ARTICLE
18 May 2011

CSSF Circular 11/508 For Compliance Of Mancos With UCITS IV Requirements

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On 15 April 2011 the Luxembourg regulator of the financial sector (Commission de Surveillance du Secteur Financier – "CSSF"), issued a new circular reminding the Luxembourg fund industry of their obligation to adapt to the new regulatory regime, commonly referred to as "UCITS IV", within short.
Luxembourg Finance and Banking

On 15 April 2011 the Luxembourg regulator of the financial sector (Commission de Surveillance du Secteur Financier – "CSSF"), issued a new circular reminding the Luxembourg fund industry of their obligation to adapt to the new regulatory regime, commonly referred to as "UCITS IV", within short.

The newly released CSSF circular 11/508 (the "Circular") highlights and clarifies the upcoming organizational requirements for Luxembourg located UCITS management companies and self-managed investment companies in accordance with the Directive 2010/43/EC, as transposed into Luxembourg law by the CSSF regulation 10-4 dated 17 December 2010.

As a quick reminder, the law of 17 December 2010 on undertakings for collective investments (the "UCITS Law 2010") has implemented the UCITC IV-Directive 2009/65/EC into Luxembourg law. One of the declared objectives of UCITS IV was the creation of a "level playing field" with regard to the substance and organizational requirements for all financial actors and service providers. The scope of the Financial Markets Directive (cf." MiFID Directive 2004/39/EC") introducing strict obligations vis-à-vis clients complaints, order executions, business conduct rules and more areas was limited to credit institutions and investment firms, management companies managing UCITS ("ManCos") were and are not covered by the MiFID Directive. UCITS IV now imposes similar rules and thereby harmonizes and aligns the diverse regulatory regimes for all players in the financial sector.

The grandfathering rules grant existing ManCos and investment companies ("SMICs") until 1 July 2011 to adapt to the new regulatory regime. However, in order to update its application files in time, the CSSF requires a set of written confirmations, descriptions and disclosures with regard to the UCITS IV – compliance from all ManCos and SMICs before 1 June of this year.

For ease of understanding please find hereinafter a table with the required actions and documents to be filed with the CSSF before 1 June 2011 together with the relevant regulatory context and the implementation work to be done (including any ongoing requirements).

I. Luxembourg ManCos

Area

Key Issues

Action

Underlying regulatory obligation for ManCos

Communication CSSF

SMIC*

1

General Organisation

Procedure Handbook

Drafting

To establish a precise and clear handbook of procedures describing specifically

  • the internal organization

  • allocation of tasks

  • hierarchy structure

  • communication with outsourcing service providers

Confirmation

" "

Management Reporting and internal communication

Implementation

  • establish, implement and maintain effective internal reporting and communication of information at all relevant levels of the management company as well as effective information flows with any third party involved;

Description

" "

Information & Data protection

Implementation

  • establish, implement and maintain effective internal reporting and communication of information at all relevant levels of the management company as well as effective information flows with any third party involved;

Description

" "

Business continuity plan

Drafting /
Implementation

establish, implement and maintain an adequate business continuity policy aimed at ensuring, in the case of an interruption to their systems and procedures, the preservation of essential data and functions, and the maintenance of services and activities, or, where that is not possible, the timely recovery of such data and functions and the timely resumption of their services and activities.

Description

" "

Financial situation

Nomination

establish, implement and maintain accounting policies and procedures (i.e. procedure handbook) that enable them, at the request of the competent authority, to deliver in a timely manner to the competent authority financial reports which reflect a true and fair view of their financial position and which comply with all applicable accounting standards and rules.

Disclosure of responsible person (name & CV)

2

Human Resources

Personnel / HR

HR Management
(Hiring & training)

  • employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them.

  • retain the necessary resources and expertise so as to effectively monitor the activities carried out by third parties on the basis of an arrangement with the management company, especially with regard to the management of the risk associated with those arrangements.

  • ensure that the performance of multiple functions by relevant persons does not and is not likely to prevent those relevant persons from discharging any particular function soundly, honestly, and professionally.

Description

3

Complaints

Policy on processing of clients' complaints

Drafting

  • establish, implement and maintain effective and transparent procedures for the reasonable and prompt handling of complaints received from investors, to be reflected in the business plan of management companies

  • ensure that each complaint and the measures taken for its resolution are recorded.

  • enable to file complaints free of charge

  • procedures to be made available to investors free of charge

  • annual report to be provided to regulator

Description

X

" "

Appointment of complaints responsible / officer **

Nomination /
Delegation

Disclosure of responsible person (name & CV)

X

4

IT / Accounting

IT Systems & Procedures and accounting policies

Implementation

  • make appropriate arrangements for suitable electronic systems so as to permit a timely and proper recording of each portfolio transaction or subscription or redemption order

  • ensure a high level of security during the electronic data processing as well as integrity and confidentiality of the recorded information, as appropriate.

  • ensure the employment of accounting policies and procedures so as to ensure the protection of unit-holders.

  • UCITS accounting shall be kept in such a way that all assets and liabilities of the UCITS can be directly identified at all time.

  • have accounting policies and procedures established, implemented and maintained, in accordance with the accounting rules of the UCITS' home Member States, so as to ensure that the calculation of the net asset value of each UCITS is accurately effected, on the basis of the accounting, and that subscription and redemption orders can be properly executed at that net asset value.

  • establish appropriate procedures to ensure the proper and accurate valuation of the assets and liabilities of the UCITS, as consistent with the applicable rules referred to in Article 85 of Directive 2009/65/EC transposed by the UCITS Law 2010.

Description

" "

Appointment of responsible accounting officer **

Nomination

Disclosure of resp. person (name & CV)

5

Compliance& Audit

Implementation of permanent compliance and internal auditfunction

Implementation

  • establish, implement and maintain adequate policies and procedures designed to detect any risk of failure by the management company to comply with its obligations under Directive 2009/65/EC as transposed by the UCITS Law 2010, as well as the associated risks, and put in place adequate measures and procedures designed to minimize such risk and to enable the competent authorities to exercise their powers effectively under that Directive.

  • establish and maintain a permanent and effective compliance function which operates independently and which has the following responsibilities: to monitor and, on a regular basis, to assess the adequacy and effectiveness of the measures, policies and procedures put in place in accordance with paragraph 1, and the actions taken to address any deficiencies in the management company's compliance with its obligations; to advise and assist the relevant persons responsible for carrying out services and activities to comply with the management company's obligations under Directive 2009/65/EC

  • establish and maintain an internal audit function which is separate and independent from the other functions and activities of the management company with following responsibilities: to establish, implement and maintain an audit plan to examine and evaluate the adequacy and effectiveness of the management company's systems, internal control mechanisms and arrangements; to issue recommendations based on the result of work carried out in accordance with above point; to verify compliance with the recommendations referred to in above point ; to report in relation to internal audit matters

Description

" "

Appointment of compliance officer & internal auditor **

Nomination / Delegation

Disclosure of resp. person (name & CV)

6

Risk Controlling

Implementation of permanent risk controlling function

Implementation

Establish and maintain a permanent risk management function, implement the risk management policy and procedures; ensure compliance with the UCITS risk limit system, including statutory limits concerning global exposure and counterparty risk; provide advice to the board of directors as regards the identification of the risk profile of each managed UCITS; provide regular reports to the board of directors and, where it exists, the supervisory function, on: the consistency between the current levels of risk incurred by each managed UCITS and the risk profile agreed for that UCITS; the compliance of each managed UCITS with relevant risk limit systems; the adequacy and effectiveness of the risk management process, indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies; provide regular reports to the senior management outlining the current level of risk incurred by each managed UCITS and any actual or foreseeable breaches to their limits, so as to ensure that prompt and appropriate action can be taken; review and support, where appropriate, the arrangements and procedures for the valuation of OTC derivatives

Description

X

" "

Appointment of
risk manager **

Nomination /
Delegation

Disclosure of resp. person (name & CV)

X

7

Personal transactions

Policy

Drafting

establish, implement and maintain adequate arrangements aiming at preventing the following activities in the case of any relevant person who is involved in activities that may give rise to a conflict of interest, or who has access to inside information within the meaning of Article 1(1) of Directive 2003/6/EC or to other confidential information relating to UCITS or transactions with or for UCITS by virtue of an activity carried out by him on behalf of the management company ()

Confirmation

8

Conflicts of Interest

Policy

Drafting

establish, implement and maintain an effective conflicts of interest policy. That policy shall be set out in writing and shall be appropriate to the size and organisation of the management company and the nature, scale and complexity of its business and shall include the following: the identification of, with reference to the collective portfolio management activities carried out by or on behalf of the management company, the circumstances which constitute or may give rise to a conflict of interest entailing a material risk of damage to the interests of the UCITS or one or more other clients; procedures to be followed and measures to be adopted in order to manage such conflicts.

Confirmation

X

9

Voting strategy

Policy

Drafting

develop adequate and effective strategies for determining when and how voting rights attached to instruments held in the managed portfolios are to be exercised, to the exclusive benefit of the UCITS concerned. The strategy shall determine measures and procedures for: monitoring relevant corporate events; ensuring that the exercise of voting rights is in accordance with the investment objectives and policy of the relevant UCITS; preventing or managing any conflicts of interest arising from the exercise of voting rights.

Confirmation

X

10

Rules of conduct

Policy

Drafting

establish, implement and maintain effective and transparent procedures for ensuring that the management company

  • acts in the best interest of the UCITS it manages and unitholders,

  • undertakes the investment decisions for each managed UCITS consistently with the objectives, strategy and within risk limits of UCITS,

  • takes all appropriate arrangements in order to carry out directly the orders to obtain the best possible result, respectively in order to monitor that the orders passed for execution within other entities are carried out to obtain the best possible result

  • provides for the prompt and fair execution of portfolio transactions on behalf of the managed UCITS

Confirmation

X

11

Risk management

Policy

Drafting

establish, implement and maintain an adequate and documented risk management policy which identifies the risks the UCITS the management company manages are or might be exposed to. The risk management policy shall comprise such procedures as are necessary to enable the management company to assess for each UCITS it manages the exposure of that UCITS to market, liquidity and counterparty risks, and the exposure of the UCITS to all other risks, including operational risks, which may be material for each UCITS it manages.

Confirmation

X

II. Specific requirements for Luxembourg ManCos providing services under the European Passport
(via branch or on cross-border basis)

Risk management

Policy

Drafting

Update program of activities

Notification update

X

Policy

Drafting

Update program of activities

Notification update

X

* Confirmations, disclosures & descriptions applicable to self-managed investment companies are marked with a "X

** Outsourcing / delegation to third party service providers permitted

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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