The Central Bank of Cyprus (“CBC”) held a seminar in Nicosia on 20 June 2014 on the impact of the upcoming Alternative Investment Funds (“AIF”) Law on private International Collective Investment Schemes (“private ICIS”), including pending applications.
It outlined key features of the AIF Law in terms of available products and supervision. This update explains the key points and transitional arrangements that will apply.1
The CBC is currently the competent authority for the licensing and supervision of regulated non-UCITS2 products in Cyprus. Cypriot regulated non-UCITS products are currently available as private ICIS. They can be offered to a limited number of 100 investors by means of private offer and are subject to less regulation than a public fund or a fund targeting experienced investors would.3 However, the need to align the Cypriot investment funds’ legal framework with recent EU Law developments, in particular with the EU AIFM Directive (Directive 2011/61/EU)4 together with the stated intention of local professionals to establish Cyprus as an emerging funds centre has led to a series of developments:
· A new law, the AIF law is going to be passed soon by the House of Representatives repealing the ICIS Law and replacing private ICIS by a new and broader range of regulated non-UCITS products, the AIFs. There will be AIFs available to the public and to experienced investors, as such experienced investors are being defined in the AIF Law. Further, a third category of AIFs corresponding to the lightly regulated private ICIS regime will be introduced, the AIFs with a limited number of investors (“light-touch regulated AIFs”). Existing private ICIS, including those whose application will be pending before the CBC upon enactment of the AIF Law, may this way continue to exist as light-touch regulated AIFs;
· The competent authority for the regulation and supervision of AIFs, including the existing private ICIS and those whose application will be pending upon enactment of the AIF Law, will no longer be the CBC but the Cyprus Securities and Exchange Commission (“CySEC”).
2. Transitional provisions framework
· Transitional provisions are laid down in Article 120 f. of the AIF Law.
· Existing private ICIS must, within four months from enactment of the AIF Law either:
(i) Submit the necessary documents, so as to operate as light-touch regulated AIFs (no license required; only additional information); or
(ii) Apply for a licence to operate as a public AIF or an experienced investor AIF; or
(iii) Opt-in to the AIFM Law regime as self-managed AIFs (AIF=AIFM), where applicable.
· In case of non-compliance with any of the above possibilities, private ICIS must enter into dissolution and liquidation within six months following expiration of the four months’ compliance deadline; dissolution and liquidation will be governed by the (repealed) ICIS Law.
· Pending applications for private ICIS shall be examined by CySEC according to the new light-touch regulated AIF regime, unless a license to operate as a public AIF or an experienced investor AIF is applied for upon enactment of the AIF Law.
3. Key features of light-touch regulated AIFs
· Branded as “AIFs with limited number of investors” max. 75. All of them must be experienced, within the meaning of the AIF Law.5 An experienced investor, according to the AIF Law, either invests minimum EUR 125.000 in the AIF or, if less is invested, submits evidence of sophistication provided by a financial services professional.
· Can be set-up either as a company (fixed or variable capital) or limited partnership; in both cases legally segregated sub-funds are allowed.
· If not self-managed, the regulatory status of the eligible external manager depends on the composition of the portfolio:
(i) UCITS management companies authorised pursuant to the UCI Law or the EU UCITS IV Directive (“UCITS mancos”) and Cypriot Investment Firms (“CIFs”) or Investment Firms authorised elsewhere in the EU pursuant to MiFID Directive (2004/39/EC) are eligible external managers in case of portfolios consisting of financial instruments. The appointment of third country managers is subject to conditions only;
(ii) For portfolios consisting of other assets than financial instruments, an unregulated company would be an eligible external manager, if exclusively managing only one such AIF;
(iii) If an AIFM authorised pursuant to the AIFM Law or the AIFM Directive is appointed, then the “light-touch” regime is disapplied and the light-touch regulated AIF is brought under the scope of the AIFM Law as well. However, if assets under management exceed the AIFM Law authorisation thresholds,6 then the appointment of an entity authorised as AIFM pursuant to the AIFM Law or the EU AIFM Directive is a “must” and the AIFM Law provision apply in their entirety as well.
· A light-touch regulated AIF is available also for new vehicles not only for existing private ICIS or private ICIS whose application is pending.
Public AIFs and experienced investor AIFs:
· Can be set-up either as a company (of fixed or of variable capital), a common fund or a limited partnership; in all cases legally segregated sub-funds are allowed.
· No maximum number of investors. The status of an experienced investor however, requires minimum investment of EUR 125.000 or evidence of sophistication provided by a financial services professional.
· If not self-managed: An AIFM, authorised pursuant to the AIFM Law or the EU AIFM Directive, a UCITS manco and a CIF or an Investment Firm authorised elsewhere in the EU pursuant to MiFID Directive are the eligible external managers. However, the appointment of an AIFM leads to the additional application of the AIFM Law regime instead of the AIF Law provisions that would only apply, if a UCITS manco or a CIF/Investment Firm authorised pursuant to MiFID were appointed. If assets under management however exceed the AIFM Law authorisation thresholds, then the appointment of an entity authorised as AIFM pursuant to the AIFM Law or the EU AIFM Directive is a “must” and the AIFM Law provisions apply in their entirety.
· Exemption from the requirement to appoint a Depositary:
(i) For light-touch regulated AIFs: When assets under management are less than EUR 5 mi. or when there are less than five investors in such AIF or when all investments are considered not to be “subject to custody” (the meaning of this term has to be determined since it refers to “assets” in general and not only to “financial instruments subject to custody” as it is the case in the AIFM Law; it is intended to apply to real estate, commodities, assets of passion funds etc.);
(ii) For public AIFs and experienced investor AIFs: When all assets are considered not to be “subject to custody” (the meaning of this term has to be determined since it refers to “assets” in general and not only to “financial instruments subject to custody” as it is the case in the AIFM Law; it is intended to apply to real estate, commodities, assets of passion funds etc.);
(iii) For self-managed AIFs of whatever type opting-in to the AIFM Law regime: No exemption is possible. A depositary has to be appointed in every case, in accordance with the provisions of the AIFM Law.
· Eligible Depositary for light-touch regulated AIFs, whose management falls below the AIFM Law authorisation thresholds: A credit institution, a CIF or another entity to be determined as eligible.
· Eligible Depositary for public AIFs and experienced investor AIFs, whose management falls below the AIFM Law authorisation thresholds: A credit institution, a CIF or another entity to be determined as eligible; provided the assets under management do not comprise “financial instruments subject to custody”, within the meaning of the AIFM Law, a registrar, or a fiduciary services provider can be appointed as depositaries.
· Self-managed AIFs of whatever type opting-in to the AIFM Law regime: A credit institution, a CIF with minimum regulatory capital of EUR 730.000 and authorisation for the ancillary service of safe-keeping or the Cypriot branch of such entities authorised elsewhere in the EU; until 2017 a credit institution based elsewhere in the EU can be alternatively appointed as custodian; for AIFs, whose assets under management do not comprise “financial instruments subject to custody”, within the meaning of the AIFM Law, a registrar, or a fiduciary services provider can be appointed as depositaries.
1This update is based on the presentation that took place on 20.06 and on the responses delivered during the discussion that followed such presentation.
2 Undertakings for Collective Investment in Transferable Securities (“UCITS”) are investment funds regulated by means of the EU UCITS IV Directive (2009/65/EC). The UCITS IV Directive has been incorporated into Cypriot Law by means of the UCI Law (Law 78 I/2012). UCITS constitute a regulated funds category by themselves. The present update focuses on the transitional provisions applying to regulated non-UCITS in Cyprus, which are the private ICIS provided for under the ICIS Law (Law 47 I/1999).
4 Incorporated into Cypriot Law by means of the AIFM Law (56 I/2013).
5 A light-touch regulated AIF is distinguished from an experienced investor AIF, although having the same investor base. Apart from the extent of regulation that differs, a light-touch regulated AIF may have only 75 investors all of them being experienced, whereas an experienced investor AIF may have potentially unlimited investors all of them being experienced.
6 As laid down in Art. 4(2) of the AIFM Law.