Key takeaways from CSSF Circular 24/856 on the protection of investors and replacing CSSF Circular 02/77

On 29 March 2024, the CSSF published Circular 24/856 , which repeals CSSF Circular 02/77 and contains updated guidelines to be followed by the investment fund industry players in case of NAV calculation errors, non-compliance with investment rules and occurrence other errors (“Error/Non-Compliance”) within Luxembourg undertakings for collective investment (“UCIs”), subject to full or limited supervision of the CSSF as further explained below.

The main purposes of CSSF Circular 24/856 is to complete and provide more details than CSSF Circular 02/77 in relation to measures to be taken in the event of Error/Non-Compliance. Whereas CSSF Circular 02/77 focused on UCITS and Part II UCIs, the new circular now also covers new fund vehicles and/or fund labels and reflects on the developments of the CSSF’s regulatory practice in the supervision of UCIs since the issue of CSSF Circular 02/77. 

CSSF Circular 24/856 will apply as from 1 January 2025 and will replace CSSF Circular 02/77 with effect from the same date. 

Selected Key Takeaways

• Scope: In addition to UCITS and Part II UCIs, which were already covered by CSSF Circular 02/77, CSSF Circular 24/856 will also cover SIFs and SICARs as well as all UCIs falling in scope of the MMF, ELTIF or EuVECA/EuSEF Regulations for which the CSSF is the competent authority, save that the rules on the intervention of the approved statutory auditor (“ASA”) foreseen by Chapter 8 of the circular will not apply to MMFs, ELTIFs or EuVECAs/EuSEFs which do not qualify as UCITS, Part II UCIs, SIFs or SICARs (as applicable). Closed-ended UCIs also fall within the scope of CSSF Circular 24/856, but will not need to comply with all provisions on NAV calculation errors foreseen by Chapter 4 of the circular.

• Organisation and involvement of stakeholders: CSSF Circular 24/856 clarifies the organisation/governance (including e.g. internal procedures and contractual agreements with service providers and delegates) required for the different stakeholders involved in the management, administration, functioning and/or control of Luxembourg UCIs, as well as their respective roles and responsibilities in the prevention and treatment of Errors/Non-Compliance. 

  These stakeholders include the UCIs’ management body (i.e. its board members), investment fund managers (“IFMs”) and their management body (including foreign IFMs which manage in-scope UCIs via a branch or via the free provision of services), UCI administrators, depositary banks and ASAs.

• NAV error and tolerance thresholds: The principle of tolerance thresholds (“Threshold”) above which a NAV calculation error is considered significant and must be notified to the CSSF and corrected remains in place and is further detailed in CSSF Circular 24/856:

  - UCITS and Part II UCIs/ELTIFs open to retail investors (excluding MMFs): While the already existing thresholds remain largely the same as under CSSF Circular 02/77, CSSF Circular 24/856 introduces a new category for UCITS and Part II UCIs investing in “other eligible assets”, with a Threshold fixed at 1%. In addition, the Thresholds will now also apply to ELTIFs open to retail investors;

  - Higher Thresholds: CSSF Circular 24/856 foresees the possibility for retail Part II UCIs/ELTIFs, by derogation and under certain conditions, to apply a higher Threshold if their characteristics and risk profile so justify;

  - MMFs: The Threshold applicable to all MMFs is lowered to 0.20% (previously 0.25%);

  - Part II UCIs and ELTIFs reserved to professional investors, as well as SIFs, SICARs, EuVECAs and EuSEFs (excluding MMFs): CSSF Circular 24/856 does not fix Thresholds but foresees that the Thresholds should be defined by the UCI’s management body, together with the IFM if applicable, on the basis of a duly documented analysis taking into account the relevant UCI’s characteristics (e.g. closed-ended vs. open-ended, type of assets and investment policy, risk profile, etc.) as well as rules and criteria set forth by CSSF Circular 24/856, subject to a maximum Threshold of 5%.

• Non-Compliance with investment rules and treatment of active/passive breaches: The CSSF reconfirms its current position according to which no Thresholds can be applied in relation to non-compliance with investment rules. It further clarifies and explicitly codifies the difference between (i) “passive breaches” occurring for reasons beyond the control of the UCI or as a result of the exercise of subscription rights, and (ii) “active breaches” corresponding to voluntary actions/operations or absence of actions/operations leading to an investment breach. 

  Only active breaches are subject to the specific corrective measures prescribed by CSSF Circular 24/856 and must be notified to the CSSF, whilst passive breaches do not need to be notified to the CSSF but need, in principle, to be corrected by taking due account of the interests of the investors. 

• Other types of Errors/Non-Compliance: In addition to NAV errors and non-compliance with investment rules, CSSF Circular 24/856 specifically identifies four additional types of other errors and describes the remedial measures to be taken: (i) incorrect application of the swing pricing mechanism, (ii) non-compliant payment of costs/fees, (iii) incorrect application of the cut-off rules and (iv) investment allocation errors. 

  More generally, CSSF Circular 24/856 also states that, even in the absence of specific guidance included in the circular, a UCI should evaluate for any type of error that may arise in relation to its operations and activities, whether regularisation and indemnification is required.

• ASA reporting process for regulated UCIs: CSSF Circular 24/856 specifies the controls to be performed and the reports to be provided by the ASA of regulated UCIs to the CSSF in the event of Errors/Non-Compliance at the level of a UCI (i.e. annual separate report under CSSF Circular 21/790 and/or ad hoc special report under CSSF Circular 24/856). 

• Specific disclosure to end investors: in the case of subscriptions received via an intermediary, where a UCI is not in a position to ensure the payment of indemnifications taking into account the individual situation of each end investor behind the intermediary, CSSF Circular 24/856 requires that end investors subscribing through financial intermediaries are informed that their indemnification rights may be affected. 

  This information must be either (i) included in the prospectus of UCITS/Part II UCIs/MMFs/ELTIFs and SIFs/SICARs or (ii) communicated through official communication channels provided in the UCIs’ constitutive/offering documents for those UCIs, which are not required to issue or update their prospectus.

Entry into force and next steps

• CSSF Circular 24/856 will apply as from 1 January 2025 and will repeal CSSF Circular 02/77 with effect from the same date. 

• The rules of CSSF Circular 02/77 will continue to apply until 31 December 2024 to:

  - the treatment of Error/Non-Compliance detected between 29 March 2024 and 31 December 2024; and

  - the annual review of Error/Non-Compliance by the ASA, and the preparation of the ASA’s annual separate report under CSSF Circular 21/790, for regulated UCIs with a financial year ending on or before 31 December 2024 (i.e. the new rules provided by Chapter 8 of CSSF Circular 24/856 will apply to financial year ending as from 1 January 2025). 

• If need be, UCIs’ prospectus must be updated to inform investors subscribing in UCIs through financial intermediaries that their individual situation may not be taken into account when indemnifications are paid in the context of Errors/Non-Compliance:

  - prospectus of UCITS/Part II UCIs/MMFs/ELTIFs must be amended, at their next update;

  - prospectus of SIFs/SICARs must also be amended when they offer additional shares to new investors;

  - if the prospectus is not updated prior to 1 January 2025, the same information must be communicated to investors through the usual official communication channels.

• It is likely that the CSSF will publish a new Frequently Asked Questions document (“FAQ”) in the next few months, replacing CSSF FAQ on CSSF Circular 02/77, in order to clarify how certain rules of CSSF Circular 24/856 should be applied in practice and/or to address certain aspects not specifically covered by CSSF Circular 24/856, such as breaches of ESG-related qualitative and quantitative limits.

Please do not hesitate to get in touch with your usual Elvinger Hoss Prussen contact to discuss these legal developments and their impact on your business.