Following a supervisory review of the monitoring put in place by selected investment fund managers (“IFMs”) in relation to the delegation of the portfolio management function, the CSSF published in October 2024 its main observations and related recommendations for improvement in a feedback report.
CSSF Circular 18/698 sets out extensive provisions relating to delegation by IFMs. The CSSF’s observations and recommendations in the feedback report are not aimed at introducing new rules but rather center on how they expect the provisions of the Circular to be implemented in the context of portfolio management. While the review related to the portfolio management function the recommendations should also be applied to other delegated functions.
Observations on monitoring
Irrespective of their size, IFMs must have in place operational procedures to monitor the delegation. The procedures must clearly define “who does what, when and how” and must be supported by documents to prove the existence of such controls.
Initial and on-going due diligence processes cannot rely solely on the reception of self-assessment questionnaires or on onsite visit memos. The analyses should be contained in written reports that are validated, dated and signed by the relevant staff members.
Business continuity plans of the delegate should be verified and tested on a regular basis by the IFM.
In terms of having adequate resources to monitor the delegated functions the CSSF has set out criteria to be considered by the IFM in determining whether the human and technical resources available are sufficient, including (i) the number of delegates, (ii) the volume of assets under management where the portfolio management function has been delegated, (iii) the number of UCIs/Sub-funds concerned by the delegation and (iv) the nature and complexity of the investment policies.
The CSSF highlights that the internal audit of the IFM should include in its internal audit plan the monitoring of the delegated activities covering all aspects of the delegation.
Contingency Plans
The CSSF reiterates that each delegation contract contains a clear clause giving the IFM the right to withdraw the mandate with immediate effect when justified by the investors’ interests. In anticipation of such an even the CSSF now specify that the IFM should have in place contingency plans. In this regard the CSSF makes a number of recommendations including that:
- the contingency plan should describe the exit strategies developed by the IFM, consisting of transferring the delegated function either to another delegate or by integrating the function within the IFM itself;
- the IFM should evaluate the impacts of the exit strategy, estimating the exit costs, resources and time required;
- the IFM should proceed to a periodic reassessment of the feasibility of each exit strategy developed.
Recommendations
IFMs should monitor compliance with applicable rules of conduct in the context of the portfolio management delegation. In this regard the CSSF recommends that the rules of conduct should be covered by the internal audit plan.
A further recommendation is that requirements on personal transactions in the context of the portfolio management delegation be covered by the internal audit plan.
Pursuant to the regulatory framework applicable to alternative investment fund managers they should be able to demonstrate the objective reasons for delegation and ensure that such reasons are properly documented and that the analysis is made available upon request. The CSSF recommend that UCITS management companies apply the same principle. Excessive reliance on delegates from the same group is to be avoided.
Next Steps
The CSSF have invited all IFMs to perform, at the latest by the end of Q1/2025, a comprehensive assessment of how they monitor the delegation of their portfolio management function in the light of their observations and applicable regulatory requirements. While there is no express requirement to feed back to the CSSF on the results of such assessment it can be assumed that there will be follow up by the CSSF on this point.
Share on
