Key takeaways from CSSF Circular 24/856

On 29 March 2024, the Commission de Surveillance du Secteur Financier (CSSF) issued Circular 24/856, which repeals Circular 02/77 and introduces updated guidelines for the investment fund industry.

This new circular, effective from 1 January 2025, aims to enhance investor protection and incorporate the latest regulatory and market practices. Here are the key takeaways:

Expanded scope and coverage

Circular 24/856 broadens the types of entities and errors covered. It now includes Specialised Investment Funds (SIFs), Société d’Investissement en Capital à Risque (SICARs), European Venture Capital Funds (EuVECA), European Social Entrepreneurship Funds (EuSEF), and Reserved Alternative Investment Funds (RAIFs), in addition to the previously covered Undertakings for Collective Investment in Transferable Securities (UCITS) and Part II UCIs.

Types of errors covered:

NAV calculation errors: Miscalculations in the Net Asset Value (NAV) which can affect investor transactions and valuations.

Non-compliance with investment rules: Breaches of stipulated investment guidelines, including both active and passive breaches.

Operational errors: Includes a wide array of new operational mistakes, such as:

• Incorrect application of swing pricing
• Non-compliant payment of fees and charges
• Incorrect application of cut-off rules
• Investment allocation errors

Enhanced error management and reporting

The circular introduces detailed procedures for managing and reporting these errors. It emphasises prompt correction and indemnification to ensure investor protection. Clear guidelines are provided for the steps to report and rectify errors to maintain transparency and accountability within fund management.

Clarification on investment rule breaches

A significant addition is the explicit distinction between active and passive breaches of investment rules. Active breaches, resulting from deliberate actions, must be reported and corrected immediately. Passive breaches, often due to market movements beyond the UCI’s control, do not require immediate CSSF notification but must still be rectified in the investors’ best interests.

Updated tolerance thresholds for illiquid assets

For unregulated funds investing in illiquid assets, CSSF Circular 24/856 provides flexibility in setting tolerance thresholds. Unlike regulated funds with predefined thresholds, unregulated funds can define their own thresholds based on a documented analysis of their specific characteristics. This includes considering factors such as the type of illiquid assets, investment policies, and risk profiles. The maximum threshold is set at 5% but not to be applied automatically, and instead should be resulting from a documented analysis. Should an error exceed the defined threshold, compensation to investors becomes compulsory.

Marketing funds outside Luxembourg

When funds are marketed outside Luxembourg, the circular emphasizes the need to comply with the regulatory requirements of the target jurisdictions. This includes adhering to local laws and regulations concerning investor protection, marketing practices, and disclosure requirements. Unregulated funds must ensure they meet the standards and expectations of the foreign markets they enter, which might involve additional compliance measures beyond those outlined by the CSSF.

Responsibilities of stakeholders

The new circular provides comprehensive guidelines on the roles and responsibilities of various stakeholders, including the management bodies of UCIs, investment fund managers (IFMs), depositary banks, and administrators. It stresses the need for robust internal procedures and contractual agreements to prevent and manage errors effectively.

Specific disclosures and ASA reporting

The circular mandates specific disclosures to end investors, especially when subscriptions are made through intermediaries. It also outlines the reporting process for Administrative Service Agents (ASAs) in regulated UCIs, requiring both annual and ad hoc special reports in case of significant errors.

Talk to IQ-EQ

For Luxembourg-based funds’ promotors, understanding these changes is crucial. If you need more detailed insights or assistance with compliance, feel free to contact us. Our expertise can help you navigate these regulatory updates effectively.

For further information, please get in touch with our team.