Looking back over 2023

Content

• CSSF SFDR data collection
• Amendments to the SFDR RTS on fossil gas- and nuclear energy-related activities
• Introduction of a vigilance duty in terms of sustainability for Luxembourg companies
• Adoption of the European Sustainability Reporting Standards
• CSSF Thematic Review on the implementation of sustainability-related provisions in the investment fund industry
• CSSF report on diversity through its data collection exercise
• Adoption of the EU Green Bonds Regulation
• ESMA Guidelines on certain aspects of the MiFID II remuneration requirements
• Update of ESMA Q&As on UCITS and AIFM Directives
• Implementation of the DLT Pilot Regime – Blockchain law III
• Modernisation of the Luxembourg fund toolbox
• MiCAR
• DAC 8
• Update of the EU Blacklist
• Luxembourg whistleblowing law
• Luxembourg foreign direct investments screening regime
• Modernisation of Luxembourg insolvency law
• Adjustments to the 1915 Law
• Standardised Model Articles of Incorporation for UCITS
• CSSF FAQ on virtual asset service providers
• CSSF general findings and observations on marketing communications
• ESMA Opinion on undue costs

CSSF SFDR data collection

On 25 March 2023, the Commission de Surveillance du Secteur Financier (CSSF) launched its digital collection process of data related to the precontractual information on financial products under Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (SFDR).

In July 2023, the CSSF launched a second data collection with regards to periodic information for Article 8 and Article 9 products. This yearly exercise covers all the SFDR periodic reports issued as from 1 January 2023 and with financial year end on or after 30 September 2022. 

For more detailed information on this topic, please click here and here.

Amendments to the SFDR RTS on fossil gas- and nuclear energy-related activities

On 20 February 2023, the Commission Delegated Regulation (EU) 2023/363 of 31 October 2022 entered into force, amending Delegated Regulation (EU) 2022/1288 of 6 April 2022 (SFDR RTS). 

The aim of the Delegated Regulation is namely to include, in the SFDR disclosures, disclosure requirements about nuclear and gas-related activities, introduced in the EU Taxonomy in March 2022 by the Delegated Regulation (EU) 2022/1214.

Key elements of the amendments to the SFDR RTS are the following: (i) revised annexes: the SFDR Annexes (precontractual and periodic) are amended with an additional question and a graph, requiring disclosing whether the financial product invests in fossil gas and/or nuclear energy related activities that comply with the EU Taxonomy; (ii) clarification about the scope of Taxonomy
disclosures: the Delegated Regulation clarifies that the application of the Taxonomy Regulation is relevant only for financial products committing to invest in “sustainable investments” with an environmental objective, as defined under Article 2(17) SFDR. As a result, funds disclosing under Article 8 that are not investing in “sustainable investments”, or funds investing in “sustainable investments” having only a social objective, are not required to include, in their SFDR disclosures, provisions about the Taxonomy-alignment of their investments; and (iii) correction of clerical errors: cross-references in Article 55(1) and 62(1) of the SFDR RTS have been corrected.

For more information on this topic, click here.

Introduction of a vigilance duty in terms of sustainability for Luxembourg companies

On 16 May 2023, a bill of law was submitted to the Luxembourg Parliament to introduce a duty of diligence for companies in terms of sustainability for (i) large Luxembourg companies (i.e. where at least two of the following criteria are met: 250 employees, an annual turnover of 50 million euros and a balance sheet 42 million euros) and (ii) small and medium enterprises which have an economic activity “at risk”, as such list of activities would be defined by way of Grand Ducal regulation. 

The bill of law is currently being discussed by the Luxembourg Parliament before being voted on, and our dedicated ESG experts at CMS Luxembourg will keep monitoring the legislative process.

For further details, please click here.

Adoption of the European Sustainability Reporting Standards

On 31 July 2023, the European Commission adopted the new European Sustainability Reporting Standards (ESRS). 

The ESRS will become mandatory for use by large companies, listed small and medium-sized companies (SMEs) and parent companies of large groups that are subject to the Accounting Directive including the Non-Financial Reporting Directive (NFRD), as amended by the Corporate Sustainability Reporting Directive (CSRD), which outlines the obligation for companies to use standards to fulfil their legal sustainability reporting obligations and aims at ensuring that companies across the European Union report comparable and reliable information on how sustainability matters affect the company’s development, performance and position. 

The first phase for companies to start reporting under ESRS is scheduled for financial year 2024, with first sustainability statement published in 2025, for companies previously subject to the NFRD (i.e. large listed companies, large banks and large insurance undertakings having more than 500 employees), as well as large non-EU listed companies with more than 500 employees. However, on 17 October 2023, the European Commission suggested a two-year extension to implement specific aspects of the CSRD including the adoption of sector-specific ESRS (see dedicated section on CSRD).

For more information on this topic, please click here. 

CSSF Thematic Review on the implementation of sustainability-related provisions in the investment fund industry

On 3 August 2023, the Commission de Surveillance du Secteur Financier (CSSF) released its thematic review on sustainability-related provisions in the investment fund industry, which findings are set to pave the way for the common supervisory action led by the European Securities and Markets Authority (ESMA). 

The review highlights the importance of transparency, accountability, and adherence to sustainability objectives. 

The observations and expectations outline the need for investment fund managers (IFMs) to embrace sustainable finance and align with the Sustainable Finance Disclosure Regulation (SFDR). By promoting clear and comprehensive disclosures, and integrating sustainability risks into their risk management frameworks, IFMs can play a crucial role in advancing the sustainable finance agenda.

Further information on this topic can be found here.   

CSSF report on diversity through its data collection exercise

In a press release dated 10 October 2023, the Luxembourg Commission de Surveillance du Secteur Financier (CSSF) presented the current state of diversity within the management bodies of less significant institutions (LSI) in a report. This report stems from the survey launched in April 2023 targeting 46 LSI and aimed at gathering additional information on the implementation of diversity policies, and essentially targets diversity in terms of gender, assessing compliance of LSI with respect to the adoption of a diversity policy and its concrete outcomes.

For further details on this topic, please click here. 

Adoption of the EU Green Bonds Regulation

On 23 October 2023, the Council of the European Union adopted in first reading the regulation on European green bonds standards (the EU GB Regulation). This formal adoption ends a two-year process, from the European Commission’s initial proposal on 6 July 2021 to the provisional agreement reached with the European Parliament (the EP) on 28 February 2023, which was formally adopted by the EP on 5 October 2023. 

Key elements of the EU GB Regulation include, among others, (i) some flexibility on the use of proceeds for European Green Bond (EuGB) s; (ii) the introduction of a safeguard for the alignment of the EuGB with the Taxonomy; (iii) the application of the technical screening criteria with grandfathering provisions; and (iv) additional disclosure requirements in case of securitisation bonds.
The EU GB Regulation shall apply from 21 December 2024.

For more information on this topic, please click here. 

ESMA Guidelines on certain aspects of the MiFID II remuneration requirements

On 13 October 2023, the Luxembourg Commission de Surveillance du Secteur Financier (CSSF) released a circular on remuneration requirements under Directive 2014/65 on markets in financial instruments (MiFID II) to integrate into the CSSF’s administrative practice and regulatory approach the Guidelines of ESMA on certain aspects of the MiFID II remuneration requirements, published in April 2023, which inter alia describe (i) the design of remuneration policies and practices, (ii) the governance, and (iii) the controlling risks related to remuneration policies and practices. The Guidelines are supplemented with examples of good and poor practice and illustrative examples.

For futher details, please click here. 

Update of ESMA Q&As on UCITS and AIFM Directives

On 13 June 2023, ESMA updated its questions and answers (Q&As) on the application of the UCITS Directive and the AIFM Directive. Changes with respect to the UCITS Directive deal with (i) permitted activities of UCITS management companies; and (ii) de-notification requirements in case there is no investor in a designated Member State. The Q&A regarding the application of the AIFMD has been revised to inter alia address the following subjects: (i) pre-marketing activities conducted by non-EU AIFMs; (ii) permitted activities of AIFMs; (iii) the definition of “substantive direct or indirect holding” in the context of sub-threshold/registered AIFMs; (iv) pre-marketing undertaken by an EU AIFM or by a third party on behalf of an authorized EU AIFM; (v) pre-marketing by registered AIFMs that do not qualify as EuSEF managers or EuVECA managers; (vi) de-notification requirements in the absence of investors in a host Member State; and (vii) the calculation of leverage for AIFs acquiring real estate assets indirectly through non-listed companies.

Implementation of the DLT Pilot Regime – Blockchain law III

On 2 June 2022, Regulation (EU) 2022/858 of the European Parliament and of the Council on a pilot regime for market infrastructures based on distributed ledger technology (DLT) was published in the Official Journal (DLT Regulation). The DLT Regulation introduces pilot scheme which allows national competent authorities to temporarily exempt DLT market infrastructures (DLT MI) from some of the specific requirements imposed by existing legislation on traditional market infrastructures. 

On 8 March 2023, the European Securities and Markets Authority (ESMA) released its Guidelines setting out standard forms, formats and templates to apply for specific permissions under the DLT Regulation on a pilot regime for market infrastructures based on DLT to operate DLT MI, namely a DLT Multilateral Trading Facility, a DLT Settlement System and a DLT Trading and Settlement System. The Guidelines set forth (i) information to be provided for all applicants (such as the identification and legal status of the applicant and the identification of the application); and (ii) specific additional information depending on the applicant’s regulatory status and on the nature of its application request, and shall apply as from 23 March 2023.

On 9 March 2023, bill of law 8055 laying down rules for the application of the DLT Regulation was adopted by the Luxembourg Parliament. The proposed legislation additionally establishes specific regulations for financial collateral arrangements and marks the third instance of Luxembourg’s legal framework concerning DLT-blockchain, referred to as “Blockchain Law III.” It shall apply as from 23 March 2023.

More information on this topic can be found here and here.

Modernisation of the Luxembourg fund toolbox

On 24 July 2023, the Luxembourg law of 21 July 2023 aiming to improve and modernise the legal and regulatory framework applicable to investment fund products has been published in the Official Journal of the Grand Duchy of Luxembourg. It comprises significant amendments to four Luxembourg product laws, namely the law of 23 July 2016 on reserved alternative investment funds, as amended (the RAIF Law), the law of 13 February 2007 on specialised investment funds, as amended (the SIF Law), the law of 15 June 2004 on investment companies in risk capital, as amended (the SICAR Law), and the law of 17 December 2010 on undertakings for collective investment, as amended (the UCI Law, and together with the RAIF Law, the SIF Law and the SICAR Law, the Product Laws), as well as the Luxembourg law of 12 July 2013 on alternative investment fund managers, as amended (the AIFM Law). The overall objective is to improve and modernise the Luxembourg toolbox for investment funds, and therefore to increase the attractiveness and competitiveness of the Luxembourg financial centre. 

Key changes to the Product Laws include inter alia (i) the amendment of the definition of “well-informed investor”; (ii) the extension of the timeframe to reach the minimum capital requirement; (iii) enhanced rules on withdrawal of the depositary; (iv) a new subscription tax exemption for ELTIFs and PEPPs; (v) the deletion of the requirement of notary’s acknowledgment for RAIFs established by notarial deed. Key amendments to the AIFM Law include, among others, (i) clarifications on the marketing to retail investors; (ii) news rules on tied agents; and (iii) clarifications on the liquidation of AIFMs. 

The law entered into force on 28 July 2023.

For more information on this, please click here.

MiCAR

On 9 June 2023, the Markets in Crypto-Assets Regulation (MICAR) was published in the Official Journal of the European Union and will apply as from 30 December 2024, with some rules already applying as of 30 June 2024. Through MiCAR, the European Union is introducing a unified regulatory framework for the crypto-asset market. This framework, the first of its kind, is applicable to both conventional financial sector entities and emerging participants in the crypto ecosystem. These entities engage in activities such as issuing, publicly offering, trading crypto-assets, or providing related services within the EU. 

To obtain a recognised regulated status at the Union level, these institutions must fulfill specific requirements, enabling the cross-border provision of these services throughout the EU market.

For detailed information on this topic, please click here.

DAC 8

On 17 October 2023, the proposal for a Council Directive amending Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC 8) was adopted, introducing an additional layer of due diligence and reporting obligations for taxpayers acting in the crypto-asset market as response to the emergence of new methods of payment and investment such as crypto-assets and e-money, which in most cases escaped from the scope of DAC framework. 

DAC 8 became effective on 13 November 2023 and EU Member States have until 31 December 2025 to transpose the main rules into national law, and the new provisions will generally apply as of 1 January 2026. However, provisions on the identification services should be transposed into national law by 1 January 2024 (applying as from 1 January 2025) and provisions on TIN validation should be implemented into national law by 31 December 2027 (applying as from 1 January 2028).

The final implementation in Luxembourg and other EU members should be monitored as it will be crucial to assess whether transactions carried out by taxpayers in crypto assets would fall into the scope of these obligations, to anticipate to the potential impact and costs these compliance obligations would have on them.

For more information on this topic, please click here.

Update of the EU Blacklist

On 17 October 2023, the Council adopted the new EU list of non-cooperative jurisdictions for tax purposes (the EU Blacklist), which is updated twice a year. Antigua and Barbuda, Belize and Seychelles are being added, while the British Virgin Islands, Costa Rica and the Marshall Islands have been removed from the EU Blacklist. Clients operating transactions with entities located in any of the above-mentioned jurisdictions should thoroughly assess the implications of the updated list on their business operations.

Luxembourg whistleblowing law

The law transposing Directive (EU) 2019/1937 on the protection of persons who report violations of Union law (the Whistleblower Directive) was published in the Luxembourg Mémorial A on 17 May 2023 with a view to establishing a comprehensive legal framework for the protection of persons who report or disclose illicit acts or omissions contravening Luxembourg or EU law ensuring that, inter alia, (i) they are effectively protected against any form of retaliation by their employer and are provided with effective legal remedies, and (ii) they will not incur any liability for obtaining or accessing information that is reported or publicly disclosed.

The obligation to implement dedicated reporting channels and procedures applies to both private and public entities with 50 employees or more, which must establish dedicated written and oral reporting channels and procedures ensuring the confidentiality of the reporting persons and any mentioned third parties and appoint an impartial person responsible for the diligent follow-up of the report. 

All forms of retaliation, including threats and attempts at retaliation, are prohibited against persons who have carried out a reporting pursuant to the law. 

Entities which fail to implement said reporting channels and procedures could face fines ranging from 1,500 to 250,000 euros, with penalties potentially reaching up to 500,000 euros for repeat offences. 

The law entered into force on 21 May 2023, apart from the obligation for private sector entities having between 50 and 249 employees to establish internal reporting channels which shall apply from 17 December 2023.

Further details on this topic can be found here.

Luxembourg foreign direct investments screening regime

On 13 June 2023, the Luxembourg Parliament adopted the law establishing a new legal national framework for the screening of foreign direct investments in Luxembourg, thereby implementing Regulation (EU) 2019/452 on foreign direct investments in the European Union. 

This law introduces a screening mechanism for foreign direct investments (excluding portfolio investments), which are likely to undermine security or public order, which are made by non-European investors in any Luxembourg entity operating in so-called “critical activities” in Luxembourg and shall apply as from 1 September 2023. 

In a nutshell, any investments made by a foreign investor which are intended to establish or maintain a direct and lasting relationship between the foreign investor and an entity governed by Luxembourg law for which the funds are intended, thereby enabling the foreign investor to participate effectively on their own, in concert or by interposition in the control of this Luxembourg entity are subject to compulsory notification to the Minister of the Economy, provided that the Luxembourg entity carries out an activity considered to be critical. 

Critical activities include, inter alia, (i) the development, operation and trading of dual-use goods; (ii) specific activities in the energy, transport, water, health and communications sectors; (iii) in the data processing or storage sector: the installations of data processing, hosting information services and internet portals, and technologies relating to artificial intelligence, semiconductors, and cybersecurity; (iv) in the aerospace sector: space operations and the exploitation of space resources; and (v) in the finance sector: the activities of the central bank, as well as the infrastructures and systems for the exchange, payment and settlement of financial instruments.

Modernisation of Luxembourg insolvency law

Introduced ten years ago as a response to the 2008 financial crisis, the bill of law on the preservation of undertakings and the modernisation of bankruptcy law was finally adopted on 19 July 2023 after a long and eventful parliamentary process and entered into force on 1 November 2023. Greatly inspired by Belgian law, it implements Directive (EU) 2019/1023 on restructuring and insolvency. Its main objective is to favour early restructuring and to avoid bankruptcy.

For further details on this topic, please click here.

Adjustments to the 1915 Law

On 19 July 2023, the Luxembourg Parliament adopted the bill of law 8007 correcting some omissions, errors and inconsistencies in the Luxembourg law of 10 August 1915 on commercial companies, as amended (the 1915 Law). 

The 1915 Law was subject to substantial amendments introduced through the law of 10 August 2016 after almost 10 years of legislative procedure. The complex and lengthy legislation process resulted in a welcome modernisation of the Luxembourg corporate law, however, some omissions, erroneous cross-references passed undetected at the time, and certain uncertainties or inconsistencies were revealed in the practical application of the new provisions. 

The Luxembourg legislator has now seized the opportunity to address these issues by means of adopting the bill of law 8007, without however making any substantial changes. The bill follows the law of 6 August 2021, which has already implemented the most urgent amendment clarifying the scope of application of the criminal sanctions applicable to non-authorised financial assistance. 

Among others, key changes include (i) a clarification that the shares with suspended voting rights (including where the suspension results from the waiver of the voting rights by the shareholder) shall not be taken into consideration for the calculation of the quorums and majorities at the general meetings of shareholders (article 450-1 (9) / article 710-19 of the 1915 Law); (ii) the removal of the double majority (the majority of shareholders per capita plus ¾ of the share capital) requirement with regard to the decision to put a private limited liability company (société à responsabilité limitée) into liquidation; and (iii) expressly providing that sole shareholder owned private limited liability companies (sociétés à responsabilité limitée) may allow in the articles of association their managers/board of managers to increase the share capital (authorised share capital) and to amend the articles of association further to the change of the registered office.

The amendments entered into force on 22 August 2023.

For more information on this topic, please click here. 

Standardised Model Articles of Incorporation for UCITS

On 1 August 2023, the Commission de Surveillance du Secteur Financier (CSSF) communicated on the launch of Standardised Model Articles of Incorporation (the Standardised Model) for drafting articles of incorporation for a an undertaking of collective investment in transferable securities (UCITS) project set up in the form of an investment company with variable capital, with the following characteristics: (a) a UCITS subject to Part I of the Law of 17 December 2010 concerning undertakings for collective investment; (b) a UCITS to be set up in the form of an investment company with variable capital (SICAV); (c) a UCITS to be managed by a Luxembourg-domiciled Management Company or by a Management Company domiciled in another EU Member state in accordance with the freedom to provide services on a cross-border basis; (d) a UCITS set up with multiple sub-funds of low to average complexity. 

Please note that using the Standardised Model shall not be considered as a regulatory requirement or as a guarantee for the approval and that the CSSF may request additional information as it deems necessary in the context of the authorisation process. While the Standardised Model should reflect current and up-to-date practice, the content is composed of information of a general nature and may need to be adapted to suit the context and circumstances of any specific investment company.

For more information on this topic, please click here. 

CSSF FAQ on virtual asset service providers

On 17 August 2023, the Commission de Surveillance du Secteur Financier (CSSF) published its frequently asked questions (FAQ) on virtual asset (VA) service providers (VASPs), which provides useful clarifications on the applicable legal AML/CFT regime applicable, including inter alia (i) the requirement for any person, natural or legal, who is established in Luxembourg and/or provides in Luxembourg any of the following VA-related services on behalf of customers or for its customers to register as a VASP in the CSSF register; (ii) a set of internal criteria analysed by the CSSF in order to determine whether a person providing services in Luxembourg needs to register as VASP or not; (iii) the fact that, under the current national and European legal frameworks, no passporting regime is foreseen; (iv) he level of information expected for the ML/TF risk assessment to be submitted as part of the registration file for a VASP; (v) the expectations in terms of monitoring of the transactions; (vi) the obligation for VASPs to report promptly to the
Financial Intelligence Unit any suspicious activities or transactions; (vi) an annual supervisory fee of EUR 15,000 to be paid by the VASP to the CSSF; and (vii) the fact that the CSSF’s role for the registered VASPs is currently limited to registration, supervision and enforcement for AML/CTF purposes only. 

The FAQ has been established based on the current legal AML/CFT framework applicable to VASPs and does not take into account the evolution of the framework related to virtual assets at European level (i.e. the Regulation on Markets in Crypto-Assets (MICAR)).

CSSF general findings and observations on marketing communications

On 23 August 2023, the Commission de Surveillance du Secteur Financier (CSSF) published the results of its thematic review on marketing communications under Regulation 2019/1156 on facilitating cross-border distribution of collective investment undertakings (the CBDF Regulation), which covers the period from 1 April 2021 to 31 March 2023, in which it lays down its findings and observation, as well as some recommendations to investment fund managers (IFMs) including inter alia on (i) the identification as such of marketing communications; (ii) the consistency with fund’s documents; (iii) the suitability of the marketing communication for the target investors or potential investors; (iv) mandatory references to the availability of fund documents; (v) information on risks and rewards; (vi) information on costs: (vii) information on performance and benchmark; (viii) information on sustainability-related aspects; and (ix) short marketing communications.

You will find more information on this topic by clicking here.  

ESMA Opinion on undue costs

On 17 May 2023, the European Securities and Markets Authority (ESMA) published an opinion on undue costs of UCITS and AIFs (the Opinion) in view of the European Commission’s legislative proposals in the context of the Retail Investment Strategy (see dedicated section). 

The Opinion includes useful suggestions and clarifications, notably (i) a suggestion to amend Article 12 AIFMD to add an obligation for AIFMs to maintain and operate a pricing process which should transparently demonstrate the legitimacy of all incurred costs, with explicit responsibilities assigned to the management body for determining and reviewing the costs charged to investors; (ii) a recommendation for the Commission to provide clarity on the eligibility of costs in reference to the PRIIPs List outlined in Annex VI of the PRIIPs KID Delegated Regulation, which assessment should be fund-specific, considering the fund type and its investment policy on a case-by-case basis as part of pricing due diligence and quantitative aspects such as costs aligning or surpassing market standards; (iii) ESMA’s role to develop Regulatory Technical Standards (RTS) to define circumstances under which a cost in the PRIIPs List would be deemed undue or ineligible, as well as conditions under which national competent authorities (NCAs) could authorise additional cost categories not covered in the PRIIPs List; (iv) the fact that, in instances where undue costs have been charged, managers should be obligated to promptly reimburse or indemnify investors; and (v) that ongoing monitoring and regular evaluations of implemented policies and procedures should be conducted to prevent undue costs,
while anomalies should be annually reported to the NCA and reported to investors.

More information on this topic can be found here.