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Cyprus: Regulating AIFM activity

Kyriacos Kourtelos
In 2009, the EC proposed a directive on Alternative Investment Fund Managers (AIFMs). The proposed directive aimed to ensure a high level of investor protection by setting out a common framework for the authorisation and supervision of AIFMs in the EU. Further, it aimed to provide robust and harmonised regulatory standards for all AIFMs within its scope and to enhance the transparency of AIFMs' activities and improve disclosure to stakeholders. In 2010, a political agreement was reached by the European Parliament and the Council of Ministers on Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD), which amended directives 2003/41/EC and 2009/65/EC and regulations EC 1060/2009 and EU 1095/2010. As the AIFMD adopts a phased approach to the implementation, it affects European Economic Area (EEA) and non-EEA fund managers differently. Nonetheless, becoming fully authorised under the AIFMD may allow certain fund managers to undertake management and marketing activities throughout the whole of the EU.

Member states were required to transpose the AIFMD into national law by July 22 2013. Cyprus was the second member state to harmonise its legislation with the AIFMD, with the enactment of the Alternative Investment Fund Managers Law of 2013 (Law 56(I)/2013 – the Law), which was published in the Official Gazette of the Republic on July 5 2013. The Cyprus Securities and Exchange Commission (CySEC) was appointed as the relevant supervisory authority under the law. The AIFMD and the law are complemented by three EC regulations that have direct effect, namely:

  • EU 231/2013 with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision;
  • EU 447/2013 establishing the procedure for AIFMs who select to proceed under Directive 2011/61/EU; and
  • EU 448/2013 establishing a procedure for determining the member state of reference of a non-EU AIFM under Directive 2011/61/EU.

The law regulates the establishment and operation of AIFMs who manage any type of investments which are not Undertakings for Collective Investment in Transferable Securities (Ucits) and thus form part of the Alternative Investment Funds (AIFs) category. In addition, the law touches upon a number of other issues, including fund manager remuneration policies, the use of depositaries and the treatment of structured products held in funds. The law creates freedom of operation for AIFMs, stating that: (i) Cyprus-based AIFMs may manage Cypriot AIFs or AIFs of another member state or third country; (ii) EU or third country AIFMs may manage Cypriot AIFs; (iii) Cyprus-based AIFMs may market units or shares of AIFs that they manage in other member states or third countries; and (iv) EU or third country AIFMs may market units or shares of AIFs they manage in Cyprus.

AIFMs are responsible for the management of a substantial volume of invested assets in the EU, accounting for a considerable amount of trading in markets for financial instruments. Therefore, they might also influence the Cyprus markets through their investment in corporate entities registered in Cyprus.

AIFMs demonstrate a considerable influence on the markets in which they operate; their activities may increase volatility and risk throughout the financial system, as the 2008 economic crisis illustrated. Starting from the premise that uncoordinated national responses on the part of member states make it difficult to manage systemic risk, the AIFMD aims to provide a coherent approach to the related risks and their impact on investors and markets in the EU. Following the 2013 bail-in, the Law will provide a framework for the rehabilitation and reconstruction of the Cyprus financial services sector, and its effective implementation is of utmost importance. In particular, CySEC, as the supervisory body, will need to strike an appropriate balance so that it achieves the directive's aim of protecting investors without imposing excessive regulatory and administrative burdens on the organisations it supervises.

The Cyprus financial services sector is experiencing significant change as a result of the country's recent economic difficulties. We are seeing the blurring of the distinctions between alternative investment funds and traditional hedge funds and the opportunities arising from the restructuring of the Cyprus banking sector, all against a backdrop of unprecedented global regulatory change. With the appropriate regulatory balance, Cyprus's excellence in professional and financial services, its legal and business infrastructure and its strategic location will stand it in good stead to emerge as a highly competitive base for investment management activities.

Kyriacos Kourtelos

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