Luxembourg’s financial watchdog, the CSSF, has made important changes to its rules for valuations of investment funds, the first in two decades. While many things stay the same, some key updates—like lowering limits for money market funds and adding new checks before making investment decisions—are aimed at tightening control and providing clearer guidance.
Starting in January 2025, these changes will affect a wide range of investment funds, pushing fund managers to review their processes to meet the new standards. While the regulator has previously published most of the rules in other communications, there are some new elements. Investment Officer spoke to three market participants and heard a surprising diversity of views.
“90% of it is no changes from what has already been communicated” by the CSSF, said Virginie Boulot, an audit partner at Deloitte who worked with the CSSF in preparing the circular. Boulot pointed to reduced thresholds for money market funds (from 25 basis points to 20) and the placement of all supervised funds in the circular.
NAV error compensation nearly €50 mln in 2023
The 2023 CSSF annual report, just published last week, calls NAV errors, as fund valuation errors are commonly known, a “recurring issue in the supervision” of investment funds. That year, the CSSF received 1,609 declarations of NAV calculation errors, down 12.7 percent from 2022. Total investor compensation for NAV errors rose significantly in 2023, reaching 49.6 million euro.
The CSSF published its Circular 25/856 on NAV calculation errors and investment breaches at the end of March, “considering the CSSF’s important mandate of investment protection and in light of the regulatory developments since 2002, the developments of the supervisory practices of the CSSF and the market evolution with regard to the activities of undertakings for collective investment.” It will take effect on New Year’s Day 2025.
Read more: CSSF circular on protection of investors in case of NAV errors
Useful to the market
“There is nothing really new, but the fact that we have a detailed circular explaining how the CSSF, is dealing with those issues is very useful for the market, especially because the Luxembourg fund industry is growing, and there are many new players, and they need to get familiar with those rules,” explained Emmanuel F. Henrion, a Clifford Chance partner specialising in structuring complex and alternative Ucits funds.
Some observers see some major changes. “One of the major changes was that the CSSF stipulated that there should be ex-ante controls,” said Viviane de Moreau d’Andoy, an independent lawyer who spent 25 years on investment funds and regulatory matters.
Ex-ante controls, d’Andoy explained, are carried out by an investment adviser to establish the shares’ suitability for the investors.
Grey area
She described this as still a “grey area”. “I know that a lot of people were not doing ex ante, so it was something you had to understand – it was not clear, and now it’s really clear.”
The new CSSF rules apply to the panoply of Luxembourg investment funds: Ucits, Part II Funds, SIFs and Sicars. It also applies to unregulated alternative investment funds (including Raifs) when they qualify as MMF, Eltif, Euveca or Eusef where the CSSF is the competent authority.
Clear procedures
The CSSF emphasised the importance of clear valuation procedures and timely rectification of errors to protect investors in discussing “handling errors”.
Henrion agreed that there is quite a bit of confusion in the industry despite previous CSSF clarifications.
“It is fair to say that some people believe they understand the rules, the regime, but actually they are misunderstanding.”
First time
Boulot of Deloitte took issue with this statement: “It’s the first time I hear such a remark,” she exclaimed. “I’ve never heard any actors telling me there is this confusion.”
For example, Henrion said some don’t really understand the difference between active and passive breaches or think that an NAV calculation error can only be an error in the calculation process.
D’Andoy also pointed to a provision she explained as meaning “you have to take into account the special situation of each final beneficiary.”
“I think this is a big revolution because it’s a lot of calculation that will have to be done on each individual case,” she said.
Major danger
D’Andoy explained her belief that regulatory attention on NAV errors seems misplaced when private banks (such as Banque Havilland) have gone out of business.
“For me, the major danger that investors are facing is to have an investment that is going bankrupt, because there you really lose money, whether there are some little errors in the calculation which are not really material,” she said.
Boulot at Deloitte pointed out that while most mutual funds have large numbers of investors, reducing the individual amounts, alternative funds often have a small number of investors – she mentioned “four or five”.
Cross-pollination
The CSSF is at the forefront of such regulation in Europe, as there is no EU-wide legislation governing fund valuations. Boulot explained there’s been cross-pollination. She pointed to Ireland’s CBI financial regulator, which had published a paper and held a public consultation.
“The CSSF, when they read this paper, there were some topics that they actually did include in their circular.” For example, “this other type of error with no materiality” was something that the CSSF introduced, she explained.
Further reading on Investment Officer Luxembourg:
- Fine for Vistra over NAV errors heralds new regime in Luxembourg
- Ireland joins supervisory drive on fund valuations
- IO Talks podcast: valuation experts move centre stage