Luxembourg regulator publishes circular providing the UCI administration industry with a modernised and comprehensive framework

On 16 May 2022, the Luxembourg supervisory authority for the financial sector, the Commission de Surveillance du Secteur Financier (the CSSF), published Circular 22/811 on administrators of undertakings for collective investment (UCIs) with the aim of replacing and modernising Chapter D of Circular IML 91/75 in view of recent developments in UCI administration (legislative framework, technology, market evolution…), hence providing the UCI administrator industry with a strong and comprehensive regulatory framework.

1. Scope

Circular 22/811 applies to the following entities carrying out the activity or part of the activity of UCI administration:

• Management companies incorporated under Luxembourg Law and subject to Chapter 15 of the law of 17 December 2010 related to undertakings for collective investment, as amended (the 2010 Law);
• Management companies incorporated under Luxembourg Law and subject to Chapter 16 of the 2010 Law;
• Alternative investment fund managers (IFMs) authorised under Chapter 2 of the law of 12 July 2013 on alternative investment fund managers, as amended (the 2013 Law);
• Foreign IFMs pursuing the activity of UCI administrator for UCIs established in Luxembourg;
• Regulated Luxembourg UCIs (UCITS, UCI Part II, SIF and SICAR);
• Credit institutions authorised under Part I, Chapter 1 of the law of 5 April 1993 on the financial sector, as amended (the 1993 Law);
• Luxembourg branches of credit institutions governed by foreign laws and authorised under Part I, Chapter 3 of the 1993 Law;
• Registrar agents authorised under Part I, Chapter 2 of the 1993 Law;
• Client communication agents authorised under Part I, Chapter 2 of the 1993 Law, only for the client communication function; and
• Administrative agents authorised under Part I, Chapter 2 of the 1993 Law, only for the NAV calculation and accounting function and client communication function.

2. Key takeaways

a. Authorisation requirements

Circular 22/811 introduces an authorisation for obtaining and maintaining such authorisation for the following entities:

• Management companies incorporated under Luxembourg Law and subject to Chapter 15 of the 2010 Law;
• Management companies incorporated under Luxembourg Law and subject to Chapter 16 of the 2010 Law;
• Alternative IFMs authorised under Chapter 2 of the law of the 2013 Law;
• Foreign IFMs pursuing the activity of UCI administrator for UCIs established in Luxembourg;
• Regulated Luxembourg UCIs;
• Credit institutions authorised under Part I, Chapter 1 of the 1993 Law; and
• Luxembourg branches of credit institutions governed by foreign laws and authorised under Part I, Chapter 3 of the 1993 Law;

The application must be submitted ex-ante in electronic format to the CSSF by filling in the appropriate forms available on the CSSF website and shall at least include all information listed in Annex A of Circular 22/811.

The authorisation shall remain valid as long as the elements on the basis of which it was granted have not change, any substantial change shall be notified to the CSSF and compliance with all requirements of Circular 22/811 shall be guaranteed throughout the UCI administration activity.

The rest of the entities covered by Circular 22/811 are by operation of law authorised to perform all or some functions of the UCI administration activity in accordance with applicable sectorial legislation.

b. UCI administration activity

Functions

The UCI administration activity can be split into three main functions: (i) registrar function; (ii) the NAV calculation and accounting function; and (iii) the client communication function.

Only one service provider may be appointed and is responsible for each above-mentioned specific UCI administration function and, in case of UCs with multiple compartments, each above-mentioned function must be performed by the same service provider.

Circular 22/811 lays down the minimum tasks that should compose the UCI administration activity, the procedures to be put in place with respect to material and non-material NAV errors, breaches or operational incidents and the need for an escalation process in that respect. It also identifies the minimum operations, and the procedures and processes that must be put in place for each of the three above-mentioned functions.

Annual report

As from 30 June 2023, UCI administrators must communicate to the CSSF, on an annual basis, information about their business activities and resources, as listed in Annex B to the Circular, which must be filed at the latest five months after UCI administrator's financial year.

c. Organisational arrangements

Written contract

A written contract must be concluded between the UCI administrator and the UCI/IFM, setting out the roles, responsibilities, rights and obligations of each party. Circular 22/811 lays down the minimum content of such contract.

Sufficient resources

The UCI administrator must have sufficient resources (e.g. human resources, technical infrastructure and IT means) and its premises shall be of sufficient size, adequate and secure. The staff must be sufficient in number and skills, taking into account the volume of UCIs serviced and their complexity. The UCI administrator should maintain a manual of procedures and processes easily accessible to the UCI administrator’s staff.

New business relationships and new services

When approving new business relationships or services, an adequate risk assessment and appropriate, formalised and documented due diligence should be performed by the UCI administrator, who should follow a documented risk acceptance policy and decision-making process, as well as sound and prudent management principles in its interest, promoting a sound risk culture.

Conflicts of interest

The UCI administrator must establish, maintain an effective conflicts of interest policy covering the specificities of the UCI administration business line.

Relationship with the depositary

The UCI administrator must act independently from the depositary and an appropriate functional and hierarchical separation between the UCI administration and depositary activities must be implemented in case these functions are performed by the same entity.

UCI documentation

Circular 22/811 also contains detailed provisions on the access and retention of the core UCI documentation, including in case of change of UCI administrator or liquidation of UCIs.

ICT, business continuity and disaster recovery planning

The UCI administrator is responsible for identifying, managing and mitigating its information and communication technology (ICT) risks, and must establish, implement and maintain adequate systems and procedures to safeguard the security (confidentiality, integrity and availability) of information, and an adequate business and services continuity policy ensuring the recovery of its activities and services after a disaster.

Delegation rules

While delegation to third parties of the performance of one or more of the UCI administration tasks may be possible under applicable sectorial legislation, such delegation must be clearly detailed in a dedicated written contract and must not be detrimental to the UCI administration services provided to the UCIs. It does not relieve the UCI administrator of its responsibilities, who must perform adequate initial and ongoing due diligence on its delegates. All delegation requirements laid down in Circular 22/811 apply mutatis mutandis to sub-delegates (excluding ICT delegation). When delegating a critical or important operational task, the previously applicable prior authorisation is replaced by a prior notification to the CSSF by the UCI administrator.

3. Timing of entry into force

Circular 22/811 enters into force with immediate effect (i.e. 16 May 2022).

The requirement for authorisation set out in section 2.a above does not apply to entities already acting as UCI administrator at the date of entry in force of Circular 22/811. A grandfathering period, in order to comply with the remaining provisions of Circular 22/811, is granted to such entities already acting as UCI administrator at the date of entry in force until 30 June 2023.

Follow this link if you would like to read the full Circular 22/811: https://www.cssf.lu/wp-content/uploads/cssf22_811eng.pdf, and feel free to reach out to your CMS experts for any questions you may have.