A significant regulatory circular introduced over the summer clarifies how investment fund management companies (mancos) must be governed. While the vast majority of funds will already be broadly compliant with these rules, it is a strong message to laggards to firm up their procedures.
On 23 August, the Financial Sector Supervisory Commission (CSSF) published circular 18/698 (PDF, in French) on the “authorisation and organisation of Luxembourgish investment management companies”. Most of this relates to the need for sufficient operational “substance” which would enable the Luxembourg entity to properly carry out required regulatory and business activity.
Most not new
“Much of this is not new,” said Marco Zwick, the CSSF’s recently appointed director with responsibility for investment funds, speaking to the Alfi Global Distribution Conference on 25 September. “Many of these requirements featured in previous circulars, but we had the desire to ensure these covered all types of management company in a consistent fashion,” he added. Much of this text is inspired by experience gleaned from onsite inspections by the CSSF. It is also a response to questions about regulatory practice received from industry players.
Most of the text concerns requirements related to regulatory compliance and internal control functions. However, there has also been a tidying-up of anti-money laundering, counterterror financing, and know-your-customer rules. Zwick added that more would follow “in the coming months” when the OECD’s Financial Action Task Force publishes their risk-based guidelines for securities, which will include investment funds.
There are now clearer definitions on the role of mancos, and how their directors and managers should act. Terms such as “delegate”, “key functions” and “fit and proper” have been firmed up. There is now a limit on the number of mandates a board member can assume (20, for a maximum of 1,920 hours per annum), deadlines are now clearer regarding ongoing and annual regulatory reporting, and risk management rules for alternative funds and Ucits have been aligned. Rules on delegation procedures have been clarified, as has the application of the European Market Infrastructure Regulation and Money Market Fund Regulation.
Zwick said that there is no official transition phase, but that some can be given time to get up to speed. “We know from our onsite visits that there are some gaps and we want to give different players the opportunity to conduct their own analysis of the situation as soon as possible. If you have any concerns about gaps and how to close them, come to us to discuss. We can then agree on a date when these gaps will be closed,” he said.
Onsite inspections will continue, and the CSSF is working towards full compliance by all players by the second half of 2019, Zwick added. “We will have a period of closing the gaps, but from the start 2020, no gaps will be tolerated any longer.”