_ The Luxembourg supervisory authority, the Commission de Surveillance du Secteur Financier (CSSF), issued on 6 July 2017 the fourth version of its frequently asked questions on the laws and regulations governing undertakings for collective investment in transferable securities (UCITS) (UCITS FAQ) and the eleventh version of its frequently asked questions on Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (AIFMD FAQ).
The only update to the AIFMD FAQ relates to the impact on Luxembourg alternative investment funds (AIFs) of Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs Regulation). As per the PRIIPs Regulation, all PRIIPs manufacturers must issue a PRIIPs KID before retail investors may invest in the relevant PRIIP (including investment funds).
The CSSF confirmed that Luxembourg AIFs that are offered or sold to retail investors must issue a PRIIPs KID as of 1 January 2018 unless they publish a UCITS key investor information-like document (UCITS KIID-like document). Such an exemption would apply to undertakings for collective investment subject to Part II of the Luxembourg Law of 17 December 2010 on undertakings for collective investment, as amended (Part II Funds), specialized investment funds (SIFs), investment funds in risk capital (SICARs) and reserved alternative investment funds (RAIFs).
Per the updated AIFMD FAQ, additional sub-funds and classes launched after 1 January 2018 may also benefit from the exemption if the Luxembourg AIF in question has issued a UCITS KIID-like document prior to that date.
The CSSF also confirmed that Luxembourg AIFs that are offered or sold only to professional investors need not issue a PRIIPs KID. In that respect, the CSSF strongly recommends that Luxembourg AIFs that fall into this category amend their offering documents to note expressly that they are offered or sold only to professional investors and that they will not issue a PRIIPs KID. As an alternative to such an amendment to the offering document, the Luxembourg AIF may complete, sign and send to the CSSF the self-assessment form which is available on the CSSF’s website. This form serves as an assessment of the status of the AIF on whether it is only offered or sold to professional investors.
The CSSF also confirmed that the PRIIPs KID does not need to be provided to investors outside the European Economic Area (EEA), unless the non-EEA country requires it.
Furthermore, a PRIIPs KID must be provided each time an investor makes a subscription in the same class, except in the case of an investment through a savings plan with a regular subscription.
The CSSF also advised that it does not require receipt of drafts of the PRIIPs KID but only the final version thereof (or, if applicable, of the UCITS KIID-like document), as well as any updates. The CSSF took the same approach that it took for the UCITS KIID and confirmed that the PRIIPs KID will not be visa-stamped by the CSSF.
Finally, it should be noted that these provisions on the PRIIPs KID are consistent with the guidelines included in the Q&A issued by the Association of the Luxembourg Fund Industry (ALFI) on the PRIIPs KID (ALFI Q&A). Please see our articles ALFI Issues Q&A on PRIIPS KIDs and ALFI issues second version of Q&A on PRIIPs KIDs on the ALFI Q&A.
The updated UCITS FAQ includes the following new topics:
- Independence requirements set forth in Chapter 4 of the Commission Delegated Regulation (EU) 2016/438 of 17 December 2015 (UCITS V)
- Impact of the PRIIPs Regulation
- ESMA Opinion on UCITS share classes
Chapter 4 of the Commission Delegated Regulation (EU) 2016/438 of 17 December 2015 supplementing Directive 2009/65/EC of the European Parliament and of the Council with regard to obligations of depositaries (Regulation) provides for certain independence requirements.
Per the UCITS FAQ, the independence requirements are applicable between the UCITS Management Company (or the self-managed SICAV) and the depositary. In the case of a depositary or UCITS Management Company having its registered office in another EU member state and therefore only having a branch in Luxembourg (which has no legal personality), one would need to look at the level of the head office and of the Luxembourg branch to assess the independence requirements vis-à-vis the other party.
With respect to these requirements, the Regulation refers to “management body” and “body in charge of the supervisory functions”. The CSSF clarifies what bodies these terms refer to for a monistic or dualistic société anonyme (SA), for a société à responsabilité limitée (S.à r.l.) and for a société en commandite par actions (SCA).
For ease of reference, the CSSF has included summary tables which elucidate the implications for the composition of the various bodies of the UCITS Management Company (or the self-managed SICAV) and of the depositary.
The CSSF has also clarified what the minimum number of independent board members should be, depending on the total number of board members of each entity.
Finally, the CSSF advised that a cooling-off period of 12 months should be respected for a person to be considered as an independent member who was previously involved with, or linked to, either the UCITS Management Company (or the self-managed SICAV) or the depositary (or any other entity within the group to which such they belong).
Impact of the PRIIPs Regulation
As a reminder, UCITS that were authorised pursuant to Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to UCITS, as amended, are exempt from the obligations under the PRIIPs Regulation until 31 December 2019.
The CSSF confirms that a UCITS will have to issue a PRIIPs KID as of 1 January 2020 unless such deadline is extended by the European Commission on the basis of the review of the transitional arrangements of the PRIIPs Regulation.
ESMA Opinion on share classes of UCITS
Please see our article ESMA issues opinion on common principles for setting up classes of shares in UCITS fund, which analyses the opinion issued by ESMA on 30 January 2017 advocating common principles for setting up classes of shares in UCITS (Opinion).
Impact on existing share classes
The CSSF advised that if the UCITS asks for the investors of a non-eligible share class to convert into an eligible share class of such UCITS, the investors should be given a 30-day notice period during which they may redeem free of charge if this conversion into another share class constitutes a change which is material enough to potentially affect the investors’ interests and impact the basis on which they made their investment. This position is consistent with CSSF Circular 14/591 on the protection of investors in case of a material change to an open-ended undertaking for collective investment.
Common investment objective
The updated UCITS FAQ also provides that not all overlay share classes that are derivatives-based, with the exception of derivatives-based currency risk hedging, are still permissible with the entry into force of the Opinion.
Currency risk hedging arrangements which systematically hedge out part or all of the foreign currency exposure in the common pool of assets into the share class currency are compatible with the principle of a common investment objective if they comply with all the requirements of the Opinion.
The CSSF confirmed that the Opinion allows for a portion of the net asset value (NAV) of the share class to be hedged against currency risk.
In addition, the CSSF indicated that a breach of the hedge ratio would not trigger CSSF Circular 02/77 on the protection of investors in case of NAV calculation error and correction of the consequences resulting from non-compliance with the investment rules applicable to undertakings for collective investment. Indeed, the CSSF expects, as per the Opinion, UCITS Management Companies and self-managed SICAVs to define and implement monitoring and control processes and procedures to ensure compliance with the hedge ratios on an ongoing basis.
Discretion as to the type of derivative instrument used to hedge the currency risk and the operational implementation is not limited by the pre-determination requirement.
The Opinion provides that UCITS Management Companies and self-managed SICAVs should, with respect to the share classes with a contagion risk, provide a list of share classes which should be kept current. The CSSF confirmed that this requirement can be met by means of a website publication if the prospectus of the UCITS includes a link to the relevant website.
If the prospectus of the UCITS is updated so as to comply with the Opinion, the affected shareholders should be notified if the changes have an impact on their rights or interests (please see Impact on existing share classes above).
In addition, the relevant investors must also be informed if a share class in which they have invested is closed to investment by new investors by 30 July 2017 and should be closed to additional investment by existing investors by 30 July 2018.