CSSF Circular 18/698 a leap forward in governance

On 23 August, the CSSF published the long waited, new CSSF Circular 18/698 (hereafter “circular”) on the
“authorization and organization of Luxembourgish investment management companies; Specific provisions on the fight against money laundering and terrorist financing applicable to investment fund managers and entities carrying out the function of registrar agent.”

The new CSSF circular 18/698 has been expanded; it now applies to both UCITS management companies and alternative investment fund managers, as well as management companies subject to chapters 16 and 17 of the Law of 17 December 2010 relating to undertakings for collective investment. It sets out the fundamental governance and organizational structures that are expected in terms of substance from Luxembourg investment management companies (hereafter “GFI” as defined by the circular).

The circular sets out the existing practices that were applied by the CSSF as well as some specific new requirements in relation to the governance; central administration and internal controls; the fight against money laundering and terrorist financing; key functions such as delegated activities, marketing, internal administration, and procedures; and valuation.

The circular also includes the requirements in respect to the compliance and internal control functions of the GFI in one single document, which were previously covered by CSSF Circular 04/155 and IML Circular 98/143. Therefore, CSSF Circular 04/155 and IML Circular 98/143 are no longer applicable to GFI.

The most salient chapters of the circular are:

• Comprehensive list of definitions, such as “delegate” and “key functions”
• Introduction of a “fit and proper” dashboard for board members and conducting officers
• Defined threshold on the time spent and number of mandates for board members (maximum 1,920 hours per annum and 20 mandates)
• Focus on delegation and oversight aspects applicable to all delegates of GFI
• Alignment of the delays within which the annual reports/recurring information have to be transmitted to the CSSF – five months after the business year-end of the GFI
• Alignment of the risk management requirements for AIFs and UCITS
• Definition of the three-lines-of defense model to be applied by GFI
• Different scenarios and rules in respect of AML/CFT
• New annual reporting requirements in the area of AML/CFT to be transmitted to the CSSF
• Own funds requirements for GFI with a discretionary portfolio management license and offering investment management services
• Specific sections on the application of the European Market Infrastructure Regulation (EMIR) and Money Market Fund Regulation (MMFR) 
• Exchange of information between the GFI and the depositary

It is clear that this new circular is an evolution, hence it is expected that substantial efforts may have to be undertaken until the requirements of the new CSSF circular can be considered as fully implemented across the entire industry.

The CSSF Circular 18/698 applies with immediate effect and repeals CSSF Circular 12/546, as amended. Assessing and implementing changes where required to your governance and business strategy has become a de facto priority.

How can Deloitte help ?

Deloitte Luxembourg can assist you in the effort of reviewing your current internal governance and due diligence arrangements, and support you in implementing any required changes or guiding you through your review and implementation process. Our experts organize tailored training sessions detailing the upcoming changes and their impact on your organization.

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