Download Regulation and what Boards should be focused on

Regulation and what Boards
should be focused on
Michèle Eisenhuth, Partner, Arendt & Medernach
26 January 2012
Table of contents
I. Focus on the Key Investor Information Document (KIID)
II. UCITS IV conflicts of interest and best execution requirements: the
role of the board of the fund
III. Outline on specific AML issues under the amended 2004 Law
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I.
Focus on the Key Investor Information Document (KIID)
 Focus on the responsibility related to the content of the KIID
 Focus on the delivery of the KIID to investors:
 assessment of the entity responsible for delivering the KIID
 delivering the KIID in good time to investors
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Focus on the responsibility related to the content of the
KIID
Rule:
The self-managed UCITS or the management company is responsible to
ensure that the KIID is not misleading, that it is accurate, consistent with the
prospectus and up-to-date.
Consequence:
As the KIID contains financial information (SRRI, ongoing charges and
performances), the UCITS or the management company must put in place
internal or outsourced appropriate mechanisms and systems to be able to
issue the KIID in due time and assess on an ongoing basis the content of the
KIID so as to keep it accurate and up-to-date.
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Focus on the responsibility related to the content of the
KIID (ctd.)
Questions:
1) May a benchmark be inserted in the KIID without being
mentioned in the UCITS prospectus?
2) Does the disclosure on the “ongoing charges” need to be
reviewed continually or only on the occurrence of a material
event?
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Focus on the delivery of the KIID to investors

Assessment of the entity responsible for delivering the KIID:
Rule:
A self-managed UCITS or the management company is responsible for:
 providing investors with the KIID when selling units directly or through
intermediaries acting under the UCITS and/or its management company’s
behalf and under its full and unconditional responsibility; or
 providing product manufacturers and intermediaries with the KIID upon
request (the latter being responsible for delivering the KIID to investors),
when not selling units directly or through intermediaries acting under the
UCITS and/or its management company’s behalf and under its full and
unconditional responsibility.
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Focus on the delivery of the KIID to investors (ctd.)

Assessment of the entity responsible for delivering the KIID (ctd.):
Consequence:
The self-managed UCITS or the management company should assess which
entity is responsible for delivering the KIID to investors and review the
agreements with its distributors as the case may be.
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Focus on the delivery of the KIID to investors (ctd.)

Assessment of the entity responsible for delivering the KIID (ctd.):
Questions:
1) Is the UCITS’ registrar and transfer agent responsible for delivering the
KIID when directly contacted by an investor?
2) Is a website platform responsible for delivering the KIID when an investor
is subscribing through it?
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Focus on the delivery of the KIID to investors (ctd.)

Responsibility for delivering the KIID in good time to investors :
Rule:
The KIID constitutes pre-contractual information that shall be delivered to
investors free of charge in good time before subscription of units in the
UCITS is proposed.
Consequence:
Distributors should be educated to deliver the KIID prior to any investment
and to evidence the delivery of the KIID to investors.
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Focus on the delivery of the KIID to investors (ctd.)

Responsibility for delivering the KIID in good time to investors (ctd.) :
Questions:
1) Do existing investors need to receive the KIID?
2) Do existing investors need to receive the KIID for subsequent
subscriptions?
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II. UCITS IV conflicts of interest and best execution
requirements: the role of the board of the fund

The UCITS IV Directive imposes a number of
requirements in terms of conflicts of interest
and best execution on UCITS management
companies or directly on self-managed UCITS

The duty to comply with such obligations
remains unaffected by the delegation of certain
fonctions to third party service providers (e.g.
investment manager)

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It is the duty of the board of the fund, in light of
its ultimate responsibility for the management of
the fund, to verify that all necessary steps are
taken at each level to comply with these UCITS
IV requirements
Fund Board
of Directors
Management
Company
Service
Provider
Conflicts of interest: UCITS IV requirements
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
A written conflicts of interest policy must be established to (i) identify
potential/existing conflicts of interest entailing a material risk of damage to
the fund and (ii) set up procedures and measures to manage these in an
independent manner

Conflicting situations and corresponding procedures/measures must be
recorded in a regularly updated register

Unresolved conflicts must be escalated to senior management which
must take action in the best interest of the fund (to be reported to
investors, e.g. in the annual report)
Conflicts of interest: other legal provisions applicable to
individual board members
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
Luxembourg Company Law (Article 57)
 Applicable to all Luxembourg funds established in corporate form;
 Any director having a conflict of interest is obliged to advise the board and may
not take part in the deliberation;
 Proposed amendment pending (Proposal 5703). In particular, any decision
taken by the Board without respecting Article 57 could become null and void.

ALFI Code of Conduct (Section 8)
 Luxembourg funds are strongly advised to adopt a code of conduct. Listed
funds must indicate in their annual report which code of conduct they have
adopted or explain why no code has been adopted;
 Under the ALFI code the board should: (i) identify conflicts of interest of its
members, (ii) define the means to avoid, manage or disclose such conflicts, (iii)
maintain sufficient autonomy to resolve conflicts of interests impartially.

EFAMA Code of Conduct: High level principles and best practice recommendations
Best execution principle
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
The management company or the self-managed UCITS must establish
procedures, arrangements and policies ensuring that the best possible
result is achieved when executing orders for the fund

The management company or the self-managed UCITS must be able to
demonstrate that orders have been executed/placed on behalf of the fund
in accordance with the best execution policy (adequate reporting of
transactions)

The board of the fund must give its prior consent on the best execution
policy, which must be reviewed on an annual basis or when a relevant
material change occurs

Appropriate information on the policy and any material change thereto
must be made available to investors (e.g. published on the fund’s website
or provided on request)
Situations requiring the attention of the board in terms of
conflicts of interest and best execution (examples)
Situations
Potential Conflicts
 Board members may be directors,  In such capacity, the interests of board
officers or employees of the promoter members may diverge from their fiduciary
of the fund or the investment manager duties towards the fund
 Conflicts may arise with respect to the time
and resources that such board members may
devote to the fund
 The investment manager may advise  The investment manager may face conflicts
or manage assets for other clients or when allocating investment opportunities
engage in proprietary trading
between the fund, other clients and its own
trading activity
 The other activities of the investment
manager may adversely impact the markets
in which the fund is invested and vice versa
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Situations requiring the attention of the board in terms of
conflicts of interest and best execution (examples/ctd.)
Situations
Potential conflicts
Certain assets of the fund may be The investment manager may face a
valued by the investment manager
conflict when valuing assets of the fund as
the fund’s NAV generally affects the
investment manager’s fees
The promoter, the investment manager
or an entity of the same group may deal
commercially with the fund, including as
counterparty to OTC derivatives
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 The fund may not deal at the best
available terms and conditions, especially
for very specific trades with no or limited
reference
market
(e.g.
swaps
on
homemade strategy indices)
Situations requiring the attention of the board in terms of
conflicts of interest and best execution (examples/ctd.)
Situations
Potential conflicts
 The investment manager may be the
sponsor and/or calculation agent of an
index replicated by the fund (and by
other funds or products promoted by the
investment manager or an affiliated
entity) and/or swap counterparty
 The investment manager may face
conflicts between these different roles and
its own interest, especially to the extent the
index sponsor and/or calculation agent have
the ability to make certain decisions to
administer the index
 The investment manager may also  Trading in the underlying assets may
trade in the assets underlying the index adversely impact the performance of the
for other clients or for its own account
index and therefore of the fund
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III.
Outline on specific AML issues under the amended
2004 Law
History
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
2004 Law: automatic exemption in certain circumstances

ALFI/ABBL/ALCO Practices and Recommandations on AML dated
December 2006
 Guidance on best practices for the Luxembourg fund industry
 to be updated

2008: amendment of the 2004 Law

GDR dated 29 July 2008: list of “equivalent” third countries

CSSF Circular 08/387: expands on certain provisions of the 2004 Law
Outline on specific AML issues under the amended 2004
Law (ctd.)
History (ctd.)
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
GDR dated 1 December 2009: list of “equivalent” third countries abolished

GDR dated 1 February 2010

CSSF Circular 10/476: abrogation of the “group” concept

Law dated 27 October 2010: repeal of automatic exemption from CDD,
concept of “other similar relationships”

CSSF Circular 10/495
Outline on specific AML issues under the amended 2004
Law (ctd.)
Rationae personae of the amended 2004 Law
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
Out of scope: funds not marketing their units or shares themselves

In scope: funds marketing their units or shares themselves
•
Simplified CDD (Article 3-1)
•
Enhanced CDD (Article 3-3(1) to (4))
•
Delegation to a third party (Article 3-3(1)-(4))
•
Outsourcing to “trusted persons” (Article 3-3(5))
Outline on specific AML issues under the amended 2004
Law (ctd.)
Practical aspects of fund boards’ role under the amended 2004
Law
Revised simplified CDD (Article 3-1)
 Repeal of automatic exemption
 If clients = institutions subject to equivalent CDD rules
 Equivalence : risk self-assessment
 Ongoing monitoring
 Identification and verification of the client
 “reasonable amount of information”
 BO ?
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Outline on specific AML issues under the amended 2004
Law (ctd.)
Practical aspects of fund boards’ role under the amended 2004
Law (ctd.)
Enhanced CDD: correspondent banking relationships with
credit/financial institutions in third countries and other similar
relationships as an alternative to simplified CDD (Article 3-2(3))
 Enhanced CDD on the respondent institution only ?
 Fund board’s enhanced obligations
 « other similar relationships »
 Relationship between a fund and a nominee ?
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Outline on specific AML issues under the amended 2004
Law (ctd.)
Practical aspects of fund boards’ role under the amended 2004
Law (ctd.)
Performance of the CDD by third parties (Article 3-3(1) to (4))
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
For institutions subject to equivalent CDD rules

Liability remains with the fund

Transfer of data without objecting any confidentiality or professional secrecy
rules
Outline on specific AML issues under the amended 2004
Law (ctd.)
Practical aspects of fund boards’ role under the amended 2004
Law (ctd.)
Outsourcing to “trusted persons” not subject to the 2004 Law or
equivalent regulations (Article 3-3(5))

Application of Luxembourg AML regulations

Liability: CDD performed by the service provider/agent deemed performed
by the fund
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Contact us

Michèle Eisenhuth
 Partner at Arendt & Medernach
 Tel : +352 40 78 78 638
 Email : [email protected]