It has been some time coming, but the CSSF has now issued their new Circular 24/856 (“the Circular”) which replaces the longstanding Circular 02/77 issued over 20 years ago on corrective measures required in the case of NAV calculation errors or breaches of investment restrictions. The new Circular brings together several key elements, regulatory developments, and insights gathered over the intervening years into a single document. Moreover, it expands the scope to include not only NAV calculation errors and breaches of investment restrictions but also other administrative errors impacting funds. The key changes Investment Fund Managers (IFM), administrators and depositaries should note are as follows:

A. Funds falling in scope of the new Circular

Section 1 of the Circular. Whereas Circular 02/77 only covered UCITS funds, the new Circular broadens the scope of beyond UCITS and Part II funds extending to both SIFs and SICARs:

• UCITS and Part II Funds
• Specialized Investment Funds (SIF)
• Société d'Investissement en Capital à Risque (SICAR)
• Money Market Funds (MMF), whether UCITS, Part II or SIF
• Any Part II, SIF or SICAR that are:
  • European Long-Term Investment Funds (ELTIF)
  • European Venture Capital Funds (EuVECA)
  • European Social Entrepreneurship Funds (EUSEF) Reserved Alternative Investment Funds (RAIFs) are generally not covered by the Circular. However, if a RAIF qualifies as an ELTIF, EuVECA, or EuSEF, certain Circular provisions must be applied. #B. Roles and Responsibilities clarified Section 3 of the Circular. The CSSF has placed a clear emphasis on the applicable conduct of business requirements, setting out the responsibilities of key parties in the fund lifecycle, including a fund’s Board of Directors, the Board of Directors and Conducting Officers of the IFM (including non-Luxembourg IFMs managing Luxembourg funds on a cross-border basis), the fund administrator (as set out in Circular 22/811) and a fund’s depositary. It also underlines that delegation does not obviate any party from their responsibilities and that such delegations should be subject to the organizational, contractual and oversight requirements that go beyond the circular 18/698. The main evolution is the responsibility of the Board of Directors and the Management Company to organise an oversight of delegates, which avoids any topics described in this circular (ie. NAV errors, breach of investment restrictions,...) and strengthen the corresponding action points planned and undertaken. UCI Administrators must:
• Implement and apply procedures to identify and assess any errors or breaches.
• Register and correct errors, once approval from the fund or IFM has been given.
• Establish a Remedial Action Plan - to be approved by the fund/IFM - and to carry out any corrective actions necessary. Fund Depositaries must:
• Inform a fund or its IFM if they detect a material NAV error or active breach of investment rules.
• Inform the CSSF when a fund or IFM has not taken appropriate action in respect of a material NAV error or active investment breach.

C. NAV Calculation Errors

Section 4 of the Circular. Materiality thresholds will continue to operate under the new Circular, above which notification will be required to the CSSF and the corrective measures of Section 4 apply (for closed-ended funds only parts of Section 4 will apply). Money Market Funds (MMF) Materiality has been tightened for MMF subject to the Money Market Fund Regulation (EU 2017/1131), decreasing the threshold from 0.25% to 0.20%. UCITS, Part II funds and ELTIFs (excluding MMF) marketed to retail investors Materiality remains consistent with Circular 02/77:

• Bond and Mixed Funds = 0.50%
• Equity and other financial assets Funds = 1.00%
• Funds investing principally in other financial assets = 1.00% Part II and ELTIFs principally investing in non-listed shares, real estate and loans A threshold higher than 1% may be applied, as an exception, where the nature of the fund and its risk profile warrant it and if certain provisions are met, as further detailed in the Circular. Part II, ELTIFs marketed only to professional or well-informed investors and SIF, SICAR, EuVECA, EuSEF (excluding MMF) Thresholds may be set up to a maximum of 5%, subject to a specific analysis covering certain criteria set out in the Circular. Both the IFM and the Board of Directors of the fund must then validate and approve the agreed thresholds. Consistent with Circular 02/77 a fund is permitted to apply lower thresholds than those set out in the new Circular, as long as these are applied on a consistent basis. Section 4 reinforces the market practices around the treatment of NAV errors.

D. Non-compliance with Investment Rules

Section 5 of the Circular. All EU and Luxembourg legal or regulatory instruments pertaining to investment rules and eligible assets apply to each respective type of fund, alongside any investment restrictions set out in the constitutional documents or prospectus of a fund. Breaches of these instruments/ documents will be considered as an active breach by the CSSF. A definition of passive and active breaches is included in the Circular, where a passive breach would occur in principle due to an event outside of the control of the fund, whereas an active breach of investment rules would be as a result of a conscious act, (dis-)investment decision or a failure to take a decision where one could have been foreseen.

E. Other Errors impacting a Fund

Section 6 of the Circular. Four types of “Other Error” and their treatment and remediation are new in the Circular, specifically errors related to:

• Application of Swing Pricing
• Payments made by the fund or to payment of fees
• Incorrect application of cut-off times (for investors)
• Incorrect accounting in respect of allocation of investments. The main specificity of this new category is the absence of materiality. This will reinforce the need of a state-of-the-art oversight enabling to reach out the appropriate control framework with the appropriate level of detail.

F. Indemnification of Investors

Section 7 of the Circula. The Circular is again consistent with its predecessor in terms of many of the principles and steps to be applied (de minimis application, means of reimbursement to investors), although there is now clarification provided where final investors may transact via financial intermediaries to ensure that final investors are reimbursed. The onus is on a fund and IFM to provide all requisite information to a financial intermediary to enable it to reimburse the final investor. One of the main changes is the compensation to perform to the ultimate investor. Even if an adequate wording in the prospectus can limit the operational burden of this new requirement, it won’t be sufficient and will be considered on an exceptional basis and not a systematic application.

G. External Auditor involvement

Section 8 of the Circular. For the “special report” required for UCITS and Part II, thresholds have been changed where indemnities in aggregate exceed EUR 50,000 or an indemnity to one individual investor would exceed EUR 5,000 and other aspects of the report have been updated. The CSSF has also introduced updates to the “separate report” required under Circular 21/790. This report is required for any errors below the two indemnity thresholds above, but does not apply to a material NAV error in a closed-ended fund.

H. Notifications

Section 9 of the Circular. Funds or their IFM must notify the CSSF of all material NAV calculation errors and active investment breaches within 4-8 weeks from the date the error was detected, using the form on the CSSF’s website (which will be updated to a new version).

I. Entry into Force

Section 10 of the Circular. Circular 02/77 will continue to apply until 31 December 2024. Circular 24/856 will apply from 1 January 2025. As detailed in the new Circular, any changes or disclosures required in an existing fund’s prospectus will need to be made at the next update to the document.

Final Thoughts

Taking a step back from the Circular’s more detailed requirements and updates, the CSSF has added an important holistic dimension, making it very clear it expects the general principles to be applied by each of the responsible parties. The CSSF has underlined the need for robust organizational requirements and technical solutions. With scale and complexity becoming an increasing challenge within fund operations, Next Gate Tech offers a Data Management platform and NAV Oversight Approach that can support firms in applying the Circular’s requirements. The NAV Oversight Approach integrates a versatile selection of analytics components coupled with a flexible Workflow solution, not only by enabling mitigation or faster detection of errors, but also allowing for a more proactive stance and to provide seamless data flows for any required downstream reporting.