On 3rd July 2020, the "Law which provides for the Incorporation and Operation of Small Alternative Investment Fund Managers (L.81(I)/2020)", (the "Mini-Managers Law"), came into force, creating a regime for the regulation and licensing of sub-threshold alternative investment fund managers. The European Directive 2011/61/EU (the "Directive") provides for the Member States to apply a lighter regime for Alternative Investment Fund Managers (AIFMs) where the total assets of the AIF under management fall below a threshold of ?100 million. The Cyprus Securities and Exchange Commission ("CySEC") took the lead and introduced the Mini-Managers Law to the financial market.
The Mini-Managers Law gives the opportunity for start-up asset managers in the European Union and/or local managers to be licensed and regulated under CySEC as well as taking advantage of the lower capital requirements and lower maintenance costs to accommodate small-scale investments. It also allows international wealth managers to establish local presence for management of their Cyprus investment projects.
The said Law applies to (1) Small AIFMs of the Republic, (2) Small AIFMs of a Member State and (3) Cyprus Investment Firms (CIFs) authorized by CySEC for managing AIFs. In general, CIFs are considered to be Mini-Managers, provided that they have obtained the required licence. A small AIFM may be established as a Limited Liability Company by shares governed by the provisions of the Mini-Managers Law as well as the provisions of the Companies law, where the registered office and central administration will be undertaken in Cyprus. Its Board of Directors shall consist of at least four natural persons, at least two of whom shall perform executive duties.
Small AIFMs must have a minimum initial capital of at least ?50,000. However, in the event that the portfolio of the AIFs managed by the Small AIFMs exceeds ?125 million, then an additional amount of own funds is required, which equate to 0.02% of the amount by which the value of the portfolio exceeds ?125 million.
According to the Mini-Managers Law, small AIFMs are empowered under the Law to provide portfolio and risk management functions, as well as the following:
- Legal and AIF management accounting services;
- Customer inquiries;
- AIF portfolio valuation and pricing, including tax returns;
- Regulatory compliance monitoring;
- Maintenance of unitholder registers;
- Distribution of AIF income;
- AIF units - issues and redemptions;
- Record - keeping;
Regarding marketing, small AIFMs are permitted to market units of the AIFs which it manages to professional and/or well-informed investors in Cyprus. Moreover, it may market the units of the AIFs it manages to professional and/or well-informed investors in another member state upon prior notification of its intention to CySEC, by submitting the required information and/or documentation.
There are general requirements that the Small AIFMs must follow during their entire duration of their operation, such as submit correct and accurate information to CySEC, act honestly with due skill, care and diligence and fairness in conducting their business activities. Moreover, they must comply with all regulatory requirements applicable to the conduct of their business activities so as to promote the best interests of the AIFs or the unitholders of the AIFs they manage and the integrity of the market.
Other obligations deriving from the Mini-Managers Law is that the Small AIFMs must functionally and hierarchically separate the functions of risk management from the operating units as well as from the functions of portfolio management. In addition, the Small AIFMs for each AIF that it manages, it must employ an appropriate liquidity management system and adopt procedures which enable them to monitor the liquidity risk of the AIF and to ensure that the liquidity profile of the investments of the AIF complies with its underlying obligations.
Another important matter is that CIFs and Small AIFMs must take into account the nature of the AIFs they manage and have in place appropriate internal procedures and arrangements as they are extensively stated in the Mini-Managers Law. The Small AIFM must ensure that appropriate and consistent procedures are established so that a proper and independent valuation of the assets of the AIFs it manages can be performed. Delegation of functions may be performed provided that certain conditions are met as described in the said law.
The Mini-Managers Law set a transitional period for CIFs that have already been authorized by CySEC under the Investment Services and Activities and Regulated Markets Law (144 (I)/2007) and the Investment Services and Activities and Regulated Markets Law (87(I)/2017) as amended, are considered to be Small AIFMs. These CIFs can continue to provide these services, provided that, within nine months from the enforcement of the Mini-Managers Law (i.e.,3rdApril 2021), they take all the necessary measures to comply with the requirements set by the Law. In case of non-compliance within the set deadline, the CIF will not be allowed to perform management functions pursuant to the provisions of the Mini-Managers Law.
This new vehicle introduced by CySEC can be characterized as a powerful tool in the European Fund industry. Taking into consideration the cost that many start-up managers face, Small AIFMs can attract the overall European market offering the shield of a reputable regulator. It is up to the local industry, as well CySEC, how this product will be used for the benefit of all.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.