CSSF clarification on eligible entities to open bank accounts for AIFs
On 18 October 2022, the CSSF issued a communication clarifying a few points regarding the eligibility of entities for the opening of cash accounts in relation to Luxembourg AIFs.
This communication arrives as AIFs facing slow opening of bank accounts due to restrictive AML/KYC requirements seek an easy way out with alternative banking platforms instead of traditional banks for the purpose of holding the cash accounts of such AIFs.
In the light of the above, the CSSF reminds that all cash of an AIF has to be booked in cash accounts opened in the name of the relevant AIF, in the name of its AIFM acting on behalf of the AIF or in the name of the depositary acting on behalf of AIF with an entity as specified under Article 19(7) of the AIFM Law.
The communication urges that AIFs for which an alternative banking platform (i.e. an electronic money institution ("EMI") or a payment institution (“PI”) has been appointed to hold cash accounts, their designated AIFM or the appointed depositary should analyse the cash account set-up in order to ensure that as soon as possible and by no later than 30 June 2023:
- a depositary within the meaning of Article 19(3)(i) is appointed; and
- central banks, EU authorised credit institutions as well as third-country authorised banks are appointed in relation to the opening of cash accounts for such AIFs.
Any new AIF must ensure that the cash accounts will be held by an eligible entity. No new sub-funds can be set up within AIFs for which the cash accounts are currently held by an EMI or a PI.
CSSF guidance on pricing process and undue costs of funds
On the 20 October 2022, the CSSF published its report with respect to the ESMA Common Supervisory Action (CSA) supervision of costs and fees of UCITS and AIFs developed in a supervisory briefing. The CSA's aim to assess the compliance of supervised entities with the relevant cost related provisions in the UCITS and the AIF framework and the obligation of not charging investors undue costs.
- Pricing process: the CSSF observed several weaknesses regarding the pricing process and expects IFMs to (i) define and implement a structured and formalised pricing process, (ii) perform an independent analysis of the fee structures once those have been established (iii) periodically review the level of cost, at least on an annual basis and (iv) ensure the viability and competitiveness of the fund over time by taking due care of the sustainability of the costs over time.
- Undue costs: As reminder, Article 17(2) of the AIFMD provides that AIFMs must ensure that the AIFs they manage or the investors in these AIFs are not charged undue costs.
In this context, the costs charged to the fund or its unit/interest holders should (i) be consistent with the investment objective of the fund and do not prevent the fund to achieve this objective; (ii) be linked to a service provided in the investor’s best interest; (iii) be proportionate compared to market standards and to the type of service provided; (iv) be consistent with the characteristics of the fund; (v) be sustainable taking into account the expected net return of the fund, based also on its risk profile and investment strategy; (vi) ensure investors’ equal treatment not be of material prejudice to the interests of any class of unitholders or potential unitholders; (vii) not be duplicated; (viii) be properly separated and accounted for; and (ix) be clearly disclosed to investors.
- Related party transactions: 92% of the IFMs in the scope of the ESMA CSA sample have identified related party transactions. On that basis, the CSSF asks IFMs to ensure that adequate conflicts of interest policy and comprehensive conflicts of interest register are in place to ensure an effective mitigation of conflicts of interest in related-party transactions.
- Quantitative findings - costs categories and costs of smaller funds:
- Types of charges included in the ongoing charges figures in the PRIIPs KID: the CSSF reminds IFMs to develop and implement a documented internal approach for the definition of what charges and payments shall or shall not form part of the amount to be disclosed as ongoing charges in the PRIIPs KID for supporting the disclosure in the PRIIPs KID; and
- Costs of smaller funds: the CSSF urges all IFMs to assess the current and foreseeable level of costs associated with their low AuM funds in order to ensure that no undue costs are charged to investors.
In this respect, the CSSF requires all IFMs to conduct, as soon as possible and at the latest by the end of Q1/2023, a comprehensive assessment with regard to the compliance of their policy, approach and arrangements related to costs.
PRIIPs KID clarifications for AIFs as of 1 January 2023
On 14 November 2022 and 21 December 2022, the ESAs issued their Q&As on the PRIIPs KID with the view to providing fair, clear and not misleading information to prospective investors:
- In the ‘General topics’ section: all KIDs published prior to 1 January 2023 need to comply with the existing requirements of Regulation 2017/653.
- In the ‘What is this product?’ section (new section): as of 1 January 2023, PRIIPs KIDs have to sufficiently disclose whether the product is actively or passively managed. As opposed to a passively managed AIF, an actively managed AIF does not have an index-tracking objective although it may include or imply reference to a benchmark.
- In the “Market risk assessment rules” section: Redemption prices of open-ended real estate AIFs are determined on the basis of the net asset value (NAV) of the respective fund, where the market prices of its properties are determined only once a year.
- In the “Past performance” section: if there is insufficient past performance data to provide a useful indication, the past performance should be included in the ‘Other relevant information’ section or in the ‘Other relevant information’ section of the PRIIPs KID.
Further to the ESA Q&A, on 16 December 2022, the CSSF updated the FAQ on the AIFM Law, regarding the impact of the PRIIPs Regulation.
Please be reminded that Luxembourg AIFs products whose units are being advised on, offered or sold to retail investors need to have in place a PRIIPs KID.
The UCITS exemption introduced by Article 32(2) of the PRIIPs Regulation allowing an exemption as well for Luxembourg AIFs to not provide a PRIIPs KID, which was previously extended, has expired on 31 December 2022.
CJEU restricts public access to the Luxembourg Register of Beneficial Owners
On 22 November 2022, the European Court of Justice (the "CJEU") ruled in its Joined Cases C-37/20 and C-601/20 that public access to the information within the Luxembourg register of beneficial owners (the "RBO") is invalid.
Despite the possibility of the Luxembourg law of 13 January 2019 on the RBO on request to restrict public access to some of the beneficial owner information, this measure is rarely granted. It is reminded that such requested restrictions must be time-limited and duly justified by certain circumstances, such as (a disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation).
Hence the CJEU - guardian of the Charter of the Fundamental Rights of the European Union - stated that “the general public’s access to information on beneficial ownership constitutes a serious interference with the fundamental rights to respect for private life and to the protection of personal data”.
Since the CJEU judgment, the RBO access has been limited to professionals as defined in Article 2 of the Law of 12 November 2004 on the fight against money laundering and terrorist financing, including lawyers, the CSSF and AIFMs as well as journalists.
CSSF letter on liability driven investment funds following the fluctuation of the market
On 30 November 2022, the CSSF issued a letter on liability driven investment funds (“LDI Funds”) in response to the recent volatility in yields associated with UK gilts, which exposed vulnerabilities in LDI Fund products, giving rise to a concerning cycle of collateral calls and forced sales.
This letter issued as a result of interactions between the CSSF, the Central Bank of Ireland and the ESMA, invites LDI Funds denominated in GBP to ensure that clear policies and procedures are established to increase resilience to face additional market fluctuations.
CSSF adds 4 new questions for the clarification on Circular 22/811 on UCI administrators
On 2 December 2022, the CSSF updated its FAQ in relation to a number of key aspects of CSSF Circular 22/811 (the “22/811 Circular”) on the authorisation and organisation of entities acting as UCI administrator (the “UCIA FAQ”). The purpose of UCIA FAQ is to bring further clarity in the supervisory expectations of the CSSF.
The CSSF clarifies that the scope of the 22/811 Circular only applies to authorised AIFMs and not to registered AIFMs. The 22/811 Circular only relates to entities of AIFM that have been appointed to perform the UCI administration functions (registrar, net asset value calculation and accounting, and client communication) and that are actually carrying out such functions.
The UCIA FAQ also states that UCIs or their AIFMs are responsible for coordinating and supervising the UCI administration activity, even if they do not perform any UCI administration functions themselves due to delegation.
It is not necessary for the same UCI administrator to perform all three administration functions, and it is possible to appoint different service providers for each function or for the UCI or its AIFM to perform any or all of the functions itself. The UCI administrator is responsible for the function(s) for which it has been appointed.
ESMA update on AIFMD to include information on special purpose acquisition companies
On 16 December 2022, the ESMA updated its Q&A on the application of the AIFMD to include a question about the scope of the AIFMD in relation to special purpose acquisition companies (“SPACs”). The ESMA notes that SPACs are not legally defined in the EU and that there is significant variation in the structure and transactions of these vehicles. The ESMA advises that it is necessary to assess on a case-by-case basis whether a SPAC meets the definition of an "alternative investment fund" as defined in Article 4(1)(a) of the AIFMD and whether it qualifies as a "holding company" in accordance with Article 4(1)(o) of the AIFMD. In determining whether a SPAC qualifies as an AIF, the ESMA suggests considering the following criteria: whether the SPAC (i) raises capital through an initial public offering (“IPO”) with the intention of investing it according to a defined investment policy, (ii) uses all, or substantially all the proceeds of the IPO for a business combination, and (iii) has a general commercial or industrial purpose after the business combination, as defined in the ESMA Guidelines on key concepts of the AIFMD.
ESMA peer review on supervisory practices further to the Brexit
The ESMA issued the peer review report on the handling of the NCAs regarding the relocation of firms following the UK’s withdrawal from the EU (the “Report”).
The Report specifically mentions several jurisdictions, including the Netherlands, France, Germany, Cyprus, Luxembourg, and Ireland, as the locations where the largest or most complex activities were relocated. The Report also notes that different NCAs have applied different interpretations of proportionality in terms of the requirements needed for relocation, which has sometimes led to small firms relocating with minimal facilities. The Report also mentions that the CSSF was criticised for not monitoring "white label" funds and for being unable to provide precise information on additional Brexit-related activities. However, the CSSF refutes these conclusions and claims that the Luxembourg sector has been subject to specific supervisory work and that Luxembourg has a regulatory framework that is ahead of many other European countries. The Report states that recommendations are relevant not just for the NCAs included in the review, but for all NCAs within the EU, and that a follow-up evaluation will be conducted in two years to evaluate the progress made.