Rules for delegation and oversight of particular importance are the rules on delegation and oversight of delegates.

The main changes are the following:

- Re-statement of the “three levels” of delegation oversight, i.e. (1) initial due diligence, (2) periodic due diligence (risk-based) and (3) ongoing oversight (i.e. KPIs and quality meetings);

- Broadening of scope of delegation oversight, i.e. not only the core functions (portfolio management, risk management and, for UCITS, distribution) as defined by the UCITS and AIFMD Laws are subject to delegation oversight, but also other delegated tasks such as IT, compliance, internal audit, finance, valuation and risk support are subject to at least the initial and periodic due diligence controls. Ongoing monitoring is not required from a regulatory perspective and can be organised on an as-needed basis;

- Inclusion of AML requirements, i.e. in Chapter 5.4, the CSSF has defined distinct scenarios implying AML-related controls for IFMs (cf. AML/TF Governance and AML/TF scenarios);

- Finally, more specific guidance as to the oversight of distribution networks and intermediaries in investment fund share transactions.

What does this mean for fund distribution?

Distribution is subject to oversight and control requirements, both from the perspective of AML as well as for the purposes of broader distribution controls.

The CSSF guidance introduces the concept of “intermediary”, as a counterpart (private or corporate) to the IFM (or its transfer agent) for the subscription/redemption of fund shares.

For direct intermediaries not subject to any other duties imposed by contract or subscription agreement (e.g. execution platforms or collecting agents), only the AML framework applies and provides written requirements to ensure that AML-specific duties are performed by the intermediary in accordance with Luxembourg standards.

For distribution agents to which specific distribution-related duties have been delegated by contractual agreement, the product-related controls apply in addition to the AML-specific ones.

As such, direct intermediaries can be subject to:

(1) AML-specific due diligence and oversight;

(2) or due diligence pertaining to the delegated distribution tasks/duties (e.g. quality of shareholders, complaints, minimum subscription amounts, distribution countries);

(3) or BOTH, if the direct intermediary is a delegated distribution agent via a distribution agreement.

The mapping of all distribution parties (introducers, intermediaries and distribution agents) is a key task of any IFM in order to align its distribution oversight framework (cf. Decision tree: distributor vs intermediary).

All indirect intermediaries or distribution agents are subject to a “mutatis mutandis” principle, i.e. the distribution oversight does not require a full look-through on all sub-­ delegated distribution agents, as long as the IFM has obtained comfort with regard to the first level (i.e. direct distribution intermediary) by obtaining the sub-delegates delegation and due diligence procedures (existence and efficiency) on its sub-delegates.

However, this main principle again changes if the first level (i.e. direct distribution intermediary) is considered high-risk from an AML perspective. In such case, an enhanced AML due diligence process applies, which triggers a look-through on UBOs and ­ sub-delegates/clients.

Consequently, the distribution network management is to be enhanced in light of the new CSSF guidance in order to comply with AML requirements (i.e. AML written agreement and, in case of high risk, enhanced due diligence) as well as in terms of broader distribution control requirements (i.e. distribution agreement for MiFID target market information, quality of investors, prospectus rules and selection of sub-delegates) (cf. New distribution oversight requirements).

More news on the fund industry in supplement.