Luxembourg: CSSF FAQ – Cross Border Distribution of Funds – Guidance on Marketing Communications

Introduction

On 20 September 2022, the Luxembourg regulatory authority (Commission de Surveillance du Secteur Financier – “CSSF”) published a new “CSSF FAQ – Cross Border Distribution of Funds – Guidance on Marketing Communications” ( “FAQ”).

The FAQ clarifies (i) the scope of the requirements for marketing communications in accordance with Article 4 of Regulation (EU) 2019/1156 on facilitating cross-border distribution of collective investment undertakings (the “CBDF Regulation”), (ii) related governance and organisational aspects from a fund manager’s perspective, and (iii) information to be provided to the CSSF in this regard.

Background

The CBDF Regulation is part of a framework regarding the distribution of funds on a cross-border basis within the European Union (the Cross-border Distribution of Funds Framework – “CBDF Framework”), which was brought into effect on 2 August 2021 and consists of two main legislative instruments – (i) the CBDF Regulation and (ii) the Directive (EU) 2019/1160 (the “CBDF Directive”), both supplemented by the Commission Delegated Regulation 2021/955 on implementing technical standards (“ITS”) and the Guidelines on marketing communications under the Regulation on cross-border distribution of funds by the European Securities and Markets Authority (“ESMA”) (the “ESMA Guidelines”). The CBDF Framework harmonises the procedures for the verification of marketing material and enables ESMA, as the competent authority, to closely monitor the marketing of collective investment undertakings.

As the CBDF Regulation is directly applicable in the European Union (“EU”), the obligations under Article 4 (1) to (5) of the CBDF Regulation apply since 2 August 2021.[1] Consequently, the IFMs obligations to “ensure that all marketing communications addressed to investors are identifiable as such and describe the risks and rewards of purchasing units or shares of an AIF or units of a UCITS in an equally prominent manner, and that all information included in marketing communications is fair, clear and not misleading (…)”, have been applicable since this date, despite the fact that precisions were given at a later stage through the ESMA Guidelines. These were adopted by the CSSF via Circular 22/795 with effect on 2 February 2022.[2]

I.  Scope

The scope of Article 4 of the CBDF Regulation and the ESMA Guidelines encompasses all Luxembourg Investment Fund Managers (“IFMs”) in accordance with section 2 of the Circular CSSF 22/795 (i.e., Luxembourg management companies of undertakings for collective investment in transferable securities (“UCITS”), alternative investment fund managers (“AIFMs”) and self-managed or internally managed funds for the funds they manage.

The FAQ must thus be taken into account by Luxembourg IFMs in relation to regulated and unregulated funds (in Luxembourg or outside Luxembourg but managed on a cross-border basis) for marketing communications aimed at investors or potential investors within the European Economic Area (“EEA”), considering that the CBDF Regulation is relevant for the member states of the EEA.

For the avoidance of doubt, IFMs acting as distributors or intermediaries for Funds that they do not manage, as well as marketing communication by IFMs aimed at investors outside the EEA do not fall within the scope of Article 4.

II.  Governance and organisational aspects

IFMs shall implement measures to identify and flag marketing communications as such and be involved via its senior management and/or its internal control functions in the preparation and validation of the respective marketing communications. The FAQ clarifies that internal processes shall include the following:

• the review and the sign-off process of marketing communication must be carried out in accordance with the four-eyes principle;

• as part of its follow-up duties of the distribution network, the executive committee of the IFM must implement procedures and arrangements allowing it to ensure compliance of marketing communication with Article 4 of the CBDF Regulation;

• the compliance of marketing communications with the CBDF Regulation should be part of the summary report prepared by the compliance officer of the IFM under point 260 of the CSSF Circular 18/698;

• breaches of compliance for marketing communications must be reported to the senior management as part of the ‘Management Information’; and

• the IFM should in particular ensure a proper validation of the consistency between the marketing communications and legal and regulatory documents (cf. Article 4 of the CBDF Regulation and points 18 to 21 of the ESMA Guidelines).

The processes may rely on or consist of a risk-based approach, committees at group level, automated systems, data rooms, etc.

The preparation of marketing communications can be delegated, with adequate oversight.

These modifications described above result in the following necessary amendments by the IFMs:

• procedures established in line with the CSSF Circular 18/698 must be amended to reflect, amongst other things, the process for identification/flagging of marketing communications and validation of consistency; and

• the processes established to ensure compliance with Article 4 CBDF Regulation must be duly documented.

III.  Information to be provided to the CSSF

The CSSF did not implement a periodic reporting obligation for the IFMs. Since the 16 September 2022, IFMs must be able to provide any relevant information to the CSSF upon request. This may include information on (i) the type of marketing communications used, (ii) the EEA countries of dissemination, and (iii) the targeted investors. This may also involve reviews of the marketing communications themselves.

In addition, and as of 1 April 2023, the IFMs must be able to link the information to each fund and identify if the marketing communications entail information with regards to ESG.

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[1] Article 19 of the CBDF Regulation.

[2] Circular 22/795.