On March 29, 2024, the CSSF introduced Circular 24/856 to enhance investor protection regarding net asset value (NAV) calculation errors and compliance issues at Undertakings for Collective Investment (UCIs).
This new circular will replace Circular 02/77 starting January 1, 2025.
Expanded Scope
The new Circular now includes a wider range of investment entities, such as:
- Specialized Investment Funds (SIFs) and Investment Companies in Risk Capital (SICARs)
- Money-Market Funds (MMFs), European Long-Term Investment Funds (ELTIFs), and other European funds.
Responsibilities
It clarifies the roles of key stakeholders (directors, fund managers, and depositaries) in managing errors and ensuring compliance, emphasizing the need for strong governance to prevent issues.
- NAV Calculation Errors and the Tolerance Levels:
- Different tolerance thresholds for errors in NAV calculations are set based on the fund type, with stricter limits for retail investors.
- A new qualitative approach allows some funds to have higher thresholds under specific conditions, up to a maximum of 5%.
- Correction and Compensation:
If a NAV error occurs, the responsible party must quickly fix the issue and compensate affected investors without delays. - Ongoing Compliance:
Funds must continuously comply with all investment rules, including those related to environmental, social, and governance (ESG) criteria. - Breach Classification:
The Circular distinguishes between active breaches (avoidable) and passive breaches (beyond control), with specific guidelines for addressing each type. - Remediation Procedures:
Funds must have a clear policy for handling breaches from the start and must correct issues promptly while considering investor interest - Other Errors
| Other Errors [1] | Corrective actions |
| Swing Pricing Errors | Definition: Swing pricing is a mechanism used to adjust a fund’s Net Asset Value (NAV) to protect existing investors from the transactional costs associated with significant subscriptions and redemptions. Incorrect application of this mechanism can result in inaccurate NAV valuation, thereby impacting fairness among investors [2]. Depending on the type of incorrect application, the UCI is indemnified if a loss occurs, and the investors are indemnified as per the material NAV error procedure. |
| Fee and cost errors | Errors can occur when fees and costs are not charged in accordance with the fund’s constitutive documents, such as the prospectus. This may include unanticipated fees or incorrect amounts. In cases of overpayment, the UCI is compensated without regard to the tolerance thresholds. In cases of underpayment, there are two possible approaches: 1. No retroactive deduction from the UCI’s assets, requiring those responsible for the error to cover the amount 2. Retroactive deduction and correction of NAV errors without regard to the tolerance thresholds. |
| Incorrect application of cut-offs rules | Cut-offs are deadlines set for the receipt of subscription and redemption orders. Incorrect application can result in improper processing of investor transactions. [3] – If the error results in a gain: the investor retains the gain, and the UCI is compensated. – If the error results in a loss: the investor is compensated If the error results in a loss: the investor is compensated |
| Investment allocation errors | These errors occur when investments are improperly allocated between the sub-funds or portfolios of a fund. [4] Erreurs d’allocation d’investissement – If the error results in a profit: the UCI retains the profit. – If the error results in a loss: the UCI is compensated without regard to the tolerance thresholds. |
External Auditor Intervention
- Auditors will conduct risk-based reviews and issue:
- Separate Report based on a sample.
- Special Report for UCITS and UCIs Part II if compensation exceeds:
- EUR 50,000 total or
- EUR 5,000 per investor.
- The special report is due within three months of CSSF notification.
- Compliance audits must start from January 1, 2025.