Brexit – Management & marketing of funds, end of the transition period

The CSSF has published this morning a press release on the withdrawal of the UK from the EU on 31 January 2020 and the forthcoming end of the time-limited transitional period which will operate until 31 December 2020. In its press release the CSSF has restated/clarified the following aspects:

(a) The lapse of passporting rights in relation to the management of Luxembourg funds on a cross-border basis

• All Luxembourg funds currently managed by a UK manager will need to appoint an EU-27 manager (ie investment fund managers as defined in Circular CSSF 18/698 ("IFMs") in the Luxembourg context) so as to maintain EU passporting rights. It is the duty of the governing body of each fund to ensure that appropriate action is being taken. As a consequence of such appointment, former notifications of cross-border management of funds under the UCITS Directive and/or the AIFMD respectively will be terminated on 31 December 2020 at midnight.

• At the same time, new notifications of cross-border management under Article 33 of the AIFMD or Articles 16 to 21 of the UCITS Directive, as applicable, will need to be operated according to the standard procedure applicable in the home Member State of the newly appointed EU-27 manager. If a manager established in Luxembourg or in another EU-27 Member State is appointed, Luxembourg funds supervised by the CSSF must inform the CSSF of such change of manager.

• Under limited circumstances, the CSSF will allow certain UK managers to continue managing regulated Luxembourg AIFs (in such event no marketing passporting rights under the AIFMD attached to the manager will be available). The deadline of 31 October 2019, initially extended to 15 January 2020 under CSSF press release 19/54 is extended until 31 December 2020. The approval referred to in CSSF press release 19/48 might not be required if the AIF's constitutive or information documents refer to Brexit consequences and already provide for measures that may be taken on the occasion of Brexit.

• All Luxembourg IFMs currently managing funds established in the UK and/or operating in the UK through a branch and wishing to continue the provision of their management services in the UK, will need to apply for the Temporary Permissions Regime ("TPR") in the UK and inform the CSSF of such application. Luxembourg managers of UK UCITS must be authorised as an AIFM in Luxembourg so to be able to continue to manage these UK funds after 31 December 2020. It is further to be noticed that Article 34 of the AIFMD (Article 34 of the AIFM Law) applies to this situation as of 1^st^ January 2021 to the extent that the UK funds managed are not marketed in Member States.

(b) The lapse of passporting rights in relation to the cross-border distribution of funds into Luxembourg

In relation to the lapse of passporting rights for cross-border distribution of funds into Luxembourg under a European passport, the required actions comprises:

• a notification to withdraw from cross-border distribution into Luxembourg (de-notification) under the regime currently applicable; and

• a new notification or request for authorisation, as the case may be, under the procedures applicable to the manager set-up put in place in view of the Brexit (eg in case of a designation of a newly appointed EU-27 manager, a cross-border notification for distribution into Luxembourg through the home Member State authority of the manager replacing the UK manager will need to follow). Such lapse of passporting rights also applies to EuVECAs, EuSEFs and ELTIFs with a UK manager marketing in Luxembourg.

• To the extent that a fund for which a de-notification for marketing has been notified to the CSSF continues to retain investors established in Luxembourg and provided that the fund does not intend to pursue any active marketing to investors in Luxembourg going forward, that fund is required to be registered with the CSSF to ensure that the CSSF remains informed and receives the relevant reporting for as long as investors established in Luxembourg are invested in such fund. Such re-registration and reporting obligations do not apply to UK AIFs with an EU-27 AIFM currently notified for marketing in Luxembourg under Article 31 or 32 of the AIFMD (Article 29 or 31 of the AIFM Law) if no further active marketing is pursued after 31 December 2020. The re-registration and continuing reporting obligations shall apply to all funds that are currently marketed in Luxembourg and that retain investors established in Luxembourg after the end of the transitional period (ie UK UCITS and AIFs managed by a UK AIFM).

• New notifications or requests for authorisations for cross-border marketing in Luxembourg shall be made under the rules applicable under the Law of 17 December 2010 relating to undertakings for collective investment ("Law of 2010") or the AIFM Law, taking into account that a distinction needs to be made between marketing to professional investors and marketing to non-professional, ie retail investors, in relation to cross-border marketing of AIFs in Luxembourg. In this context, marketing of funds established in the UK automatically and in all instances qualifies as marketing of third-country AIFs in Luxembourg in accordance with the relevant provisions under the AIFM Law, and UK managers are automatically and in all instances to be considered as third-country managers as of 1 January 2021.

• As of 1 January 2021, current UK UCITS will qualify as AIFs from a Luxembourg perspective provided they meet the AIF criteria, given that they cease to be authorised under the UCITS Directive.

1) Marketing in Luxembourg to professional investors

Marketing of AIFs to professional investors in Luxembourg will need to be operated under the provisions of Article 36 or Article 42 of the AIFMD (Article 37 or Article 45 of the AIFM Law).  Article 36 of the AIFMD (Article 37 of the AIFM Law) covers the marketing in Luxembourg after 31 December 2020 of UK AIFs managed by an EU-27 AIFM.  Article 42 of the AIFMD (Article 45 of the AIFM Law) applies in relation to the marketing in Luxembourg of AIFs (EU AIFs or third-country AIFs, including UK AIFs) which are managed by a UK manager after 31 December 2020.The notification under Article 45 of the AIFM Law must be done before the start of the marketing in Luxembourg. It is to be noted that a notification under Article 42 of the AIFMD (Article 45 of the AIFM Law) automatically triggers the required de-notification mentioned above.

A notification under Article 37 of the AIFM Law is required only when active marketing continues to be performed after 31 December 2020. UK AIFs notified for marketing in Luxembourg under Article 29 of the AIFM Law (Article 31 of the AIFMD) or Article 31 of the AIFM Law (Article 32 AIFMD) (managed by an EU-27 AIFM) prior to 31 December 2020 will need to register for active marketing in Luxembourg under the provisions of Article 37 of the AIFM Law. Such registration will automatically trigger a de-notification in relation to Article 29 or Article 31 of the AIFM Law.

AIFMs established in Luxembourg managing UK AIFs prior to 31 December 2020 and having notified the marketing of those AIFs to professional investors in other EU Member States under the provisions of Article 30 of the AIFM Law, shall review the marketing requirements applicable to those funds as of 1 January 2021. Such marketing will be subject to national placement regimes.

2) Marketing in Luxembourg to retail investors

Marketing to retail investors in Luxembourg will require an authorisation under Article 100(1) of the Law of 2010 for funds other than of the closed ended type managed by a UK manager (UK or non-UK funds) or under Article 46 of the Law of 2013 for UK funds managed by a EU-27 manager. Only regulated funds can be marketed to retail investors under these articles.

(c) Other Brexit related issues

The CSSF further addresses the following specific issues:

1) Delegation of investment management/portfolio management and/or risk management activities to undertakings in the United Kingdom

The delegation of IFM functions, such as investment management/portfolio management and/or risk management activities to undertakings based in the UK is permitted provided that the following conditions are met: (i) these undertakings are authorised or registered for the purpose of asset management, (ii) are subject to prudential supervision and that (iii) cooperation between the supervisory authority of these undertakings (eg the UK FCA) and the CSSF is ensured. In that respect the CSSF restated that on 1 February 2019, the ESMA, EU national securities regulators, and the UK FCA signed a multilateral memorandum of understanding (MMoU) which allows specific activities, such as the delegation of IFM functions, to continue to be carried out by UK based entities on behalf of counterparties based in the EEA.

2) Compliance with investment policy and eligibility issues

As of the end of the transitional period, any issues of non-compliance with applicable investment rules or policies triggered by the withdrawal of the UK from the European Union will not be considered as occurring in circumstances defined under Article 49(2) of the Law of 2010 concerning undertakings for collective investment for the purposes of Circular CSSF 02/77 (ie they will hence be considered as "active breaches").

As regards UCITS master-feeder structures (ie a UCITS feeder fund established in Luxembourg investing into a UCITS master fund established in the UK), given that UK UCITS will qualify as "other UCIs" in the sense of articles 41.1(e) and 46.1 of the Law of 2010, the investments into these funds may not in aggregate exceed 30% of the assets of the Luxembourg UCITS.

As regards Money Market Funds (MMFR), article 12 (c) of the Regulation (EU) 2017/1131 on Money Market Funds (MMFR), requires that deposits with a credit institution having its registered office in a third country is an eligible investment by an MMF only where the third country credit institution is subject to prudential rules considered to be equivalent to those laid down in EU law. As of the date of the CSSF's press release deposits with credit institutions having their registered office in the UK will not be eligible investments as of 1 January 2021, unless the European Commission adopts a decision that UK credit institutions are subject to prudential rules considered to be equivalent to those laid down in EU law in accordance with the procedure set out in Article 107(4) of Regulation (EU) No 575/2013.

3) CSSF position on secondments

• The CSSF confirmed that in accordance with Article 3 of the UCITS Directive related Commission Directive 2010/43/EU and Article 1 (2)(b) of the AIFMD related Commission Delegated Regulation (EU) 231/2013, it is as such possible to place at the disposal and under the control of an Investment Fund Manager ("IFM") established in Luxembourg the services of an individual involved in the provision of collective portfolio management services by the IFM.

• The CSSF clarified that such secondments of staff, provided they comply with all applicable requirements and that the IFM ascertains appropriate supervision over the secondees, are acceptable.

• Amongst the requirements, the CSSF indicated that there is notably the requirement of a physical presence in the premises of the Luxembourg IFM of the seconded staff, being understood that travels for professional purposes are accepted.

• The CSSF must be duly notified beforehand by IFMs which make use/intend to make use of secondments. In the specific context of Brexit, the CSSF remind market participants of the necessity to reorganise certain functions and more specifically the marketing function, if such function is staffed with secondees from the UK not being always physically present (ie for reason of professional travels) at the premises of the Luxembourg IFM. Such reorganisation of the impacted functions in principle needs to occur prior to 31 December 2020, having regard to the COVID situation.