Further legal and regulatory developments

On 3 February 2025, the CSSF announced the availability of the self-assessment questionnaire (SAQ), the separate report (SR), and the management letter (ML) for UCIs with financial year-ends on 31 January 2025, 28 February 2025, and 31 March 2025 (the “Communication”). These reports are now accessible through the CISERO module on the CSSF eDesk platform. Reports for UCIs with a financial year-end after 31 March 2025 will be released three months prior to the respective year-end. The Communication emphasises that the updates to these reports have been made to align with the entry into force of Circular CSSF 24/856, and incorporate insights gained from CSSF’s assessments and industry feedback.

With the implementation of Circular CSSF 24/856 concerning the protection of investors in case of an net-asset-value (“NAV”) calculation error, the self-assessment questionnaire (“SAQ”) now includes a new question regarding the classification of passive instances of non-compliance with undertaking for collective investment (“UCI”) investment rules. Additionally, the previous question on active instances of non-compliance has been removed following the introduction of new notification forms. The SAQ has also been updated to reflect the expanded scope of Circular CSSF 24/856, incorporating a question about the existence of a formalised policy for handling errors. Furthermore, two new questions address arrangements for investor compensation in cases of subscription through financial intermediaries.

The separate report (“SR”) includes a new procedure requiring auditors to review a sample of passive non-compliance instances in accordance with Circular CSSF 24/856. Additionally, review procedures for active non-compliance instances and significant NAV errors have been modified to a sample-based approach, replacing the previous comprehensive review.

The statutory auditor’s requirement to review a documented “backtesting” control for non-quoted investments in the SR has been removed, although it remains in the SAQ. The sample size for the auditor’s review of non-standard costs/fees in the SR has been reduced from six to two items. Two new questions have been added to the management letter (“ML”), requiring the auditor to confirm whether the UCI’s managers have implemented corrective measures for findings to prevent recurrence and whether significant findings affecting subscriptions and redemptions have been reported to CSSF under Circular CSSF 02/77 or Circular CSSF 24/856.

The ML and supporting documents must now be submitted exclusively through the CSSF eDesk platform, replacing the previous email-based submission method outlined in Circular CSSF 21/790.

On 14 January 2025, ESMA released its latest market report on the costs and performance of EU retail investment products (the “Report”). Alternative investment funds (“AIFs”) reported a total asset valuation of approximately EUR 7.7 trillion in 2023, with EUR 900 billion estimated to be held by retail investors. This marks a decline in the retail investor share from 13.8% to 11.3%, reflecting shifting investor preferences and market conditions.

Retail AIFs include diverse investment categories, such as real estate funds, funds of funds, and other specialised investment strategies. Among these, the Report highlights that “other AIFs” captured the largest market share at 42%, while real estate funds accounted for 21% and funds of funds comprised 22%. The decline in retail participation suggests a growing inclination towards other investment vehicles, possibly due to cost considerations and market volatility.

The Report outlines those annualised returns for retail AIFs improved significantly in 2023 compared to the previous year, mirroring broader market trends. A hypothetical five-year investment of EUR 10,000 in AIFs between 2019 and 2023 would have yielded around EUR 12,600 net, exclusive of fees, or EUR 10,500 when adjusted for inflation. This performance underscores the potential of AIFs to deliver stable returns over longer investment horizons, despite macroeconomic challenges.

A key challenge in evaluating AIFs remains the scarcity of detailed cost data. Unlike UCITS, where cost structures are more transparent, AIFs often lack comprehensive cost disclosures. This opacity makes it difficult for retail investors to assess the true cost-effectiveness of these funds. Additionally, distribution costs, which can significantly impact net returns, remain underreported in the AIF segment.

The evolution of the market suggests a need for enhanced regulatory scrutiny to ensure greater transparency and investor protection. The Report emphasises the necessity of improved data availability and cost transparency to facilitate informed investment decisions for retail participants. Enhanced reporting requirements and standardised cost metrics could improve investor confidence and contribute to a more competitive and efficient retail investment market in the EU.

On 6 March 2025, the CSSF announced an upcoming transformation in the electronic VISA “stamp” procedure for the prospectuses of UCITS, Part II UCIs, SICARs, and SIFs.

Effective as of April 2025, the current VISA procedure will be replaced by a new “e-Identification” system designed to modernise and streamline administrative processes for fund prospectuses. This new system will assign a unique identification number and an e-Identification date. Both elements will be clearly visible on the first page of the prospectus. Submission of new or revised fund prospectuses will be conducted through the eDesk e-Identification prospectus application.

The introduction of this new system comes with changes to CSSF’s administrative procedures. Certain changes can henceforth be integrated into the prospectus without prior approval. In this respect, a guide has been made available via eDesk, detailing the new procedure, the list of amendments exempts from prior CSSF review, applicable conditions and a frequently asked questions section. The CSSF may, however, request documents for ex-post analysis of changes that have not been subject to prior review.

The existing process for amendments requiring prior review by the CSSF for authorisation or non-objection remains unchanged.

On 26 July 2024, the CSSF published a policy statement in connection with the Overseas Funds Regime in relation to the UK Financial Conduct Authority’s publication of a policy statement detailing the final rules and guidance for implementing the Overseas Funds Regime, which will replace the Temporary Marketing Permissions Regime when it expires. The CSSF advises Luxembourg-based management companies to carefully monitor the developments to ensure the continuation of their marketing activities in the UK. Further details and specifications are available on the UK Financial Conduct Authority’s website.

On 14 January 2025, the CSSF introduced new communication methods for requests and reports by financial sector professionals replacing the list of information on the depositary function required by annex 1 of Circular CSSF 18/697. The self-assessment questionnaire for professional depositaries of assets other than financial instruments (“PDAOFI”) must be submitted annually to the CSSF electronically via:

• a dedicated eDesk procedure;
• an API (“Application Programming Interface”) solution using the S3 protocol.

A user guide detailing the submission procedures has been provided by the CSSF. The reporting applies to all PDAOFI for Luxembourg-domiciled UCIs under Article 26-1 of the Law of 5 April 1993 on the financial sector, as amended.

The reference date for the reported data is 31 December 2024, and submissions must be received by 31 March 2025.

On 28 February 2025, the CSSF announced a postponement in notifying financial entities of their obligation to report major incidents on weekends or bank holidays under the Digital Operational Resilience Act (“DORA”). As announced in a communication dated 15 January 2025, the CSSF initially planned to inform affected financial entities by the end of February 2025, in line with Article 5(5) of the RTS. However, as Article 5(5) of the RTS refers to the Directive (EU) 2022/2555 of 14 December 2022 on measures for a high common level of cybersecurity across the Union, the notification process is now delayed until the directive is transposed into national law. Financial entities awaiting confirmation of their reporting obligations will be informed once the transposition is complete. This delay does not impact the broader requirements of DORA, and financial institutions should continue to comply with existing ICT risk management and incident reporting obligations.

In March 2025, the CSSF launched a survey via eDESK to streamline the upcoming submission of the DORA Register of Information for Luxembourg-based asset managers. The survey aims to clarify:

• whether the asset manager is considered a microenterprise;
• whether the asset manager will submit a register of information to the CSSF or be included in a register submitted to another national competent authorities (“NCA”) (consolidation at group level).

Asset managers were expected to reply by 25 March 2025. The survey was concise and straightforward, required minimal effort to complete as the necessary information should have already been available to the entities. Based on the results of the survey, the CSSF will ensure a smooth collection process for the DORA Register of Information and define/confirm the classification of microenterprises for proper supervision.

On 10 February 2025, the law of 6 February 2025 (the “Law”) was published, aiming to integrate the updated European long-term investment fund regulation (“ELTIF 2.0”) requirements into national law.

The Law specifically addresses the investment policies, operating conditions and the definition of eligible assets for investment under European long-term investment fund (“ELTIFs”) and empowers the CSSF to impose administrative actions and penalties on non-compliant ELTIFs. Additionally, the Law integrates new ELTIF measures such as more flexibility in eligible assets, introduction of open-ended ELTIFs, master-feeder structures, increased borrowing limits, fund of funds strategy, and a matching mechanism for secondary transactions, without introducing extra local provisions, ensuring a smooth implementation into Luxembourg's legal framework.

On 12 March 2025, ALFI provided its responses to ESMA’s consultation on the draft RTS for open-ended loan-originating AIFs under the AIFMD. Considering that AIFMs need to demonstrate to their competent authorities that the AIFs’ liquidity risk management systems are compatible with their investment strategies and redemption policies, existing AIFMD provisions are sufficient, and no additional supervision of AIFMs should be needed in that respect.

ALFI suggested that each AIFM should determine relevant factors based on the investment policy and characteristics of the funds managed, rather than adding a specific list in the RTS, which might be unnecessarily restrictive.

Additionally, it was stressed that AIFMs typically have redemption/liquidity policies for groups of funds of the same type (e.g., loan funds or real estate funds), with individual fund provisions included in appendices as needed. Separate policies for each fund were not seen as necessary.

It was also pointed out that “the redemption policy of open-ended loan-originating AIFs differs from the daily redemptions typical of UCITS. AIFs may have various redemption terms, differing from daily redemptions, while still qualifying as open-ended”. Appropriate liquidity management tools include not only redemption frequency but also notice periods and redemption gates.

Finally, ALFI stressed that determining a proportion of liquid assets on a pre-launch/product basis to meet redemption requests would be counterproductive and that the AIFMs should have the ability to determine “which portion of the AIF’s portfolio may be deemed liquid taking into consideration other liquidity management tools”. The fact that the RTS only define liquid assets in a principle-based manner is welcomed and it would not be appropriate to extend further the definition or to provide a list of liquid and illiquid assets.

On 10 February 2025, ALFI responded to the international organisation of securities commissions (“IOSCO”) consultation on the Guidance for Open-ended Funds for Effective Implementation of the Recommendations for Liquidity Risk Management.

ALFI welcomed IOSCO's revised recommendations, appreciating the nuanced and flexible approach.

The response focuses on key considerations for assets liquidity and redemption terms in open ended funds (“OEFs”).

ALFI agreed with the identified common components of OEF structures, such as notice periods, lock-up periods, settlement periods and redemption caps, emphasising, however, that the above tools are not exhaustive and that fund managers should have the ability “to rely on a broad toolkit of LMT and measures with diverse features and then choose the appropriate ones for the particular circumstances faced, given the nature of the fund, the fund investments and the investor activity on that particular day” instead of having to choose from a list of predefined tools.

ALFI highlighted the limitations of a prescriptive approach to fund classification based on asset liquidity, arguing that a more flexible, principle-based approach would be more effective. They discussed the inherent uncertainties in liquidity estimates and the challenges of categorically classifying assets based on liquidity, noting that liquidity profiles are time-sensitive and can change rapidly.

ALFI proposed several recommendations to enhance liquidity risk management, including:

• Encouraging the use of stress testing and scenario analysis
• Promoting transparency and disclosure of liquidity risk management practices to investors
• Supporting the development of industry best practices and guidelines

ALFI concluded by reiterating their support for IOSCO's revised recommendations and emphasising the need for a balanced approach that considers the dynamic nature of liquidity and the practical challenges of implementing prescriptive regulations.