Supervision and enforcement: where is Luxembourg heading? 15 November 2016
Agenda 1. CSSF supervisory practice 2. Managing sanctions risk 3. Directors duties and liability 2
3 1. CSSF supervisory practice
Background Harmonisation and convergence Top priorities of the European Supervisory Authorities (EBA, EIOPA, ESMA) Fighting regulatory arbitrage to reach a level playing field of high quality regulation and supervision across Member States Enhanced sanctions regime UCITS V, MiFID II or MAR, PRIIPS or SFTR foresee an enhanced regime of sanctions either administrative, criminal, personal or targeted towards a company. [.] sanction shall hurt and amounts must be higher [.] (CSSF) On-site inspection but not only [.] Our great upcoming challenge is to increase on site visits and controls [.] (CSSF). The investigation arsenal will also include questionnaires and whistleblowing 4
5 What is the approach of other regulators?
Examples of shortfalls that may give rise to enforcement Before - mostly formal compliance issues Failure to file annual report and management letter Failure to comply with other regulatory reporting requirements Now - both form and substance issues Repeated breach of investment restrictions (UCITS) Repeated non-compliance with investor information rules (e.g. prospectus, KID, factsheets ) (UCITS) Capital and own funds requirements (UCITS and AIFM) Unauthorised distribution investor eligibility (UCITS and AIFM) Non compliance with organisational or conduct of business rules foreseen by regulation (UCITS and AIFM): o RM, delegation, conflicts of interests 6
Questionnaires Liquidity and market stress testing Credit line facilities and related aspects Remuneration under UCITS V Etc. 7
Whistleblowing Different from customer complaint process By whom? How am I informed? 8
On-site visits Generally announced in writing Request to provide information and documents, relatively short notice (1-2 weeks) Extremely extensive and detailed review of a firm s organisation and functioning Follow-up questions 9
10 2. Managing sanctions risk
Background of an inspection Understanding the background is key: Is it a sectorial investigation? Is it specific to the regulated firm, is it only me? Is it on a precise subject matter (e.g. investment compliance)? Is it connected to other Group entities and/or outstanding inquiries from other regulators? Is it in relation to internal control reports or incidents? Is it an action following an external audit finding? Is the information request caused by a complaint? Is it caused by whistleblowing from a connected party or employee(s)? Depending on the context, the regulated firm operator has to take some inquiries more seriously than others 11
Plan ahead and give appropriate answer Avoid the issue in the first place Regular compliance review of organisation, product information and distribution Always be first in class when surveyed by CSSF Don t be caught by surprise General guidance to personnel and management Identify staff authorised to deal with the issue Review past correspondence on the matter, what was already provided to the regulator about this? Keep record of any exchange (minute oral conversations, keep record of formal request and answers) Have a good MIS in place, IT records, archives Review of answers by authorised persons and management Manage confidentiality 12
Timeline of a regulatory investigation 1 2 3 4 5 Preparatory phase Managing response Draft of decision Decision release Appeal and actions CSSF collects information: On site visits (announced or not) Questionnaire Whistleblowing Back and forth Regulated firm prepares response CSSF prepares decision Regulated firm s right to access administrative file Meeting CSSF Decision is released: Public disclosure? Notification to other regulators Notification to ESMA Different actions are possible Non-litigation remedies (before the CSSF) Litigation remedies (before Courts) Investor action 13
Sanctions under the 2010 law Administrative sanctions ( name and shame, injunction, licence withdrawal, prohibition to exercise conduct, fines (up to 5 million/up to 10% of (consolidated) turnover) or twice the amount of the benefit) may be applied in case of: UCITS* Ch. 15 ManCo UCI Any entity contributing to the funds activity Mgt** Refusal to provide financial reports or information X X Incorrect, inaccurate or incomplete information X X Hampering of CSSF supervision, inspection and inquiry powers X X No publication of financial statements X X Non-compliance with CSSF injunctions X X Conduct jeopardizing the sound and prudent management X X Presenting the agreement of the CSSF of a UCI as a positive appreciation Failure to notify CSSF of acquisition or disposal of qualified holding in another management company X X X X - - X Obtain authorisation through false statements or other irregular means X - X - X Failure to notify CSSF of acquisition or disposal of qualified holdings in own capital Failure to inform CSSF annually about names of shareholders and members possessing qualifying holdings and the sizes of such holdings - X - - X - X - - X Failure to comply with structural and organisational requirements X X - - X Failure to comply with business conduct rules (e.g. accounting rules, personal transactions etc.) X X - - X 14 * Self-managed UCITS or UCITS having appointed a management company, as the case may be ** Management: members of the management body or supervisory board or the dirigeants
Sanctions under the 2010 law Administrative sanctions ( name and shame, injunction, license withdrawal, prohibition to exercise conduct, fines (up to 5 million/up to 10% of (consolidated) turnover) or twice the amount of the benefit) may be applied in case of: UCITS* Ch. 15 ManCo UCI Any entity contributing to the funds activity Mgt** Failure to comply with rules relating to conflicts of interest X X - - X Failure to comply with delegation rules - X Repeated failure to comply with rules relating to eligibility of assets or investment restrictions X X Repeated failure to comply with investor disclosure rules Distribution without having completed notification procedures X X X X Criminal sanctions including fines or imprisonment may be applied on managers of the management company in case of: Failure to comply with rules on the sale and redemption of units of a common fund Failure to inform the CSSF without delay that the net assets of the common fund have fallen below two thirds and one fourth, respectively, of the legal minimum for the net assets of the common fund Failure to comply with rules relating to valuation rules and investment restrictions Use a designation or description of UCI or UCITS without prior authorisation Failure to determine and publish the issue and redemption price Failure to convene the extraordinary general meeting if the net assets have fallen below two thirds of the legal minimum Receipt of savings from the public with a view to investment if the UCI which was not entered on the list 15 * Self-managed UCITS or UCITS having appointed a management company, as the case may be ** Management: members of the management body or supervisory board or the dirigeants
Sanctions under the AIFM law Legal persons subject to the supervision of the CSSF and natural persons in charge of the administration or management of these legal persons as well as natural persons subject to the same supervision may be sanctioned by the CSSF in the case of: (e.g. AIFM, AIF, management) Warning Reprimand Fine (between EUR 250 250,000) Temporary or definitive ban on carrying out operations or activities or entity Temporary or definitive ban on acting as director, manager or conducting persons Failure to comply with requirements for registered AIFMs (registration, identification of AIFs, disclosure duties, etc). Failure to inform the CSSF in case one or several requirements of the Law of 2013 are not complied with Failure to comply with duty to only provide services included in the license Failure to comply with requirements regarding initial capital and own funds Failure to comply with notification duty in case of material changes to information provided for application purposes Failure to comply with general principles regarding operating conditions Failure to comply with requirement to have lawful remuneration policy in place Failure to comply with requirement concerning conflicts of interest, risk management (incl. liquidity management), valuation & delegation Failure to comply with requirements concerning the appointment of a depositary 16
Sanctions under the AIFM law Legal persons subject to the supervision of the CSSF and natural persons in charge of the administration or management of these legal persons as well as natural persons subject to the same supervision may be sanctioned by the CSSF in the case of: (e.g. AIFM, AIF, management) Warning Reprimand Fine (between EUR 250 250,000) Temporary or definitive ban on carrying out operations or activities or entity Temporary or definitive ban on acting as director, manager or conducting persons Failure to comply with transparency requirements (annual report, disclosure to investors, prudential reporting, PE reporting) Failure to comply with requirements concerning the marketing and management passport Failure to comply with requirements concerning the marketing to retail investors in Luxembourg Refusal to provide accounting documents or other requested information or where documents prove to be incomplete, false or inaccurate Preventing the CSSF from exercising its powers of supervision, inspection or investigation and failure to act in response to orders of the CSSF Failure to comply with the duty to publish balance sheets and accounts Putting at risk the sound and prudent management of the institution concerned X X X X Criminal sanctions (a penalty of imprisonment of eight days to five years and a fine of EUR 5,000 to EUR 125,000 or both) may be applied in case of: Carrying out or attempting to carry out the activity of AIFM without being in possession of an authorisation from the CSSF Using a designation or description giving the impression that activities are subject to the AIFM law without having obtained a license 17
18 3. Directors duties and liability
Directors basic duties and standard of care Principal duty: manage the business and realise the corporate object in the best corporate interest of the fund For investment funds, means that directors must ensure compliance with the investment objective of the fund in the best interest of the investors Standard: act prudently, diligently, skilfully and in good faith Objective test Marginal court interpretation Attendance in meetings is key 19
Directors liability management error Contractual liability mandate Determination of the liability Action (wrongful act) or inaction (omission) In abstracto appreciation Marginal appreciation (equivalent of US business judgement rule ) Who may initiate action: The company (after decision of the general meeting of shareholders) Receiver/liquidator Personal and individual liability 20
Breach of companies law or articles of incorporation Determination of the liability Presumption of error Who may initiate action: The company Insolvency receiver Third parties: creditors, individual shareholders Joint and several liability (exception possible) 21
Criminal sanctions Failure to submit and/or consolidated accounts to the general meeting of shareholder (with or without fraudulent intent) Forgery Abuse of corporate assets Group considerations may only apply in very limited circumstances Securities price manipulation 22
Mitigating risks Discharge Ad hoc approval Insurance Indemnity letter Limitation of liability provisions Time limitation 23
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Contact us Isabelle Lebbe Odile Renner Partner Investment Management Arendt & Medernach +352 40 78 78 510 isabelle.lebbe@arendt.com Partner Arendt Regulatory & Consulting +352 26 09 10 77 41 odile.renner@arendt-arc.com This presentation does not constitute legal advice and is merely intended to raise awareness on specific topics. This presentation however is not a substitute for seeking appropriate commercial and legal advice and should not be relied on in this manner.