CSSF publishes Circular 24/856 on the protection of investors, repealing Circular 02/77

28th May 2024

Introduction

The CSSF published on 29 March 2024 its Circular 24/856 (the “Circular“) concerning NAV calculation errors, non-compliance with investment rules and other types of errors (the “Errors“) at the undertakings for collective investments (“UCIs”) level. The Circular incorporates CSSF practice, aims to reflect market developments over the last 20 years and ultimately, enhance investors protection.

This Circular will replace Circular 02/77 upon its entry into force on 1 January 2025. It is for now available in French only, but an English translation is expected shortly.

Regulatory developments and scope of application of the Circular

Since the publication of the Circular CSSF 02/77 by the CSSF in 2002, the funds industry has been undergoing numerous regulatory developments at the European and Luxembourg levels, such as the updates of the UCITS Directive, the implementation, and updates of the AIFM Directive as well as the introduction of specific product rules (ELTIF, EuVECA, EuSEF, MMFs, SICAR etc.).

As a result, the Circular now explicitly applies to UCITS, UCI Part II, SIFs and SICARs as well as to ELTIF, MMF, EuVECA and EuSEF (which are not UCITS, UCI Part II, SIF and SICAR) for which the CSSF is the competent supervisory authority.

The Circular does not apply to closed-end UCIs as far as NAV calculation errors are concerned. These entities do not need to notify the CSSF about those errors, but these errors must, however, be rectified, and the independent auditor must verify the correction in the context of its annual audit.

Types of errors

The Circular sets guidelines to be followed by investment management professionals in case of errors in the administration or management of a UCI. More particularly, it covers, in addition to NAV calculation errors and non-compliance with the investment rules applicable to UCIs, other errors (e.g. errors at the level of the payment of costs/fees, swing pricing) that may occur at the level of a UCI. This Circular also defines a dedicated approach for the different types of funds concerning the tolerance thresholds governing NAV calculation errors.

 NAV calculation errors

  • The Circular provides for materiality thresholds for NAV calculation errors in relation to MMFs (0.2%), UCITS (1% for equity funds, 0.5% for fixed income and mixed funds) and Part II UCIs & ELTIFs not reserved to well-informed or professional investors (0.5% for fixed income and mixed funds, 1% for equity funds and funds investing in other assets).
  • Non-UCITS funds reserved to well-informed or professional investors can apply higher materiality thresholds that can never exceed 5% and which must be determined on the basis of specific analysis which is to be provided to the CSSF upon its request.

Guidelines regarding the treatment and correction of errors

Besides clarifying the scope of the application, this Circular lays out guidelines to be followed by in-scope entities in case of Errors. In this respect, the Circular consolidates relevant guidance provided by the CSSF over the past years, such as CSSF FAQs and activity reports and provides additional guidance on selected topics, e.g. active vs passive breach. CSSF clarifies that passive breaches result from events beyond the control of the UCI whilst active breaches refer to voluntary acts or the absence of action when a breach was predictable and avoidable. Active breaches must be notified to the CSSF whilst passive breaches need not be notified.

This Circular further introduces some new sections and topics, such as e.g. rules related to investor compensation, indemnification, role of the intermediaries and the notification process to the CSSF.

Notification to the CSSF

Material NAV calculation errors, active breaches of investment rules and other errors must be notified to the CSSF by using the ad hoc form that will be posted on the CSSF website, revising the currently used form. The notification must be made within four to eight weeks following the detection of the Error.

When a special report is required, it must be submitted to the CSSF within three months following the above notification. The CSSF does not approve the remediation actions described in the notification but it may, however, intervene at any time, on an ex-post basis, in order to require additional information, other remediation actions or improvements in the organisational set-up of the UCI or their investment fund managers (“IFM”) in case of identified shortcomings.

Implications for Clients

This Circular will have a major effect on the UCIs and IFMs in the scope of its application. The implementation of guidelines introduced by the Circular by Luxembourg UCIs, their IFM, and other relevant parties taking part in the management and control of UCIs, should hopefully contribute to maintaining the confidence of investors in collective portfolio management globally and investment management professionals operating in Luxembourg.

As an initial step, entities in scope are invited to review and potentially revise UCI documentation to ensure currently prescribed thresholds and description of steps to be taken in case of Errors are in line with the provisions of the Circular.

In addition to this initial step, the senior management of the UCI or its IFMs (including non-Luxembourg IFMs managing Luxembourg UCIs/AIFs on a cross-border basis) must ensure that a suitable organisation is in place to avoid the occurrence of Errors. This also includes ensuring suitable contractual arrangements with the various delegates/subdelegates and service providers aiming to avoid that such delegations create obstacles to the application of the Circular and investor protection safeguards.

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Author

Andjelija Miladinovic