Effects of UCITS V Transposition into Luxembourg Law
June 28, 2016
The law that transposed UCITS V1 into Luxembourg law (UCITS V Law) entered into force on 1 June 2016. Among other matters, the UCITS V Law: (i) implements a depository regime based upon – but more stringent than – the AIFMD depositary regime; (ii) requires UCITS management companies and self-managed UCITS in the form of SICAVs to establish a remuneration policy; (iii) contemplates the imposition of sanctions and administrative measures by the Commission de Surveillance du Secteur Financier (CSSF) on certain persons and entities under the regulator’s supervision; (iv) requires all authorised Luxembourg alternative investment fund managers (AIFMs) to have an external auditor; and (v) introduces a MiFID II passport for certain Luxembourg AIFMs.
The UCITS V Law amended the Luxembourg law of 17 December 2010 on undertakings for collective investment, as amended (2010 Law) and the Luxembourg law of 12 July 2013 on alternative investment fund managers, as amended (2013 Law). Below is a summary of certain changes that became effective when the UCITS V Law entered into force. For a complete overview of the amendments, please refer to Introduction of Bill to Transpose UCITS V into Luxembourg Law.
Depositary Regime
The UCITS V Law implements the UCITS V depositary regime, which is based on the depositary regime under AIFMD.2 However, the UCITS V depositary regime goes beyond the AIFMD regime in their respective requirements pertaining to cash monitoring, as well as the safe-keeping and segregation of assets. Further, the UCITS V Law does not permit depositaries to discharge their liability pursuant to contract.
Under the UCITS V Law, the depositary must analyse potential conflicts of interest when sub-delegating the safe-keeping function. These conflicts, as well as the list of sub-delegates, must be disclosed in the prospectus of the UCITS, and updates must be provided to investors on request. The CSSF has taken a practical approach, and only requires that the prospectus include a link to the website where potential sub-delegates are listed.3
The UCITS V Law also provides, on a recommendation by the Luxembourg State Council (Conseil d’Etat), that the depositaries of (i) Part II UCIs4 managed by authorised AIFMs and (ii) internally managed part II funds qualifying as fully authorised AIFMs, must comply with the new UCITS depositary regime rather than the regime set out in the 2013 Law. The legislator has therefore ensured that all funds authorised under the 2010 Law (i.e., UCITS and Part II UCIs) are subject to a single depositary regime, as these funds target retail investors.
Remuneration Policy
UCITS management companies, as well as self-managed UCITS in the form of SICAVs, must establish a remuneration policy subject to the principle of proportionality, and must inform investors of such policy in the UCITS’ prospectus. In lieu of including a detailed discussion of the policy in the prospectus, the UCITS V Law permits the inclusion of a summary in the prospectus (with a reference to the website where the details may be found, together with a statement that a paper copy of the policy may be obtained free of charge on request). As a practical matter, most UCITS management companies and self-managed UCITS in the form of SICAVs opt for the summary and disclosure on a website.
Sanctions and Other Administrative Measures
The CSSF may impose a new range of sanctions and administrative measures on UCITS, Part II UCIs, their respective management companies, depositaries and other service providers, as well as certain members of their supervisory or management boards, as long as such persons and entities are under the supervision of the CSSF. Persons and entities subject to sanctions have the right to appeal the decision or measure – this amendment from the initial draft of the bill of law was required by the Conseil d’Etat. The UCITS V Law also clarifies that only persons who are members of the supervisory or management board and who effectively determine the conduct of the business of the relevant entities are subject to sanctions and measures – this too represents a change from the initial draft, which referred to “any individual responsible for the violation”.
MiFID Extension and Requirement that AIFMs have an External Auditor
The UCITS V Law also introduces the obligation for all authorised Luxembourg AIFMs to have an external auditor whose appointment is subject to the authorisation of the CSSF.
Authorised Luxembourg AIFMs that have been granted an extension of their authorisation to provide MiFID-like services5 may provide these services in other EU Member States,6 either directly or by establishing a branch after notifying the CSSF. Initially, passporting was not provided under AIFMD or the 2013 Law, but has been introduced by MiFID II7 and is now transposed into Luxembourg law.
Timeline for Implementation
The CSSF has indicated8 that the timeline for Luxembourg entities to implement the new regime introduced by the UCITS V Law is that set out by the European Securities and Markets Authority (ESMA) in Questions and Answers, Application of the UCITS Directive. As a consequence, UCITS must update their KIIDs and prospectuses with their next update, or at the latest by 17 February 2017 (for KIIDs) and 18 March 2017 (for prospectuses).
Footnotes
1) Directive 2014/91/EU of the European Parliament and of the Council of 23 July 2014 amending Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions for UCITS as regards depositary functions, remuneration policies and sanctions.
2) Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers.
3) See CSSF Press Release 16/10 of 2 March 2016.
4) These are funds subject to part II of the 2010 Law.
5) Under article 5(4) of the 2013 Law, authorised AIFMs may: manage portfolios of investments; provide investment advice; provide safe-keeping and administrative services in relation to shares or units of collective investment undertakings; and receive and transmit orders in relation to financial instruments.
6) This includes: (i) the Member States of the European Union; and (ii) the states that are contracting parties to the agreement creating the European Economic Area (Agreement) other than the Member States of the European Union, within the limits set forth by the Agreement and related acts.
7) Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments.
8) CSSF Press Release, supra note 4.
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