Obtaining approval

Obtaining approval

The CSSF, the Luxembourg regulator, is in charge of the approval, oversight and control of investment funds in Luxembourg. It acts exclusively in the public interest.

All funds domiciled in Luxembourg must be duly authorised by the CSSF, that will also approve the service providers involved in the operations of the fund.

Sponsor of the fund

The Luxembourg supervisory authority has always been very demanding regarding the sponsor of a fund, the entity that decides to launch or distribute a product. Traditionally, any fund subject to the 2002 Law needed to have what is known as a “promoter”, an entity that would ultimately bear a financial responsibility for the fund. The CSSF’s administrative practice in that respect has consistently been to require such promoter to be (i) a regulated entity, with (ii) a significant capital base (at least EUR 7.5 Mio in equity), these conditions being assessed in the course of the fund’s application file. The CSSF also required that a majority of the Board of the fund be composed of promoter’s representatives, so as to ensure its full involvement in the fund it initiates.

For entities which were either too small or otherwise failed to comply with the CSSF requirements, Luxembourg banks often offered a “co-promotership” service, whereby they assumed, against consideration, the roles and responsibilities of the promoter vis-à-vis the CSSF.

The introduction of UCITS IV in Luxembourg and the fact that foreign UCITS management companies approved on their territory may now set-up and run Luxembourg UCITS obviously questions the possibility for CSSF to impose a promoter requirement, as described above.

Luxembourg wants to protect its reputation and remain immune from problems resulting from initiators lacking the necessary seriousness and standing for launching products. Whatever form it will take, there is no doubt that the CSSF will keep a close scrutiny on the entities “behind” the funds, as it has done in the past and does more and more for SIFs, structures which are currently exempt from the promoter’s approval requirement.

Funds approval

In order for a fund to be approved, the CSSF must review and agree to the following constitutive documentation:

  • articles of incorporation (if SICAV/ SICAF) or management regulations (if FCP);
  • prospectus and, for UCITS funds, Key Investor Information Document (“KIID”);
  • agreements with the principal service providers: management company (for a UCITS), investment manager, administrative agent, transfer agent, potential distributors, etc.;
  • information on the fund’s sponsor.

If the fund is to be launched by a foreign management company, the CSSF will also decide on the application of that entity, which will need to provide information on its delegation arrangements regarding asset management and administration as well as the agreement with the depositary organising the flow of information crossborder.

The directors of the fund (if in corporate form) or of the management company (if in Luxembourg) must be authorised by the CSSF, in view of their experience and reputation: hence, CVs and documentation certifying such reputation must also be filed with the CSSF.

Depending on the type of fund to be approved (Fund Law or SIF), some of the service providers must themselves be subject to supervision by a regulatory authority to be approved by the CSSF. This is, for example, the case for the investment manager who, if acting for a fund ruled by the Fund Law, must be a regulated firm licensed for asset management services and, if located outside the EU, must be in a country whose supervisory authority cooperates with the CSSF. To avoid any conflicts of interests, the investment manager of such fund can never be its depositary bank.

The requirements relating to the quality of the investment managers are not yet foreseen in the current SIF Law. This may, however, change soon in anticipation of AIFMD.

The Key Investor Information document (“KIID”)

In the course of the approval process of a new fund, and even though it will not “visa” the document, the CSSF will want to see the KIID, which is the investor information document replacing the old and far too long “simplified prospectus”. The KIID is the response brought by UCITS IV to the investors’ demand of having simple, understandable, transparent and comparable information on their proposed investment.

A two-page[1] document, harmonised in form and content, the KIID purports to give the investors essential information on a fund’s policy, its risk and reward profile, past performance, charges borne by fund and investor and a series of practical information.

This KIID, to be revised on a periodic basic to always be as current as possible, will be the main information document for investors, in all countries of distribution and an essential communication tool for asset managers.
Existing Luxembourg funds dispose of a grace period until 1 July 2012 to replace the many thousands of existing simplified prospectuses of UCITS by asmany KIIDs. The complexity of crossborder distribution of funds and the requirements which may be imposed by regulators outside of the EU should not be underestimated when preparing for this transition to the KIID.

Transitory rules

While the Fund Law has entered into force on 1 January 2011, some of its rules[2] as regards cross-border activities will only be applicable as from 1 July 2011, which is the latest date for the transposition into the national legislation of Member States.

Part I funds which were created under the 2002 Law will all automatically become subject to the Fund Law in July 2011. They will however need to adapt their prospectuses if they want to benefit from the new flexibilities. A “fast-track” procedure at the CSSF will allow promoters to amend their prospectuses swiftly before the end of 2011, in order notably to insert mandatory new wording on risk management measurement. Management Companies will also be automatically subject to the Fund Law as from 1 July 2001 and will need to be compliant with the new constraints in their organisation and functioning by that date[3].

All provisions of the Fund Law are already applicable to Part II funds (except for those relating to the delegation of functions, where the funds have until 1 July 2012 to adapt their situation). Non-UCITS management companies are also already subject to the Fund Law, with the same grace period to adapt to the new delegation constraints.

The following diagram illustrates the main transitory provisions:

[1]Three pages for structured UCITS.

[2]Cross-border master-feeders, cross-border mergers, management company passport, cross-border notification.

[3]A CSSF Circular 11/508 dated 15 April 2011 imposes Luxembourg management companies to update their application file in that respect.