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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)

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Regulation and what Boards should be focused on

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  1. Regulation and what Boards should be focused on Michèle Eisenhuth, Partner, Arendt & Medernach 26 January 2012

  2. Table of contents I. Focus on the Key Investor Information Document (KIID) II. UCITS IV conflicts of interest and best executionrequirements: the role of the board of the fund III. Outline on specific AML issues under the amended 2004 Law

  3. 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

  4. 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.

  5. Focus on the responsibility related to the content of the KIID (ctd.) Questions: • May a benchmark be inserted in the KIID without being mentioned in the UCITS prospectus? • Does the disclosure on the “ongoing charges” need to be reviewed continually or only on the occurrence of a material event?

  6. 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.

  7. 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.

  8. Focus on the delivery of the KIID to investors (ctd.) • Assessment of the entity responsible for delivering the KIID (ctd.): Questions: • Is the UCITS’ registrar and transfer agent responsible for delivering the KIID when directly contacted by an investor? • Is a website platform responsible for delivering the KIID when an investor is subscribing through it?

  9. 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.

  10. Focus on the delivery of the KIID to investors (ctd.) • Responsibility for delivering the KIID in good time to investors (ctd.) : Questions: • Do existing investors need to receive the KIID? • Do existing investors need to receive the KIID for subsequent subscriptions?

  11. II. UCITS IV conflicts of interest and best executionrequirements: the role of the board of the fund • The UCITS IV Directive imposes a number of requirements in terms of conflicts of interestand best execution on UCITS management companies or directly on self-managed UCITS • The duty to complywithsuch obligations remainsunaffected by the delegation of certain fonctions to third party service providers (e.g. investment manager) • It is the duty of the board of the fund, in light of itsultimateresponsibility for the management of the fund, to verifythat all necessarysteps are takenateachlevel to complywiththese UCITS IV requirements FundBoard of Directors Management Company Service Provider

  12. Conflicts of interest: UCITS IV requirements • 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)

  13. 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 Conflicts of interest: other legal provisions applicable to individual board members

  14. Best execution principle • 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)

  15. Situations requiring the attention of the board in terms of conflicts of interest and best execution (examples)

  16. Situations requiring the attention of the board in terms of conflicts of interest and best execution (examples/ctd.)

  17. Situations requiring the attention of the board in terms of conflicts of interest and best execution (examples/ctd.)

  18. III. Outline on specific AML issues under the amended 2004 Law History • 2004 Law: automatic exemption in certain circumstances • ALFI/ABBL/ALCO Practices and Recommandations on AMLdatedDecember 2006 • Guidance on best practices for the Luxembourg fundindustry • to beupdated • 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

  19. Outline on specificAML issues under the amended 2004 Law (ctd.) History (ctd.) • 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 

  20. Outline on specificAML issues under the amended 2004 Law (ctd.) Rationae personae of the amended 2004 Law • Out of scope: funds not marketing their units or shares themselves • In scope: funds marketing their units or shares themselves • SimplifiedCDD (Article 3-1) • EnhancedCDD (Article 3-3(1) to (4)) • Delegation to a third party (Article 3-3(1)-(4)) • Outsourcing to “trusted persons” (Article 3-3(5))

  21. Outline on specificAML 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 ?

  22. 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 ?

  23. 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)) • For institutions subject to equivalent CDD rules • Liability remains with the fund • Transfer of data without objecting any confidentiality or professional secrecy rules

  24. Outline on specificAML 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

  25. Contact us • Michèle Eisenhuth • Partner at Arendt & Medernach • Tel : +352 40 78 78 638 • Email : michele.eisenhuth@arendt.com

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