The Impact of the New CSSF Circular on Luxembourg ManCos providing MiFID II Portfolio Management Services

Abstract

On 23 August 2018, the CSSF issued its circular 18/698 on the substance requirements (the “CSSF Circular”) applying to Luxembourg management companies. The management companies to which the CSSF Circular applies, include alternative investment fund managers (“AIFM”), as well as management companies subject to chapters 15 (“UCITS ManCo”), 16 and 17 of the Law of 17 December 2010 (“UCITS Law”) relating to undertakings for collective investment. According to this new CSSF Circular, the CSSF is further tightening its substance and corporate governance requirements and placing greater demands on Luxembourg ManCo (as defined below) operators. Currently, both the AIFM and the UCITS Law allow AIFMs and UCITS ManCos (hereinafter collectively referred to as “ManCos”) to perform certain additional “MiFID II portfolio management services” in addition to the management and marketing of AIFs and UCITS (as applicable). For that purpose, the AIFM and the UCITS Law, till now, required AIFMs and UCITS Mancos to solely comply with certain MiFID I requirements as implemented in the amended Law of 5 April 1993 on the financial sector (“LFS Law”). The implementation of Directive 2014/65/EU (“MiFID II”), as implemented in the LFS Law in Luxembourg, strengthened investor protection rules. Contrary to the pre-MiFID II era, the AIFM nor the UCITS Law clarify whether and to what extent the new MiFID II rules apply to ManCos that perform additional MiFID II portfolio management services. By absence of any MiFID II updates of the AIFM and UCITS Law in this regard, the CSSF Circular clarified what MiFID II rules are applicable to ManCos additionally performing MiFID II portfolio management services. This contribution discusses the new CSSF Circular rules applicable to ManCos performing “MiFID II portfolio management services”, in addition to, those set out in the AIFM Law and the UCITS Law. For that purpose, first this contribution provides an overview of the MiFID II portfolio management services allowed to be performed and the requirements applicable to Man-Cos under the AIFM Law and UCITS Law.This article then clarifies what MiFID II and Luxembourg-specific requirements are under the CSSF Circular applicable to ManCos for the performance of these services. It continues by discussing the impact of the CSSF Circular clarifications regarding Luxembourg ManCos and then concludes.