MEMORANDUM Authorisation and Organisation of Management Companies and Self-Managed SICAVs & UCI Promotership A. INTRODUCTION Within less than a week, the CSSF published (i) a circular regarding authorisation and organisation of Luxembourg UCITS management companies and selfmanaged Sicavs, hereafter referred to as the "Circular" 1, and (ii) a press release on the promotership of Luxembourg UCIs, hereafter referred to as the "Press Release" 2. The Press Release refers to the Circular but does not form part of it. It must be read, and will be addressed, in conjunction with the Circular in this newsflash. The Circular is based on a few key provisions of the UCI Act 3 and, more specifically, of CSSF Regulation 10-4 4. The Circular reflects in a comprehensive document 5 the prudential position which, going forward, the CSSF will adopt regarding the documents and information to be provided as well the conditions and organisational requirements to be fulfilled for obtaining and maintaining authorisation to act as a so-called "Chapter 15 management company", hereafter a 1 2 3 4 5 CSSF Circular 12/546 dated and published on 24 and 26 October 2012, respectively, concerning the authorisation and organisation of Luxembourg management companies subject to Chapter 15 of the Act of 17 December 2010 on undertakings for collective investment (the "UCI Act") as well as investment companies which have not designated a management company within the meaning of Article 27 of the UCI Act. Please click for the French and English versions of the Circular. CSSF Press Release 12/45 dated and published on 31 October 2012 concerning UCI and Promoter. Please click for the French and English versions of the Press Release. Luxembourg Act of 17 December 2010 on undertakings for collective investment, as amended. CSSF Regulation Nr 10-4 of 22 December 2010 transposing Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company. The Circular repeals and replaces three circulars dealing with its subject matter, namely CSSF Circular 03/108, CSSF Circular 05/185 and CSSF Circular 11/508. 2, place Winston Churchill - B.P. 425 - L 2014 Luxembourg - T (352) 44 66 44 0 - F (352) 44 22 55 - www.ehp.lu
- 2 - "ManCo" 6, or as a self-managed SICAV, hereafter a "SIAG" 7. The Circular discusses in depth themes such as shareholding, own funds, management bodies, central administration, internal governance, delegation, rules of conduct, principle of proportionality, performance of services outside of Luxembourg, etc. The Press Release confirms the CSSF s (conditional) surrender of the historic "promoter" requirement by stating in substance that Luxembourg UCITS which fulfil, or the (designated) ManCo of which fulfil, the requirements of the Circular will no longer need to have a promoter. On several important points, the Circular and the Press Release curtail the past regime. For certain ManCos and SIAGs, this will require structural changes. Far from being exhaustive, this newsflash aims at identifying and briefly summarising these key changes and salient points. This Circular entered into force with immediate effect on 24 October 2012 (the "Entry into Force"). Until 30 June 2013, transitional provisions 8 have the effect of grand-fathering certain (but not all) arrangements which are in place for ManCos or SIAGs existing (meaning have been authorised) before the Entry into Force. According to the Press Release, these grand-fathered ManCos or SIAGs have, until 15 April 2013 at the latest, to submit a file to the CSSF containing the information necessary for the CSSF to assess their compliance with the Circular by 30 June 2013. B. PROMOTER According to the Press Release, a promoter is no longer necessary for UCITS having taken the form of a SIAG or having designated a ManCo when they meet the requirements of the Circular. Without prejudice to what is set forth below in Section C regarding the possible requirement for a "sponsorship letter" for a ManCo to be authorised by the CSSF, the Circular and the Press Release have hence the combined effect of eventually abolishing the concept or promoter for UCITS 9. It is interesting to note that this position of the CSSF is officially issued a 6 7 8 9 Luxembourg management company subject to Chapter 15 of the UCI Act. Luxembourg investment company which has not designated a management company within the meaning of Article 27 of the UCI Act. See section VIII.3 of the Circular. The CSSF will reconsider the promoter's requirement for Luxembourg UCIs falling under Part II of the UCI Act following transposition of the AIFMD in Luxembourg. In the meantime, any of these UCIs will be required to have a promoter unless it is managed by a ManCo which meets the requirements of the Circular.
- 3 - few months following its unofficial confirmation that a Luxembourg UCITS having or designating a UCITS-compliant management company established in another Member State would no longer need to appoint or have a promoter. From a practical point of view the determination of whether a Luxembourg UCITS needs to have a promoter is dependent upon the date of authorisation of its ManCo (if this UCITS is an FCP or has designated this ManCo) or its date of authorisation if it is a SIAG. (a) (b) If the relevant UCITS (if a SIAG) or its ManCo is authorised after the Entry into Force, this UCITS or its ManCo should by definition be compliant with the Circular. This UCITS will then not need to have a promoter. If the relevant UCITS (if a SIAG) or its ManCo is authorised before the Entry into Force: this UCITS (if a SIAG) or its ManCo has, until 15 April 2013 at the latest, to submit a file to the CSSF containing the information necessary for the CSSF to assess the SIAG's and the ManCo's, compliance with the Circular by 30 June 2013. The promoter of the relevant UCITS should presumably be released from its promoter status as from 1 July 2013. this UCITS (if a SIAG) or its ManCo may submit the file referred to in the previous bullet point in advance if the promoter of the relevant UCITS wants to be released from its promoter status before 1 July 2013. As from 1 July 2013, all promoters of Luxembourg UCITS should be released of their obligation as promoter as all these UCITS (that are SIAGs) or their ManCo should be fully compliant with the Circular. C. SPONSORSHIP LETTER Although the CSSF clearly confirms surrendering the promoter concept, it nevertheless retains the possibility, in certain circumstances, to require the issue of a "sponsorship letter" (lettre de patronage) whereby its issuer undertakes to the CSSF that the sponsored entity (namely the ManCo or the SIAG) complies/will comply with the prudential requirements imposed by the applicable law,
- 4 - particularly (but not only) regarding the ManCo's own funds requirements for the ManCo to have appropriate financial means (solidité financière). The Circular does not provide details on the form, scope and binding intensity of the letter (e.g., firm guarantee or best effort). The same goes for the circumstances under which the CSSF may request this letter to be issued and, as to who should issue this letter. Considering the context in which this requirement is set forth in the Circular (i.e., its section I.2 relating to shareholding requirement), one likely circumstance to consider is the fact that the shareholder(s) of reference of the ManCo is not regulated or itself lacks appropriate financial means (solidité financière). This might typically be the case in the situation where the shareholder(s) of reference of the ManCo are natural persons or an institution with limited financial resources. D. SUBSTANCE With the aim of reinforcing the substance of ManCos and SIAGs (or, to put it differently, to prevent either of them from qualifying as "letter-box" entities), the Circular introduces new concepts and requirements or increases the conditions to be fulfilled for complying with already existing ones. The following paragraphs will consider some of them by successfully addressing the regime applicable to the members of the management body, the conducting officers and the arrangements regarding the central administration and internal governance. In this context, certain precisions regarding incompatibilities and delegation limitations will be noted. (a) Management body Multiple mandates The Circular now clearly states that members of a ManCo's or SIAG's management body (i.e., in most cases, of the board of directors) must limit the number of mandates they may hold in other companies to the extent necessary in order to perform their tasks properly. Incompatibilities The Circular also specifies a few incompatibilities affecting the members of a ManCo's or SIAG's management body: It is prohibited for the majority of members of a ManCo's or SIAG's management body to be representatives of the banking business line of the depositary appointed by the UCITS managed by this ManCo or this SIAG, respectively.
- 5 - Recommendation is given that the board members of a ManCo's management body and of the SICAV which has appointed this ManCo shall predominantly not be composed of the same persons. The compliance officer, the internal auditor or the risk manager cannot be members of the ManCo's or SIAG's 10 management body. (b) Conducting officers In general The Circular describes in great detail the qualification requirements (experience, location, availability, occupation) of conducting officers, the scope of their duties (largely reflecting the relevant provisions of CSSF Regulation 10-4) and the manner in which they have to perform their duties, i.e. acting as a joint management committee with the possibility for individual allocation of specific areas of responsibility. In our opinion, four elements require specific attention, namely presence in Luxembourg, multiple mandates and management committee and incompatibilities. Presence in Luxembourg In practice, this is probably the element likely to have the heaviest impact on current arrangements. The Circular provides that at least two conducting officers being permanently based in Luxembourg is now the rule and that only one conducting officer being permanently based in Luxembourg is the exception. This exception is subject to express derogation given by the CSSF based on the nature, scale and complexity of the ManCo's or SIAG's activities (or, more generally, based on the proportionality principle). Although the possibility to have only one conducting officer in Luxembourg remains available under the new regime, it must be expected that, in practice, the CSSF will take a more restrictive position than in the past and will therefore grant this derogation only if the specific situation so justifies. Multiple mandates As for members of a ManCo's or SIAG's management body, multiple mandates for conducting officers remain possible, but the CSSF will monitor more closely the number and nature of the mandates and other activities of conducting officers to ensure that the number of their mandates does not prevent them from performing each of these mandates properly by devoting adequate time to them. The Circular specifies that the conducting officers may be supported in their daily work by qualified staff 10 SIAGs are not required to have a compliance officer and an internal auditor.
- 6 - working in Luxembourg 11 and thereby implies that this support will be taken into account by the CSSF when assessing the number of mandates a conducting officer may perform. Management Committee The Circular details in a non-exhaustive manner the responsibility of the management committee and the way its work shall be organised and documented. In addition to requiring the conducting officers to be in regular contact with each other, the Circular insists that management committee meetings are held periodically and that their agendas include, amongst other things, a discussion on the "management information" 12. The Circular further requires resolutions of these meetings to be formalised in written minutes available at the offices of the ManCo/SIAG and that the management committee regularly and in an exhaustive manner informs the relevant management body in writing of the activities of the ManCo/SIAG and UCITS/UCIs it manages. Incompatibilities The Circular also specifies a few incompatibilities affecting the conducting officers: Prohibition for conducting officers of a ManCo or SIAG to be employees of the depositary appointed by the UCITS managed by this ManCo or this SIAG, respectively. The functions of risk-taking and the independent control of these same risks cannot be assigned to the same conducting officer (i.e. the performance and/or control of the risk management function and the investment management function shall not be carried out by the same conducting officer, for example). (c) Central Administration and Internal Governance In general A substantial part 13 of the Circular is dedicated to the arrangements regarding the ManCo's or SIAG's central administration and internal governance. The Circular reiterates that central administration must 11 In this regard, please also consider our developments under D.(c) regarding the "operating staff". 12 The "management information" is required by Article 5 (1) e) of CSSF Regulation 10-4 and is more fully described in section I.5.2.1.2 of the Circular. It is the records, to be maintained in an adequate and orderly manner, of the ManCo's/SIAG's activities and internal organisation. It permits the follow-up of the ManCo's/SIAG's activities and that of their delegates. 13 As a matter of fact, more than a third of the Circular.
- 7 - be established in Luxembourg and specifies that it does not only consist of an "administrative centre", but also of a "decision-making centre"; the latter being defined as not only comprising the activity of conducting officers but also, as the case may be, that of persons responsible for the different administrative and control functions or the different departments or occupations existing inside the ManCo/SIAG. The Circular has the virtue of providing market players with guidelines (but also reminders) on the interpretation and implementation of CSSF Regulation 10-4 requirements in terms of having the minimum human and technical resources and infrastructure in Luxembourg. Each of these guidelines aim somewhat at reinforcing the Luxembourg substance of the ManCo/SIAG. In this context, the Circular contains certain interesting precisions regarding premises, operating staff, delegation and incompatibilities which are briefly described below. Premises The Circular specifies that the concept of central administration implies that a ManCo/SIAG must have its own premises in Luxembourg. Sharing of premises by several ManCos or several SIAGs may no longer be possible to the same extent as was tolerated by the CSSF in the past. Operating staff The Circular expressly specifies that the ManCo/SIAG must as a matter of principle employ enough staff in Luxembourg and with the skills, knowledge and expertise necessary to execute its decisions, fulfil the tasks that it wishes to perform and efficiently supervise the activities of delegates. The CSSF may grant an exemption regarding this requirement of an employment contract with the relevant staff and hence, subject to conditions, authorise the entire or only part of the staff to be either on secondment or made available by an undertaking belonging to the same group or by a non-affiliated company. As was already the case for ManCos, SIAGs are now to submit on a quarterly basis financial information and Staff table as detailed in Appendices 1 to 3 of the Circular. Delegation The Circular aims at drawing a clear line between the functions which a ManCo/SIAG may or may not delegate and, in this context, the Circular reiterates the obligation for the ManCo/SIAG to perform initial and ongoing due diligence and controls on its delegates and further details on how this may be achieved. It also emphasises the compulsory legal provisions which shall be integrated in the agreements entered into with the delegates. More strikingly maybe, the Circular provides that a ManCo/SIAG may only delegate the central administration
- 8 - function to a Luxembourg authorised regulated entity, hence even prohibiting delegation of the central administration function to a UCITScompliant management company duly approved and located in another Member State. This clearly limits the impact of the express deletion from the EU UCITS Directive of the (now former) requirement that a UCITS must have its central administration in its home Member State. Incompatibilities The Circular also specifies a few incompatibilities affecting the persons involved with the key functions of compliance, internal audit and risk management: As already mentioned, the compliance officer, the internal auditor or the risk manager cannot be members of the ManCo's 14 management body. Contrary to the functions of compliance officer and risk manager (which can be undertaken by the same person), no person may undertake the functions of risk manager and internal auditor in the same ManCo 15. E. GENERAL APPRECIATION Save for the abolishment of the promoter requirement for UCITS announced by the Press Release, the Circular does not bring about significant changes as many formal requirements stem from the UCI Act and CSSF Regulation 10-4 already in force since December 2011, which mirror the EU UCITS Directive and related EU Commission Directive 2010/43/EU. However, the Circular clearly reflects a tightening of the CSSF's position as regards the circumstances in which, under the justification of the principle of proportionality, derogations may be obtained which, in the past, have permitted for some SIAGs or ManCos to be authorised by the CSSF with a "lighter" structure. It must be expected that, going forward, the CSSF will have higher expectations as regards the standards to be met under the Circular. Many existing ManCos and SIAGs may already meet these increased standards today. On the other hand, a number of SIAGs and ManCos will have to reconsider 14 SIAGs are not required to have a compliance officer and an internal auditor. 15 SIAGs are not required to have a compliance officer and an internal auditor.
- 9 - their current set-up and, in light of the requirements of the Circular and the standards applied by the CSSF, may have to increase the human and technical resources and infrastructure available to them. The additional costs which the implementation of these enhancements will necessarily create may lead some of these ManCos to revisit their viability and their controlling management group to consider other options, such as using a third-party ManCo for their UCITS structures. Similarly, SIAGs which, for the same reasons, may be required to increase the human and technical resources available to them, might reconsider restructuring to a UCITS designating a ManCo. Based on the foregoing, it is not unreasonable to expect that the number of ManCos and SIAGs will, as a result of consolidating restructuring, decrease in number by 1 July 2013. * * *