While the CSSF approves of the overall level of compliance with the UCITS and AIFMD framework with regard to the delegation of the portfolio management function, it has nonetheless issued several recommendations to further strengthen adherence to the relevant legal and regulatory requirements. Luxembourg IFMs must assess how they monitor the delegation of the portfolio management function by the end of March 2025, at the latest.
On 23 October 2024, the CSSF published a report with its observations made during a supervisory thematic review on the monitoring processes put in place by investment fund managers (IFMs) who delegate the portfolio management function. The aim of the CSSF's thematic review was to assess the compliance of Luxembourg-based IFMs with the relevant provisions of the UCITS and AIFMD framework regarding the supervision of such delegation and related contingency planning. For this review, they selected a sample of IFMs managing regulated investment funds and investment funds that are not authorised by the CSSF.
Overall, the CSSF observed that IFMs were mostly adhering to the relevant legal and regulatory framework. Nonetheless, the CSSF has issued several recommendations with the goal of further strengthening compliance. While the thematic review focused on the delegation of the portfolio management function, the CSSF explicitly specified that, where relevant, its recommendations should also be applied to other delegated functions.
The CSSF reminded IFMs that they must implement and maintain a delegation framework procedure in accordance with the applicable rules under Circular CSSF 18/698 on substance. This includes, among others, well-documented and formalised processes for the initial and periodic due diligence, as well as the monitoring of delegates, the identification and management of potential and actual conflicts of interest arising from the delegation, the set-up of contingency plans for situations where the IFM needs to withdraw the mandate of a delegate with immediate effect, and the allocation of sufficient human resources to monitor the delegated activity.
In a related press release, the CSSF stated its expectation that all IFMs should perform a comprehensive assessment of how they monitor the delegation of their portfolio management function considering the observations made and, where necessary, take corrective measures. This assessment must be performed, at the latest, by the end of Q1 2025.
Given the number of relevant communications and the relatively generous adjustment period, IFMs should expect little patience from the CSSF if they are found lacking in one of the areas identified for assessment after the March 2025 deadline.
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