BACKGROUND INFORMATION

On 29 March 2024 the CSSF published Circular 24/856 (the “Circular”), which repeals CSSF Circular 02/77 and contains updated guidelines to be followed by the investment fund industry in case of NAV calculation errors, non-compliance with investment rules and occurrence other errors (“Error/Non-Compliance”) within Luxembourg undertakings for collective investment (“UCIs”), subject to full or limited supervision of the CSSF.

MAIN PURPOSE

To complete and provide more details than CSSF Circular 02/77 in relation to measures to be taken in the event of Error/Non-Compliance.

WHAT HAS CHANGED

CSSF Circular 24/856, inter alia:

  • Expands the scope of application of the circular 02/77
  • Clarifies organisation/governance requirements for different stakeholders
  • Contains further clarification regarding NAV errors and tolerance thresholds
  • Includes other types of errors, e.g. errors regarding the payment of costs/fees and swing pricing
  • Consolidates in one single document the guidelines given by the CSSF over past years via channels such as its frequently asked questions (the “FAQ”) and annual reports.

ENTRY INTO FORCE

Entry into force: 1 January 2025. The rules of the CSSF Circular 02/77 will continue to apply until 31 December 2024 to:

  • The treatment of Errors/Non-Compliance;
  • The annual review of Errors/Non-Compliance by the statutory auditor, and the preparation of a separate report under the CSSF Circular 21/790.

SCOPE

This Circular applies to all UCIs subject to supervision by the CSSF:

  • UCITS
  • Part II UCIs
  • SIFs and SICARs
  • UCITS, UCIs Part II or SIFs which are MMF (money market funds)
  • UCIs Part II, SICARs or SIFs which are ELTIF (European long term investment fund) or EuVECA/EuSEF
  • Luxembourg ELTIFs, EuVECAs, EuSEFs and MMF not authorised as UCITs, Part II UCIs, SIFs and SICARs for which the CSSF is the competent authority
  • Chapter 8 of the Circular (intervention of the auditor) is not applicable to them

CLOSED-ENDED UCIS

  • Fall within the scope of the CSSF Circular 24/856
  • Do not need to comply with all provisions on NAV calculation errors (Chapter 4 of the Circular)
  • No notification is required in case of NAV calculation error
  • NAV calculation rules to be complied with on an ongoing basis
  • Must ensure that corrective measures have been taken to correct any NAV calculation error
  • An auditor (in the context of the audit) has to verify that the NAV accurately reflects the value of UCI assets and liabilities calculated in line with constitutive documents

RESPONSIBLE PERSONS

  • The Circular clarifies roles and obligations of main stakeholders involved in the management and administration of UCIs (the governing body of the UCI or IFM), (ii) the IFM, (ii) the UCI administrator, and (iv) the depositary
  • It confirms the role of UCI/Investment Fund Managers (the “IFM”) dirigeants for adequate organisation/governance of the UCI to prevent the occurrence of errors/non-compliance at the UCI level

UCI ADMINISTRATOR

  • May control or partially control, compliance with investment rules (based on delegation)
  • Must establish, implement and maintain procedures to detect, assess and, notify errors/non-compliance to the UCI or its IFM (Circ 22/811)
  • In case of errors/non-compliance draw up a remediation plan (in cooperation with other stakeholders) to be approved by the UCI or its IFM, if necessary
  • Implements corrective measures and ensure the proper follow-up
  • In case of delegation: it does not exempt an UCI Administrator from its responsibilities
  • Includes ensuring that a sound organisation, including delegates, is in place

DEPOSITARY

  • Implements adequate procedures ensuring compliance with its oversights and control functions
  • Occurrence of errors/non-compliance must be communicated to the depositary
  • If depositary notices such errors/non-compliances, must inform the dirigeants of the UCI or IFM
  • Must inform the CSSF in case of no reaction of the UCI dirigeants or IFM

NAV CALCULATION ERROR

The Circular defines NAV calculation errors similarly to the ones from the CSSF Circular 02/77. It reduces NAV tolerance thresholds for money market funds (“MMF”) from 0.25% to 0.20%. Other thresholds remain mostly the same and are applicable to:

  • UCITS and MMF
  • UCIs Part II & European Long-Term Investment Funds (“ELTIF(s)”) whose shares can be held by investors who are not well-informed/professional investors (derogation possible for UCIs investing in other assets)
  • Only as a reference for UCIs Part II and ELTIFs reserved to well-informed/professional investors, as well as for SIFs, SICAVs, EuVECA and EuSEF

NON-COMPLIANCE WITH INVESTMENT RULES

The CSSF reconfirms its current position according to which no Thresholds can be applied in relation to non-compliance with investment rules. The Circular:

  • Clarifies differences between active (voluntary actions/operations or their absence) and passive breaches (beyond the control of the UCI or as a result of subscription rights)
  • Provides guidelines applicable to all UCIs
  • Specific considerations for AIFs, especially AIF investing in less liquid/illiquid assets

OTHER ERRORS AT THE UCI LEVEL

The new Circular mentions other 4 types of errors including correction actions, resulting in the UCI being in breach of the applicable regulations, and its constitutive documents:

  • incorrect application of the swing pricing mechanism
  • non-compliant payment of costs/fees
  • incorrect application of the cut-off rules
  • investment allocation errors

CORRECTION OF ERRORS/NON-COMPLIANCE

The Circular confirm that UCI/IFM should ensure that the remediation of the loss is done without delay. If compensation cannot be paid out without delay, the dirigeant of the UCI should ensure that the CSSF is informed of the reasons via a notification. The Circular further describes particularities in case of financial intermediaries. In such case, the UCI should ensure that:

  • in principle, the final investors are paid the relevant indemnities
  • where this is not feasible, the UCI must clearly disclose in its prospectus that the rights of the final investors, having subscribed through financial intermediaries, may be impacted.

INTERVENTION OF THE AUDITOR

The auditor will carry out specific controls among the errors/non-compliance issues that have been presented to it to ensure that the provisions of the Circular have been observed while preparing a separate report as per Circular CSSF 21/790. An additional control would be required by the CSSF where:

  • the error or non-compliance relates to a UCITS or Part II Fund
  • the total amount of indemnification exceeds EUR 50,000 or the amount to be paid to one single investor exceeds EUR 5,000.

The auditor must also carry out sample-based controls on the adequate classification of instances of “passive non-compliance”.

NOTIFICATION OF ERRORS/NON-COMPLIANCE

  • Notification to the CSSF not required for passive investment breaches and NAV calculation errors for closed-ended UCIs.
  • Timing for submission of the notification is in general between 4 to 8 weeks after detection (except for more complex cases)
  • No CSSF approval of correction actions/compensation is needed
  • Where the UCI is marketed in other countries, the relevant competent authorities must be informed of the error/non-compliance in accordance with local rules.