CSSF launches data collection exercise for IFMs on sustainability-related disclosures under SFDR
The CSSF has launched a data collection exercise related to the SFDR. The exercise focuses on the collection of information regarding organisational arrangements of IFMs.
The data collection is necessary for the CSSF to assess the compliance of IFMs with the requirements applicable under SFDR .
The CSSF is requiring Luxembourg-domiciled UCITS management companies, SIAGs, authorised AIFMs, managers of a qualifying venture capital fund registered in accordance with Article 14 of Regulation (EU) No 345/2013 and managers of a qualifying social entrepreneurship fund registered in accordance with Article 15 of Regulation (EU) No 346/2013 to complete a dedicated questionnaire via the launch of a new eDesk module, “SFDR-IFM disclosures” as from 2 February 2023.
The questionnaire must be completed and submitted by an eDesk user linked to the IFM.
The deadline for submission of the questionnaire is 2 March 2023.
IFMs must ensure that the information provided is being kept up-to-date, and can use the “Create update declaration” function under the new eDesk module to allow the amendment of information initially submitted.
The CSSF will communicate further details on timing and practical proceeding of the data collection for the collection of information contained in the PAI statements and in the precontractual and periodic disclosure templates.
The CSSF also reminds industry participants that a Common Supervisory Action exercise (CSA) in relation to sustainability risks and disclosures is currently under discussion at ESMA level, focusing on both SFDR Level 1 and Level 2 provisions as well as the requirements outlined in the ESMA Supervisory Briefing on Sustainability risks and disclosures in the area of investment management.
CSSF study on the AML/CFT controls applied in terms of preventing tax offences
On 8 November 2022, the Commission de Surveillance du Secteur Financier (CSSF) published a statement regarding the AML/CFT controls applied for preventing tax offences.
Following the Law of 23 December 2016, the money laundering offence was extended to encompass aggravated tax fraud (fraude fiscale agravée) and tax evasion (escroquerie fiscal). Therefore, the professionals shall consider the tax crimes within the scope of their due diligence and professional obligations in terms of anti-money laundering and countering the financing of terrorism (AML/CFT).
The CSSF conducted the “UCI On-site Inspections” from November to December 2021 on the prevention of tax offences and concluded that the mitigation measures put in place by the entities inspected were satisfactory.
These are the key weaknesses found by the CSSF during their inspection:
- The risk assessments do not always cover the aspects of circular CSSF 20/744 (the “Circular 20/744“), which provides guidance and new indicators on aggravated tax fraud and tax evasion to consider in risk assessment and risk mitigation measures;
- The risk-based approach of the compliance monitoring plan or internal audit plan does not fully cover the tax offence. The CSSF emphasized that the investment fund managers (the “IFM“) shall design specific risk mitigation measures that integrate tax offences that include proportionately all relevant tax-specific indicators detailed in Circular CSSF 17/650 amended by Circular 20/744; and
- The lack of monitoring from IFMs in respect of delegated subscription tax calculation. The CSSF advocates that IFMs mention their tax compliance obligations in their procedure and perform adequate monitoring where such activity is delegated to third parties.
The CSSF has also pointed out the best practices by the IFMs, being (i) the performance, documentation, and endorsement of a tax due diligence by the governing bodies of IFMs before performing complex investments and (ii) the reporting to and endorsement by the governing body of the IFMs of risk assessments relating to Circular 20/744.
Don’t hesitate to contact our investment management team should you need our assistance regarding your AML_CFT process.
CSSF Standardised Model Prospectus for UCITS
The CSSF issued on 17 November 2022 a communication on the launch of a standardised prospectus template for UCITS (the “Standardised Model Prospectus“), to be used when applying for authorisation of a new UCITS.
The aim of the Standardised Model Prospectus is to facilitate the drafting of the fund’s issuing document for a proposed UCITS launch and enable the CSSF to carry out an easier examination of the application for authorisation.
The use of the Standardised Model Prospectus is intended for the constitution of any UCI which cumulatively meets the following four conditions:
- a UCITS subject to Part I of the law of 17 December 2010 concerning undertakings for collective investment;
- a UCITS to be constituted in the form of an investment company with variable capital (SICAV);
- a UCITS to be managed by a management company domiciled in Luxembourg or by a management company domiciled in another EU Member State in accordance with the freedom to provide services on a cross-border basis; and
- an umbrella UCITS of low to medium complexity.
The Standardised Prospectus Model should not be considered a regulatory requirement nor a guarantee for approval. Indeed, the Standardised Model Prospectus is intended to serve as guidance and good practice to reduce the overall processing time. Therefore, the approval process (i.e. the submission of the application, the exchange of comments and the approval decision) will not differ.
This document is made available with information of a general nature. It may need to be customised to fit the context, circumstances and specificities of a fund and/or sub-fund project.
Please feel free to contact our investment management team concerning the writing of the issuing document for your future UCITS.
CSSF clarification on the use of electronic money institutions and payment institutions by AIFs
On 18 October 2022, the CSSF published a clarification regarding the eligible entities for opening cash accounts concerning alternative investment funds (“AIF”).
The CSSF states that, based on its observations, some AIFs, particularly those having appointed as their single depositary a professional depositary of assets other than financial instruments (the “PDAOFI”), as defined in article 26-1 of the Law of 5 April 1993 on the financial sector, as amended, use or intend to use for the purpose of holding their cash accounts, the services of :
- An electronic money institution (the “EMI”) within the meaning of the Law of 10 November 2009 on payment services (the “Payment Services Law”). EMI is defined as a legal person that has been granted authorisation by the competent authorities of a Member State under Title II of Directive 2009/110/EC to issue electronic money. In Luxembourg, this refers to any legal person that has been granted authorisation to issue electronic money under the Payment Services Law; or
- a payment institution (the “PI”) within the meaning of the Payment Services Law, defined as legal persons or persons that have been granted authorisation following Articles 7 and 22 of the Payment Services Law to provide and execute payment services.
As a consequence of the preceding, the CSSF reminds that all cash of an AIF has to be booked in cash accounts opened (i) in the name of the AIF, (ii) in the name of their alternative investment fund manager (the “AIFM”) acting on behalf of the AIF, or (iii) in the name of the depositary acting on behalf of the AIF with an entity as specified under Article 19(7) of the Law of 12 July 2013 (the “AIFM Law”). In particular, as per point 18 of circular 18/697, a PDAOIF acting as depositary must ensure the appointment of one or more entities with which all cash of the AIF shall be booked in cash accounts.
Article 19(7) of the AIFM Law, Article 86(a) of the Commission Delegated Regulation (EU) 231/2013 and article 18(1) (a), (b) and (c) of the Directive 2006/73/EC provide that the only eligible entities (the “Eligible Entities”) qualified for the holding of cash accounts for AIF operation’s purpose are:
- a central bank ;
- a credit institution authorised per Directive 2000/12/EC; and
- a third country-authorised bank.
Therefore, AIFs for which an EMI or PI has been appointed to hold a cash account shall, as soon as possible but no later than 30 June 2023 :
- appoint a depositary within the meaning of Article 19(3)(i) of the AIFM Law; and
- appoint an Eligible Entity concerning such AIF’s cash accounts.
The CSSF forbids the set-up of new sub-funds of AIFs for which an Eligible Entity does not currently hold cash accounts. Any new AIF must ensure that an Eligible Entity will hold the cash accounts.
Please feel free to contact our investment management team concerning the completion of the qualification of your depositary.
Provisional agreement relating to ELTIF II
On 19 October 2022, the negotiators from the Council and the European Parliament reached a provisional agreement on a revision of the European Long-Term Investment Fund (ELTIF) Regulation. The changes are intended to make the framework more attractive to asset managers and especially retail investors for a fund framework that has hitherto struggled to gain traction.
On 25 November, 2021, the EU Commission presented its Capital Markets Union package, including the proposal to amend Regulation (EU) 2015/760 of 29 April 2015 on European long-term investment funds (the “Proposal”). The Council adopted its position on the Proposal on 24 May 2022. Negotiations with the European Parliament to reach an agreement on a final version of the text started on 14 September 2022 and resulted in the provisional agreement of 19 October 2022.
The purpose of the Council and the European Parliament is to make ELTIFs more attractive and to facilitate investment in these funds. One of the Council’s key priorities is now reflected in the text, namely an overhaul of the ELTIF framework that will allow channelling more funding to small and medium-sized enterprises (the “SMEs”) and long-term projects to help achieve the digital transition. The SMEs represent 99% of all businesses in the EU. Moreover, ELTIFs can help with financing the ecological transition, among others. Thus, ELTIFs can be an important means of financing long-term projects such as transport infrastructure, sustainable energy production or distribution.
The co-legislators intend to overcome several supply and demand side limitations, such as the constraints to the distribution process and the strict investment rules. Among other things, they have clarified the definition of eligible assets and investments, portfolio composition and diversification requirements, conditions for borrowing and lending liquidity and other rules for funds, including sustainability aspects. The Proposal also includes rules to make it easier for retail investors to invest in ELTIFs while ensuring strong investor protection.
Please feel free to contact our Investment Management team about any questions, pieces of advice or issues relating to ELTIFs and the future ELTIF regime.
Cross border distribution of funds - CSSF FAQ guidance on marketing communications
Introduction
The CSSF published the CSSF FAQ – Cross Border Distribution of Funds – GUIDANCE ON MARKETING COMMUNICATIONS (the “CBDF FAQ”) on 20 September 2022. The CBDF FAQ brings further clarity about the supervisory expectations of the CSSF relating to the application of Regulation (EU) 2019/1156 of the European Parliament and of the Council of 20 June 2019 on facilitating cross-border distribution of collective investment undertakings (the “CBDF Regulation”) and the Guidelines of ESMA on marketing communication (ESMA34-45-1272) (the “ESMA Guidelines”). In particular, the CBDF FAQ deals with marketing communications as mentioned in section 1 of the ESMA Guidelines and article 4 of the CBDF Regulation (the “MCs”).
On an indicative basis, article 4 of the CBDF Regulation requires that MCs are identifiable and describe the risks and rewards of purchasing units or shares of the fund in an equally prominent manner. Moreover, all information included in MCs shall be fair, clear and not misleading. If an AIF publishes a prospectus according to Regulation (EU) 2017/1129 of the European Parliament and the Council on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, as amended (commonly referred to as the ‘Prospectus Regulation’), its MCs must not contradict or diminish the significance of the information contained in the prospectus but must indicate that a prospectus exists and provide hyperlinks to or a web address for it.
Q.1 Which Luxembourg entities are in the scope of article 4 of the CBDF Regulation?
The following managers are in the scope of article 4 of the CBDF Regulation and of the ESMA Guidelines concerning the funds they manage:
- management companies incorporated under Luxembourg law and subject to Chapter 15 of the Law of 17 December 2010 relating to undertakings for collective investment, as amended from time to time (“2010 Law”);
- management companies incorporated under Luxembourg law and subject to Article 125-2 of Chapter 16 of the 2010 Law;
- investment companies which did not designate a management company within the meaning of Article 27 of the 2010 Law;
- alternative investment fund managers authorised under Chapter 2 of the Law of 12 July 2013 on alternative investment fund managers, as amended from time to time (“2013 Law”);
- internally managed alternative investment funds (“AIFs”) within the meaning of point (b) of Article 4(1) of the 2013 Law;
- managers of European qualifying venture capital funds (“EuVECA”) within the meaning of Regulation (EU) No 345/2013;
- managers of European qualifying social entrepreneurship funds (“EuSEF”) within the meaning of Regulation (EU) No 346/2013 (all together referred to as the “IFMs”).
However, article 4 of the CBDF Regulation shall not apply to IFMs when they act as distributors or intermediaries for funds they do not manage, although they may be impacted by such an article (see Q.3 below).
Q.2 Which funds are in the scope of article 4 of the CBDF Regulation?
MCs addressed to investors or potential investors of regulated and non-regulated funds managed by an IFM are in scope, as well as MCs addressed to investors or potential investors of Luxembourg and non-Luxembourg funds managed on a national, respectively, cross-border basis by an IFM.
Therefore, all UCITS and AIFs, including when they are set up as EuVECAs, EuSEFs, European long-term investment funds (the “ELTIFs”)1 and money market funds (the “MMFs”)2 managed by an IFM, are in the scope of article 4 of the CBDF Regulation.
But MCs addressed to investors or potential investors who are not residents of the European Economic Area are not in the scope of article 4 of the CBDF Regulation.
Q.3 Are the distributors or intermediaries involved in the distribution of funds managed by the IFM impacted by article 4 of the CBDF Regulation?
“Fund managers are responsible for the compliance with Article 4 of CBDF Regulation, irrespective of who is the actual entity marketing the fund, and of the relationship it has with the third-party distributor (whether it is contractual or not).”3
Q.4 Are MCs in relation to a Luxembourg or non-Luxembourg EU fund which is managed by a Luxembourg IFM and distributed only in Luxembourg in the scope of article 4 of the CBDF Regulation?
Yes. Article 4 of the CBDF Regulation does not limit the scope to funds which have been solely notified for distribution on a cross-border basis but also include funds which are distributed in Luxembourg.
Q.5 Are MCs targeting professional investors in the scope of article 4 of the CBDF Regulation?
Yes, MCs addressed to all types of investors or potential investors of UCITS and AIFs, including when they are set up as EuVECAs, EuSEFs, ELTIFs and MMFs, are in the scope.
Q.6 What kind of information should be provided to the CSSF upon request?
There is no periodic reporting to the CSSF in relation to the MCs.
IFMs in the scope of Circular CSSF 22/795 of 31 January 2022 on the application of ESMA Guidelines (the “Circular 22/795”) shall, as of 16 September 2022, be ready to provide the following information with regards to the MCs used in relation with the funds under their management:
- types of MC used;
- country(ies) of dissemination of the MC (European Economic Area only); and
- targeted investors.
Furthermore, as of 1 April 2023, IFMs in the scope of Circular 22/795 must be able to link the above information to their relevant Fund(s) (respectively sub-funds) and identify if the MC entails information with regards to ESG in the context of the application of article 13 of Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector, as amended (commonly referred to as ‘SFDR’), and of the ESMA Supervisory briefing on Sustainability risks and disclosures in the area of investment management (ESMA34-45-1427).
AML/CFT supervision of unregulated alternative investment funds (excluding RAIFs) by the AED
The Luxembourg Registration Duty, Estate and VAT Authority (in French, l’administration de l’enregistrement, des domaines et de la TVA or “AED”) has under its anti-money laundering and counter financing of terrorism (“AML/CFT”) supervision Luxembourg alternative investment funds being unregulated and not supervised financial vehicles by any other Luxembourg supervisory authority (“unregulated AIFs”).
In such respect, the AED has recently added a specific section on its website regarding these unregulated AIFs (https://pfi.public.lu/fr/blanchiment/questionnaire/vehicules-financiers-non-reglementes/fia.html). Indeed, the AED requests the unregulated AIFs to complete and file:
(i) an identification form related to (a) the person responsible for the control of the compliance of the AML/CFT obligations at the appropriate hierarchical level (in French, “responsable du contrôle du respect des obligations” or the “RC”) and (b) the responsible for the compliance with the professional obligations as regards the AML/CFT (in French “responsable du respect des obligations” or the “RR”) (the “RR/RC Form”) (https://pfi.public.lu/fr/blanchiment/questionnaire/vehicules-financiers-non-reglementes/fia/rr-rc-identification.html) ; and
(ii) a yearly AML/CFT Questionnaire covering the financial year 2021 (the “Questionnaire”) (https://pfi.public.lu/fr/blanchiment/questionnaire/vehicules-financiers-non-reglementes/fia/aml-cft-questionnaire.html).
In order to correctly complete the RR/RC Form and the Questionnaire, the AED has published frequently asked questions and guidelines documents on its website.
Certain unregulated AIFs have received communication from the AED asking them to complete and file the RR/RC Form and the Questionnaire by 12 November 2022 at the latest. In case you have not received such a communication, it is recommended to anticipate AED’s request and, therefore, to prepare the RR/RC Form and the Questionnaire together and to submit such documents in advance to the AED. In addition, the RR/RC Form must be transmitted to the AED without delay in the following situations:
- Initial appointment of the RC and/or RR of the unregulated AIF; and
- Change of the RR and/or RC of the unregulated AIF.
As a general reminder, all Luxembourg investment funds and Luxembourg investment fund managers shall establish an AML_CFT governance framework (AML_CFT policy, risk assessments, appointment of RR/RC etc.).
Please feel free to contact our investment management team concerning the completion of the Questionnaire and the RR/RC Form or any further questions on this matter.
CSSF update of FAQ market entry form for investment funds and IFMs
The CSSF updated on 4 October 2022 its Frequently Asked Questions regarding the AML/CFT market entry form for investment funds and investment fund managers (the “IFMs”) (the “FAQ”). A market entry form shall be completed by supervised funds (UCITS, UCI Part II, SIF, SICAR, or when asking authorization of a label (ELTIF, EUSEF, EUVECA or MMF) in relation to the set-up but also in case of approval of new sub-fund. It shall also be completed for the set-up of an authorized IFM or the registration of an IFM and adapted by such IFM in case of (i) approval of an additional license, a license extension including the request to manage an ELTIF, (ii) entry of a qualified shareholder in the shareholding structure of the IFM and/or (iii) merger (only if the merger leads to a change to the information provided in the Market Entry Form for the absorbing IFM).
The FAQ aims to assist with the proper completion of the AML/CFT market entry form on eDesk.
The updated FAQ clarifies the situation of the reporting of indirect shareholders, each holding less than 10% of the shareholdings of an IFM. In such a situation, it is not required to report such shareholders to the CSSF, but the CSSF requests to be provided with the following:
- A written confirmation (from the IFM, the shareholder, the proposed acquirer or its representative) that each non-reported indirect shareholder is individually and, on an aggregate basis, holding less than 10% of the indirect shareholding of the IFM;
- The maximum percentage that the most non-reported shareholder(s) is/are holding in the IFM;
- A written confirmation that there is no shareholder agreement in place at the level of non-reported shareholders;
- A written confirmation (from the IFM, the shareholder, the proposed acquirer or its representative) that there has been no AML/CFT sanction over the last five years for the indirect non-reported shareholders; and
- Any other document requested by the CSSF.
Feel free to contact our investment funds team regarding the completion of the AML/CFT market entry form.
CSSF fast-track procedure for visa-stamping regarding SFDR RTS
Introduction
The CSSF issued communications, respectively on 27 July and 6 September 2022, to the investment fund industry relating to (i) the regulatory requirements concerning Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (the “SFDR”) and the upcoming entry into force of SFDR Level 2 provisions (the “SFDR RTS”), and (ii) the SFDR RTS confirmation letter.
The SFDR RTS requires financial market participants to present by 1 January 2023, for financial products subject to Articles 8 and 9 of SFDR, precontractual and periodic disclosure information in the format of templates set out in the annexes of the SFDR RTS. A fast-track procedure relating to the visa stamp of the issuing documents is now available concerning articles 8 and 9 regulated funds, in other words, UCITS and regulated AIFs (alternative investment funds).
As a reminder, the SFDR RTS also precise mandatory website product disclosure requirements applicable to financial market participants through the need for a separate website section titled, ’Sustainability-related disclosures’. Regulation (EU) 2020/852 of 18 June 2020, on the establishment of a framework to facilitate sustainable investments (the “Taxonomy Regulation”) requires financial market participants, for those financial products subject to Articles 8 and 9 of SFDR, to provide by January 1, 2023, for transparency in pre-contractual documents and periodic reports concerning the environmental objectives referred to in Article 9, points (c) to (f) of the Taxonomy Regulation.
Q.1 What is the fast track process relating to SFDR RTS?
The CSSF expects to receive the updated pre-contractual documents by October 31, 2022, at the latest, for financial market participants who have not yet submitted to the CSSF the required updates to the issuing documents of UCITS and/or regulated AIFs under the SFDR RTS and the Taxonomy Regulation. If submissions following the filing procedure in Q.3 are compliant and received by the CSSF by 31 October 2022, the CSSF will endeavour to release the visa stamp before 31 December 2022.
Q.2 What are the conditions?
The CSSF will give priority for visa stamping to the issuing documents and may release the visa stamp before 31 December 2022, if the following conditions are fulfilled:
– changes made to the pre-contractual documents are limited to the insertion of the templates according to the annexes of SFDR RTS and that for all the sub-funds subject to Article 8 or 9 SFDR;
– the updated filed prospectus is accompanied by the RTS confirmation letter and the related table, duly filled in and signed by authorised persons; and
– any other changes made apart from changes made about the insertion of the standardised annexes pursuant to SFDR RTS must be minor, of editorial nature only and not entail a material change for investors.
Moreover, on an indicative basis, the precontractual and periodic disclosure templates shall not be amended except as foreseen under Article 2 of the SFDR RTS, i.e. the size and font type of characters and the colours. If a financial market participant deems sections of the pre-contractual or periodic template not relevant for a given fund or sub-fund/compartment, those sections shall still be maintained in the precontractual and periodic disclosure template and shown as being not applicable.
Where a notice is foreseen to inform investors of an update of the issuing documents, this notice shall also be uploaded and submitted to the CSSF. Regarding UCITS, the RTS confirmation letter shall be duly filled out and merged with the prospectus in the track change version.
Q.3 What is the procedure?
– Each duly updated UCITS prospectus, including only the sustainability-related disclosure changes, should be filed for visa stamp with an accompanying RTS confirmation letter. A template of the RTS confirmation letter is now available for UCITS from 6 September 2022.
– Each AIF regulated by the CSSF, which, on the basis of Article 6(3) of SFDR, is obliged or intends to publish the pre-contractual disclosure templates in an annexe to its issuing document, shall submit the issuing document to the CSSF within the set deadline. The RTS confirmation letter template for regulated AIFs is now available from 6 September 2022.
The updated pre-contractual documents for visa stamping shall be filed electronically with the CSSF under the provisions set out in Circular CSSF 19/708 relating to the electronic transmission of documents to the CSSF.
Finally, after submission for examination, the CSSF may ask for prompt clarification or confirmation, if needed, with potential reiteration until completion and consent on disclosures to be inserted. Thus, obtaining the visa stamp may also depend on the ability of the applicant to communicate relevant information requested by the CSSF after the first submission of the updated version of the issuing document including the templates, the RTS confirmation letter, and the related table.
Please feel free to contact our investment management team concerning the update of your issuing documents and completion and filing of the RTS confirmation letter and the relevant annexes pursuant to SFDR RTS.
Amendment to the Luxembourg AML Law - Time to update your AML policies
The law of 29 July 2022, which entered into force on 12 August 2022, amended the Law of 12 November 2004 on the fight against money laundering and terrorist financing, transposing Directive 2001/97/EC of the European Parliament and of the Council of 4 December 2001 amending Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering (the AML Law).
Following such amendments, professionals in the scope of such legislation will need to update their AML policies and procedures, in particular regarding customer due diligence, to provide, amongst other things, for the following obligations :
- To determine the extent of the customer due diligence requirements according to the assessment of risks relating to types of customers, countries or geographical areas and particular products, services, transactions or delivery channels;
- To compare the information collected with that in the registers (i.e. register of beneficial owners, if available) in order to detect any erroneous data or the absence of all or part of the data or the lack of registration, amendment or deletion. Professionals shall proceed in the same way in the context of the exercise of constant vigilance of the business relationship;
- To retain copies of the documents, data and information collected as part of the due diligence process;
- To apply enhanced due diligence requirements where a customer or a person purporting to act on behalf of or for the customer or beneficial owner is a PEP, i.e., to:
(a) have appropriate risk management systems, including risk-based procedures, to determine if the customer, the person purporting to act on behalf of or for the customer or beneficial owner is a politically exposed person;
(b) obtain senior management approval for establishing or continuing, for existing customers, business relationships with such persons;
(c) take reasonable measures to establish the source of wealth and source of funds that are involved in the business relationship or transaction with such persons;
(d) conduct enhanced ongoing monitoring of the business relationship.
Please get in touch with our investment management team if you wish assistance.
