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      Substance enhancement

      Substance enhancement

      Luxembourg regulator CSSF clarifies substance requirements with regard to UCITS management companies and self-managed investment companies. In an interview with LFF, Thierry Blondeau, Partner at PwC Luxembourg speaks about the key elements of this circular affecting the investment fund industry.

      What are the requirements for conducting officers in terms of reputation, experience and availability?

      You will always need to have a good reputation. The regulator will also look at the expertise that you have and the kind of funds you want to act for. For UCITS IV (Undertakings for Collective Investment in Transferable Securities) the scope of investment is relatively large, so it is to make sure that you have the proper knowledge and expertise. There is also the question of availability. The second point is the question of proportionality.

      If you are a conducting officer for a wide range of funds with 50 sub-funds and some of them are quite complex, presumably you will spend quite a lot of time on them. On the other hand, if you are a conducting officer with very small volume, with funds that are not complex and whose number is limited, you will spend less time on them.

      The CSSF will also ask all the mandates that you have and by looking at them they will try to assess if you have enough time to do your job properly.

      What are the functions  that one person cannot perform simultaneously?

      There is a basic principle: you can’t be both the doer and the controller at the same time. There is in particular incompatibility between the portfolio management and the risk management function, because the risk manager has to make sure that the portfolio manager does not take too many risks.

      Can you tell us more about the concept of central administration?

      The central administration concept is wider; it has to make sure that decisions of Luxembourg funds are taken with the involvement of people in Luxembourg in the context of this fund with premises in the Grand Duchy. As regards the central administration of the UCITS, the new circular is focusing less on fund accounting than the one before. With UCITS IV, the management company can have the passport and manage a French fund, for instance.

      The circular specifies that if you are a Luxembourg management company managing a Luxembourg fund, you need to do the central administration of that fund in Luxembourg. If you manage a French fund, its accounting can be done in Luxembourg or in France, which is something new.

      What is the main reason for delegating activities: cost or lack of resources and know-how?

      It might be a question of cost but in the end it is often linked to a centre of expertise. Take for example a Luxembourg management company that is managing a fund investing in French equities and you have another subsidiary in the group that has a specialist team dealing with portfolio management of French equities. It would not make a lot of sense to duplicate and have another team doing exactly what is already being done in Paris. The idea is to leverage the centre of excellence within a particular group so that you can benefit from economies of scale.

      What is the information that needs to be communicated to the CSSF if a management company wishes to pursue activities within the territory of another EU Member State?

      You can either open a branch in another Member State or you can directly manage a foreign fund. In both cases it is a regulator-to-regulator process: the Luxembourg management company has to go to its local regulator (CSSF) who will transmit the application to the foreign regulator, who in turn will review the document and ideally the company will get the approval.

      You have your programme of activities; you will have to explain what you want to do and how you want to do it. You will also need to explain the risk linked to your activity. Last but not least, in case of a branch, you will need to communicate the management team that is running your foreign branch.

      What can be said about the use of own funds of management companies?

      It is obvious that a company’s own funds have to be invested in its own interest. The objective is that your own funds are not meant to finance the group through shares or loans. You can of course turn them into cash and deposits. If you invest in government bonds, they have to be rapidly convertible to cash. The circular also notes that you are not allowed to take any speculative positions.

      Can we say that with the new circular the substance of management companies will be boosted in Luxembourg?

      Yes, for some players and to a certain extent. According to the circular, a UCITS management company or a self-managed SICAV needs its own premises, which wasn’t required before. In general, it will certainly increase the level of substance in Luxembourg; there is no doubt about that. CW

      Photo: © PricewaterhouseCoopers, Société coopérative – Photographer : Blitz agency