CSSF Issues New Substance Circular For Luxembourg Investment Fund Managers

On 23 August 2018, the CSSF issued Circular 18/698 addressed to Luxembourg based Investment Fund Managers (UCITS Managers and AIFMs including self-managed UCITS/AIF) setting out extensive prescriptive guidance on their expectations regarding organization, operations and substance, as well as the management information systems and regulatory reporting to be in place to facilitate the CSSF's ongoing supervision of these firms.

The new Circular is a useful compilation of guidance on the required level of local substance and on how the core business activities and internal controls functions should be organized, including the conditions for delegation of activities as well as on the concept of proportional application of the rules. The Circular replaces Circular 12/546 that laid down the CSSF's expectations for UCITS Managers, although in practice had also served as the benchmark for AIFMs. The new Circular also contains important guidance on what Investment Fund Managers need to have in place to comply with the AML/CTF legislation, including situations where distributors and Transfer Agents are appointed either by the Manager or by the Funds directly.

The Circular provides detailed guidance on the following key areas:

Governance framework Clarity on the role and responsibilities of Directors, the number and type of other mandates permitted and their professional time commitments. Directors are in principle limited to 20 mandates and 1,920 professional hours, although there is some flexibility including for mandates on SPVs held by the funds and for mandates within the same family of funds. The CSSF expects that the majority of Directors are not also employees of the Manager. Clarity on responsibilities and location of Senior Management (Conducting Persons), their time commitments, other mandates and responsibilities. The CSSF expects the two Senior Managers to be located in Luxembourg, although gives flexibility to Managers with less that1.5bn in AuM. In these cases one of the Senior Managers can be located abroad and work in Luxembourg on a part-time basis only if there are a sufficient number of qualified staff in Luxembourg to support them in their areas of responsibility. In excess of1.5bn the two Senior Managers must be located in Luxembourg on a full-time basis. If the IFM has more than two Senior Managers, there is the possibility that the additional Senior Managers are located abroad if they have qualified staff in Luxembourg to...