CSSF publishes Circular CSSF 24/856 repealing Circular 02/77

At a glance
 

The CSSF has issued Circular 24/856, updating the framework for error management in investment funds. This comprehensive Circular, which takes effect on 1 January 2025, extends beyond just net asset value (NAV) calculation errors, incorporating lessons from over two decades of regulatory evolution and market practice. It now encompasses a wider array of operational errors, setting new standards for investment management professionals under its scope. The Circular aims to reinforce investor protection through enhanced error management procedures and clear guidelines for reporting and correcting discrepancies.

Key changes introduced by Circular 24/856 include:

1. Expanded scope of errors: Besides NAV calculation errors and investment rule breaches, the Circular now covers 4 new error types – (i) incorrect application of swing pricing, (ii) incorrect application of cut-off periods, (iii) non-compliance with costs and charges and (iv) investment allocation errors
2. Clarified responsibilities: It defines the roles and responsibilities of investment management professionals in maintaining stringent error management and investor protection measures.
3. New Reporting and Correction Guidelines: It introduces detailed procedures for reporting errors and outlines steps for their correction, ensuring transparency and accountability in fund management.

This update signifies the CSSF's commitment to safeguarding investor interests and maintaining the integrity of Luxembourg's financial market. Entities governed by this Circular are urged to review and adapt their internal procedures in accordance with the new guidelines to ensure compliance and uphold investor confidence.

A closer look
 

Effective date: 1 January 2025

Replaces: Circular CSSF 02/77

Key changes introduced

• Significant NAV calculation errors

The Circular outlines what constitutes a significant NAV calculation error and the measures to be taken in case of such an error from an Investor and UCI perspective. It also defines new tolerance thresholds and the financial impact methods to consider. There are different thresholds applied depending on the investment strategy. Closed-ended funds do not have the same obligations with respect to CSSF notifications. 

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• Non-compliance with investment rules

The Circular introduces the idea of passive non-compliance (acts or events outside the control of the UCI) and active non-compliance (voluntary acts or operations or the absence of such acts), as well as the two correction methods (accounting and economic).

• Other errors

4 new types of “other errors” have been introduced by the Circular, namely:

- Incorrect application of Swing pricing

- Non-compliance of costs and payments

- Incorrect application of cut-off rules

- Allocation errors at the investments level

• Remediation methods & auditor intervention

The Circular sets the procedure for the compensation for damages from an Investor loss and UCI compensation perspective, as well as the de minimis rule for such compensation (which only applies at the investor level). Furthermore, the Circular outlines the three-step procedure for auditor intervention in case of significant NAV error and compliance breaches, as applicable.

How Deloitte can help

Deloitte can play a pivotal role in assisting your organization navigate the complexities of CSSF Circular 24/856, by leveraging our extensive experience in regulatory compliance and risk management within the financial services sector. We can offer a suite of services tailored to ensure full compliance with the new Circular, including but not limited to:

1. Impact assessment at the product and organization levels
   
2. Delegation/outsourcing model review
   
3. Gap analysis and update of relevant policies and procedures
   
4. Review and implementation of updated control frameworks
5. Compliance on demand

Virginie NG Wing Lit - Boulot
Partner - Audit & Assurance
Tel: +352 45145 2990
vboulot@deloitte.lu

Xavier Zaegel
Partner - Consulting
Tel: +352 45145 2748
xzaegel@deloitte.lu

Prasanta Mandal
Director - Consulting
Tel: +352 45145 2208
pmandal@deloitte.lu