LEGAL ALERT CSSF CIRCULAR 12/546 OF 24 OCTOBER 2012 RE: AUTHORISATION AND ORGANISATION OF MANAGEMENT COMPANIES AUTHORISED UNDER CHAPTER 15 OF THE LAW OF 17 DECEMBER 2010 RELATING TO UNDERTAKINGS FOR COLLECTIVE INVESTMENT ( 2010 LAW ) AND SELF-MANAGED INVESTMENT COMPANIES WITHIN THE MEANING OF ARTICLE 27 OF THE 2010 LAW 30 OCTOBER 2012!2012
TABLE OF CONTENTS!"! #$%&'()*%#'$+,$(+-*'./+'0+%1/+*#&*)2,&+"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+3! 4"!,)%1'&#-,%#'$+&/5)#&/6/$%-+"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+7! 2.1.! AUTHORISATION REQUIREMENTS APPLICABLE TO CHAPTER 15 MANCOS+""""""""""""""""""""+7! 2.1.1.! SHAREHOLDING!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!#! 2.1.2.! CAPITAL REQUIREMENTS!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!#! 2.1.3.! MANAGEMENT!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!$! 2.1.4.! PROGRAMME OF OPERATIONS!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!%! 2.1.5.! CENTRAL ADMINISTRATION AND INTERNAL GOVERNANCE!""""""""""""""""""""""""""""""""""""""""""""""""""!%! 2.1.5.1.! Central Administration!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!%! 2.1.5.2.! Internal Governance!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!&! 2.1.5.3.! Organisational requirements!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!&! 2.1.5.4.! Complaints handling!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!'! 2.1.5.5.! Compliance functions and internal audit functions!"""""""""""""""""""""""""""""""""""""""""""""""!'! 2.1.5.6.! Risk management!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!'! 2.1.5.7.! Personal Transaction!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!()! 2.1.5.8.! Conflicts of Interest!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!()! 2.1.5.9.! Exercise of voting rights!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!()! 2.1.5.10.! Rules of Conduct!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!()! 2.1.5.11.! Remuneration Policy!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!()! 2.1.5.12.! External Control!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!((! 2.1.5.13.! Principle of proportionality!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!((! 2.2.! AUTHORISATION REQUIREMENTS APPLICABLE TO SIAGS+"""""""""""""""""""""""""""""""""""""""""""""+!!! 2.3.! AUTHORISATION REQUIREMENTS APPLICABLE TO CHAPTER 15 MANCOS WHOSE ACTIVITIES INCLUDE COLLECTIVE PORTFOLIO MANAGEMENT AND INDIVIDUAL PORTFOLIO MANAGEMENT+"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+!4! 8"! (/2/9,%#'$+'0+-/&:#*/-+"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+!8! 3.1.! SCOPE OF THE DELEGATION+""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+!8! 3.2.! GENERAL REQUIREMENTS APPLICABLE TO THE DELEGATION+""""""""""""""""""""""""""""""""""""""+!3! 3.2.1.! MINIMUM SUBSTANCE REQUIREMENT!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!(*! 3.2.2.! DUE DILIGENCE REQUIREMENT!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!(*! 3.3.! SPECIFIC REQUIREMENTS APPLICABLE TO THE DELEGATION+"""""""""""""""""""""""""""""""""""""""+!7! 3.3.1.! COLLECTIVE PORTFOLIO MANAGEMENT!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!(#! 3.3.2.! ADMINISTRATION OF UCITS!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!(#! 3.3.3.! COMPLIANCE FUNCTION!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!($! 2
3.3.4.! INTERNAL AUDIT FUNCTION!""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!($! 3.3.5.! RISK MANAGEMENT FUNCTION!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!($! 3.3.6.! COMPLAINTS HANDLING!"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""!($! 3"!.,--.'&%#$9+'0+*1,.%/&+!7+6,$*'-;+,*%#:#%#/-+""""""""""""""""""""""""""""""""""""""""""""""""+!<! 4.1.! ESTABLISHING A BRANCH+"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+!<! 4.2.! FREEDOM OF SERVICES+"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+!=! 7"! &/2,%#'$-1#.+>#%1+%1/+,2%/&$,%#:/+#$:/-%6/$%+0)$(+6,$,9/&-+ (#&/*%#:/+?,#06(@+""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+!A! 3
1. INTRODUCTION AND SCOPE OF THE CIRCULAR On 24 October, 2012 the Commission de Surveillance du Secteur Financier ( CSSF ) issued Circular 12/546 (the Circular ) addressed to all management companies authorised in Luxembourg under chapter 15 of the law of 17 December 2010 on undertakings for collective investment ( 2010 Law ) and all self-managed investment companies authorised under Part I of the 2010 Law, which have not designated a Chapter 15 ManCo ( SIAGs ). The Circular replaces CSSF Circular 03/108 and CSSF Circular 05/185 which are both applicable to all management companies of undertakings for collective investment (the UCI ) currently authorised under chapter 15 of the 2010 Law ( Chapter 15 ManCos ) as well as any SIAG following the amendments of the 2010 Law and CSSF Regulation n 10-4 implementing EU Directive 2010/43 of the European Commission of 1 July 2010 (the CSSF Regulation ). Chapter 15 ManCos and SIAGs are subject to a certain number of requirements as set out below established mainly for the purpose of protecting the interests of the investors and providing a certain level of transparency on the management of their portfolios and the management of their risks. The purpose of the Circular is to clarify in a single document 1 (i) the conditions for a Chapter 15 ManCo and a SIAG to be authorised to manage UCIs governed by the 2010 Law (Section 2) and (ii) the rules applicable to the delegation of activities performed by Chapter 15 ManCos or SIAGs to a third party (Section 3). In addition, the Circular enumerates the information to be communicated by Chapter 15 ManCos to the CSSF in order to exercise their activities in another member state of the European Union ( EU Member State ) through the establishment of a branch or by way of the freedom to provide services (Section 4). The management company of alternative investment funds (i.e. mainly SICARs, SIFs, and UCIs governed by part II of the 2010 law) as more particularly defined under the Alternative Fund Manager Directive 2 falls outside of the scope of the Circular. However, one of the consequences of the passing of the AIFM Directive, which came into force on 21 July 2011, is to bring the regime applicable to the management company of alternative investment funds close to the regime applicable to Chapter 15 ManCos (Section 5). Management companies authorised under chapters 16, 17 and 18 of the 2010 Law fall outside the scope of the Circular. 1 The Circular integrates the CSSF Circular 11/508 applicable to Chapter 15 ManCo and SIAG. 2 Directive 2011/61/EC of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010. 4
2. AUTHORISATION REQUIREMENTS The Circular recalls that Chapter 15 ManCos and SIAGs in Luxembourg must be authorised by the CSSF. This extends to the opening of agencies in Luxembourg, and representative offices or branches in a foreign jurisdiction. 2.1. Authorisation requirements applicable to Chapter 15 ManCos 2.1.1. Shareholding The Circular provides details on the requirements applicable to the shareholding structure of Chapter 15 ManCos. In order to grant an authorisation, the CSSF must be assured that the shareholders of Chapter 15 ManCos are of sufficiently good repute and will exercise their powers in a way that enables the prudent and diligent management of the company. From a practical point of view, the identity of all direct or indirect shareholders holding at least 10% of the share capital or voting rights or who can exercise a significant influence over the management (the Qualified Majority ) together with the amount of their participation must be communicated to the CSSF. Any modification of the identity of holders of a Qualified Majority must also be submitted to the CSSF for approval. In circumstances where a depositary bank holds a Qualified Majority in a Chapter 15 ManCo, all potential conflicts of interest must be identified and prevented. 2.1.2. Capital Requirements The Circular expressly recalls the need for Chapter 15 ManCos to have adequate and sufficient financial means as described in the 2010 Law. In practice, Chapter 15 ManCos must have an initial minimum fully paid up share capital of EUR 125,000.- (or its equivalent in any other currency) at the time of their incorporation. If the activities of the Chapter 15 ManCo are limited to collective portfolio management, beside the requirement to have the initial minimum share capital fully paid up, it will be necessary to prove the existence of own funds (fonds propres) equal to the higher of (i) 0.02% of the value of the portfolios managed by the Chapter 15 ManCo and exceeding EUR 250,000,000, with a cap set at EUR 10,000,000.- or (ii) one quarter of their preceding financial year's fixed overheads. When the Chapter 15 ManCo is authorised by the CSSF, the latter amount is calculated according to fixed overheads projected in its business plan. By way of derogation, Chapter 15 ManCos do not need surplus of own funds covering the excess amounts under management, up to an amount equal to 50% of the required total amount if they benefit from a guarantee of the same amount given by a credit institution or an insurance undertaking. Further, the own funds shall be permanently kept at the disposal of the Chapter 15 ManCo and shall be invested for its own interest in order to guarantee the continuity and regularity of its activities and the services it provides. As already laid down in the CSSF 5
annual report for the year 2008 3, such own funds cannot be used for investment purposes with its shareholders or to finance a loan granted to the same. However, the own funds may be invested in liquid assets or assets which are easily convertible into short-term liquidities and which are not of a speculative nature. If necessary, the CSSF can request a comfort letter from the shareholders of a Chapter 15 ManCo by which the shareholders will undertake on behalf of the Chapter 15 ManCo to respect all prudential requirements, in particular the requirement of own funds. 2.1.3. Management Any member of the management structure (i.e. all persons managing in fact the affairs of the Chapter 15 ManCos as well as any person entrusted with the day-to-day management of the UCI (the Managing Persons )) shall: (i) (ii) be of good repute and have the necessary experience regarding the type of undertaking for collective investment in transferable securities ( UCITS ) or UCIs they manage: a minimum of an appropriate five (5) years experience as evidenced by the exercise of similar activities at a senior level in terms of responsibility and independence; and devote all necessary time and attention to perform their functions: a limited number of professional mandates is therefore required and shall be communicated to the CSSF. Chapter 15 ManCos shall have at least three (3) board members (the Board Members ), the majority of which cannot be representatives of the depositary bank. The CSSF also requires the appointment of two (2) Managing Persons who shall be permanently present in Luxembourg and who shall be reachable by the CSSF at all times to furnish any information that may be required from time to time. Derogations may be granted in line with the structure and complexity of the investment vehicles managed. Managing Persons do not need to be employed by the Chapter 15 ManCo, provided an agreement defines precisely their rights and obligations. In addition, they cannot be employees of the depositary bank of the investment undertaking(s) which they manage and shall be assisted by qualified employees, in particular when they exercise several mandates. The Managing Persons will constitute an executive committee (comité de direction), each member of which will have specific competences. Such committee is competent, under the ultimate responsibility of the management board of the Chapter 15 ManCo, for: (i) (ii) the implementation of strategies and guidelines on central administration and internal governance via precise written internal policies and procedures; the implementation of proper internal control mechanisms (i.e. the permanent, compliance, internal audit and risk management functions); 3 CSSF annual report, 2008, p. 86 (http://www.cssf.lu/fileadmin/files/publications/rapports_annuels/rapport_2008/ra2008_integral.pdf) 6
(iii) (iv) (v) (vi) the implementation of the general investment policy of each UCITS managed by the Chapter 15 ManCo, in accordance with the prospectus, the management regulations or the constitutional documents of the UCITS; to supervise the adoption of investment strategies for each UCITS managed by the Chapter 15 ManCo; to implement and to make subject to review on a regular basis the risk management policy, as well as the implementation provisions, procedures and techniques of such policy; and to implement and follow up on the marketing policy and distribution network of the UCITS and UCIs managed by the Chapter 15 ManCo. The Circular further requires that the Managing Persons remain in touch and meet on a regular basis and that the meetings they hold be recorded in minutes available at the premises of the Chapter 15 ManCo in Luxembourg. In addition, those meetings must relate, amongst other things, to the management information (Please also refer to section 2.1.5.3 below). 2.1.4. Programme of operations A programme of operations shall be provided to the CSSF which shall include the following information: (i) the scope of services proposed by the Chapter 15 ManCo for the next three (3) years in relation to collective portfolio management, (ii) the investment policies of the UCIs and the relevant financial instruments and markets, (iii) the risk management measures as specified in CSSF Circular 11/512, and (iv) the financial forecasts for the next three years together with the possibilities which are retained by the Chapter 15 ManCo in respect of the future extension of its activities. 2.1.5. Central Administration and Internal Governance The Circular further explains the concepts of central administration and internal governance. 2.1.5.1. Central Administration In addition to having their registered office in Luxembourg, Chapter 15 ManCos must also have their central administration carried out in Luxembourg. This comprises (i) the decision-making centre and (ii) the administrative centre. The notion of decision making centre includes the activities of the Managing Persons as well as the activities of the persons responsible for the commercial, administrative and oversight functions or head of departments. The notion of administrative centre includes, in particular, a sound administrative and accounting organisation ensuring adequate execution of operations, the registration of the operations, the follow up in relation to delegated activities, the conflicts of interest management and the adherence to the applicable rules of good conduct. To that end, it 7
must have all necessary technical and human resources (including IT systems) to exercise its activities or to monitor the activities which have been delegated. Thus the Chapter 15 ManCo will be required to have the following non-exhaustive list of on-site capabilities: (i) must employ in Luxembourg a sufficient number of employees with the necessary qualification, knowledge and expertise to perform their duties and supervise any delegated services; the CSSF may grant a derogation in relation to this point and may authorise the inclusion of staff, in whole or in part, who are either detached or made available by an entity belonging to the same company group or by a third party; in such case, the contract governing this arrangement must be submitted to the CSSF; (ii) set up a technical and IT infrastructure to control and to ensure the quality, security, confidentiality and integrity of the information; it is permissible for the Chapter 15 ManCo to use a parent or affiliated company to provide this service. Should a third party be used, the Chapter 15 ManCo must ensure that this third party has the necessary qualifications and a formal contract must be put in place; (iii) set up a system adapted to the collective portfolio management; it must be possible to obtain the documents concerning such function when performed by delegates, either electronically or upon demand; (iv) implement accounting policies and procedures in order to furnish all financial information which shall give a true and fair view of the financial situation of the Chapter 15 ManCo. The name of the persons in charge of providing all financial information must be communicated to the CSSF, or where applicable, the name of the delegated third party. 2.1.5.2. Internal Governance Each Chapter 15 ManCo shall have a robust internal governance to ensure a prudential management of its activities and related risks, covering among other things the following areas: organisational requirements including internal control processes, rules on conflicts of interest, rules of conduct, remuneration policies and risk management. To this effect, each Chapter 15 ManCos shall establish and maintain permanent compliance, internal audit and risk management functions which are managed by different persons and as more particularly described herebelow: 2.1.5.3. Organisational requirements Each Chapter 15 ManCo: (i) shall establish a clear procedures manual describing its internal organisation, the division of tasks among its personnel, the internal hierarchy, the information exchange process and the controls performed in relation to their delegates. This procedures manual must be available at the headquarters of the Chapter 15 ManCo, be accessible to its staff and be kept up to date as the activities of the management company evolve; 8
(ii) (iii) (iv) (v) shall register the details of its activities and internal organisation by establishing a management information sheet which shall contain the results of any controls performed on the delegated activities, the analyses of the conflicts of interest, all incidents linked to the management of UCITS (i.e. errors in the calculation of the net asset value); complaints etc!; shall ensure that management information is readily available in Luxembourg and preferably stored in a central database that can be accessed at any time from Luxembourg; must establish, implement and maintain operational systems and procedures appropriate to preserve the security, integrity and confidentiality of information, taking into account the nature of the information concerned; must establish, implement and maintain an appropriate policy of continuity for the restoration of activity after a disaster and the provision of a regular back up control. 2.1.5.4. Complaints handling Each Chapter 15 ManCo shall put in place effective and transparent procedures for the reasonable and prompt handling of complaints received from investors, which shall be made available to the investors, free of charge. Among the staff, one person (whose identity must be communicated to the CSSF) shall be responsible for the handling, centralisation and follow-up of complaints. The Chapter 15 ManCo must notify the CSSF of a list of authorised persons who will handle complaints as well as an annual list of complaints received by investors, the reasons for these complaints and how the complaints have been addressed. 2.1.5.5. Compliance functions and internal audit functions Each Chapter 15 ManCo shall establish its own and independent compliance and audit functions in order to detect any risks relating to the non-respect by the Chapter 15 ManCo of its obligations under the 2010 Law and any other applicable regulations. The identity of the compliance officer and of the internal auditor shall be communicated to the CSSF. No Board Member can act as compliance officer or internal auditor of a Chapter 15 ManCo. 2.1.5.6. Risk management Each Chapter 15 ManCo shall establish and maintain a permanent risk management function in order to take into account all risks linked to the UCITS in a centralised and integrated way. Such risks shall include all risks linked to the management of its portfolios (liquidity risk, counterparty risk, etc.), as well as all operational risks due to the activities of all entities that are part of the collective management of the UCITS. A method of risk management shall also be put in place in order to control and to measure at all time any risks associated with certain positions and the general risk profile of the portfolios. The risk management policy shall include the market risk and counterparty risk together with the 9
operational risk, liquidity risk and any significant risk for the UCITS. In this context, each Chapter 15 ManCo is required to calculate the global risk of the UCITS once per day. An update of the risk management procedure must be communicated to the CSSF at least once a year within one month of the date of closing of the Chapter 15 ManCo s financial year. 2.1.5.7. Personal Transaction Each Chapter 15 ManCo shall establish written procedures in order to record all personal transactions that have been notified or identified and such record shall be available at the registered office of the Chapter 15 ManCo. This procedure must be kept up-to-date and the CSSF reserves the right to request a copy of this procedure at any time. 2.1.5.8. Conflicts of Interest Each Chapter 15 ManCo shall establish and maintain an effective conflicts of interest policy which shall be in writing and appropriate to the nature and scale of the business. The policy should identify the circumstances which constitute a conflict of interest entailing a material risk to the UCITS and shall include procedures to be followed to manage such conflicts of interest. An updated record of the types of situations that would give rise to a conflict of interest shall be available at the registered office of the Chapter 15 ManCo. 2.1.5.9. Exercise of voting rights Each Chapter 15 ManCo shall set up appropriate and effective strategies as to when and how to exercise the voting rights attached to the financial instruments held by the UCITS that they manage. A short description of such strategy shall be made available to the investors, free of charge. 2.1.5.10. Rules of Conduct Each Chapter 15 ManCos shall put in place procedures and policies to ensure that they (i) act in the best interest of the UCITS and its investors; (ii) complete all investment decisions in accordance with the objective, investment strategy and risk limits of the UCITS; (iii) take all reasonable steps to execute in the best manner all orders and (iv) execute all portfolio operations in a fast and equitable manner. 2.1.5.11. Remuneration Policy The management board of Chapter 15 ManCos shall put in place a remuneration policy in conformity with CSSF Circular 10/437 4, in case the remuneration of the members of the administrative and management bodies of a Chapter 15 ManCo and the members of its staff whose activity has an impact on its risk profile (the Remuneration ), includes a variable component or a bonus in addition to a fixed part. 4 CSSF Circular 10/437 on guidelines concerning the remuneration policies in the financial sector. 10
An appropriate balance must exist between the fixed and variable components of the Remuneration, the latter having to be capped. In addition, the fixed remuneration must represent a sufficiently high proportion of the total Remuneration. The general principles of the remuneration policy are designed by the management board of Chapter 15 ManCos in cooperation with the risk management, internal control and compliance officers. External experts can also be associated thereto. The remuneration policy of Chapter 15 ManCos shall be designed in such a way that conflicts of interest are prevented. The remuneration policy, shall be subject to central and independent internal review on a yearly basis by the risk management, internal control and compliance officers, and shall be communicated to the personnel of the Chapter 15 ManCo. 2.1.5.12. External Control Each Chapter 15 ManCo shall appoint an independent auditor (réviseur d entreprises agréé) having an adequate professional experience to audit its financial documents. Any changes to the independent auditor must receive the prior approval from the CSSF. 2.1.5.13. Principle of proportionality The Circular allows for some flexibility regarding the implementation of the requirements set out above, taking into consideration the nature, scale and complexity of the activities of each Chapter 15 ManCo. Consequently, Chapter 15 ManCos can be authorised to apply the principle of proportionality vis-à-vis the compliance, internal audit and risk management functions, by submitting a prior request to the CSSF. Moreover, each Chapter 15 ManCo may also apply the principle of proportionality, without being authorised, when complying with the requirements relating to the internal procedures and organisation, the employees and the conflicts of interests policy, by taking into consideration the nature, scale and complexity of its activities as well as the nature and range of services and activities performed. The number of UCITS and UCIs managed, the amount of total assets under management, the size of delegated activities, the use of a certain classes of assets are among others, elements to be taken into consideration to appreciate the principle of proportionality. 2.2. Authorisation Requirements applicable to SIAGs The activities of a SIAG are subordinated to the CSSF approval. The infrastructure of a SIAG shall comply with a certain number of requirements set out in the Circular. In particular a SIAG shall (i) have a minimum capital requirement of 300,000 euros, (ii) submit to the CSSF a plan of activities, and (iii) appoint at least two Managing Persons. The Circular indicates that SIAGs must adhere to most of the regulatory requirements governing Chapter 15 ManCos (namely, in relation to the management, the internal organisation and central administration, complaints handling, the rules of conduct, the rules on conflicts of interest and risk management, the remuneration policy and the programme of activities as set out above), which will apply mutatis mutandis. Therefore, 11
SIAGs must also have their registered office, central administration and decision-making centre located in Luxembourg. On a case by case basis, the CSSF may also request a SIAG to comply with additional operational requirements applicable to Chapter 15 ManCos in view to protect the investors such as the requirement for a SIAG to also dispose of qualified employees, of an IT and technical infrastructure and of compliance and internal audit functions. 2.3. Authorisation Requirements applicable to Chapter 15 ManCos whose Activities include Collective Portfolio Management and Individual Portfolio Management Where the Chapter 15 ManCo s activities also include individual portfolio management, all of the conditions applicable under chapter I of the Circular as set out in Section 1 above will apply. However, additional information must be provided in the programme of activities, in particular, concerning the scope of services to be provided by the Chapter 15 ManCo for the three years following authorisation, including: (i) information on the individualised discretionary management of investment portfolios (for example, the number of private clients, institutional and pension funds and assets managed and the type of customers, financial instruments and markets concerned); (ii) an indication of banks with which client assets are deposited; (iii) the risk management policy applied in discretionary management; and (iv) ancillary services offered, where applicable in the circumstances. The Circular clarifies that certain provisions of Directive 2009/49/EC on markets in financial investments ( MIFID ) and its implementing Directive 2006/73/EC are applicable to Chapter 15 ManCos providing individual or discretionary portfolio management services. Therefore, to the extent Chapter 15 ManCos need to comply with the MIFID requirements, they will fall within the ambit of the law of 5 April 1993 on the financial sector as amended (the 1993 Law ). In particular, they shall comply with articles 37-1 and 37-3 of the 1993 Law, which relate respectively to the organisational requirements applicable to them and the conduct of business rules concerning the performance of services for clients. Additionally, the provisions of Grand-Ducal Regulation of 13 July 2007 relating to organisational and rules of conduct in the financial sector shall apply mutatis mutandis to the provision of discretionary portfolio management services by a Chapter 15 ManCo. In this context, the Chapter 15 ManCo must provide the CSSF with confirmation of its adherence to the applicable MiFID requirements. The Circular provides that the Chapter 15 ManCo must also submit to the CSSF their standard contract for discretionary management and investment advice that it intends to enter with its individual clients. Each Chapter 15 ManCo which provides discretionary investment portfolio management under a mandate given by the investors, including portfolios operated by pension funds, 12
must comply with Section I.3 of this Circular concerning own funds as set out in Section II.1.3 above, in addition to the provisions of CSSF Circular 07/290 5. In addition, where a Chapter 15 ManCo s authorisation covers the provision of discretionary portfolio management, the Chapter 15 ManCo must participate in a compensation scheme for investors in Luxembourg which is recognised by the CSSF. Such Chapter 15 ManCo is therefore obliged to join the AGDL (Association for the Guarantee of Deposits, Luxembourg). A confirmation of this membership must be promptly filed with the CSSF following the authorisation of the Chapter 15 ManCo. 3. DELEGATION OF SERVICES The Circular reiterates a series of existing rules on delegation contained in various circulars issued by the CSSF 6. It provides additional clarifications on the functions which are authorised to be delegated by Chapter 15 ManCos to third parties and the conditions under which delegates can be validly appointed. In particular, the Circular expressly prohibits the delegation of the totality of the activities of a Chapter 15 ManCo and clearly stipulates that the delegation does not impact the liability of the Chapter 15 ManCo. Any delegation regarding the management of UCITS must be approved by the CSSF and the offering memorandum of the UCITS shall expressly mention the identity of the delegates together with a description of the nature of the delegates activities. SIAGs are also entitled to delegate the administration of their portfolios to a third party established in Luxembourg (such as a bank, a professional of the financial sector or a management company) having the requisite authorisation and adequate organisation to perform the delegated activities. 3.1. Scope of the Delegation The Circular enumerates in a non-exhaustive list the functions that can be delegated by Chapter 15 ManCos: collective portfolio management, including portfolio management, administration and marketing; risk management; complaints handling; compliance; 5 CSSF Circular 07/290 (as amended by CSSF Circulars 10/451 and 10/497) on the definition of capital ratios pursuant to article 56 of the 1993 Law (applicable to Chapter 15 ManCos). 6 Namely IML circular 98/143 on internal control (as modified by CSSF circular 04/155), CSSF circular 04/155 on the compliance function, CSSF circular 11/512 on the presentation of the main regulatory changes in risk management following the publication of CSSF regulation 10-4 and ESMA clarifications. 13
internal audit; and operation of the IT system. The Circular prohibits the delegation of certain core functions, namely, the: determination of the general investment policy for each UCITS managed by the Chapter 15 ManCo; determination of the risk profile for each UCITS managed by the Chapter 15 ManCo; interpretation of the risk management analysis, including the corrective measures which are necessary as the case may be; implementation of a policy addressing conflicts of interest; implementation of a best execution policy; decisions relating to the determination of the likely realisation value assessed with prudence and in good faith in the absence of a representative quote,; decisions concerning the choice of service providers to retain; and follow-up and monitoring of the delegated functions. 3.2. General Requirements applicable to the Delegation 3.2.1. Minimum Substance Requirement The delegation of functions shall not render the Chapter 15 ManCo a letterbox entity. Hence, the delegation of the totality of the Chapter 15 ManCo s activities is prohibited and its infrastructure must be maintained at its registered office. The CSSF shall be adequately informed of any delegation of functions. To this effect, the Chapter 15 Manco shall submit to the CSSF, in relation to each UCITS it manages, a description of the functions to be delegated, the identity of the delegated entity and the procedure of control set up by the Chapter 15 ManCo to supervise the delegated entities. 3.2.2. Due Diligence Requirement As a new requirement, Chapter 15 ManCos shall ensure of the professionalism of the delegated entity by performing a written due diligence, so as to identify the operational risks relating to the delegation. Thus, Chapter 15 ManCos are required to appoint only qualified delegates having all the required skills to perform the outsourced functions and which can provide evidence of sufficient human and technical resources to perform their activities. Chapter 15 ManCos shall also ensure that delegates comply with similar rules of conduct as set out in section II.1.5 (j) above. 14
To insure the effective monitoring of the delegates, the Chapter 15 ManCo must have a sufficient number of qualified employees having the necessary expertise to monitor the outsourced functions. Chapter 15 ManCos shall supervise at all times the delegated activities by having permanently access to all information pertaining to the delegated activities. Chapter 15 ManCo shall among others, be in a position to: (i) (ii) (iii) (iv) control the calculation of the NAV and the completion of transactions; ensure that the assets of the UCITS are invested in conformity with the offering memorandum and the applicable legislation; be involved in the marketing policy of the UCITS; control the risk exposure of the UCITS (including among others, market risk, liquidity risk, counterparty risk and operational risk). The Board Members shall receive for each UCITS a periodic report on the results of such control. In addition, the delegation shall not prohibit the possibility for the Board Members to give additional instructions to the delegates or to withdraw with immediate effect their mandate. 3.3. Specific Requirements applicable to the Delegation 3.3.1. Collective Portfolio Management In order to protect investors, delegation of the collective portfolio management function is only permitted to entities authorised to manage collective portfolios and which are subject to the prudential supervision of a regulatory authority. In case the delegate is established in a country other than an EU Member State, cooperation between the CSSF and that third country supervisory authority must be ensured. The Circular prohibits the delegation of collective portfolio management to the depositary of the UCITS and to any other undertaking whose interest may conflict with those of the Chapter 15 ManCo. However, the delegation to another company belonging to the same group as the depositary may be authorised if evidence is given to the CSSF that no conflicts of interest shall arise. The Circular also imposes that the delegates manage the portfolios in conformity with the allotment criteria applicable to the investments as periodically set by the Chapter 15 ManCo. 3.3.2. Administration of UCITS Delegation of the administration of UCITS is permissible, provided that the delegates have all necessary authorisations and an appropriate organisation to perform this function, including accounting procedures and policies. 15
A Chapter 15 ManCo incorporated under Luxembourg laws can only delegate the administration of UCITS governed by Luxembourg law to a third party established in Luxembourg. When the UCITS is established in another EU Member State, the Chapter 15 ManCo is authorised to appoint a delegate established either in Luxembourg or in the EU Member State of the UCITS. In both cases, the delegates shall comply with the same level of professionalism as required for the Chapter 15 ManCo. 3.3.3. Compliance Function The delegation of the compliance function is only available for Chapter 15 ManCos whose activity is limited to collective portfolio management, provided that the CSSF has granted a prior exemption upon duly justified request. 3.3.4. Internal Audit Function Unless the Chapter 15 ManCo has branches, the internal audit function can be delegated to an external expert specialised in this field. The identity of the delegate together with a description of its knowledge and internal organisation shall be communicated to the CSSF. 3.3.5. Risk Management Function The risk management function can be delegated to a third party pursuant to an agreement to be submitted to the CSSF which shall include the name of the delegates and a description of the competences and internal organisation of such delegates. 3.3.6. Complaints Handling Complaints handling can be delegated to one or several specialised third parties located in Luxembourg or abroad. The list of the delegates appointed by the Chapter 15 ManCo shall be communicated to the CSSF together with a report on the number of complaints received. 4. PASSPORTING OF CHAPTER 15 MANCOS ACTIVITIES 7 4.1. Establishing a Branch A Chapter 15 ManCo wishing to operate or provide services on the territory of another EU Member State through a branch shall submit the following information to the CSSF: (i) the EU Member State within the territory of which it plans to establish a branch; (ii) a programme setting out (i) the activities and services to be carried out through the branch, (ii) the details of the organisational structure of the branch including a description of the risk management process (which shall be appropriate and 7 The provisions applicable to Chapter 15 ManCos on the establishment of branches and freedom of services are not applicable to SIAG. 16
proportionate to the activities and services of the branch); (iii) a description of the procedures for the handling of complaints as well as for the handling of requests for information by either the public or the competent authorities of the Chapter 15 ManCo s home EU Member State; (iii) the address in the host EU Member State where documents may be obtained; and (iv) the name(s) of the responsible manager(s) of the branch. The managers of the branch shall give evidence of their good reputation and adequate experience by providing the standard documents to the CSSF (i.e. curriculum vitae, declaration of honour and judicial extract). The Chapter 15 ManCo must also designate a person responsible for the branch, whose name shall be communicated to the CSSF and who shall be in charge of coordinating the flow of information between the branch and the Chapter 15 ManCo. The external auditor of the Chapter 15 ManCo shall include the branch(es) when auditing the annual accounts of the Chapter 15 ManCo. 4.2. Freedom of Services A Chapter 15 ManCo wishing to operate or provide services on the territory of another EU Member State under the freedom of services shall notify the following information to the CSSF: (i) the EU Member State on whose territory it intends to operate; and (ii) a programme setting out (i) the activities and services to be carried out, (ii) the description of the risk management process (which shall be appropriate and proportionate to the activities and services of the branch and which may also cover the activities of individual portfolios management); (iii) a description of the procedures for the handling of complaints as well as for the handling of requests for information by either the public or the competent authorities of the Chapter 15 ManCo s home EU Member State; In addition, the Chapter 15 ManCo must provide a description of the main marketing techniques intended to be used when carrying on free provision of services in the host EU Member States. The Circular reiterates that where a Chapter 15 ManCo, without establishing a branch, only markets the units of the UCITS it manages in the territory of an EU Member State other than its home EU Member State without proposing to pursue any other activities or services, such Chapter 15 ManCos shall only be subject to the those requirements applicable to UCITS wishing to market their activities in another Member State under the 2010 Law. Regardless of whether a Chapter 15 ManCo has established a branch or acts under the freedom of services, it must notify both the competent authority of the host EU Member State and the CSSF in writing of any changes concerning the program setting out the activities and services contemplated to be carried out through a branch and where appropriate the address of the Chapter 15 ManCo in the host EU Member State and the 17
name(s) of the responsible manager(s) of the branch, at least one month before the entry into force of such change. 5. RELATIONSHIP WITH THE ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE (AIFMD) The Alternative Investment Fund Managers Directive 8 ( AIFMD ) aims to provide a harmonised regulatory regime throughout the European Union ( EU ) for managers of alternative investment funds ( AIFs ) by establishing common requirements for the authorisation and supervision of alternative investment fund managers ( AIFMs ). The scope of the AIFMD is broader than the scope of the 2010 Law applicable to Chapter 15 ManCo as it will concern all EU and non EU AIMF managing or marketing EU or non EU AIF within the EU. Therefore the following cases shall fall under the scope of the AIFMD: EU AIFM managing EU or non EU AIF Non EU AIFM managing EU AIF; and Non-EU AIFM marketing EU or non-eu AIF within the EU. The AIFMD defines AIFM as any legal person whose regular business is managing one or more AIF(s) where those AIFs meet the minimum threshold requirements set out in the AIFMD. The management activities must include at least the investment management functions of portfolio management and/or risk management provided certain threshold requirements are met. AIFMs may also perform administrative and marketing functions and activities related to the assets of the AIF. AIFs are undertakings for collective investment, including investment compartments thereof, which raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors 9. All non- UCITS regardless of their asset class, e.g. hedge funds, real estate and infrastructure funds, private equity and venture capital funds etc. are therefore targeted by the AIFMD regardless of their current regime and their legal form. In Luxembourg this comprises notably of UCIs authorised under Part II of the 2010 Law, SIFs, SICARs and SOPARFIs as long as they raise capital from a number of investors with a view to investing it in accordance with a defined investment strategy for the benefit of those investors. The AIFMD came into force on 21 July 2011 and Member States have until 22 July 2013 to transpose it into their national legislation. Once the AIMFD is transposed into Luxembourg law, different regulatory regimes will be available to managers established in Luxembourg who provide collective portfolio management services, namely the Chapter 15 ManCo regulatory regime for UCITS and the AIFM regime for qualifying AIFs. On August 24, 2012, a draft law transposing the AIFMD into Luxembourg law was submitted to the Luxembourg Parliament for approval (the Draft Law ). The Draft Law 8 Directive 2011/61/EC of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010. 9 Article 4 (1) (a) of the AIF 18
purports to faithfully transpose the provisions of the AIFMD while also introducing a number of innovations which are designed to facilitate and improve the development of the AIF industry as a whole. Chapter 15 ManCos, as regards their authorisation and permitted activities, will remain governed by the 2010 Law and the AIFMD will not impact upon such authorisation. The AIFMD does make it possible, however, for a Chapter 15 ManCo to be authorised as an AIFM where the Chapter 15 ManCo wishes to manage both UCITS and AIFs. Equally an authorised AIFM will be able to provide management services to a UCITS where it obtains the requisite Chapter 15 ManCo authorisation. Where documentation has already been provided to the CSSF prior to obtaining an authorisation as a Chapter 15 ManCo under the 2010 Law, the CSSF will not require filing of the same information for the purpose of obtaining the AIFM licence, provided all information is up to date. EU AIFM starting their activities on or after 22 July 2013 will have to apply for authorisation as from that date whereas EU AIFM already performing management activities before 22 July 2013 will have to comply with the AIFMD before 22 July 2014. Non-EU AIFM will not be required to become authorised under the AIFMD immediately. They will benefit from a transitional period and will have the possibility to apply for being authorised under the AIFMD only as from July 2015. The following provisions will bring AIFMs into closer alignment with Chapter 15 ManCos: (i) Requirement for authorisation: In line with the requirements applicable to Chapter 15 ManCos, AIFMs located in Luxembourg will need to apply for authorisation with the CSSF prior to start their activities. (ii) Single depository rule: The AIFMD introduces the appointment of a single depository for each AIF managed by an AIFM. The depository must either be a credit institution, a MiFID investment firm or other categories of institutions that are subject to prudential regulation and on-going supervision and which are eligible to act as a depository under the UCITS Directive. For EU funds, the depositary must be EU domiciled. This requirement is in line with the 2010 Law which requires that the safe-keeping of the assets belonging to a UCITS must be entrusted to a depositary. (iii) Passporting provisions: Similarly to the provisions available to Chapter 15 ManCos, under the AIFMD, all AIFM as authorised by the competent EU authority will benefit from a passport enabling them to manage other AIFs in the EU and to market their EU or non EU AIF to investors throughout the EU, once their home regulator has verified their compliance with the AIFMD s provisions and notified the competent authorities of the host Member States. (iv) Capital Requirements: Internally managed AIF will need to maintain an initial capital of EUR 300,000 and externally appointed AIFM will have to maintain an initial capital of EUR 125,000. Where the value of the portfolios managed by the externally appointed AIFM exceeds EUR 250 Million, additional own funds will be required (i.e. 0.02 % of the value of the portfolio which exceeds EUR 250 million 19
with the amount capped at EUR 10 Million). These capital requirements are akin to those applicable to Chapter 15 ManCos under the 2010 Law 10. (v) Delegation: Similar to Chapter 15 ManCos, the AIFM will be able to delegate part but not all of their functions to third parties so as to increase the efficiency of their business. The delegation of portfolio management and risk management can be given only to authorised and registered firms for the purpose of asset management Sub-delegation may also be permitted with the approval of the AIFM, however, the AIFM remains liable in cases of delegation. So far, the rules expressed in the Circular show striking similarities with the provisions contained in the latest version of the Draft Law. For instance, both the AIFM and Chapter 15 ManCo regimes would apply to management companies managing respectively AIFs or UCITS, but also to the funds which are managed internally by their respective management body and have not decided to appoint an external management company. Furthermore, most of the rules of the Draft Law, pertaining to the internal organisation of AIFMs are similar to those contained in the Circular as to Chapter 15 ManCos. In particular, according to the Draft Law, AIFMs will need to identify and prevent the occurrence of any conflicts of interest as well as to set up an independent risk management function. It is also required under the Draft Law that AIFMs shall be managed by persons of good reputation having the adequate experience to manage AIFs and shall dispose of all necessary and appropriate human and technical resources to enable the sound management of the AIF even in case of delegation. In addition, alike the Chapter 15 ManCo, identity of the holder of a Qualified Majority in the AIFM shall be disclosed to the CSSF. However, some rules concerning the internal organisation will only apply to AIFMs due to their specificity, such as the evaluation rules concerning the assets of the AIFs managed by AIFMs, the implementation of a liquidity management function, etc.. At this stage, it is therefore possible to anticipate that the Chapter 15 ManCos managing AIFs in addition to at least one UCITS, will not encounter too many difficulties to comply with the rules of the Draft Law in order to be granted the AIFM authorisation. For further information feel free to contact the following persons: Alex SCHMITT aschmitt@bonnschmitt.net Corinne PHILIPPE cphilippe@bonnschmitt.net Marcus PETER mpeter@bonnschmitt.net Christine MARC cmarc@bonnschmitt.net Laurent HENERESSE lhenneresse@bonnschmitt.net 10 Article 102 of the 2010 Law sets out the capital requirements for Chapter 15 ManCos which are set out in Section 1 of the present document. 20