Breaking down big changes introduced by CSSF Circular 24/856, and how to prepare for them
The Luxembourg regulator CSSF (Commission de Surveillance du Secteur Financier) recently announced several major shifts that will impact the regulatory landscape for the Luxembourg-based funds industry. Circular 24/856 imposes new requirements in the event of NAV errors and non-compliance with investment rules in order to increase investor protection and public confidence in the industry.
The new rules come into force on 1 January 2025 and will repeal the previous Circular 02/77. Investment firms in Luxembourg should review their current policies and procedures, consider the latest requirements, and take action to ensure compliance readiness.
Why is the CSSF changing NAV oversight and compliance rules in Luxembourg?
Since Circular 02/77 was published in 2002, the industry has evolved in different directions. We’ve seen the implementation of the UCITS and AIFM directives. A host of new products has been introduced, such as ELTIFs, EuVECAs, EuSEFs, and MMFs. Along with these new products has been the growth of the investor base and the corresponding exposure to the associated risks and damages caused by NAV errors and non-compliance events.
The regulator has been very active in recent years with inspections and the issuing of fines; however, these can shine a spotlight on the risks rather than building investor confidence. Therefore, issuing new regulations to mitigate operational break risks is considered a prudent course of action.
Outlining significant regulatory changes in Luxembourg: what you should know
The new guidelines can be divided into three main categories: expanding the scope of errors covered, clarifying roles and responsibilities among the parties involved, and introducing the concept of active versus passive breaches. Let’s review each of these categories.
Expanded scope of errors around NAV pricing and fund oversight
Circular 24/856 expands the scope of errors that should be prevented, reported when they occur, and for which firms might be liable. It looks at four areas in particular.
Swing Pricing. Swing pricing is a mechanism that protects investors already invested in the fund from share price dilution caused by new subscriptions and redemptions. Errors can occur when they are applied improperly or when the incorrect adjustment factor is used, and firms now must report this to the regulator when such errors occur.
Non-compliant payment of costs or fees. Costs or fees that are accrued incorrectly over time can lead to the NAV being overstated or understated. Incorrect NAVs are a cardinal sin in the funds industry, so it’s not surprising that the regulator wants to sharpen their focus.
Incorrect application of the rules regarding cut-offs. If subscription or redemption orders are not carried out by the deadline imposed by the fund, the incorrect NAV price could be used to process the capital transaction, with direct consequences for investors.
Allocation errors at the investment level. Sometimes, orders placed and executed by the portfolio manager are allocated to the wrong fund or share class. The new rules underscore the importance of preventing – or quickly catching and rectifying – such operational mistakes.
Clarification of compliance and oversight roles and responsibilities
The new regulation further clarifies the roles and responsibilities of key entities within the Luxembourg Funds market. These include Investment Fund Managers (IFMs), ManCos, Collective Investment Funds (UCIs), Fund Administrators, and Depositaries.
IFMs (French: GFIs) and UCIs (French: OPCs) must implement robust programs and systems to prevent NAV errors and non-compliance.
UCI governance includes ensuring that a good administration and accounting organization is put in place. This includes having adequate internal resources at the UCI and service provider levels.
The UCI’s Fund Administrator(s) must implement processes and procedures to monitor for errors and non-compliance. Fund admins must notify the UCI or its IFM when errors or noncompliance occur. The UCI or its IFM must approve any corrective action.
When a Depositary is delegated the responsibility of monitoring for compliance, it must have adequate systems and procedures in place to guarantee compliance. Depositaries must notify the UCI or the IFM of any errors or non-compliance.
The new rules also instill the general principle that entities that have caused errors or non-compliance resulting in harm must ensure corrective action is taken.
New CSSF requirements: introducing the concept of active versus passive breaches
The new regulation also reasserts the concept of active versus passive breaches that result in non-compliance.
Active breaches are those where noncompliance results from voluntary acts such as investment decisions. Active breaches also occur when noncompliance is foreseeable or avoidable by the UCI, but it fails to act.
Other examples of active breaches are those where noncompliance results from inadvertent faults, human errors, and operational or technical/IT failures.
Passive breaches are defined as being outside the UCI’s control, such as market price fluctuations. Breaches that occur independently of the will of the UCI are also defined as passive breaches.
Eight steps you should take now to prepare for Circular 24/856 compliance
The new CSSF regulations take effect on 1 January 2025, and firms will be liable from that date if they breach the new requirements. It’s essential to act now to make sure you are ready. Here are eight steps to be prepared.
1. Thoroughly review your UCI governance structure. Identify all contractual obligations with all service providers to ensure these align with the new circular.
2. Review all controls for NAV oversight and confirm what types of errors are being targeted.
3. Confirm that manual controls are operationally fit for purpose by conducting an internal audit.
4. Investigate opportunities to automate manual NAV oversight testing wherever possible.
5. Incorporate the correct CSSF reporting thresholds for significant errors into your NAV oversight and compliance program.
6. Ensure you have an adequate controls system for complying with investment rules.
7. Review UCI investment monitoring and compliance policies and procedures and ensure these are robust and consistent with operational monitoring practices.
8. Perform controls and monitoring on a timely basis to identify non-compliant events when they occur and limit the financial and regulatory impact.
Linedata offers compliance and oversight solutions tailored to the needs of the Luxembourg funds market
If you need to automate, streamline, or improve your ability to comply with the new requirements of Circular 24/856, Linedata can help. Our NAV Oversight, Investment Compliance, and Cash Monitoring solutions automate oversight and control with intuitive tools, centralized management dashboards, and digital audit trails.
With a dedicated team of Luxembourg-based experts, we serve over 30 Luxembourg clients, including several of the largest ManCos, Depositary Banks, and Fund Administrators. We’ll help you control compliance costs, get better outcomes, streamline reporting, and reduce the risk of getting it wrong.
About the author, Matt Grinnell
Matt Grinnell is global product manager for Linedata software solutions, including fund oversight and compliance. A seasoned industry veteran, Matt’s focus is driving vision and strategy, working closely with clients and industry participants to discover and develop initiatives that grow customer value. Before joining Linedata, Matt worked at Fidessa for over a decade, where he was responsible for global product management and marketing of investment compliance and regulatory controls solutions. Prior to that he held compliance leadership roles at Putnam Investments and Fidelity and specialized in assessing the impact of new regulations and evaluating industry trends in risk and compliance.
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