Luxembourg: Improved Investor Protection Through Regulations For AIFM Depositaries

Last Updated: 10 October 2018
Article by Robin Hoekjan and Anja Grenner

In July 2013 the Alternative Investment Fund Manager Directive 2011/61/EU (AIFMD) was implemented. After an almost two-year delay since its initial draft, the implementation of the directive set important standards for marketing, capital raising, valuation, risk monitoring and reporting, as well as compliance and accountability for alternative investment funds. The directive applied, among others, to hedge funds, real estate funds and private equity funds.

With its implementation just before the financial crisis, investor protection was at the heart of the AIFMD. Besides the previously existing key players, such as the fund manager and fund administrator, the depositary was introduced for providing a 'supervisory' role for funds that have to comply with the AIFMD or for marketing non-EU funds to EU investors (so-called 'Depo-light' regime).

Today, five years later, the AIFMD and the depositary are unavoidable names in the fund world. However, constant updates and improvements in regulations have already brought several significant specifications to the initial directive. The contribution of government bodies regulating the fund industry at the local level is especially pivotal in this matter. The Luxembourg regulator, Commission de Surveillance du Secteur Financier(CSSF), has published several Circulars in recent years to improve the regulations to which funds, fund and asset managers and any other parties involved, have to abide by.

Most notable of these for depositaries: in October 2016, Circular 16/644 to clarify the UCITs Depositary Regime. Almost two years later, on 23 August this year, Circular 18/697 further elucidates and complements the requirements applicable to depositaries of alternative investment funds (AIFs). The Circular does not only impact the depositary itself, but also the funds and fund managers it supervises.

The Circular applies to:

  1. AIFs managed internally or by AIFMs;
  2. Part II UCIs, managed by authorized AIFMs, of which the offering documents expressly proscribe the marketing to retail investors established in Luxembourg;
  3. Part II UCIs managed by registered AIFMs, of which the offering documents expressly prohibit the marketing to retail investors established in Luxembourg; and
  4. SIFs/SICARs which are not AIFs and SIFs/SICARs managed by registered AIFMs.

The Circular includes several clarification details for depositaries. Key specifications are:

Eligibility criteria

A (credit) institution desiring to act as an AIF depositary has to be granted with specific approval to act in that capacity. Parties already approved prior to this Circular are not required to apply for a new approval, but must comply with the obligations described in the Circular. This means that the (credit) institutions have to prove that the AIF's depositary managers have the necessary skills and adequate professional experience to fulfill the role. In addition, the CSSF must receive a detailed description of the organization's available human and technical resources. This information should, along with other detailed information and documentation with regards to sub-contracting and sub-delegation, be (periodically) shared with the CSSF.

Clarification on the organisation and governance

With investor protection in mind, the depositary must act honestly, loyally, professionally, independently and solely in the interest of the AIF and the investors it serves. For obvious reasons, the depositary cannot act as an investment manager, nor can it be a shareholder in the fund. However, large services providers usually also provide fund administration and AIFM services.

The Circular allows this only to the degree when there is

  1. an effectively established, implemented and maintained policy for managing conflicts of interest ;
  2. a clear identification, management and sharing of adequate information on the potential conflicts of interest;
  3. a functional and hierarchical separation between the depositary and fund administrator/AIFM or both; ; and
  4. a contractual separation between the depositary and other rendered services.

To be approved as a depositary for an AIF, the depositary must set up appropriate internal procedures for the correct fund description and fund approval via an internal approval committee. In addition, the manager of the depositary business line or department must be notified to the CSSF. In addition, the CSSF should also receive a precise and detailed description of the organization in terms of the technical and human resources available related to the AIF depositary function. Overall, there must also be a clear description in place on how the depositary will carry out its duties, taking into account the different types of AIFMs it serves.

In addition to the internal procedures and contractual agreements with the AIFM, the depositary must also put in place written procedures or contracts with any other parties with whom they must work with in exercising its duties. These written procedures or contracts may take the form of a formal operating memoranda or service level agreements. In terms of specific requirements, the depositaries will have to maintain a list of delegates that are each subject to a contractual and documented relationship along the Circular's principles. This, too, must be shared with the CSSF on an annual basis.

The fund administrator and AIFM are often the parties providing information and documentation to the depositary. The Circular underlines that the depositary must at all time have the right access to all relevant information to meet its regulatory duties and obligations. This timely access is essential to the depositary's duty of safekeeping of other assets - the depositary has to be informed of any changes without delay. In that respect, the depositary must warrant that procedures are place to ensure that registered assets can only be assigned, transferred, exchanged or delivered if the depositary is properly informed about this.

The Circular also places special attention on segregation rules. It is the depositary's responsibility to ensure at all times that the AIF (or a sub-fund in case of a multi-compartment AIF) is the rightful owner of all portfolio holdings/assets in accordance with the applicable law. To fulfil this duty correctly, the Circular includes the following segregation rules:

  1. a segregation at the first level of the chain of custody that segregates the AIF's assets from others; and
  2. a segregation installed by the parties to which the depositary sub-delegates this duty.

Specific obligations and requirements

The Circular also describes the accountability and responsibilities in the relationship structure between the depositary and the fund, as well as at the subsequent levels of (sub-)custodians/(sub) delegates. The depositary has some duties, responsibilities and obligations over the network of the appointed custodians and delegates. The Circular also addresses the obligations per type of asset: financial derivative instruments, real estate and intangible rights (i.e. rights, royalties, patents, etc.) and target funds for fund of funds in terms of ownership verification and reconciliation. In the context of derivative instruments, the depositary must track changes in the margins applied to the fund on a daily basis.

Now all Depositaries have until 1 January 2019 to comply with the organisational and governance regulations prescribed in the Circular. For depositaries the next step will be to determine the degree the Circular will impact their current (internal) procedures, work processes and arrangements with other parties involved and, if applicable, make the necessary improvements to comply with the Circular. While the latest update may initially seem like a new prescriptive layer of obligations, it will, undoubtedly, help navigate the depositary to the purpose for which it was initially created – protecting investors.

Published 9 October in Börsen-Zeitung in German here.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions