AGEFI Luxembourg - avril 2024

Avril 2024 25 AGEFI Luxembourg Fonds d’investissement O n 28March 2024, the CSSF publishedCircular 24/856 (the “newCircular”) which will repeal, from1 January 2025, CSSF Circular 02/77. Herein lies a detailed overviewof the con- tents of the newCircular, which, inter alia: - ExpandsCircular 02/77 application scope - Includes other types of errors, such as errors regarding the payment of costs/fees and swingpricing - Consolidates in one single docu- ment the guidance given by the CSSF over the past years via channels such as its frequently asked questions document and annual reports. Towhomdoes the new Circular apply? Circular24/856hasexpandedtheapplicationscopeof Circular 02/77 in order to cover UCITS, Part II UCIs, SIFsandSICARs,aswellasMMFssetupasaUCITS, PartIIUCIorSIFandELTIFs,EuVECAsandEuSEFs setupasPartIIUCIs,SIFsorSICARsaswellasMMFs, ELTIFs,EuVECAsandEuSEFswhicharenotauthor- izedasUCITS, Part IIUCIs, SIFs andSICARs, but for which the CSSF is the competent authority in accor- dancewiththeapplicableproductregulations.Forthe latter, chapter 8 of the new Circular (intervention of the auditor) is not applicable. Key players ThenewCircular clarifies the roles andobligationsof the main stakeholders involved in the management andadministrationofUCIs.TheCSSFhighlightsthat the dirigeants ofUCIsincaseofinvestmentcompanies or of IFMs (for UCIs set up in contractual form), should ensure: - The establishment of good organization in order to prevent to the extent possible the occurrence of errors/instances of non-compliance, - The compliancewith the guidelines, as specified by the new Circular, in terms of handling these errors/ instances of non-compliance, -Therelationshipswiththeserviceprovidersinvolved in the operation of the UCI are covered by adequate arrangements (including contractual arrangements) -Theerror/non-complianceiscorrectedandanydam- age suffered by the UCI and/or its investors is com- pensated. NAVcalculation errors NAV calculation errors occur when the NAV is deemed inaccurate. The new Circular reduces the NAVcalculationerrortolerancethresholdinitiallyset outinCircular02/77,forMMFsandincludesathresh- old regarding investments inother eligible assets: Part II UCIs, ELTIFs reserved to well-informed or professional investors, SIFs, SICARs, EuVECAs and EuSEFs must consider the thresholds set out in the table above as a reference. The CSSF expects, for ex- ample, Part II UCIs and ELTIFs reserved to well-in- formed or professional investors, or SIFs following similar investment policies to those described in the table above to adopt similar thresholds to those in the table above. The new Circular allows, however, Part II UCIs, ELTIFs reserved towell-informed or professional in- vestors,SIFs,SICARs,EuVECAsandEuSEFstoadopt a higher tolerance thresholdup to amaximumof 5% of the NAV of the UCI. To do so, the UCI must per- formanddocumentaspecificanalysistakingintoac- countthecriteriasetoutbelowandmustnottherefore set the tolerance threshold above those set out in the tableabovebydefaultandwithoutsuchanalysis.The analysis should be made available to the CSSF upon request and take into account: -WhethertheUCIisopenorclosed-ended,anditsfre- quency of subscription and redemptiondealing, -TheinvestmentpolicyfollowedbytheUCIassetout in its constitutional document/prospectus, -Thenatureofitsinvestments(forexamplelisted/un- listed securities), - The riskprofileof theUCI, including liquidity,mar- ket and credit risk aswell as its volatility, -ThevaluationandinvestmentpoliciesoftheUCIand anticipated investments. Inadditiontomeetingtheabovecriteria,theUCI’sin- vestors must be made aware of the higher threshold viatheusualmeansprovidedforbytheUCI’sconsti- tutional document/prospectus. In case of a UCI registered for distribution outside of Luxembourg, should thehost countryof distribution applythresholdslowerthanthoseoutlinedinthenew Circular by the CSSF, the UCI must apply the lower threshold at the level of the relevant sub-fund. Errors regarding investment rules The new Circular differentiates between active and passiveinstancesofnon-compliancewithinvestment rules. Instances of active non-compliance, reportable to theCSSF, are defined as those resulting from: -Voluntaryactsoroperations,mainlylinkedtoinvest- ment/divestment decisions, - The absence of acts/operations when the non-com- pliance was avoidable and should have been able to be anticipated. Bothoftheabovecanbecausedbyanintentionalde- cision, an inadvertent error, human error or opera- tional, technical or system-basedweakness. Equally, the act/operation in question can derive from the dirigeants of the UCI, the IFMor froma delegate. When correcting an instance of non-compliance with investment rules, UCIs must calculate the im- pact this breach has caused. For this, they can use either the accounting or the economic method to measure the impact: -Accountingmethod : calculating the gain or loss re- alizedintheaccountingoftheUCIinrelationtonon- compliancewith the investment rule, - Economic method : comparing the financial impact of non-compliance calculated according to the ac- counting method with the performance that would have been achieved if the irregular investments had undergone the same variations as the portfolio in- vested in accordancewith the investment policy and investmentrestrictionsprovidedforbytheapplicable regulations andby theUCI’s constitutional doc- umentsorprospectus(“comparativereference”). The accounting method should be the default method formeasuring the impact of investment rules breaches. UCIs can, hence, use the eco- nomicmethodonlyifitisforeseenintheinternal policiesrelatingtheretoandthecomparativeref- erence enables to determine a performance whichisrepresentativeoftheinvestmentpolicy. Note that there is no tolerance threshold for in- stancesofnon-compliancewithinvestmentrules. Other types of errors ThenewCircular alsomentions other types of errors: Errors arising from incorrect application of anti-di- lution tools (i.e., swing pricing) Withrespecttoerrorsarisingfromtheincorrectappli- cationofanti-dilutiontools,theUCImustbecompen- satedforanylosssuffered.Investorsmustbecompen- sated if the tolerance thresholds have beenbreached. Errors resulting from incorrect payment of costs/fees ThenewCircularhighlightsthaterrorsresultingfrom costs/fees which have been accrued but not paid shouldbedealtwithinasimilarmannertootherNAV calculation errors. Regarding instances where costs/feeshavebeenover-charged,invoicedandpaid bytheUCIinamannerthatdoesnotcomplywiththe provisions set out in the UCI’s constitutional docu- ments, prospectus or contractual agreements, no tol- erancethresholdisapplicableforthecompensationof the error. If the amount of compensation exceeds the tolerance threshold, the error must be corrected in a similarmannertootherNAVcalculationerrors.Ifthe UCIhasunder-paidacost/fee,eitherthepartyrespon- sible for the under-payment should compensate the thirdpartytowhomthepaymentwasdue,orincases where theUCI decides to retroactively record the in- sufficient payment, theUCImust performcorrection procedures including re-calculation of theNAVover theentireperiodoftheunder-paymentwithouttaking into account any tolerance threshold. Cut-off errors When the cut-off times outlined in a UCI’s constitutional document/ prospectushavenotbeenrespected,the UCI must take corrective measures to ensureinvestors’subscription/redemp- tion orders have been carried out in ac- cordance with such documents. All orders carried out at an incorrect NAV per share must be corrected, with no threshold being applied. Investors having incurred losses must be indemnified. In cases where investors have ben- efitted from the cut-off error, well-informed/pro- fessional investors may be contactedinanattempttore- imburse the UCI. Any profit resulting from the error must remainwith theUCI. Investment allocation errors Incaseof investment allocationerrors, aUCImust be indemnified the amount of the loss suffered by the misallocation.IfthelossresultsinamaterialNAVcal- culationerror,itmustbedealtwithinaccordancewith chapter4ofthenewCircular(NAVcalculationerror). Any profit resulting from the misallocationmust re- mainwith theUCI. Error compensation When an error/non-compliance occurs at the level of aUCIandcompensationistobepaidtoinvestors,the UCIoritsIFMmustensurethatthefinalbeneficiaries receivethecompensation.Forthisreason,whenusing financial intermediaries, UCIs/IFMs must have in place the necessary arrangements to be able to look through the intermediation chain in order to be able toensuretheinvestorreceivestheduecompensation. If this is not possible, the UCI must nevertheless en- surethatallinformationrelatedtotheerror/non-com- pliance is provided to the financial intermediaries to allowthefinancialintermediariestoproceedtothein- dividual investor indemnification. In such cases the UCImustensurethatinvestorsareinformedinaclear manner, via the UCI’s prospectus, that their rights to indemnificationwhensubscribingviafinancialinter- mediariesmaybeimpacted.Thepaymentofcompen- sation must not be spread over time or be deducted fromfutureremunerationtowhichthepartyrespon- sible for the error/non-compliancewould be entitled. However, for the compensationof investorswho still hold shares/units at the time of the payment of the compensation, UCIsmaydecide toallocate themad- ditional shares/units instead of submitting the pay- ment via bank transfer. When UCIs/IFMs fail to pay former investors the compensation due, despite all the efforts to execute the payment, they are required to deposit it with the Caisse de Consignation . Notification Any error/non-compliance must be notified to the CSSF using the notification formwhich is provided for andmade available on theCSSFwebsite. The no- tification must be made within four to eight weeks maximumafterthedateofdetectionoftheerror/non- compliance. For more complex errors/instances of non-compliance involvingmultiple investors inava- riety of jurisdictions, notification to the CSSF should be made as soon as possible, and not necessarily fol- lowing the date of indemnificationof investors. Whentheerror/non-complianceconcernsaUCITSor aPart IIUCI and the total amount of compensation is greaterthanEUR50,000ortheamounttobecompen- sated for a single investor is greater than EUR 5,000 the auditor will be required to issue a special report. The monetary thresholds outlined in CSSF Circular 02/77 (beingEUR25,000 andEUR2,500 respectively) have therefore beendoubled in the newCircular. The special report must be transmitted to the CSSF within threemonths fromsubmissionof thenotifica- tion form. The CSSFmay issue further guidance in a frequently asked questions document to clarify ele- ments of the newCircular. Nicolas BANNIER EY Luxembourg Partner, Wealth & Asset Management Jean-Marc CREMER EY Luxembourg Partner, Wealth & Asset Management 1) A UCI can decide to apply a lower threshold than those outlined in the table – providing that such lower threshold is applied consistently over time. 2) For UCITS, “other assets” refer, alongside bonds and/or other debt securities as well as shares and/or other securities comparable to shares, to other assets inwhich aUCITS can invest according to the applicable law. For Part II UCIs and ELTIFs whose units/shares may be held by retailinvestors,“otherassets”refer,forexample,tounlistedshares,real estate, loans or eligible investments for ELTIFs. Circular 24/856 - the CSSF’s update on NAV calculation errors, non-compliance with investment rules and other types of errors Tolerance ȱ thresholds ȱ ȱ Previous ȱ threshold ȱ under ȱ Circular ȱ 02/77 ȱ New ȱ threshold ȱ (applicable ȱ ȱ from ȱ 1 ȱ January ȱ 2025) (1) ȱ Money ȱ market ȱ UCIs ȱ 0,25% ȱ 0,20% ȱ UCIs ȱ which ȱ invest ȱ primarily ȱ in ȱ bonds ȱ and/or ȱ other ȱ debt ȱ securities ȱ 0,50% ȱ 0,50% ȱ UCIs ȱ which ȱ pursue ȱ a ȱ mixed ȱ investment ȱ policy ȱ 0,50% ȱ 0,50% ȱ UCIs ȱ which ȱ invest ȱ primarily ȱ in ȱ shares ȱ and/or ȱ other ȱ securities ȱ comparable ȱ to ȱ shares ȱ 1% ȱ 1% ȱ UCIs ȱ which ȱ invest ȱ primarily ȱ in ȱ other ȱ eligible ȱ assets (2) ȱ N/A ȱ 1% ȱ