On 23 August 2018, Luxembourg’s regulator, the CSSF, published a Circular 18/698 which set out to codify the organisation, substance and authorisation of Luxembourg investment fund managers. Amongst others the Circular replaces Circular 12/546, which detailed the CSSF’s expectations for UCITS managers and also served as the benchmark for AIFMs under the AIFM Directive.
This approach to further clarify and summarise what is expected of a Luxembourg management company is helpful according to Daniela Klasen-Martin (pictured), Managing Director and Country Head, Crestbridge Luxembourg, a leading independent administration, management and corporate governance solutions business.
“The Circular is a summary of practices that management companies were already doing in Luxembourg but which had not been formally set in writing; for example, the number of mandates that directors can have, which the CSSF has limited to 20 mandates.
“However, the regulator has clarified that if a client has multiple fund structures, a director can combine all of them into a single mandate. There is also an indication in terms of the number of hours a director can spend working for an AIFM, which is 1,920 professional hours per year,” explains Klasen-Martin.
The Circular also stipulates what is expected of Senior Management (also known as Conducting Persons) with respect to their AIFM responsibilities. There is a EUR1.5 billion AUM threshold. Klasen-Martin says that if the management company has less than EUR1.5 billion it will require two Senior Managers, but the CSSF may accept that one can be located outside of Luxembourg and work there on a part-time basis, provided there is sufficient substance in Luxembourg to support the Senior Manager in their role.
“If you are more than EUR1.5 billion in AUM, you will need at least two dedicated Senior Managers working full-time in Luxembourg,” says Klasen-Martin. She adds:
“We have 30 people here in Luxembourg and approximately 17 of those are working for our management company so we have a lot of substance. We don’t anticipate any immediate change to the way we are operating under the new Circular. Some of our staff have directorship mandates, including myself, but none of us are exceeding the limit set out by the CSSF. I think where you might see issues, with regards to substance, is with smaller AIFMs.”
Independent risk management is one of the core operations that Crestbridge provides as a third party AIFM to investment funds. It has a dedicated team of seven risk managers, as well as a dedicated team providing the oversight and governance function. “We also have valuation officers, who oversee the valuation function of some of the funds on our platform; although some funds use an independent valuation agent.
“What we really focus on is risk management, control and oversight; these are key aspects to an AIFM,” emphasises Klasen-Martin.
With the new substance requirements detailed in the Circular, the upshot is that it will take time and significant human resources for fund managers to set up their own Luxembourg AIFM.
As Klasen-Martin is keen to stress: “It’s complicated to set up operations in Luxembourg. You have to compete for resources. We have all the licenses, we have the staff and this means fund managers can focus on what they do best relying on us to perform the regulatory functions and provide the substance. Currently, we act as the external AIFM to approximately 50 investment funds.”