On 31 March 2022, the CSSF released an FAQ on the use by investment funds of liquidity management tools (LMTs), addressing some of the issues facing investment fund managers (IFMs) with Russian and Belarussian assets under management that have become illiquid or non-tradeable due to the Ukraine crisis and the sanctions imposed by the EU and other countries. More particularly, the FAQ discusses the valuation of affected assets and provides guidance to the management bodies of investment funds on evaluation of a fund's specific circumstances and insight into the various alternatives available.
The FAQ addresses how investment funds with high exposure to illiquid assets should deal with such assets and how the management body of an investment fund should segregate illiquid assets from liquid ones in order to renew the fund's structure and strategy or, as a last resort, to liquidate the fund if no solution can be found. The CSSF emphasises the management body’s responsibility to check, based on the constitutional documents of the UCITS, whether a side-pocket clause could be used to segregate riskier or illiquid assets from more liquid investments and the circumstances and conditions to be considered in that respect.
The FAQ suggests several segregation approaches that can be considered by the governing body with respect to funds with higher exposure to illiquid assets. In that respect, the CSSF suggests, as a first step, suspending subscription and redemption activities and then applying one of the following options to segregate structurally illiquid assets from the still liquid part of the portfolio or, as a last resort, placing the fund in liquidation:
- accounting segregation of the illiquid assets of the impacted fund by allocating the illiquid assets to a new share class with the aim of realising them in the best interest of investors;
- splitting the impacted sub-fund into two sub-funds, with the initial sub-fund retaining the illiquid assets and the liquid assets being transferred to a new sub-fund; or
- splitting the impacted sub-fund into two sub funds, with the initial sub-fund retaining the liquid assets and the illiquid assets being transferred to a new sub-fund.
The management body must be able to demonstrate that the selected segregation option is the only/best possible solution, taking into account the interests of investors, legal aspects (e.g. assessment of potential breaches of the UCITS regulation), tax and accounting aspects related to the proposed transaction, compliance with the sanctions regulations and the constitutional documents of the UCITS, and the costs involved.
Affected investors should be informed of the selected option in accordance with the provisions of the prospectus.
Implementation of any of the abovementioned options requires prior notification to the CSSF in order to obtain an authorisation and submission to the CSSF of relevant information.
Our team is available to provide any assistance you may require in this context.