Luxembourg: CSSF Issues New Substance Circular For Luxembourg Investment Fund Managers

Last Updated: 7 September 2018
Article by Dee Ruddy
Most Read Contributor in Luxembourg, September 2019

On 23 August 2018, the CSSF issued Circular 18/698 addressed to Luxembourg based Investment Fund Managers (UCITS Managers and AIFMs including self-managed UCITS/AIF) setting out extensive prescriptive guidance on their expectations regarding organization, operations and substance, as well as the management information systems and regulatory reporting to be in place to facilitate the CSSF's ongoing supervision of these firms.

The new Circular is a useful compilation of guidance on the required level of local substance and on how the core business activities and internal controls functions should be organized, including the conditions for delegation of activities as well as on the concept of proportional application of the rules. The Circular replaces Circular 12/546 that laid down the CSSF's expectations for UCITS Managers, although in practice had also served as the benchmark for AIFMs. The new Circular also contains important guidance on what Investment Fund Managers need to have in place to comply with the AML/CTF legislation, including situations where distributors and Transfer Agents are appointed either by the Manager or by the Funds directly.

The Circular provides detailed guidance on the following key areas:

  • Governance framework
    • Clarity on the role and responsibilities of Directors, the number and type of other mandates permitted and their professional time commitments. Directors are in principle limited to 20 mandates and 1,920 professional hours, although there is some flexibility including for mandates on SPVs held by the funds and for mandates within the same family of funds. The CSSF expects that the majority of Directors are not also employees of the Manager.
    • Clarity on responsibilities and location of Senior Management (Conducting Persons), their time commitments, other mandates and responsibilities. The CSSF expects the two Senior Managers to be located in Luxembourg, although gives flexibility to Managers with less that €1.5bn in AuM. In these cases one of the Senior Managers can be located abroad and work in Luxembourg on a part-time basis only if there are a sufficient number of qualified staff in Luxembourg to support them in their areas of responsibility. In excess of €1.5bn the two Senior Managers must be located in Luxembourg on a full-time basis. If the IFM has more than two Senior Managers, there is the possibility that the additional Senior Managers are located abroad if they have qualified staff in Luxembourg to support them in their areas of responsibility.
    • Guidance on Committees, including a new product approval committee and a new intermediary approval committee
  • Staffing requirements with a minimum staff of 3 full time equivalents (FTE) employed and located in Luxembourg as well as guidance on staff secondments.
  • Delegation of activities and oversight of delegatesThe guidance sets out detailed requirements for initial and ongoing due diligence on delegates, and clarifies that delegate oversight arrangements should satisfy the same standards irrespective of whether the delegate is part of the same corporate group or an external delegate. The CSSF expects a risk based approach to the ongoing monitoring of delegates, the definition of robust KPIs by the Manager and reminds firms of the importance of reviewing the delegates business continuity planning.
  • The guidance clarifies the range of functions that may be delegated and the specific conditions relevant to each type of delegation. These functions include the delegation of portfolio management, risk management, valuation, complaints handling, compliance, internal audit, IT, finance and so-called MiFID services.
  • Requirements in relation to the AML/CTF legal provisions and clarification in relation to the expected level of due diligence on investors, portfolio investments, investment managers/advisors and fund promoters. The Circular identifies 4 distribution/transfer agent scenarios and outlines their expectations under each of the arrangements.

The Circular also provides useful guidance on the following areas:

  • For AIFMs, guidance on the format and content of the Risk Management Process document to be communicated to the CSSF, as well as on the annual update of this document.
  • The additional authorization and organisational requirements to obtain a license to perform the activity of discretionary portfolio management for individual clients
  • Obligations regarding EMIR, MiFID II and MMFR compliance for funds managed
  • Notifications and approval requirements for changes to qualified shareholdings
  • Own funds requirements including eligible capital instruments, use of own funds, acquisition/creation of a subsidiary, and ongoing financial control and reporting obligations
  • Reporting to the CSSF with some changes to the frequency and deadlines of specific reports
  • Guidance on the notion of proportionality

With this Circular the CSSF is introducing a harmonized approach to Investment Fund Managers in Luxembourg, whether they have a UCITS ManCo or an AIFM license. There are specific areas where the law and regulation do not impose the same requirements, and for example when it comes to the requirements regarding (1) the proper valuation of assets (2) the correct calculation and publication of the NAV (3) rationale for delegation, the guidance recommends that UCITS ManCos follow the same rules as AIFMs. Similarly AIFMs are recommended to respect the same independence rules as UCITS Managers when it comes to their board members and those of the depositary acting for the AIFs.

The CSSF Circular 04/155 (Compliance Function) and IML Circular 98/143 (Internal Audit Function) are no longer applicable to Investment Fund Managers as the new Circular contains the full body of requirements for these functions.

The 101 pages of the new Circular has immediate effect.

The Circular is available on the website of the CSSF via the following link.

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.

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