Earlier this summer, on 3 July 2020, the Cypriot Parliament passed the Mini Alternative Investment Fund Managers Law (L. 81(I)/2020), or the Mini-AIFM Law. The new legislation sets up a regulatory and licensing regime for Cyprus-based sub-threshold alternative investment fund managers (also known as sub-threshold AIFMs or mini-AIFMs).
Prior to the Mini-AIFM Law, there used to be no independent licensing requirements for sub-threshold AIFMs in the Republic of Cyprus. This lack of oversight carried a number of legal and financial risks that could come at a great cost, both for individual investors and for the jurisdiction at large. The new legislative framework seeks to address these concerns and to create an environment that is investor friendly as well as fully in line with EU law.
The Mini-AIFM Law complements the amended Alternative Investment Fund Management Law (L. 56(I)/2013), also known as the AIFM Law. The AIFM Law, in turn, transposes the Alternative Investment Fund Managers Directive 2011/61/EU into national legislation and establishes a comprehensive regulatory regime for Cyprus-based AIFMs.
However, the AIFM Law only applies to AIFMs whose assets exceed the following legislative thresholds:
- €100 million; or
- €500 million, where no leverage is used, and the funds restrict redemption rights for a minimum of five years.
AIFMs that do not exceed the thresholds above are known as sub-threshold AIFMs. In Cyprus, they are also referred to as sub-threshold managers, mini-managers, or mini-AIFMs.
Until recently, sub-threshold AIFMs operated with minimal supervision in a sort of regulatory limbo. However, the Mini-AIFM Law changed that.
The Mini-AIFM Law in a Nutshell
Legal and Institutional Framework
Mini-AIFMs are subject to licensing and oversight by the Cyprus Securities and Exchange Commission (CySEC). In addition to the Mini-AIFM Law, they are also governed by The Companies Law, as amended (Cap. 113).
What Qualifies as a Mini-AIFM Under the New Provisions?
The Mini-AIFM Law expressly defines Mini-AIFMs as companies that are:
- Limited by shares;
- Appointed as external managers by an Alternative Investment Fund (AIF); and
- Responsible for managing that AIF.
In addition, the Mini-AIFMs must have central management and a registered office that are both based in Cyprus.
Minimum Capital Requirements
Mini-AIFMs must have an initial paid-up capital of at least €50,000.
However, if the portfolio of the AIF managed by a Mini-AIFM exceeds €125 million, the Mini-AIFM is required to have additional funds of its own. These must be equal to 0.02% of the amount by which the AIF portfolio exceeds €125 million.
Board of Directors
Under the new law, a Mini-AIFM must have a board of directors of a minimum of four natural persons. Two of them must also perform executive functions.
Duties of Mini-AIFMs
Provision of Information
Mini-AIFMs are obliged to submit accurate information to CySEC at all times.
Best Interests of the AIF
Mini-AIFMs must act in the best interests of the AIFs they manage or their investors, always respecting the integrity of the market.
Remuneration and Commissions
Mini-AIFMs must ensure that the collection, payment, provision, or securing of any:
- Remuneration; or
- Non-monetary benefit
does not lead or amount to a breach of its obligation to act in a fair and honest manner.
Conflict of Interests
Mini-AIFMs must take reasonable measures to avoid conflicts of interests between:
- The Mini-AIFM;
- The AIF under management; and
- Other AIFs managed by the Mini-AIFM.
A Mini-AIFM must take steps to separate its risk management activities from any other operating functions, including portfolio management. The separation must be functional as well as hierarchical.
For each of the AIFs under its management, a Mini-AIFM must set in place an adequate liquidity management system. The Mini-AIFM must also establish procedures that:
- Enable it to monitor each AIF's liquidity risk; and
- Guarantee that the liquidity profile the AIF complies with its legal obligations.
Furthermore, Mini-AIFMs must ensure that the liquidity profile, investment strategy, and redemption policy for each AIF under their management are consistent.
Marketing of AIF Units
Mini-AIFMs may market units of the AIFs they manage to professional as well as adequately informed investors based in the country.
Additionally, Mini-AIFMs are allowed to market units to professional or adequately informed investors in other EU member states, as long as CySEC has been notified.
Mini-AIFMs and collective investment funds (CIFs) must take into account the nature of the AIFs they manage and adopt internal arrangements and procedures accordingly and as per the Mini-AIFM Law.
For all AIFs under their management, Mini-AIFMs must establish appropriate and consistent procedures that also allow for proper and independent asset valuation.
CIFs that are already authorized by CySEC, as per the Investment Services and Activities and Regulated Markets Law (L. 144(I)/2007) and the Investment Services and Activities and Regulated Markets Law (L. 87(I)/2017), are considered Mini-AIFMs for the purposes of the Mini-AIFM Law.
Such CIFs may continue to operate on the condition that they take all necessary steps to bring themselves in compliance with the Mini-AIFM Law within nine months of its entry into force on 3 July 2020.
Otherwise, these CIFs will not be able to provide management services under the Mini-AIFM Law.
The new law brings some much-needed clarity, consistency, as well as regulatory supervision to the Mini-AIFMs operating in Cyprus. That should help establish a level playing field for investors and start-up asset managers alike and will improve the effectiveness of Mini-AIFMs.
What's more, the Mini-AIFM Law brings the national legislation fully in line with the relevant EU rules, enhancing the transparency, reliability, and attractiveness of Cyprus to local, European, and international investors alike.
What Does the Mini-AIFM Law Mean for You?
In light of the new regulatory regime, it is highly likely that banks and other institutions will be requiring authentic proof of CySEC licensing and supervision to continue to provide services to Mini-AIFMs.
To ensure that your business is fully compliant with the Mini-AIFM Law, get in touch with us today. The experts at C. Savva & Associates Ltd will provide you with all the information you need to bring your business fully in line with the new legal requirements and well within the nine-month deadline.
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.