Substance requirements applying to Luxembourg UCITS management companies and to Luxembourg self-managed UCITS investments companies

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1 October 2012 Substance requirements applying to Luxembourg UCITS management companies and to Luxembourg self-managed UCITS investments companies Contents Introduction On 26 October 2012, the Commission de Surveillance du Secteur Financier ( CSSF ) released the long-awaited circular (the Circular ) relating to the authorisation and to the organisation of UCITS management companies and of self-managed UCITS investment companies. This Note details the key elements of the Circular. Scope of the Circular The scope of the Circular is limited to UCITS management companies (hereinafter Chapter 15 Management companies ) and to UCITS investment companies that have not designated a managed company (hereinafter SIAGs ) having their registered office in Luxembourg and, the case be, to their representatives offices or branches abroad. The Circular does not apply to Luxembourg non-ucits management companies and to Luxembourg non-ucits corporate-type funds. Further, it does not apply to EU or non EU management companies other than those authorised by the competent authorities of another Member State in accordance with the UCITS directive. Conditions for obtaining and maintaining authorisation for Chapter 15 Management companies whose activities are restricted to collective management The Circular details the conditions for obtaining and maintaining authorisation for Chapter 15 Management companies as they are laid down under the 2010 Law and Regulation These conditions are divided into eight items: Basic principles (Chapter I. 1.), Shareholders (Chapter I. 2.), Own funds (Chapter I. 3.), Bodies of the management company (Chapter I.4.), Central administration and internal governance set up (Chapter I. 5), External audit (Chapter I. 6), Conditions applying to the authorisation of delegation (Chapter I. 7), Programme of activity (Chapter I. 8). 1 Scope of the Circular... 1 Conditions for obtaining and maintaining authorisation for Chapter 15 Management companies whose activities are restricted to collective management... 1 Reuse of own funds... 2 Bodies of the management company... 2 Central administration set up... 2 Delegation rules... 3 Conditions for obtaining and maintaining authorisation for management companies which engage in activities of collective portfolio management and management of portfolios of investments on a discretionary basis... 4 The management company and the principle of right of establishment and the freedom to provide services... 4 Principle of proportionality 5 SIAGs... 5 Prudential supervision of a Chapter 15 management company... 5 Prudential supervision of a SIAG... 6 Entry into force... 6 Transitional provisions... 6

2 Particular attention needs to be paid to the following provisions: Reuse of own funds The Circular recalls that own funds of a Chapter 15 management company have to be available on a permanent basis and to be invested in the company s own interest to ensure the continuity and the consistency of the activities and services provided by the management company. Consequently, own funds cannot be used for investments made with its shareholders or to finance loans granted to shareholders. However some adjustments to this rule are admitted. Thus, it is acceptable for own funds to be invested in liquid assets or assets easily convertible into short-term liquidities, without taking speculative positions. Moreover, a management company is allowed to take participations in another company provided (i) the participation is exclusively financed by the excess amount of own funds available to the company, (ii) this participation is notified without delay to the CSSF, (iii) the activity of the subsidiary is in line with the authorised activities of a management company. Bodies of the management company The Circular provides details as to the way a Chapter 15 Management company must organise its board, management and the legal requirements applying to this organisation. The Circular stresses that board members must be of sufficiently good repute and experienced in relation to the type of UCITS and UCIs managed. Sufficiently experienced means having the relevant professional experience and having performed similar functions at a high level of responsibility and autonomy. In addition to this professional background, the Circular now pays particular attention to the time a board member can dedicate to the management company and hence the number of mandates a board member can hold. The same requirements as regards professional repute, experience and availability of time apply to the two persons in charge of the day to day business of the management company. These two persons must, in principle, be present in Luxembourg on a permanent basis. Nevertheless, this condition is fulfilled if they reside in a place that enables them to come to Luxembourg daily. Central administration set up The Circular emphasizes the infrastructure required for a Chapter 15 management company to perform all its contemplated activities. The presence of a Chapter 15 management company in Luxembourg can not indeed be limited to a legal or statutory head office. As a consequence, every Chapter 15 management company must have its central administration in 2

3 Luxembourg including a decision-making centre and an administrative centre. The decision-making centre does not only comprise the activity of the governing bodies but further the activity of the persons responsible for the several commercial, administrative or supervisory functions. The administrative centre consists of having sound administrative and accounting procedures in place. This implies that Chapter 15 management companies must have on site the following (this list being not exhaustive): (i) its own executive and competent staff (ii) its own executive systems, (ii) appropriate procedures as well as technical and IT infrastructure depending on both its contemplated activity and the fact that the management company has internalised or delegated one or more of the functions part of collective portfolio management, (iv) an accounting function. It should be noticed that the concept of central administration also implies that a management company must have its own premises in Luxembourg. Delegation rules The conditions relating to delegation are very detailed in the Circular. Subject to a Chapter 15 management company not becoming a letter box entity, the Circular provides a non exhaustive list of tasks that a management company can in principle delegate and to the contrary, a list of tasks which must be performed by the management company (Cf. sub item and 7.1.2). The Circular also states the conditions for a Chapter 15 management company to delegate one of the above authorised tasks, namely: > for every managed UCITS, a description of the delegated functions has to be notified to the CSSF specifying the functions it intends to delegate, the undertakings to which they are delegated, as well as the management company s procedures to monitor the activities of the entities concerned; > a written due diligence of the management company on the service provider has to be made and has to remain available for consultation by the CSSF, on request; > a written agreement must be concluded between the management company and the delegate; > the mandate must not prevent the proper supervision by the management company, it must in particular not prevent the management company from acting and the UCITS from being managed in the best interest of its investors; > the management company and the delegate must establish, implement and maintain a continuity plan; 3

4 > the management company must set up monitoring arrangements which allow the senior management and its personnel to access the data documenting the activities performed for and on behalf of the management company and the UCITS under its management by the delegate(s); > the mandate shall not prevent the persons who conduct the business of the management company from giving any additional instructions to the undertaking to which functions have been delegated at any time, nor from withdrawing the mandate with immediate effect when the interests of investors so warrant; > the company to which functions are delegated must be qualified and capable of undertaking the functions in question, in accordance with the nature of the functions to be delegated. Thus, the entities to which functions are delegated must demonstrate that they dispose of adequate human and technical resources with regard to the delegated functions; > the prospectuses of the UCITS list the functions which the management company has been permitted to delegate; Finally, the Circular also embodies specific conditions on the delegation of the investment management function and of the UCI administration function. Conditions for obtaining and maintaining authorisation for management companies which engage in activities of collective portfolio management and management of portfolios of investments on a discretionary basis The above conditions which apply to Chapter 15 management companies are applicable to management companies which engage in activities of collective portfolio management and management of portfolios of investments on a discretionary basis. There are additional requirements specific to the activities of management of portfolios of investments on a discretionary basis. For instance, certain provisions of MiFID as well as the prudential rules applicable to private portfolio managers which are applicable to the management companies providing services of discretionary management come into play. The management company and the principle of right of establishment and the freedom to provide services Every management company wishing to pursue activities or to provide services within the territory of another Member State through a branch or /under the freedom to provide services must, inter alia, submit to the CSSF a notification providing such information as stated in the Circular. In addition, every management company wishing to pursue activities or to provide services within the territory of another Member State by use of a branch must appoint a person who is responsible to coordinate the flow of 4

5 information between the branch(es) and the head-office of the management company in Luxembourg. Principle of proportionality In view of the nature, scale and complexity of its business as well as of the nature and range of services and activities provided, a Chapter 15 management company can resort to the principle of proportionality to sidestep certain requirements of the Circular 1. SIAGs Going forward SIAGs will, except for the provisions on the right of establishment and the freedom to provide services, be subject to substantially the same substance requirements in terms of procedures, rules of conduct, conflicts of interest and risk management as those applying to a Chapter 15 management company. A SIAG must, consequently, not only have its registered office in Luxembourg, but also its central administration including a decision-making centre and an administrative centre. A SIAG is though to delegate the administration of its portfolio(s) to a provider established on the Luxembourg territory (i.e. bank, professional of financial sector, management company) provided it benefits from all the required authorisations and, from adequate procedures to accomplish the said functions. A SIAG can also resort to the principle of proportionality concerning the organisation of the risk management function. Prudential supervision of a Chapter 15 management company Every management company, including its branches, must provide the CSSF with financial information drawn up on a quarterly basis. The tables related to the reporting requirements to the CSSF are included in the appendices of CSSF Circular 10/467. They need to be carefully reviewed. 1 By application of Regulation 10-4, a management company may be authorised to apply the principle of proportionality in respect of the organisation of its compliance (item ), internal audit (item ) risk management (item ) functions. In addition, a management company may be authorised to apply the principle of proportionality with reference to the following items :. General requirements on procedures and organisation (item 5.2.1), Clarifications on the executive staff of a management company (5.1.1) and Conflicts of interest policies ( ). 5

6 Prudential supervision of a SIAG Every SIAG must provide the CSSF with specific financial information drawn up on a quarterly basis. The appendices of the Circular detail reporting requirements to the CSSF. They need to be carefully reviewed. Entry into force This Circular enters into force with immediate effect. Transitional provisions Chapter 15 management companies existing at the time of entry into force of the Circular will have until 30 June 2013 to comply with the provisions on the reuse of own funds (Chapter I., item 3.), management bodies (Chapter I., item 4.), central administration set up (Chapter I., item 5.1.) and delegation rules (Chapter I., item 7). SIAGs existing at the time of entry into force of the Circular will have until 30 June 2013 to comply with the provisions on management bodies (Chapter I., item 4.) and delegation rules (Chapter I., item 7). SIAGs must also take all measures to set-up a decision-making centre and an administrative centre (Chapter I. item). Contacts For further information please contact: Freddy Brausch Partner freddy.brausch@linklaters.com Hermann Beythan Partner hermann.beythan@linklaters.com Emmanuel-Frederic Henrion Partner emmanuelfrederic.henrion@linklaters.com Francine Keiser Of Counsel francine.keiser@linklaters.com Author: Claire Virard Canto This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2012 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the nonmembers who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. Josiane Schroeder Counsel josiane.schroeder@linklaters.com 35 Avenue John F. Kennedy P.O. Box 1107 L-1011 Luxembourg Telephone Facsimile (+352) Linklaters.com 6 //