Cyprus: The Cyprus Investment Firm

Last Updated: 29 April 2015
Article by Andri Michael

A. INTRODUCTION

The provision of investment and ancillary services in Cyprus is governed by the Law 144(I)/2007 on the Provision of Investment Services, Exercise of Investment Activities, the Operation of Regulated Markets and Other Related Matters (the "Law").

The Law came into force on 1st November 2007 repealing and replacing the old Investment Firms Law of 2002 and implementing the provisions of the Markets in Financial Instruments Directive ("MiFID") into the domestic law. The Law has undergone various amendments with the most recent ones taking place in 2014.

The implementation of this new legal framework and its continuous harmonization with European Directives along with a favorable tax treatment makes Cyprus an attractive place for establishing an investment firm ("IF") offering investors and businesses a "single passport" to provide investment services across the European Union ("EU").

With this report we shall briefly explain the main features of the Law and present some of the requirements to set up a Cyprus Investment Firm ("CIF").

B. THE SCOPE OF APPLICATION OF THE LAW

The Law regulates the provision of investments and ancillary services, as well as the performance of investment activities, as these will be identified further below in Chapter III, on a professional basis in the Republic of Cyprus (the "Republic") including:

  • any provision or offer for the provision of investment and ancillary services, made from a place outside the Republic to persons within, or resident or domiciled in the Republic, provided the above provision or offer reaches such persons when they are within or resident or domiciled in the Republic or whether the relevant transaction is concluded within the Republic;
  • any provision or offer for the provision of investment and ancillary services, which comes from inside the Republic or from a person within, resident or domiciled in the Republic, to persons that are within, resident or domiciled in the Republic or outside the Republic;
  • any provision or offer for the provision of investment and ancillary services, that comes from a person that is within, resident or domiciled within the Republic and acts or purports to be acting in the capacity of an employee or in another capacity, on behalf of a third person who is outside the Republic, to persons that are within resident or domiciled in the Republic or outside the Republic.

C. INVESTMENT SERVICES

I. Investment Services and Activities

The investment services and activities which are regulated by the Law and subject to the granting of a license are the following:

  1. Reception and transmission of orders;
  2. Execution of orders on behalf of clients;
  3. Dealing on own account;
  4. Portfolio management;
  5. Investment advice;
  6. Underwriting and/or placing of financial instruments on a firm commitment basis;
  7. Placing of financial instruments without a firm commitment basis;
  8. Operation of Multilateral Trading Facilities ("MTF").

A CIF must apply for at least one of the above regulated services.

II. Ancillary Services

The CIF may also offer a range of the below regulated non-core activities:

  1. Safekeeping and administration of financial instruments;
  2. Safe custody services;
  3. Granting credits or loans to an investor for transaction purposes;
  4. Advice on capital structure, industrial strategy and related matters;
  5. Foreign exchange services;
  6. Investments research and financial analysis;
  7. Services related to underwriting.

It is important to note that no license is granted for the operation of a CIF in relation to the provision of ancillary services only.

D. REQUIREMENTS FOR THE GRANTING OF A CIF LICENSE

I. Capital Requirements

The initial issued and paid up share capital required depends on the activities to be provided:

  1. The minimum initial capital for a CIF holding client's assets and/or clients' financial instruments and providing any of the following is €125.000 :

    • Reception and transmission of orders;
    • Execution of orders on behalf of clients;
    • Portfolio management;
    • Investment advice.
  2. A CIF providing any of the above mentioned services without holding client's assets and/or clients' financial instruments may have minimum initial capital of € 50.000.
  3. The minimum initial capital for a CIF providing and/or conducting any of the following is € 730.000 :

    • Dealing on own account;
    • Underwriting/placing of financial instruments on a firm commitment basis;
    • Operation of MTF;
    • Placing of financial instruments without a firm commitment basis.

II. Head Office

A CIF's head office must be situated in the Republic and shall be fully staffed. Any person employed by a CIF to perform any of the investment services must be a holder of a certificate obtained after having successfully taken the relevant examination of the Cyprus Ministry of Finance.

III. Ownership

The competent authority shall not authorize the performance of any investment services until there is full disclosure of the identity of the direct or indirect shareholders, being either legal or natural, that have qualifying holdings (10% or more) or which makes it possible to exercise a significant influence over the management of that undertaking as well as the amounts of those qualifying holdings.

In respect to legal persons, the applicant company must provide information with regards to the identity of the natural persons that they are managed by, as well as the identity of their shareholders, reaching the beneficial owners.

It is important to clarify that no information in relation to the beneficial owner is revealed or made available to the public records of the Registrar of Companies.

IV. Management

The management of a CIF must be undertaken by two persons (four-eye principle) who shall be of sufficiently good reputation and have sufficient experience as to ensure the sound and prudent management of the CIF.

V. The Board of Directors

The board of directors of a CIF (the "Board") shall consist of at least two executive members and two independent non-executive members.

The overall composition of the board of directors must cover a wide range of experiences and knowledge. CySEC must be satisfied for the integrity and experience of the persons who shall effectively manage the applicant company prior to granting the license.

The persons to be appointed as directors of the company must:

  • Dedicate adequate time for the execution of their duties;
  • Be of sufficiently good repute;
  • Possess adequate knowledge, capabilities and experience so as to comprehend the activities and main risks of the CIF

VI. Organizational Requirements

The CIF must comply with various organizational requirements such as the following:

  • Establish adequate policies and procedures in order to ensure that it complies with its obligations under the Law and relevant directives by maintaining an independent compliance unit;
  • Maintain effective organizational and administrative procedures to protect clients from any conflicts of interest;
  • Take all necessary measures to ensure continuity of services and activities;
  • Take necessary actions to minimize operational risks by establishing a risk management unit to implement and adopt policies for risk management;
  • Have proper corporate governance in place with well-defined lines of responsibility;
  • Have sound administrative and accounting procedures including internal control mechanisms, risk management and monitoring procedures;
  • Maintain sufficient records of all services and transactions taken;
  • Apply client identification procedures and maintain internal reporting policies in order to prevent any money laundering activities;
  • Take adequate steps to safeguard clients' ownership rights.

The Board of Directors determines, supervises and reports in relation to the implementation of the organizational requirements to ensure the effective management of the CIF achieving at the same time separation of powers and avoiding any conflict of interest.

Furthermore, the CIF must have well defined hierarchy structure and must ensure that the employees are aware of all the procedures and policies of the company in relation to their duties.

A CIF while allocating functions internally must ensure that the senior management and the Board, are responsible for ensuring that the CIF complies with its obligations under the Law and should assess and periodically review the effectiveness of the policies, arrangements and procedures put in place to comply with the obligations under the Law and the directives and to take appropriate measures to address any deficiencies.

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