Luxembourg: Clarification Of The UCITS v Independence Rules, Priips Impacts And The Application Of ESMA's Opinion On Share Classes Of UCITS

On 6 July 2017 the CSSF published the updated versions of its Frequently Asked Questions (FAQ) documents on the UCI Law.

This update was long awaited by the Luxembourg fund industry especially because it provides additional guidance on the independence requirements applying to the depositary bank and the management company (ManCo) of the UCITS laid down in Chapter 4 of the Commission Delegated Regulation (EU) 2016/438 of 17 December 2015 (Level 2).

New Section 5 on independence requirements

The CSSF clarifies the following:

  • If the UCITS has designated a Chapter 15 ManCo, the independence requirements apply between the ManCo and the depositary.
  • If the UCITS is a self-managed SICAV, the requirements apply between the UCITS and the depositary.
  • The FAQ specifies the concept of management body applied to Luxembourg company law:

→ S.à.r.l.: EN: managers, FR: gérants, DE: Geschäftsführer, or EN: board of managers, FR: conseil de gérance, DE: Geschäftsführung

→ S.C.A.: EN: managers, FR: gérants, DE: Geschäftsführer

→ S.A. (i) Monistic: EN: board of directors, FR: conseil d'administration, DE: Verwaltungsrat, or (ii) Dualistic: EN: management board, FR: directoire, DE: Vorstand

The CSSF specifies that when the appointed member of the management body is a legal entity, the independence requirements shall be assessed at the level of the management body of such legal entity.

  • The FAQ specifies that the concept of "body in charge of the supervisory functions" is to be understood as the supervisory board ( FR: conseil de surveillance, DE: Aufsichtsrat) of a dualistic S.A. established in Luxembourg.
  • When the depositary of a UCITS is established as a Luxembourg branch of an entity having its registered office in another EU Member State, the independence requirements are assessed at the level of the ManCo (or the self-managed SICAV) established in Luxembourg with regard to the management body (where applicable, its supervisory board) of the head office of the depositary and the employees of the depositary (both at the level of its head office and of the Luxembourg branch).
  • When the management company of a UCITS is established as a Luxembourg branch of a management company having its registered office in another EU Member State (and has therefore no legal personality in Luxembourg) the independence requirements are assessed at the level of the depositary established in Luxembourg with regard to the management body (where applicable its supervisory board) of the head office of the management company and the employees of the management company (both at the level of its head office and of the Luxembourg branch).
  • When there is a group link between the ManCo (or the self-managed SICAV) and the depositary the provisions of article 24 [independence of management boards and supervisory functions in the context of a group link] of the UCITS V Delegated Regulation apply in addition to the provisions of article 21 [common management] of the UCITS V Delegated Regulation.
  • The CSSF summarises the implications of the provisions of articles 21 and 24 of the UCITS V Delegated Regulation on Luxembourg entities as follows (the rules below applicable to the Chapter 15 ManCo apply in the same manner to the self-managed SICAV):
  • The employees and the members of the management body of a ManCo cannot be at the same time an employee or a member of the management body of the depositary (article 21).
  • It is prohibited for the employees and the members of the management body of the depositary to be at the same time an employee or a member of the management body of the ManCo (article 21).
  • It is prohibited to have more than one third of the members of the supervisory board of a ManCo who are at the same time members of the management body, members of the supervisory board or employees of the depositary and vice-versa (article 21),
  • Exceptions can be granted for employees who are not involved in the "depositary bank" business line of the bank.
  • Obligation to have a number of independent members in the relevant management body or, when applicable, in the supervisory board, in case of a group link between the Chapter 15 ManCo and the depositary (article 24). This number of independent members depends on the total number of members within the governing relevant body:

    • bodies of three members or less in total must include a minimum of one independent member.
    • bodies of four members in total must include a minimum of one independent member.
    • bodies of five members in total must include a minimum of two independent members.
    • bodies of six members or more in total must include a minimum of two independent members.

      • The FAQ implements of a cooling-off period of 12 months for individuals to be considered as independent when they were previously involved with the Chapter 15 ManCo, the depositary, or the self-managed SICAV (or with any other undertaking of the group to which they belong).
      • CSSF Circular 12/546 remains applicable, i.a. those regarding the governance arrangements and those on independence rules governing the relations between the ManCo and the depositary.

PRIIPs' impact on Luxembourg UCITS

  • The CSSF recalls that for the moment UCITS manufacturer are exempted from the obligation to provide a PRIIPs KID. But starting from 1 January 2020 they will have to draw up such KIDs instead of UCITS KIIDs unless the EU Commission postpones the deadline based on the review of the transitional arrangements of Art. 33(1) par.2 of the PRIIPS Regulation. For the drawing up of the PRIIPs KID, the CSSF further refers to point 23 of its FAQ on the AIFM Law [see our article here].

ESMA's opinion on share classes of UCITS

[See our article on this Opinion]

Impact on existing share classes and transitional provisions

  • In case a UCITS intends to convert an existing share class that is considered as non-eligible according to ESMA's opinion into an eligible share class, Circular 14/591 [see our article] on the "Protection of investors in case of a material change to an open-ended undertaking for collective investment" will have to be applied.
  • ESMA's opinion had introduced transitional provisions foreseeing that existing share classes that do not comply with the principles of the opinion can continue to operate but should be closed for investments by new investors by 30 July 2017 and for additional investment by existing investors by 30 July 2018. The CSSF clarifies that new investors that will have entered a "non-eligible share class" before the 30 July 2017 deadline will be allowed to further invest in the same share-class until 30 July 2018.

High-level principle: Common investment objective

  • All "overlay share classes" that are derivatives-based, with the exception of derivatives-based currency risk hedging, will not be permissible anymore with the entry into force of the ESMA Opinion.
  • Currency risk hedging arrangements which systematically hedge out part or all of the foreign currency exposure in the common pool of assets into the share class currency will be considered as compatible with the principle of a common investment objective as long as they comply with the principles contained in ESMA's Opinion.

High-level principle: Non-contagion

  • The ESMA Opinion, in its point 26. c., allows for the partial hedge (e.g. 50% of a share class) of a share class against currency risk.
  • In view of the ESMA requirement to maintain the hedged ratios between 95% and 105% of the NAV of the share class, and applying the requirements of point 26.d and e. of the Opinion, the CSSF expects UCITS ManCos or investment companies to define and implement monitoring and control processes/procedures for ensuring compliance with the hedge ratios on an ongoing basis. In this case, CSSF circular 02/77 does not apply.

High-level principle: Pre-determination

  • According to this principle, all the features of a share class should be pre-determined before the share class is set up and that, in share classes with hedging arrangements, this pre-determination should also apply to the currency risk which is to be hedged out systematically. As a consequence, no discretionary element in the currency risk hedging strategy will be allowed. Room for discretion remains in the choice of the type of derivative instrument used and the operational implementation.

High-level principle: Transparency

  • The CSSF allows UCITS ManCos to provide the list of share classes on the website of the ManCo or of the fund as long as the link to this publication is included in the UCITS' prospectus.
  • The CSSF clarifies that, in accordance with point 32 of the Opinion, the prospectus should contain information on the types and main features of the share classes including the fee structure, dividend policy, investor type, currency or currency risk hedging. Investors must be notified if the prospectus is amended as a consequence of the Opinion and if the changes impact their rights and/ or interests.
  • The CSSF does not expect an exhaustive list of share class with exhaustive details on their characteristics. However, the additional information must be provided to investors on request and free of charges of via a link to such a list in the prospectus.
  • In accordance with the provisions contained in the prospectus, investors must be informed where a non-eligible share class is closed for new investments by 30 July 2017 and for additional investments by 30 July 2018.

The FAQ on the UCI Law is available via the following web link.

In addition, the CSSF provides guidance on the electronic transmission of documents to the CSSF (FR only).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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