In July 2020, the law 81(I)/2020 of Small Alternative Investment Fund Managers was enacted in the Republic of Cyprus, regulates the framework for the operation of Small Alternative Investment Fund Managers (SAIFMs or Mini Managers). SAIFMs are companies that manage alternative investment funds such as hedge funds, venture capital funds, private equity funds etc. The Law sets out the criteria, requirements, and registration process for SAIFMs and also establishes the rules and procedures for the oversight and regulation of SAIFMs by the Cyprus Securities and Exchange Commission (CySEC).
This Law has been enacted to protect the investors of the Funds, portfolio of which is below the AIFMD thresholds, i.e. the Assets under Management (AuM) do not exceed the amount of EUR100mln with use of leverage or the AuM do not exceed the amount of EUR500mln without use of leverage and with no right of redemption for 5 years from the date of the initial investment.
The main characteristics of the Mini Managers:
- Shall be a limited liability company by shares with the registered office and central admin in the Republic of Cyprus;
- The initial capital must be at least EUR50k;
- The members of the board of directors and the senior management of the Mini Manager must be of sufficiently good repute and sufficiently experienced in relation to the investment strategies;
- Should employ at least two persons as senior management;
- Management and control must be conducted in Cyprus;
- The board of directors of the Mini Manager should be consisted by at least 4 natural persons, of whom at least two shall perform executive duties.
Obtaining License – the competent authority shall require the following:
- CVs and Certificates, Diplomas, Degrees and all that information and data regarding the directors and senior management, for the competent authority to be able to assess whether they are of sufficiently good repute and have sufficient knowledge, skills and experience to perform these duties;
- Passport and IDs and all that information on the identities of the shareholders, whether direct or indirect, that have qualifying holdings in the Mini Manager irrespective of whether they are natural or legal persons, as well as information on the amounts of those holdings;
- Business plan and the internal operations manual which sets out its organizational structure including information on how to comply with its obligations;
- Information on the arrangements and procedures for the delegation to third parties of functions;
- Information on the investment strategy, risk profile, the use of leverage and other characteristics of the AIFs it manages or intends to manage, including information on the member states or third countries in which such AIFs are established or are expected to be established;
- Where the AIF is a feeder AIF, information on where the master AIF is established; and
- Information on the arrangements made for the appointment of a depositary, where required, in accordance with the legislation governing the AIF.
*The competent authority may request the submission of any additional or clarifying information or additional documentation in order to decide whether to authorize or not a Mini Manager.
The Mini Manager is permitted to be appointed as external manager for the following types of AIFs:
- AIF established and operating in the Republic of Cyprus;
- AIF established and operating in a member state other than the Republic of Cyprus or in a third country, if permitted by the legislation governing the AIF;
- AIFLNP;
- RAIF.
Management functions:
- AIF investment management, which includes the portfolio management and the risk management functions;
- AIF administration, which includes the following:
- Legal and AIF management accounting services;
- Customer inquiries;
- AIF portfolio valuation and pricing, including tax returns;
- Regulatory compliance monitoring;
- Maintenance of unitholder register;
- Distribution of AIF income;
- AIF units issues and redemptions;
- Contract settlements, including certificate dispatch;
- Record keeping;
- Marketing of AIF;
- Activities related to the assets of an AIF, namely services necessary to meet the fiduciary duties of the Mini Manager, facilities management, real estate administration activities, advice to undertakings on capital structure, industrial strategy and related matters, advice and services relating to mergers and the purchase of undertakings and other services connected to the management of the AIF and the companies and other assets in which it has been invested.
Delegation of functions:
- The Mini Manager may delegate the task of performing function/s on its behalf, to third parties by informing the competent authority (CySEC) prior the delegation becomes effective, provided that the delegation does not prevent the effectiveness of supervision of the Mini Manager and the Mini Manager being able to manage the AIF it manages, in the best interests of unitholders.
- Any function that is delegated to a third party, might be sub-delegated by the third party to another person, provided that the Mini Manager expressly gives its consent prior to the sub-delegation and notifies the competent authority (CySEC) of the sub-delegation before it becomes effective.
General obligations:
- Act honestly, with due skill, care and diligence and fairly in conducting its business activities;
- Have and employ effectively the resources and procedures that are necessary for the proper performance of its business activities;
- Comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of the AIFs or of the unitholders of the AIFs its manages and the integrity of the market.
- Submit correct, complete and accurate information to the competent authority;
- Secure the interests of the AIFs it manages and of their unitholders;
- Take all reasonable steps to identify conflicts of interests that arise in the course of AIF management.
Risk management:
- Implement adequate risk-management systems in order to identify, measure, manage and monitor appropriately all risks relevant to each AIF investment strategy and to which each AIF is or may be exposed;
- Adopt and implement appropriate, documented and regularly updated due diligence processes when investing, according to the investment strategy, the objectives and risk profile of the AIF;
- Ensure that the risks associated with each investment position of the AIF and their overall effect on the AIF’s portfolio can be properly identified, measured, managed and monitored on an ongoing basis, including, inter alia, through the use of appropriate stress testing procedures; and
- Ensure that the risk profile of the AIF shall correspond to the size, portfolio structure, investment strategies and objectives of the AIF, as laid down in the AIF fund rules or instruments of incorporation or in the partnership agreement, its prospectus or offering memorandum and AIF units offering documents.
Liquidity management:
- Employ an appropriate liquidity management system and adopt procedures which enable it 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;
- Ensure that, for each AIF that it manages, the investment strategy, the liquidity profile and the redemption policy are consistent.
Marketing of units/Passporting rights:
- Mini manager licensed by CySEC is permitted to market units of AIFs it manages to professional and/or well-informed investors in Cyprus. The Mini Manager may market units to professional and/or well-informed investors in another member state or in a third country after it has notified the competent authority (CySEC) of such intention.
- Mini manager is also permitted to market units of AIFs it manages to retail investors in Cyprus, provided that AIF was granted authorization under the provisions of the Alternative Investment Funds Law.
*CySec may consult with the competent authorities of the other member state or of the third country in case where the Mini Manager is authorized in another member state or in a third country.
Advantages of sAIFM:
- Lower set-up and maintenance cost.
- Suitable for portfolios below AIFMD thresholds.
- Flexible regime compared to AIFM.
- Ability to convert to a fully-fledged AIFM.
Conclusion:
The Small Alternative Investment Fund Managers regime of the Republic of Cyprus provides an attractive and efficient vehicle for those seeking to manage alternative investment funds. The Cyprus Securities and Exchange Commission ensures the highest standards of professional conduct and investor protection are met. The authorities shall inform the applicant of its decision to grant authorization or not, within six months from the date of submission of the duly completed application.
With its favorable tax regime and cost-effective regulation, Cyprus provides an ideal environment for alternative investment fund managers to operate, providing also “passporting” rights.
For further information and/or tailor-made advice, please contact Theo Antoniou: theo.antoniou@ctalaw.net or Christiana Antoniou: christiana.antoniou@ctalaw.net
