Long awaited CSSF regulation n° 12-01 regarding risk management and conflict of interests has been issued and lays down detailed rules for the application of article 42bis of the amended Luxembourg law of 13 February 2007 relating to specialized investment funds.
The regulation n°12-01 issued by the CSSF (the "Regulation") lays down detailed rules for applying paragraphs (1) and (2) of article 42bis of the amended Luxembourg law of 13 February 2007 relating to specialized investment funds (the "Law") (the "SIF(s)") regarding (i) on one hand the appropriate management of risks referred to in this article and in particular the criteria for assessing the adequacy of the risk management systems used by SIFs and (ii) on the other hand providing details on structures and organizational requirements designed as to minimize the risk of conflict of interests.
Regarding the question of risk management, clarifications have been provided by the Regulation on how SIFs shall establish and document an adequate risk management system and in particular with regards to the risk management function and its delegation to third parties.
- The Regulation clearly states that the risk management system shall be adopted by the directors of the SIF and submit it to an adequate review on a regular basis, so as to be able to notify the CSSF with any material change that may occur.
- Except duly authorized by the CSSF, the risk management function shall be independent, functionally and hierarchically separate from the operating units of the SIF. It must also dispose of the necessary authority and have access to all relevant information for the proper accomplishment of the mission. With regards to the delegation of the risk management function, SIFs are authorized to delegate to a third party all or part of the risk management function under the following conditions:
- such third party shall have the necessary competence and capacity to perform the risk management function in a professional, reliable and efficient manner; and
- the delegation shall not, in any case and under any circumstance relieve the directors of SIFs of their responsibility, neither in terms of monitoring nor in terms of the risks associated with the activity they assume.
Regarding the conflict of interests, the Regulation specifies that the operational management of conflict of interests established by the SIF must be, more than set by writing, appropriate also in terms of the SIF's size and activities as well as the nature, scale and complexity of its business.
- The measures and procedures provided by the Regulation specify the criteria the SIF must take into consideration when providing services and activities regarding the detection of potential situations the relevant persons can be in that would conduct to conflict of interests.
- The Regulation also reminds that SIFs have to keep and regularly update a register of the types of activities of portfolio management they perform on their behalf or on others, for which a conflict of interest entailing a material risk of impairment occurred or, in the case of a continuous activity of collective portfolio management, is likely to occur.
- SIFs must also inform the investors, by any appropriate durable medium, when the management of conflict of interests is not sufficient to ensure reasonable confidence that risks of damage to the interests of the SIF will be prevented.
SIFs already in existence when this Regulation enters into force (being on the first day of the month following its publication in the Mémorial) have until 31 December 2012 to comply with the relevant requirements, meaning that already drafted risk management and conflict of interests documents, that have been provided to the CSSF, will need to be updated pursuant to the requirements laid down in the Regulation until 31 December 2012 at the latest.
