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Circular 18/698 on the "Authorisation and organisation of investment fund managers incorporated under Luxembourg law"

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On 23.08.2018, the CSSF issued its 110 page Circular 18/698 on the "Authorisation and organisation of investment fund managers incorporated under Luxembourg law" with immediate effect.

The comprehensive circular applies to Chapter 15 companies authorised to manage UCITS and UCIs in Luxembourg, to Luxembourg authorised AIFMs and to Chapter 16 management companies. It repeals circular 12/546, bundles what was stated in 04/155 and 98/143, and adds specific provisions on anti money laundering (AML) and counter terrorist financing (CTF) applicable to investment fund managers and entities carrying out registrar agent functions.

The Circular formalises certain of European Securities Markets Authority (ESMA)’s view points and integrates the administrative practices of the CSSF. It details the minimum substance (number and type of employees) fund management companies need to have in Luxembourg to adequately fulfill their fund oversight functions.

Small management companies are now required to have three FTEs in Luxembourg (meaning, able to come and work daily in Luxembourg – reference to "Luxembourg" persons below has the same meaning) involved in the company’s core functions.

If the company is managing more than 1.5B€, it has to have two full-time Luxembourg conducting officers. If, however, the AuM is below 1.5B€, the proportionality principle applies and the company can apply for a derogation to the CSSF that only one conducting officer be in Luxembourg. Non Luxembourg conducting officers must be supported by Luxembourg staff for their duties. Note that the Luxembourg conducting officer(s) count in the three FTEs.

The circular restates previously considered industry level regulations, such as European Market Infrastructure Regulation (EMIR) and Markets in Financial Instruments Directive (MiFID) for product governance, and AML/KYC, as being management company obligations.

It provides great detail on how delegation controls should be managed and documented. It provides minimum criteria that ManCos must consider when they perform due diligence and operational controls over delegates. It provides additional specific criteria to be considered for delegations of portfolio management, fund administration and distribution.

Due diligence frequency will depend on the nature of the function to be delegated and perceived levels of risk, but is anticipated to be on a 3 year cycle.

As an immediate step, we recommend ManCos perform a detailed gap analysis of their organization, processes, procedure and contractual documentation against the provisions of the new Circular, and to setup a remediation plan.

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