LUXEMBOURG - The financial regulator Commission de Surveillance du Secteur Financier (CSSF) is rethinking its rules on substance for funds firms wishing to operate in the duchy and is set to relax its rules.

As reported this month in European Fund Focus publication, sources close to a lobbying effort have told EFF that throughout March, fund association Alfi was in talks with the CSSF to negotiate a rethink of the substance requirement.

It is believed that in a meeting later that month CSSF indicated to Alfi that if firms were looking to set up in Luxembourg but were able to prove substantiation outside of the duchy, the firm may not have to fulfil the substance rule as the letter of the law states.

The substance rules came into play because promoters of Luxembourg funds come from 42 different countries. However, in many cases it was believed these funds or their Luxembourg management company often outsourced administration and investment management functions, and in most cases are virtually letter box entities.

Chapter 13 of the 2002 Law requires management companies of Luxembourg UCITS to meet certain capital requirements and to have sufficient resources and means to conduct their business from Luxembourg.

It is understood that the CSSF will this month release a circular re-assessing the substance rules and providing a full explanation of their new position.

Alfi general director Robert Hoffmann says: “”Substance is going in the right direction. The case by case approach has already become common practice and the CSSF is now aware that substance is not a one size fits all solution.

The CSSF was unavailable for comment.