Financial Services

Substance abuse: CSSF says the fund manager must be in full control

Published on 15th Oct 2018

As we discussed in our previous Insight, in light of the uncertainty around Brexit, a number of asset managers have outlined plans to increase their presence in, or move part of their operations to, Dublin or Luxembourg.

Among the many considerations that such a move entails, managers need to be particularly mindful of the local “substance” requirements and any requirements as to: the delegation of key functions; the allocation of tasks between the manager, its delegate and investment advisers; and the governance/organisation of any established investment committee.

The Circular published on 23 August 2018 by Luxembourg's Financial Regulator, the Commission de Surveillance du Secteur Financier (the CSSF) brings welcome clarity to the authorisation and organisational requirements of fund managers (Managers) seeking to establish themselves in Luxembourg, and indeed those already operating in the jurisdiction. It also introduces some important (and potentially onerous) new requirements, as set out below.

The Circular applies to both Managers regulated under AIFMD and ''management companies'' as defined under the Luxembourg’s Law of 17 December 2010 relating to undertakings for collective investment as amended (Management Companies).

Composition of the Board of Directors/Managers/Executive Committee

The governing body of a Manager should consist of at least three managers/directors (the Board), and the usual conditions as to the professional competences, experience and honorability of members of the governing body continue to apply. The Circular further clarifies that (i) the Board may not be comprised of a majority of Conducting Officers (see point 2 below) or other employees of the Manager; and (ii) the appointment of Manager representatives to the Board must be adequately justified.

With regard to the conditions for exercising multiple mandates, the maximum number of similar mandates that a member of the Board may exercise is capped by the Circular at 20, and the maximum number of working hours that a Board member may dedicate to their professional commitments is capped at 1920 hours a year. However, both of these limits may be waived by the CSSF if a Board member is able to demonstrate that the size and complexity of the entities governed by the Board member justifies it. Similarly, mandates in different underlying SPVs held by the same fund entity, or in different funds managed by the same Manager, may be treated as a single mandate for the purposes of such caps.

Representatives physically located in Luxembourg

The Circular indicates that the Managers should have at least 2 senior managers (other than the members of the Board), i.e. individuals that are responsible for the day-to-day management of the Manager ('Conducting Officers'), physically present in Luxembourg. Such Conducting Officers may be domiciled outside of Luxembourg, provided that they are physically present in Luxembourg on a daily basis during usual working hours. The Conducting Officers should in principle also be bound to the Manager via an employment arrangement, either by an employment agreement (as an employee) or via secondment arrangements, whereby the latter is subject to the CSSF’s prior approval.

Where Managers have AUM of more than €1.5 billion, Conducting Officers may not act as a senior manager of any other Manager. If there are more than two Conducting Officers, the additional individuals are not required to reside permanently in Luxembourg if they regularly travel to Luxembourg and there are sufficient additional staff in Luxembourg to support their activities.

Where a Manager has AUM of less than 1.5 billion: (i) the two Conducting Officers may each act in a similar capacity for one additional Manager; and (ii) where they are deemed to be sufficiently supported in their role by qualified employees located in Luxembourg, the CSSF may allow that only one of the Conducting Officers is permanently stationed in Luxembourg.

Notwithstanding the above, Managers must retain at least three full-time employees in Luxembourg (which may include its Conducting Officers).


Before a Manager may delegate its functions to another entity, it is required under the Circular to notify the CSSF and provide an updated business plan detailing (i) the identity of the delegate; (ii) the delegate's home regulator; and (iii) the procedures the Manager has in place to monitor the activities of the delegate. The delegation must be formalised in a written delegation agreement containing a number of mandatory terms (i.e. ensuring the ongoing monitoring of the delegate by the Manager and the delegate's adherence to certain KYC and AML requirements).

The initial policies and procedures used by the Manager to select and monitor the delegate must be documented and retained and must be made available to the CSSF on demand.

Changed or new Manager reports to the CSSF

Annex 2 of the Circular contains a detailed (non-exhaustive) list of the items and changes that the CSSF requires Managers to either request prior approval for, or notify it of post implementation. For example:

Amendments subject to prior notification with a view to authorisation by the CSSF:

  • Amendments to the constitutional documents;
  • Modification of the allocation of responsibilities between Conducting Officers;
  • Request for an exemption concerning the permanent presence of the Conducting Officers in Luxembourg; and
  • Decisions to delegate the performance of internal control functions, or perform functions internally that were previously performed by third parties.

Amendments subject to notification to the CSSF:

  • Delegation of the accounting or IT functions or complaints handling;
  • Resignation of the members of the managing body and/or Conducting Officers and (if applicable) members of the supervisory board;
  • Change in the identity of the certain persons, including the Compliance Officer, head of internal audit, head of permanent risk management and head of accounting (or the responsible officer where the function has been delegated); and
  • Significant changes to the risk management process.

In addition, Annex 2 also sets out all the reports and documents which must be filed with the CSSF by a Manager and new timeframes within which that filing must take place (being, 5 months following the end of the Manager's fiscal year for all documents except the audited annual report and the management letter).

Osborne Clarke / Sedlo comment

The Circular entered into force with immediate effect on 23 August 2018 and repeals the CSSF Circular 12/546. Moreover, the CSSF circulars 04/155 and IML 98/143 no longer apply to the Managers and the Management Companies following the publication of the Circular.

Existing fund management companies operating in Luxembourg may need to make changes and certain adjustments to their current set-up and procedures in order to reflect the requirements of the Circular. Firms seeking to apply for a fund management company license must also now take into account the requirements of the Circular in their applications.

This article has been written by Osborne Clarke in collaboration with Sedlo Law Firm Luxembourg

Interested in hearing more from Osborne Clarke?

* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

Connect with one of our experts

Interested in hearing more from Osborne Clarke?

Related articles