Luxembourg AIFs under special limited partnership (SCSp) form may use US GAAP accounting principles
Luxembourg-domiciled alternative investment funds in the form of special limited partnerships (SCSp) may use US GAAP accounting principles under an amendment to the legislation transposing the Alternative Investment Fund Managers Directive into national law. Previously they were required to follow Lux GAAP or IFRS principles. The change, adopted as of July 21, is intended to enable US asset managers to meet the needs of their investors and enhance comparability with other funds.
The law of 21 July 2021 has amended article 20 (3) of the Luxembourg AIFM law.
For more information, please get in touch with our investment management team.
Performance fees: New online CSSF declaration for investment fund managers regarding performance fee model
Further to its communication on 22 September 2021, the Luxembourg Regulator (Commission de Surveillance du Secteur Financier, CSSF) informed the investment fund managers (IFMs) of the launch of a new e-desk module on performance fees as of 30 September 2021. The purpose of such a new module is to ensure compliance with the European Securities and Markets Authority’s guidelines on performance fees applicable to UCITS and certain types of AIFs (ESMA Guidelines) and to collect standardized key information concerning performance fees. Indeed as of 30 September 2021, all funds with a financial year ending between July 2021 and 31 December 2021 will be available in the performance fee module. The IFMs will be required to transmit the performance fee declaration and the confirmation of compliance with the ESMA Guidelines via e-desk. For such funds, the deadline for submission of the initial declarations is 30 November 2021. The same will apply for funds with a financial year ending between 1 January 2022 and 30 June 2022 as from January 2022. The deadline for submitting the initial declaration will be at the latest before the corresponding closing date of each fund, as further specified in the IFM corresponding performance fee e-Desk dashboard.
Funds and sub-funds that are not subject to a performance fee will have to be declared accordingly as well as funds that have not yet been launched since having been approved by the CSSF or which are inactive following the full redemption of their shares or units.
IFMs will also be responsible for ensuring that performance fee declarations are kept up to date in case of changes (e.g., the introduction of a performance fee for the first time after that date or changes in performance fee models). A specific update function will be made available shortly by the CSSF under the new e-Desk module to send electronically any such changes in parallel to the transmission of the modified prospectus/issuing document.
For any further questions, feel free to contact our investment management team.
Non-judicial liquidation of UCITS, UCIs, SIFs and SICARs I CSSF press release
Further to its communication on 31 August 2021, the Luxembourg Regulator (Commission de Surveillance du Secteur Financier, CSSF) decided that there will no longer be a requirement to request a liquidation period extension for funds in non-judicial liquidation. The status of the liquidation will be monitored via the semi-annual reports on the progress of the liquidation to be submitted by the liquidator (i) no later than 30 September of the same calendar year (for the period from 1 January to 30 June) and (ii) no later than 31 March of the following year (for the period from 1 July to 31 December). However, any significant issue shall still be reported to the CSSF without delay, and therefore the liquidator should not wait until issuing the semi-annual report.
For liquidation of sub-funds (i.e. for sub-funds of funds that are on the official list and consequently not in non-judicial liquidation), the request for extension requests is still required when the nine-month deadline is reached.
For any further questions, feel free to contact our investment management team.
Luxembourg - New rules on pre-marketing and marketing of investment funds
Luxembourg’s legislation of July 21, 2021 on cross-border distribution of investment funds has come into force on August 2 following its publication in the Mémorial, Luxembourg’s official gazette, on July 26.
The legislation, which transposes into Luxembourg law Directive (EU) 2019/1160 on Cross-Border Distribution of Collective Investment Schemes, the so-called CBDF Directive, amends Luxembourg’s investment fund law of December 17, 2010 and its law on alternative investment fund managers of July 12, 2013.
The legislation, along with the directly applicable CBDF Regulation, which also took effect on August 2, aims to enhance the cross-border distribution of UCITS and alternative investment funds by harmonising rules governing the launch and discontinuation of marketing, retail marketing and the content and supervisory review of marketing communications.
It notably creates a new harmonised regulatory regime defining and implementing a notification process for pre-marketing of AIFs throughout the EU. Pre-marketing was not defined in the original AIFMD and was left to rules and guidance applicable in individual member states, leading to inconsistencies and uncertainty.
The legislation – which is not being implemented by the UK – restricts third-party pre-marketing to certain authorised EU financial institutions comprising MiFID-authorised firms and their tied agents, banks, UCITS management companies and other EU AIFMs, restricting the possible use of non-EU distributors or placement agents.
Any subscription made within 18 months of pre-marketing activity will be considered to be the result of marketing, which requires marketing notification, effectively barring reliance on reverse solicitation for that period.
The CBDF legislation requires EU managers to notify their home regulator within two weeks of starting pre-marketing, a notification to its home member state, specifying the member states and the periods during which pre-marketing is taking place and a brief description including information on investment strategies. This is separate from the notification procedure required to use the AIFMD marketing passport.
ESMA guidelines issued on May 27, 2021 require AIFMs to ensure that all marketing communications aimed at EU investors in the EU can be identified as such, describe prominently the risks and rewards of investing in an AIF and contain information that is fair, clear and not misleading. They will become applicable six months after their publication in all EU languages.
How the CBDF rules apply to non-EU AIFMs is down to the implementation of the directive by member states, which should ensure that especially the pre-marketing requirements should not disadvantage EU AIFMs, including in the event that passporting rights are extended to non-EU managers through revision of the AIFMD.
In Luxembourg, the CSSF has published Circular 21/778, updating its Circular 11/509 to incorporate amendments relating to the CBDF legislation, notably the process of de-notification of Luxembourg-domiciled UCITS.
The regulator has also published on its website a frequently-asked questions document detailing changes in notification rules and procedures for management companies of UCITS and AIFs as a result of implementation of the CBDF Regulation. It has also created a new dedicated web page regarding the pre-marketing notifications of AIFMs.
For more information, please contact the investment management team.
Clarification of the ESMA’s guidelines on performance fees in UCITS and certain types of AIFs
On 30 March 2021, the European Securities and Markets Authority (ESMA) updated its Questions and Answers on the application of the Undertakings for Collective Investment in Transferable Securities Directive (Q&A on the UCITS Directive) and its Questions and Answers on the application of the Alternative Investment Fund Managers Directive (AIFMD) (Q&A on the AIFMD).
ESMA added two new Q&As (applicable to both Q&As on the UCITS Directive and the AIFMD) relating to the ESMA’s guidelines on performance fees in UCITS and certain types of AIFs (the Guidelines) whereby it confirms the following :
- “The Guidelines on performance fees do not prevent to pay performance fees during the performance reference period of 5 years and/or in the first years of a fund’s existence, in case the fund has not existed for 5 years“.
- “Managers of any funds already compliant with paragraphs 40) and 41) of the Guidelines on performance fees before the application date of the guidelines should look at the past 5 years/whole life of the fund for the purpose of setting the performance reference period (i.e. they should not reset the performance reference period after the application date of the guidelines). In all the other cases, managers should apply the performance reference period starting from the beginning of the financial year following 6 months from the application date of the Guidelines (i.e. the performance reference period should start at the beginning of the financial year following 5 July 2021; by way of example, if the financial year of the fund starts on 1 September 2021, the period 1 September 2021 – 1 September 2022 should be considered as the first year of the performance reference period)“
ESMA also added a third new Q&A relating to the scope of the Guidelines in respect of ELTIFs in the Q&A on the AIFMD whereby it confirms the following :
“The Guidelines on performance fees apply to managers of UCITS and, in case Member States allow AIFMs to market to retail investors in their territory units or shares of AIFs they manage in accordance with Article 43 of the AIFMD, they also apply to AIFMs of those AIFs, except for:
- a) closed-ended AIFs; and
- b) open-ended AIFs that are EuVECAs (or other types of venture capital AIFs), EuSEFs, private equity AIFs or real estate AIFs.
Therefore, ELTIFs marketed to retail investors that do not have a closed-ended structure, within the meaning of Article 1(2) of the Delegated Regulation 694/201425 and are not venture capital/private equity or real estate AIFs are in scope of the guidelines.”
Links to the updated Q&A on the UCITS Directive: https://www.esma.europa.eu/sites/default/files/library/esma34_43_392_qa_on_application_of_the_ucits_directive.pdf
Links to the updated Q&A on the AIFMD: https://www.esma.europa.eu/sites/default/files/library/esma34-32-352_qa_aifmd.pdf
For any questions concerning the above, please do not hesitate to contact our investment management team.
NAV calculation errors - CSSF explanations on the notification form regarding Circular CSSF 02/77
The CSSF Circular 02/77 concerning the protection of investors in case of NAV calculation errors and correction of the consequences resulting from non-compliance with the investment rules applicable to undertakings for collective investment (the “Circular”) was issued on 27 November 2002. On 7 July 2020, a Frequently Asked Questions (“FAQ”) was published by the CSSF regarding the Circular which applies to UCITS and UCIs subject to part II of the Law of 17 December 2010 (the “2010 Law”) and outlines the principles to be used by Specialized Investment Funds (SIFs).
On 18 February 2021, the CSSF updated its additional explanations (available here) regarding the notification form to be submitted in line with the Circular. The CSSF reiterates the scope of application of the notification, which concerns :
- UCITS and UCIs subject to the 2010 Law;
- Specialised investments funds (SIFs) subject to the Law of 13 February 2007.
The revised notification form should be used as of 18 February 2021, but the CSSF will accept notifications using the prior form until 22 March 2021. The amendments to the form concern among other things the introduction of new drop-down menus (e.g. categorisation of investment breaches) and of some date fields (in particular on corrective measures implemented at the level of the fund for avoiding the reoccurrence of similar incidents in the future) as well as the deletion of some data fields (e.g. share class specific information).
The CSSF underlined that the form should not be modified. In case of modification, the CSSF will not accept the notification. Additionally, in principle, the CSSF will not accept incomplete notifications (all the requested information as foreseen by the applicable data fields should be completed). The CSSF accepts, as an exception, that a partially filled notification form can be submitted to it in cases where it is not possible to submit a complete notification form within the timeline set out below. It will be considered as a pre-notification. But the complete notification form with all required information will have to be submitted in a next and final step. However the CSSF reminds that “The pre-notification option, explicitly foreseen in the notification form, can however only be used on an exceptional basis in duly justified cases where the calculations and compensation processes necessary to remediate and correct NAV calculation errors or non-compliance of investment rules are particularly complex and time-consuming and thus do not allow entities to provide the CSSF, within 6 to 8 weeks, with a complete notification form.”
Regarding the timing of submission of the notification, the CSSF requires a complete notification to be submitted, (i) in principle, within 4 to 8 weeks of the detection of the incident and (ii) for non-compliance with investment rules that do not involve time-consuming calculations, in principle, within 4 to 6 weeks following their detection.
The new notification form is available here.
For any questions concerning the above, please do not hesitate to contact our investment management team.
Simplication of the submission with the CSSF for new Luxembourg sub-funds
Requests for approval of a new sub-fund within an existing fund structure must be transmitted via a single new questionnaire form, the CSSF has announced, in order to standardise further the information the regulator requires for examination of the application. The CSSF says the new application process will enable the gathering of accurate data, information and documents through one standardised questionnaire, which replaces the following four application questionnaires currently in use. The new questionnaire includes information concerning the Benchmarks Regulation, EMIR and the Sustainable Financial Disclosure Regulation (SFDR). The new questionnaire is valid immediately, but the CSSF will accept the previous ones until March 12.
For any further questions, feel free to contact our investment management team.
Cross-border distribution of funds: ESMA finalises rules on standardised information (technical standards)
The European Securities and Markets Authority has issued on February 1 its final report on implementing technical standards under the EU’s regulation on cross-border distribution of funds.
The cross-border distribution regulation and its accompanying directive were adopted as of June 20, 2019. The regulation has been directly applicable from August 1, 2019, apart from provisions on marketing communications requirements and European social entrepreneurship funds, which take effect as of August 2, 2021. That date is also the deadline for adopting the directive into national law by EU member states.
The implementing technical standards deal with the publication of information by national regulators on their websites and their notification of information to ESMA and the publication of information by ESMA on its website.
ESMA says the final report and draft standards, which follow an industry consultation, largely reflect its original proposals for the information to be published on regulators’ websites regarding national rules setting out funds’ marketing requirements and the regulatory fees and charges imposed on fund managers relating to their cross-border business.
The draft standards also include provisions on national regulators’ communication of information to develop and update a central database on ESMA’s website listing UCITS and alternative investment funds marketed on a cross-border basis.
Following reception of the draft implementing technical standards, the European Commission must decide whether to adopt them within three months.
The ESMA final February 1 report on implementing technical standards under the regulation on cross-border distribution of funds available here.
For more information, please get in touch with Olivier Sciales at oliviersciales@cs-avocats.lu
Sustainable Finance I CSSF issues update on SFDR fast-track procedure ahead of March 10 deadline
The CSSF has reminded on February 5 UCITS management companies and alternative investment fund managers of their deadline to comply with the Sustainable Finance Disclosure Regulation of March 10.
On December 16, 2020, the regulator announced the establishment of a fast-track procedure for approval of revised prospectuses and issuing documents adapted to meet the SFDR requirements regarding pre-contractual information.
UCITS Mancos and AIFMs must submit amended prospectuses and issue documents at the latest by February 28 to meet the March 10 deadline.
The CSSF says it has also adapted the confirmation letter incorporated in the SFDR fast-track procedure so that it can also be used to support the review of sustainability-related disclosures in prospectuses or issuing documents submitted under the regulator’s ordinary amendment procedure rather than the fast-track facility.
Sustainable Finance | Luxembourg regulator implements SFDR fast track procedure
The CSSF has alerted Luxembourg-based investment fund managers about the regulatory requirements arising from Regulation (EU) 2019/2088 on Sustainability-Related Disclosures in the Financial Services Sector, otherwise known as the SFDR which will be applicable from March 10, 2021.
The Luxembourg regulator has announced on December 16, 2020, details of a fast-track approval system for updating funds’ prospectuses or offering documents to incorporate sustainability disclosures, one of the requirements under the regulation.
The SFDR requires managers of UCITS and alternative investment funds, along with other financial products, to comply with transparency rules on incorporating sustainability risks into their investment strategies, considering potential adverse impacts, and the provision of other sustainability-related information.
No deferral of SFDR compliance
The European asset management industry had lobbied vigorously for the deferral by up to a year of the legislation’s provisions coming into force because of the impact on the industry of the Covid-19 pandemic and notably an ongoing delay in the publication of regulatory technical standards setting out details of how the regulation is to be interpreted and implemented.
The deadline for publication of the standards, at the end of 2020, will not be met because of an extension required to the public consultation period, the European Commission says. However, on October 20, the Commission announced that the application of the SFDR in March would not be conditional on the formal adoption and entry into force of the regulatory technical standards.
Therefore, all deadlines for the SFDR remain in force, but investment fund managers will be required to comply not with detailed standards, but the high-level principle-based requirements set out in the regulation. This will entail more judgement-based decisions by both industry members and regulators.
Assessing the impact of sustainability risks on strategy and returns
Article 6 of the SFDR requires managers to indicate how they integrate sustainability risks into their investment decisions and assess and disclose the likely impact of such risks on the returns of a particular fund.
The sustainability risk assessment approach and related disclosures must be published in UCITS prospectuses as well as other fund offering documents. Suppose the risk assessment concludes that no sustainability risks are relevant for a fund. In that case, the reasons must be explained to investors, and managers must also disclose if they do not consider any adverse impact of investment decisions on sustainability factors for a fund.
Prospectuses of UCITS or offering documents of alternative funds qualifying as financial products that promote environmental or social characteristics, or a combination of them, according to Article 8 of the regulation, or that have sustainable investment as their objective under Article 9 may also need to be modified.
Disclosure to investors
The updating of disclosures requires prior categorisation of the sustainability characteristics or nature of the fund according to the SFDR where applicable, and related information, including the fund’s name, should not mislead end-investors by exaggerating the impact of sustainability in its investment policy. Sustainability risks must also be integrated into the manager’s risk management policy.
The CSSF requires managers to assess their situation concerning the SFDR disclosure obligations and submit an updated UCITS prospectus or fund issuing document at the latest by February 28, 2021. This information should be provided to AIF investors under Article 6 (3) (a) of the SFDR.
Managers should also ensure they comply with requirements on the publication of information on their websites and the update of policies and processes relating to sustainability risk policies, the investment decision-making process, adverse impacts as defined under Article 4 of the SFDR and remuneration policies. They should take appropriate measures to remedy any gaps and ensure information remains up to date.
Fast-track procedure for fund prospectus updates
Disclosures required under Article 6 (3) (g) and, if applicable, Articles 7, 8 and/or 9 of the SFDR must be incorporated into UCITS prospectuses. Management companies are required to assess the new disclosure obligations and submit an updated prospectus for each Luxembourg UCITS they manage to the CSSF by February 28.
The CSSF has implemented a dedicated fast-track procedure to facilitate the submission of revised prospectuses or issuing documents to the CSSF, both for UCITS management companies and AIFMs submitting updates for SIFs and Part II funds. The facility is restricted to updates reflecting changes required under the SFDR; modifications to the investment policy and restrictions material according to CSSF Circular 14/591 cannot benefit from the fast-track procedure.
How does the fast-track process work?
Each updated prospectus or issuing document submitted must be accompanied by a letter confirming their conformity, as well as providing evidence that the investment fund manager has upgraded its policies and processes to comply with the SFDR.
A template of the confirmation letter is available on the CSSF website. It must be signed by at least one representative of either the UCITS ManCo, an investment company that has not designated a management company, AIFM or a legal advisor, or another representative of the manager or fund.
The updated prospectus or issuing document version submitted for approval by the CSSF must be uploaded in a clean version, in accordance with Circular 19/708 on electronic transmission of documents to the CSSF alongside the confirmation letter, merged with the updated prospectus or issuing document in track-changes version. If a notice is planned to inform investors about the update, it must also be uploaded and submitted as a letter.
Upon acceptance by the CSSF, the prospectus or issuing document will be visa-stamped and returned through the e-file/Sofie channel. If the filing is deemed unsatisfactory, the manager or fund will receive a notice requesting the submission of a freshly revised version.
For further information, please get in touch with Olivier Sciales at oliviersciales@cs-avocats.lu.
