Cyprus: Cyprus introduces new law on sub-threshold AIFMs
Lawyers from Elias Neocleous & Co look at the new rules and how the new regime will look for alternative investment fund managers
The provisions of the EU Directive 2011/61/EU on alternative investment fund managers (AIFMD) have been transposed into the Law on Alternative Investment Fund Managers L. 8(I)/2015, as in force (the Cyprus AIFM Law). On a Cyprus-specific level, the Law on Alternative Investment Funds L. 124(I)/2018 (the Cyprus AIF Law) put in place a regime applicable to the authorisation, operation and regulation of such collective investment vehicles that operate as alternative investment funds (AIFs) in various legal forms recognised by the Cyprus AIF Law. Against this legal background, the EU level 2 framework on AIFMD, together with the secondary legislation of the Cyprus Securities and Exchange Commission (CySEC) under the Cyprus AIFM Law and the AIF Law, further supplement and detail the sound framework for the establishment and operation of these regulated structures in and from Cyprus. From a commercial perspective, this regime at the disposal of managers of AIFs (AIFMs) has been utilised with great success so far.
Preamble 17 and Article 3(2) of the AIFMD provides to EU member states the option to apply a lighter regime for AIFMs that fall below the thresholds set out it in the AIFMD and the Cyprus AIFM Law, as their assets under management (AuM), in total, either do not exceed €100 million ($119 million) for leveraged AIFs, or €500 million for unleveraged AIFs that do not grant to investors redemption rights for a five-year lock up period. These thresholds are replicated in Section 4(2) of the Cyprus AIFM Law.
Exercising the above option under the AIFMD, Cyprus enacted relevant legislation this summer, namely the Cyprus Law on Sub-Threshold AIFMs L. 81(I)2020 (Cyprus Sub-Threshold AIFMs Law).
The Cyprus Sub-Threshold AIFMs Law applies to sub-threshold AIFMs in Cyprus, authorised by CySEC, or by the competent authority of another EU country as home member state, and Cypriot investment firms (CIFs) which have been licensed by CySEC for the provision of AIF management functions under the Cyprus Investment Services Law L. 87(I)/2017, transposing Mifid II.
A sub-threshold AIFM is the legal person acting as an external manager of the following:
an AIF based in Cyprus, in another EU member state or in a third country;
an AIF with limited number of persons (AIFLNP) under the Cyprus AIF Law; or
a registered AIF (RAIF) under the Cyprus AIF Law.
The person may provide the following management services:
AIF investment management services, which includes portfolio management and risk management;
AIF administration, including the following:
(i) Services for dealing with legal issues and accounting management services;
(ii) customer service information;
(iii) AIF portfolio valuation services and determination of the value of shares, including any tax issues, regulatory compliance, issuance and redemption of units, distribution of proceeds from units to investors and record-keeping activities;
the offering or placement of units of AIFs to investors;
activities relevant to assets of the AIF (such as services necessary for the fulfilment of the fiduciary duty of the sub-threshold AIFM).
To be authorised by CySEC, a sub-threshold AIFM must have a capital of at least €50,000. Additional own fund obligations arise if the value of the managed portfolios exceeds €125 million; in such an instance, an additional equity requirement would be triggered, equal to 0.02% of the amount by which the value of its portfolios exceeds the stated amount.
The application for authorisation to CySEC is detailed and should, inter alia, be accompanied by the following information:
the members of the board and senior management staff;
the identity and the shareholding percentage of direct, or indirect, shareholders with a special participation in the sub-threshold AIFM;
business plan and detail of internal operations manual;
investment strategies, the risk profile, and the use of leverage.
From a corporate governance perspective, at least four natural persons should comprise the board of the sub-threshold AIFM, at least two required to have executive duties, with the remaining responsible for non-executive roles. Adequate and suitable administrative and other procedures for information data, actions to minimise risk of losses due to conflicts of interests, liquidity management and other requirements for AIFMs are also adopted to ensure investor protection.
There is hope that this sub-threshold AIFM regime will simplify procedures and will improve market accessibility for AIFMs looking to Cyprus as a headquartering option. This initiative, in the European framework reinforcing investor trust and mitigating systemic risks, could provide an interesting option for collective investments in the post-Covid reconstruction era.