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Luxembourg Fine Tunes Specialized Funds Regulation

by Ulrika Lomas,, Brussels

27 August 2012

Luxembourg's Financial Ombudsman (CSSF) has recently issued a regulation regarding requirements for specialized investment funds in matters of risk management and conflicts of interests.

Specialized investment funds are usually more lightly regulated than mainstream quoted investment funds. These funds are only available to institutional investors or to individuals with at least EUR125,000 in investments or “sound expertise”.

To protect international investors and improve Luxembourg's reputation as a reliable offshore financial centre (OFC), Luxembourg enacted back on 13 February 2007 a law covering the regulation of specialized investment funds. The CSSF has finally issued in August 2012 a regulation to enforce the provisions of this law with respect to conflicts of interests and risk management.

Under the new regulation, a specialized investment fund is required to amend its business structure in such a way that the fund has effective risk management as required by law, and that the fund's business structure protects investors from conflicts of interests.

Concretely, the fund must have a separated risk management team, and it must be able to prove it has taken “appropriate [investor] protection measures” with regard to conflicts of interests. Moreover, the fund's risk management team must have extensive access to any information which is relevant for its mission. However, any fund may still choose to externalize its risk managament function.

There are also tight reporting requirements to the CSSF with respect to risk managament, although no regular reporting is required. All funds covered by the law must detail their risk managament structure upon application of a licence, and must report any “major change” to the CSSF thereafter.

Similar concrete requirements also apply for management of conflicts of interests purposes, but funds are also required to take steps to “identify situations suceptible to create conflicts of interests”, and hold a registry of such situations. This is to prevent fund managers from using the defence of not being aware of potential conflicts of interests.

Existing Luxembourg specialized investment funds must comply with this new regulation by December 31st, 2012.

TAGS: individuals | investment | business | interest | law | investment funds | Luxembourg | offshore | regulation

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