2022 Thematic Review: STOR Obligations of IFMs

On 25 January 2022, the Commission de Surveillance du Secteur Financier (CSSF) published its 2022 Thematic Review: STOR Obligations of IFMs.
The present review „is part of the measures taken by the CSSF following the finding made in 2019 in the ESMA Peer Review on Suspicious Transaction and Order Reports (STOR) that national competent authorities, including the CSSF, need to engage more with asset managers when it comes to their STOR obligations. Other CSSF measures included awareness raising at several industry events and on-site inspections at Luxembourg-based IFMs“.
„In 2022, the CSSF launched a thematic review on the STOR obligations of Investment Fund Managers (IFMs) under Article 16 (2) of the Market Abuse Regulation (MAR). The phrase “STOR obligations“ refers to the obligation to establish and maintain effective controls to detect and report potential instances of insider dealing or market manipulation to the CSSF“ via a STOR. „In this context, a self-assessment questionnaire was sent to a sample of six IFMs selected based on the size of their assets under management“.
„Generally speaking, it may be noted that the thematic review on the STOR obligations of IFMs“ did not discover indications of serious failures „among respondents as regards their STOR obligations. However, the review pointed out a number of potential shortfalls from the applicable technical standards“, which are laid down by DelReg (EU) 2016/957. „In this sense, the findings of the thematic review are in line with the findings of the aforementioned on-site inspections at IFMs“.
THE GENERAL FINDINGS AND OBSERVATIONS OF THE PRESENT REVIEW ARE THE FOLLOWING:
„The thematic review confirmed the importance of the delegation schemes used by Luxembourg-based IFMs. All respondents without exception indicated to work with business models where under the activity of portfolio management is delegated to a group entity and/or to a third party“. „None of the respondents indicated to maintain a trading desk (which would arguably have heightened the market abuse risks to be addressed by them). Therefore, questions relating to the separation of the activities of the trading desk from the activities of other relevant business units did not arise within the context of the review“.
„The review found that a majority of respondents had undertaken an in-house risk assessment to identify the market abuse risks to which they are potentially exposed as a result of their business activities. Such in-house assessments deserve to be recognized as a best practice, in particular because they constitute a means whereby the IFM can demonstrate the appropriateness and the proportionality of its market abuse controls upon the request of the CSSF, as is required by the aforementioned technical standards“. „None of the respondents indicated a high mark abuse risk, which, in light of the activities performed by them, the regulatory environment in which they operate, the circumstance that none of them operates its own trading desk and the past experience of the CSSF does not generally seem objectionable“.
„A majority of respondents acknowledged the existence of a risk that a staff member may place orders or enter into transactions on own account on the basis of inside information obtained while working for the IFM (or disclose such information to an unauthorised third party with a recommendation to trade on it)“. „In this respect, the CSSF would nevertheless like to emphasize that the aforementioned risk that a staff member with access to inside information may abuse such information, for example, by subscribing or redeeming fund units or shares on own account on the basis of inside information obtained while working for the firm, cannot be excluded and needs to be taken into account by IFMs, in particular through the rules on personal transactions. The CSSF therefore wishes to remind IFMs of the importance to ensure that all staff members have been duly informed that they are not permitted to trade on the basis of inside information, including inside information of which they may become aware while working for the IFM, and that failure to comply with this ‘trading restriction’ may result in administrative or criminal sanctions in case of transgression“.
„Respondents unanimously agreed that staff training is an appropriate market abuse control. A majority also considered that clear written instructions to staff to escalate suspicions of market abuse constitute an appropriate control. Automated controls were also considered appropriate, but only by the larger respondents“. „An automated surveillance of orders and transactions is however not expressly prescribed by MAR, which, in this respect, defers to the scale, size and nature of the business activities of obliged professionals and to the principles of adequacy and proportionality“. „MAR requires the monitoring to be effective. It follows that if an IFM considers, in light of the principles of adequacy and proportionality, that its business activities do not call for an automated monitoring, such IFM must be able to demonstrate, upon request, how suspicious operations may be effectively detected otherwise“. „The CSSF also considers it important that the monitoring, whether through staff vigilance or automated controls, leaves an audit trail, as was not the case for the respondents who rely on staff vigilance only“.
„The feedback from respondents suggests that in many cases, most of the applicable technical standards were fulfilled. However, a number of shortfalls or potential shortfalls from those standards were identified in individual cases. They include the lack of an audit and internal review of the market abuse controls; the lack of a STOR training provided to relevant staff on a regular basis; and the lack of formalization of market abuse controls“.
„A majority of respondents indicated not to have received inside information from the outside, and not to have come across cases where inside information was generated from within the firm, in recent years“, and „none of the respondents indicated to have received ‘market soundings’, which typically contain inside information and are subject to a specific regime under MAR“. „The review found that, in the vast majority of cases, the due diligence conducted by the IFM on the entity to which portfolio management has been delegated covers the existence of market abuse controls at the level of the delegate, which may be considered to amount to a best practice“.