as of first subscription). For private investment strategies, ramp-up may extend, in principle, up to four years from launch and in any event must be limited to a period consistent with the investment policy; an exceptional one-year extension is possible upon justification.

Wind-down periods may also be envisaged for private strategies. The ramp-up and wind-down periods must be disclosed in the Offering Document. Funds should avoid excessive or unidentified risks and conflicts of interest during such periods, and may invest cash temporarily in accordance with their disclosed policies.

Stricter borrowing limits for targeted unsophisticated retail investors

SIFs and Part II UCIs may borrow to invest or to meet fees, expenses or redemptions; SICARs may borrow only to invest in risk capital. Borrowing may be secured by fund assets.

For funds that may be marketed to unsophisticated retail investors, borrowing for investment purposes should not exceed 70% of assets or commitments. For funds reserved to well-informed or professional investors, no hard cap applies provided the maximum borrowing limit is disclosed in the Offering Document.

Temporary borrowings fully covered by capital commitments, and debt securities issued by the fund that are linked to asset performance, are generally not treated as "borrowing" for these purposes. Calculations under other applicable leverage regimes remain unaffected.

General principles for EPM techniques

The Circular consolidates expectations on repos, reverse repos, securities lending and borrowing or other types of arrangement. Efficient portfolio management (EPM) techniques must be in investors' interests, economically appropriate to generate capital/income or reduce risks/costs, and must not alter investment objectives or the fund's risk profile. Uncleared or non-collateralized counterparty risk must be limited by reference to counterparty quality and qualification, and collateral must be diversified to deliver risk-spreading comparable to that applicable to the fund's investments.

Modernization of the risk capital concept for SICARs

The Circular modernizes the definition and assessment of "securities representing risk capital." Investments may be made directly or indirectly and can encompass equity, loan origination, bonds, bridge and mezzanine financing, including secondary acquisitions of risk capital securities.

The CSSF emphasizes three cumulative elements:

• An intention to actively develop the value of the target entity (through launch, growth, restructuring or listing)
• The presence of specific risks exceeding general market risk considering the target's profile, maturity, development project and expected holding period—the geographical location alone generally being insufficient to prove a risk
• A time-limited investment with a credible exit strategy, whether through IPO or private sale

While active involvement in value creation is commonly expected, the CSSF may accept risk-capital qualification where, viewed holistically, factors such as financing mode, instruments and remuneration of involved parties demonstrate genuine development risk. Active involvement is assessed for instance through board representation, value-creation measures like structuring, restructuring launch, modernization research or prospection.

SICAR authorization files should explain how the policy satisfies the risk-capital criteria. The Offering Document should describe the exit strategy, a non-exhaustive range of divestment options, expected holding periods, and where investing via target funds, confirm that such target funds apply comparable risk-capital and exit criteria than the fund.

Specific clarifications include the following:

• Listed securities may be eligible, for example where the listing venue is not an eligible UCITS regulated market, where the issuer itself qualifies as risk capital, where the investment supports a development project, or where a delisting is contemplated; small caps may be suitable. ABS/CDOs and similar instruments are in principle not eligible.
• Cash may be (i) held to meet liabilities or (ii) placed temporarily in low-risk liquid instruments as a management method for liquidities pending investment subject to prudent person principles and due care diligence to preserve capital.
• Mezzanine financing is eligible where the borrower constitutes risk capital; acquisitions of existing mezzanine or distressed debt are permissible when targeting value creation through restructuring.
• Derivatives may be used for hedging or where necessary to implement the policy but cannot be the object of the strategy.
• Real estate and infrastructure exposure is permissible only via intermediary vehicles or funds whose underlying assets meet risk-capital criteria.
• Commodities cannot be held directly, though indirect exposure via operating companies may be acceptable case-by-case if the risk and development criteria are satisfied at portfolio-company level.
• Indirect investments (e.g. through PE/VC/real estate funds) or intermediary vehicles are acceptable if their objectives restrict them to risk capital consistent with the SICAR's policy; hedge funds are generally not eligible as they do not primarily create value at target-entity level. Incoming cash must be deployed into eligible risk-capital assets.

Enhanced investor disclosures in the Offering Document

Transparency expectations are reinforced, without prejudice to Article 23 AIFMD disclosures.

Where a prospectus under Prospectus Regulation is required, Chapter 8 content must in principle be included.

The Offering Document must be correct, clear and not misleading.

Investments

The Offering Document should set out the investment objective and strategy, eligible asset classes and portfolio composition, any use of intermediary vehicles, the calculation bases for investment limits, specific risks and conflict of interests, as well as the approach to temporary investments of significant cash for less liquid strategies.

They should specify whether investments in UCIs/vehicles are permitted; for funds that may be marketed to unsophisticated retail investors and intend to invest more than 25% in UCIs/vehicles, they should confirm that target-level risk-spreading is comparable to or stricter than the fund's own. Where target UCIs/vehicles are not supervised by, or registered with, an authority with which the CSSF has a cooperation agreement, this must be disclosed and reflected in risk factors. Fees or charges applicable to investments in UCIs/vehicles of the same initiator or manager must be disclosed.

If efficient portfolio management techniques are contemplated, the documents should describe transaction types, conditions and limits, cash-collateral reinvestment conditions, and the inherent risks incurred, without prejudice to SFTR Annex Scheme B disclosures for AIFs managed by an authorized AIFM. The manner in which proceeds from asset sales or disposals are distributed should be explained where applicable.

Subscriptions and redemptions

The Offering Document should disclose subscription terms as well as redemption rights and all relevant conditions, including frequency, notice and settlement periods, other applicable conditions, available liquidity management tools with concise but appropriate descriptions of mechanics and activation conditions, execution processes, and redemption gate process. In respect of the latter, they should state whether unexecuted portions are cancelled or carried forward, and if carried forward, whether such orders receive priority over new orders and which NAV applies. Alternative treatments are permissible if AIFMD requirements are met (as applicable) and are justified to and approved by the CSSF. The determination date for issue/redemption prices must align with the issuance/redemption frequency of securities. Redemption frequency must be appropriate to the policy; for private assets strategies, lower than monthly frequency may be justified. Subscription and redemption frequencies need not match. NAV must be calculated in accordance with applicable law and regulation.

Borrowing

Borrowing disclosures must include the maximum borrowing limit, where applicable.

Additional disclosures for funds marketed to unsophisticated retail investors

For funds that may be marketed to unsophisticated retail investors and that invest primarily in private assets, a prominent risk warning is required to highlight that such investments may entail a high level of risk, are suitable only for investors able to bear that risk, and that the average subscriber should allocate only a portion of long-term capital.

If a fund's life, or its no-exit period, exceeds or may exceed ten years, an additional warning is required on potential unsuitability for investors unable to maintain commitments over that horizon.

Offering document's amendments

The Offering Document should describe procedures for modifying the investment policy or making other material changes, in compliance with applicable law. A notice period with a free redemption right may be required.

One-year life extensions are permitted up to three times where necessary to allow investments to reach their full potential, provided this possibility is set out in the constitutive documents or the Offering Document. In exceptional cases, the CSSF may grant derogations on duly justified grounds.

Immediate application and transitional provisions

The Circular enters into force on December 19, 2025. Open-ended funds authorized before that date may continue to apply their existing rules.

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.