On 7 July 2020, the Commission de Surveillance du Secteur Financier (the “CSSF”) published a list of frequently asked questions in relation to the provisions of Circular CSSF 02/77 concerning the protection of investors in case of net asset value (“NAV”) calculation error and correction of the consequences resulting from non-compliance with the investment rules applicable to undertakings for collective investment (the “FAQ”).
The FAQ on Circular CSSF 02/77 applies to undertakings for collective investment subject to the law of 17 December 2010 (UCIs and UCITS) and outlines the principles to be applied by specialized investment funds governed by the law of 13 February 2007 (SIFs) (hereafter “UCI”).
In particular, the FAQ provides useful insights on the applicability of such circular to SIFs as well as on the notification requirement with the CSSF of such NAV calculation errors and active investment breaches by such SIFs or their management companies. This FAQ reminds SIF managers of the CSSF practice that provisions of this circular on NAV calculation errors and correction methods for investment breaches will automatically apply in the absence of other specific internal rules applicable in the context of NAV calculation errors and active investment breaches.
The CSSF also clarifies the organisational requirements that apply in such context to fund managers and funds (e.g. AIFM, self-managed AIFs), in particular regarding their relevant policy to be implemented in this respect.
The twenty-one questions/answers are divided into the three following chapters:
1. General application of Circular 02/77
Chapter 1 aims to clarify the scope of application of Circular 02/77 in the context of NAV calculation errors and active investment breaches, and inter alia defines:
- which situations are considered as an active investment breach of investment restrictions or diversification rules;what types of active (and passive) investment breaches and material NAV calculation errors must be reported or notified to the CSSF, as the case may be, considering their outcomes and what form such communication to the CSSF must take;
- which remediation actions should be taken;
- which methods are acceptable for the financial impact calculation for determining the potential compensation;
- what are the CSSF expectations towards the investment fund manager.
2. Selection of the correction method
Chapter 2 further clarifies, in the presence of an actual breach under Circular 02/77:
- what organisational requirements apply;
- under which circumstances the economic or accounting method should be chosen to calculate the compensation amount; who is responsible for the choice of the methodology and what principles must be observed when using one or another method;
- how the correction method should be applied; and
- whether a change in the correction method is possible.
3. Tolerance threshold of Circular CSSF 02/77
Chapter 3 finally clarifies that:
- the tolerance thresholds provided for by Circular CSSF 02/77 do not apply to errors in the calculation of fees and costs borne by the UCI that led to payments higher than the fees / costs laid down in the prospectus of the UCI;
- any NAV calculation errors covered by the tolerance threshold applied to the fund must be notified to the CSSF; and
- the applicable materiality threshold for NAV calculation errors for UCIs is defined by reference to the investment policy laid down in the prospectus.
The FAQ also include three powerful decision trees representations relating to (1) NAV calculation errors, (2) investment breaches, and (3) the use of the economic/accounting method.
The FAQ can be found under the following link.
For any questions regarding the above, please do not hesitate to contact our specialists.
