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Fund management regulation

Regulatory framework and authorities

How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

Cyprus is a member state of the European Union and therefore is subject to, and obliged to be in compliance with, all EU directives and regulations in respect of fund management. In general, Cyprus implements EU legislation on a ‘copy-out’ basis.

The legal framework regulating fund management in Cyprus is contained in the following legislation:

  • the Alternative Investment Fund Managers Law 2013 (the AIFM Law), which transposes EU Directive 2011/61/EU on alternative investment fund managers (AIFMD) into national law and regulates Cypriot alternative investment fund managers (AIFMs);
  • the Alternative Investment Funds Law 2014 (the AIF Law), which regulates ‘full-scope’ alternative investment funds (AIFs) and alternative investment funds with limited number of people (AIF LNPs) in relation to professional and well-informed investors; and
  • the Open-Ended Undertakings for Collective Investment Law 2012 (the UCI Law), which transposes EU UCITS legislation into national law.

 

In addition to the above, those engaging in the marketing of funds will need to consider regulations issued further to the Investment Services and Activities and Regulated Markets Law 2017 (the IS Law), which implements EU Directive 2014/65/EU on markets in financial instruments (MiFID II).

In terms of supervisory authorities, the Cyprus Securities and Exchange Commission (CySEC) is the national competent authority and regulator in respect of regulating funds, fund managers and those marketing funds on the basis of the above legislation.

In certain circumstances, sub-threshold fund managers of overseas funds (ie, managers not within the scope of the AIFM Law as the funds they manage are below certain AIFMD thresholds) based in Cyprus may fall outside of any licensing or regulatory requirements.

Fund administration

Is fund administration regulated in your jurisdiction?

Cyprus does not presently regulate fund administration as a distinct and separate category of licensable financial services activity.

However, some regulation of administration as an ‘ancillary matter’ may be provided for under the following:

  • as an ‘administrative service’ under the Administrative Services Providers Law 2012; or
  • within the ambit of the IS Law, under the non-core or ancillary investment service of ‘safe-keeping and administration’ of financial instruments.

Authorisation

What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

Licensing process

There are currently two broad categories of funds in Cyprus, namely:

  • open-ended undertakings for collective investments funds (UCITS), aimed at investors universally (retail and professional); and
  • AIFs, aimed at professional or ‘well-informed’ investors.

CySEC is the competent authority for granting licences to both. The establishment of a Cyprus investment fund requires prior authorisation from CySEC. An application form accompanied by certain supplementary documents is required to be submitted for the consideration and approval of CySEC. In the case of UCITS, the management company of the UCITS will be advised of authorisation within two months of the submission of a complete application file and, in the case of AIFs, notice of authorisation will be provided within three months of the submission of a complete application.

The main requirements for operating funds in Cyprus are set out below.

AIFs

An AIF can be established as a company (with fixed or variable capital), a limited partnership or a ‘common fund’ (an undertaking similar to the common law unit trust).

The AIF Law provides the legal framework for the establishment and operation of AIFs as well as AIF LNPs. Under the AIF Law, all Cypriot AIFs must be licensed and regulated by CySEC. The AIFM Law applies extra requirements to the managers of AIFs that meet or exceed the thresholds for assets under management set out in the AIFMD (additionally, indirect requirements are placed on the AIFs themselves).

In Cyprus, determining whether an investment fund is subject to the full scope of regulation of the AIFMD depends on whether its assets under management meet or exceed the thresholds that cause it to fall within the ambit of the AIFMD, these being as follows:

  • €100 million leveraged; or
  • €500 million unleveraged with a five-year lock-in period for investors.

These thresholds apply to the assets under management of the investment fund as a whole, as opposed to individual investment compartments. An investment fund may not be set up as an AIF LNP if it meets or exceeds the AIFMD thresholds.

Accordingly, depending on the intended value of the assets under management of the investment fund to be set up, the following Cypriot regulated products would be relevant in relation to this matter:

  • a full scope AIF;
  • a sub-threshold AIF; or
  • an AIF LNP.

An investment fund set up in Cyprus typically needs to include the following parties and service providers in its structure in the course of its operations in Cyprus:

  • fund manager: depending on the intended structure and assets under management of the investment fund, it may be necessary to appoint an external manager for the investment fund. It is also possible, under certain circumstances, for the investment fund to be self-managed;
  • depositary: it is typically required that an investment fund appoints a depositary, although it is possible, under certain circumstances, for this requirement to be disapplied. Depending on the type of investment fund, the depositary may be located and regulated in another EU member state or a third country;
  • general partner (where applicable): in the event that the investment fund is established as a limited partnership, the general partner will need to be incorporated and established in Cyprus;
  • local directors: in the event that the investment fund is established as an investment company or otherwise in relation to the general partner of a limited partnership, directors resident in Cyprus will need to be appointed to the board of directors;
  • auditor: the investment fund will need to appoint an auditor in Cyprus; and
  • fund administrator: although there is no strict legal requirement for the fund administrator to be located in Cyprus or appointed, it is standard to appoint an administrator as managers do not typically maintain the infrastructure required to undertake fund administration internally.

UCITS

UCITS can be formed either as a common fund or as a variable capital investment company (VCIC). In the case of a common fund, the initial capital requirement is €200,000, payable within three months of the grant of the licence. On the other hand, the initial capital requirement for a VCIC is either €200,000 fully paid-up in cash upon constitution or €300,000 if it is self-managed. For umbrella funds, the minimum capital applies for each compartment.

Where the UCITS is self-managed, the UCI Law imposes additional requirements; in particular, a self-managed VCIC must comply with the following additional conditions:

  • include at least two executive directors of sufficient repute and experience in relation to the type of investment pursued; and
  • hold an appropriate business plan (programme of activities) and programme of operation.

Authorisation of a UCITS management company in Cyprus can be granted by CySEC, provided a number of conditions are met:

  • an initial capital of €125,000, plus additional own funds of 0.02 per cent of assets under management exceeding €250 million, subject to a maximum of €10 million;
  • a minimum of two fit and proper persons must conduct the business of the management company; and
  • the application must be accompanied by a document containing:
  • the programme of activity;
  • the risk management process;
  • the organisational structure;
  • the human and technical infrastructure;
  • the delegation arrangements; and
  • details of shareholding and external auditor.

Territorial scope of regulation

What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

With regard to the territorial scope of fund regulation, in high-level terms, an AIF or UCITS will be considered to be based in or operating from Cyprus where it is registered or otherwise established in Cyprus.

A Cypriot AIF manager or investment firm could provide its services on a relatively unimpeded basis to funds domiciled within the European Economic Area; equally, an AIF manager or investment firm based in the EU, but outside of Cyprus, could offer its services on an unrestricted basis to AIFs domiciled in Cyprus.

A non-EU AIF manager will, in general terms, require prior authorisation from CySEC in order to manage an AIF established in Cyprus. CySEC Directive DI131/56/02 stipulates detailed requirements for third-country AIF managers to manage or market AIFs in Cyprus.

Similarly, under the provisions of the UCI Law, a management company authorised in another member state according to Directive 2009/65/EC, may pursue the activity for which it has been authorised in Cyprus, either by the establishment of a branch or under the freedom to provide services. This means that the management company authorised in another EU member state shall not be subject to any authorisation requirement and may offer its services to funds domiciled in Cyprus.

However, non-EU management companies wishing to market or manage UCITS in Cyprus must obtain a licence from CySEC.

Acquisitions

Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

AIFs

Under the AIFM Law, an AIF manager that manages an AIF that acquires, disposes of or holds shares of a non-listed company, must notify CySEC of the proportion of voting rights of the non-listed company held by the AIFs any time when that reaches, exceeds or falls below the thresholds of 10, 20, 30, 50 or 75 per cent. The AIFM Law defines qualifying holding as a direct or indirect holding in an AIFM that represents, at least, 10 per cent of the capital or of the voting rights or that makes it possible to exercise a significant influence over the management of the AIFM in which that holding subsists.

UCITS

Section 113 of the UCI Law imposes notification requirements to fund manager companies when a qualifying holding in the fund manager company is acquired or disposed, directly or indirectly, or such a qualifying holding in a fund manager company is further increased or reduced so that the proportion of the voting rights, or of the capital held, would reach, exceed or fall below 20, 30 or 50 per cent. Qualifying holdings, for the purposes of the UCI Law, means any direct or indirect holding in a management company that represents at least 10 per cent of the capital or of the voting rights of the management company. Furthermore, a management company must also inform CySEC, at least once a year, of the names of shareholders and members possessing qualifying holdings and the sizes of such holdings.

Restrictions on compensation and profit sharing

Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

AIFs

Information on the remuneration policy, including, but not limited to, a description of how remuneration and benefits are calculated, must be provided to CySEC in order for CySEC to grant an authorisation to an AIF. Furthermore, the AIFM Law sets out a number of principles on remuneration policies and practices for AIFMs to comply with, and these shall be applied in a way and to the extent that is appropriate to the size, internal organisation and the nature, scope and complexity of the activities of the AIFMs.

UCITS

Similarly, under the UCI Law, the details of the up-to-date remuneration policy, including, but not limited to, a description of how remuneration and benefits are calculated, the identities of persons responsible for awarding the remuneration and benefits, including the composition of the remuneration committee, where such a committee exists (section 56), must be included in the prospectus of the fund. The UCI Law also sets out a number of stringent remuneration policies, which must be adopted and applied by UCITS management companies.

Most importantly, CySEC has recently adopted the guidelines that the European Securities and Markets Authority (ESMA) issued on sound remuneration policies under the AIFMD (ESMA/2016/579) in 2016, which apply as of 1 January 2017. This means that the guidelines on professional fees will also apply to UCITS and AIFMs established in Cyprus.

Further rules governing intermediaries’ dealings with fund managers are provided for under the IS Law and MiFID II.

Fund marketing

Authorisation

Does the marketing of investment funds in your jurisdiction require authorisation?

Yes, in certain circumstances.

What marketing activities require authorisation?

UCITS

Any authorised UCITS established in another EU member state that wishes to market to investors in Cyprus must submit a notification to CySEC before embarking on their marketing activities.

AIFs and AIF LNPs

Marketing of an AIF by a full-scope AIFM that has duly exercised its right to passport into Cyprus under the AIFMD does not require a licence in Cyprus. A separate notification regime applies where an above-threshold AIFM wishes to market the AIF to professional investors in Cyprus without a passport.

However, an application needs to be submitted to CySEC in order to obtain approval to market accordingly, where:

  • a below-threshold AIFM will be marketing the AIF to professional investors in Cyprus without a passport;
  • an AIFM wishes to market the AIF to well-informed investors in Cyprus without a passport; or
  • an AIFM wishes to market to retail investors in Cyprus.

Territorial scope and restrictions

What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

No; however, in certain cases, a notification procedure, instead of an authorisation procedure, may apply (see question 8).

If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

A local entity is not required to be involved in the fund marketing process.

Commission payments

What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

The IS Law introduces a crucial distinction between the provision of independent and non-independent advice. When investment advice is provided, investment firms are required to inform clients in good time prior to providing the investment whether or not the advice is provided on an independent basis, and further whether the advice is based on a broad or on a more restricted analysis of different types of financial instruments and, in particular, whether the range is limited to financial instruments issued or provided by entities having close links with the adviser or any other legal or economic relationships that pose a risk to impartiality of the advice.

Of particular note is the fact that, for investment advice to be considered independent, an adviser cannot accept fees, commission or other benefits. Only minor payments may be accepted in certain very restricted circumstances. CySEC Directive DI87-01 for the Safeguarding of Financial Instruments and Funds belonging to Clients of January 2018 further provides that any remuneration, commission or monetary benefits that a firm receives from third parties in relation to providing investment advice on an independent basis or portfolio management must be passed on in their entirety to the client.

Retail funds

Available vehicles

What are the main legal vehicles used to set up a retail fund? How are they formed?

A UCITS can be set up as a mutual fund or a variable capital investment company. The mutual fund is a pool of assets that belong to the unitholders of the fund and its operation is defined by a regulation. The fund is managed by a mutual fund management company in the interest of the unitholders. The assets of the mutual fund are kept with a depository. The mutual fund has no legal standing and its interests are represented by the management company in any case of dispute.

Variable capital investment companies are limited liability companies with shareholdings, registered with the Registrar of Companies. These companies have the exclusive purpose of investment of their pooled assets in transferable securities and other financial instruments. The assets of the company are kept with a depository.

Laws and regulations

What are the key laws and other sets of rules that govern retail funds?

The key legislation that regulates retail funds is the following:

  • the UCI Law;
  • the Companies Law; and
  • CySEC directives and circulars.

Authorisation

Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

See question 4 in relation to establishment and question 8 in relation to marketing.

Marketing

Who can market retail funds? To whom can they be marketed?

See questions 3 and 4.

Managers and operators

Are there any special requirements that apply to managers or operators of retail funds?

See question 3.

Investment and borrowing restrictions

What are the investment and borrowing restrictions on retail funds?

Under the UCI Law, there are some investment restrictions applicable to UCITS. Specifically, a UCITS fund may invest no more than 10 per cent of its assets in transferable securities or money market instruments issued by the same body. The total value of the transferable securities and the money market instruments held by the UCITS in the issuing bodies in each of which it invests more than 5 per cent of its assets shall not exceed 40 per cent of the value of its assets. Moreover, a UCITS cannot invest in precious metals or certificates representing them.

In principle, neither a UCITS nor a management company or depositary acting on behalf of a UCITS, may borrow. However, the UCI Law provides three exceptions to this restriction:

(i) borrowing is permitted provided that such borrowing is on a temporary basis and does not exceed 10 per cent of the net asset value of the UCITS;

(ii) a management company may borrow on its own behalf provided that such borrowing represents no more than 15 per cent of its own funds, to enable the acquisition of immovable property essential for the direct pursuit of its business; and

(iii) borrowing to acquire foreign currency by means of a ‘back-to-back’ loan, is permitted under certain conditions.

The combined amounts of borrowings under (i) and (ii) shall not exceed 15 per cent of its net asset value in total. It should also be noted that UCITS shall not grant loans or act as a guarantor on behalf of third parties.

Tax treatment

What is the tax treatment of retail funds? Are exemptions available?

In principle, retail funds in Cyprus are treated the same as any other Cypriot entity, and therefore they are subject to the general 12.5 per cent corporate tax on annual net profits earned worldwide.

The following tax exemptions are available to retail funds:

  • exemption from tax on profits generated from the sales of securities, which includes shares, bonds, debentures and other instruments;
  • exemption from tax on dividend income;
  • there is no withholding tax on income repatriation (dividends paid to unitholders);
  • exemption from tax on capital gains arising from the sale of immovable property that is situated outside Cyprus;
  • there is no capital gains tax on disposal of shares or units by the holders; and
  • there is no subscription tax on the net assets of the fund.

Further, retail funds established in Cyprus benefit from the wide network of double tax treaties in place with more than 50 countries worldwide.

Asset protection

Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Under the UCI Law, the portfolio of assets of a UCITS fund must be held by a local custodian or depositary. The depositary must be an authorised credit institution or another entity licensed by CySEC to provide depositary services. Where the depositary is not a credit institution, it is further subject to (among other things) capital adequacy requirements and to stringent regulation and ongoing supervision. The depositary and management company may belong to the same group of companies. However, they have a duty to act independently from one another and to promote solely the interests of all unitholders. The depositary must provide services such as safekeeping of the assets of the UCITS and monitoring of the assets of the UCITS (monitoring on how the assets are invested and how many assets are available to the fund).

The depositary may delegate the safekeeping of the assets of the UCITS to a third party if so entitled under the UCITS regulations or instruments of incorporation.

Governance

What are the main governance requirements for a retail fund formed in your jurisdiction?

The primary governance requirements for retail funds established in Cyprus are the following:

  • the management company of the fund must report and provide the following documents to the investors of the fund on a regular basis:
  • a prospectus;
  • an annual report for each financial year; and
  • a half-yearly report covering the first six months of the financial year;
  • there must be at least two executive natural persons of sufficient integrity and experience in relation to the type of investment pursued to manage the managing firm;
  • the management companies must put in place risk assessment procedures to ensure the control of risks associated with the fund; and
  • the management companies must, at all times, be in compliance with CySEC rules and regulations and code of conduct. This is to promote the effective functioning of the fund as well as to ensure that the fund operates in a lawful and diligent manner.

Reporting

What are the periodic reporting requirements for retail funds?

Under the UCI Law, the manager of a UCITS fund must submit an annual report for each financial year and a half-yearly report covering the first six months of the financial year to CySEC. The reports must be submitted to CySEC no later than four months after year end, in the case of the annual report; and two months after the end of the six-month period, in the case of the half-yearly report.

The annual report shall include a balance sheet or a statement of assets and liabilities, a detailed income and expenditure account for the financial year and a report on the activities of the financial year, as well as any significant information that will enable investors to make an informed judgement on the development of the activities of the UCITS and its results.

The annual report of an UCITS must be prepared in accordance with the International Financial Reporting Standard No. 34 and shall include the interim non-audited financial statements.

It must be noted that CySEC is entitled to impose additional reporting requirements on managers of retail funds.

Issue, transfer and redemption of interests

Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

According to the UCI Law, the acquisition of UCITS units by the unitholder requires full payment, to the depositary, of the amount due for the acquisition of units, as determined on the basis of the sale price of units, in cash or in transferable securities or other financial instruments.

The redemption of UCITS units shall be obligatory upon request of the unitholder. The value of the UCITS units redeemed shall be paid in cash within four working days of the date of valuation that is used for the calculation of the repurchase price of the units. As per the UCI Law:

In exceptional cases, when circumstances make it necessary, or in cases provided for in the UCITS regulation or its instruments of incorporation, and in any case it is in the unitholders’ interest, it shall be permitted to suspend the redemption of units for a period up to one month, by a decision of the management company or the UCITS itself.

Non-retail pooled funds

Available vehicles

What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Under the AIF Law, there are two types of non-retail funds: AIFs and AIF LNPs.

AIF

An AIF can be established provided that its constitutional documents specify that the fund is restricted to professional or well-informed investors. ‘Professional clients’ are defined in the IS Law and MiFID II. The concept of a well-informed investor was introduced by the Cypriot legislation and means an investor who is not a professional investor but confirms in writing that he or she is well informed and is aware of the risks associated with investing in the said AIF, and either:

  • invests at least €125,000 in the AIF; or
  • is assessed as a well-informed investor with the necessary experience and knowledge to evaluate the appropriateness of his or her investment in the AIF in question by a credit institution falling within the scope of the Banking Laws of 1997, or by a UCITS management company or by an investment firm.

An AIF can be established as a mutual fund, as an investment company in the legal form of a limited liability company with shares or as a limited partnership.

AIF LNP

AIF LNPs are subject to considerably less regulatory oversight than full-scope AIFs. This is because they fall outside of the scope of the EU-wide AIFMD. As a consequence, they do not benefit from the passporting mechanism under the AIFMD.

The establishment of an AIF LNP is allowed, provided that it does not fall within the scope of the AIFM Law (ie, it is not caught within the AIFMD) and it is not managed by an AIFM (ie, does not opt in to the AIFMD). In addition, its constitutional documents must specifically define that:

  • the relevant fund is only addressed to professional or well-informed investors;
  • the number of its unitholders, including the co-holders, is limited to a maximum of 75 persons; and
  • it does not allow the issue of bearer shares.

An AIF LNP can be formed either as a company, with the legal form of a limited liability company with shares that is recognised to operate as an investment company of fixed or variable capital, or as a limited liability partnership.

The operation of an AIF LNP is subject to the prior notification of authorisation by CySEC. An AIF LNP must communicate to CySEC, without any delay, any change in the information on the basis of which its authorisation was granted. Further, the acquisition of partnership interests in an AIF LNP should not take place before the notification of its authorisation by CySEC.

Laws and regulations

What are the key laws and other sets of rules that govern non-retail funds?

The key legislation that regulates non-retail funds is the following:

  • the AIF Law;
  • the AIFM Law;
  • the IS Law;
  • the Companies Law;
  • the General and Limited Partnerships and Trade Names Law, Chapter 116 of the statutes of Cyprus (the Partnerships Law); and
  • CySEC directives and circulars.

Authorisation

Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

See questions 4 and 8.

Marketing

Who can market non-retail funds? To whom can they be marketed?

Under the relevant laws, management companies and other intermediaries may market non-retail funds in Cyprus provided that they are a licensed investment firm, a credit institution or a UCITS management company. EU management companies may market non-retail funds provided they have satisfied the notification requirement to CySEC. It must be noted that where the constitutional documents of a non-retail fund do not permit its marketing to certain classes of investor, the management company or other intermediary must be precluded from marketing the fund to such investors.

Ownership restrictions

Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

To the extent that ownership refers to unitholders in the fund, the AIF Law provides that AIFs may only be addressed to professional or well-informed investors. An additional licence would need to be obtained to permit such funds to market to retail investors.

Managers and operators

Are there any special requirements that apply to managers or operators of non-retail funds?

An AIF LNP could be self-managed or externally managed. Where the AIF LNP is externally managed, a set of stringent requirements is applicable. A manager of an AIF LNP can be an authorised UCITS management company, a Cypriot investment company under the IS Law or a company established in another EU member state that is authorised by the competent authority of that member state to provide portfolio services. A full-scope AIF must comply with the AIFM Law.

With regard to other non-retail funds, and more specifically AIFs, see question 3.

Tax treatment

What is the tax treatment of non-retail funds? Are any exemptions available?

Non-retail funds are treated identically to retail funds for tax purposes, thus the tax treatment outlined in question 18 also applies to non-retail funds.

Asset protection

Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

In principle, the portfolio of assets of an AIF LNP fund must be held by a separate local custodian. A depositary that has a registered office in Cyprus, in the EU or in a third country, with the condition that CySEC has a written agreement of cooperation with that country, must be appointed. The depositary must be an authorised credit institution or another entity licensed by CySEC to provide depositary services.

The above requirement can be waived where the following exemptions apply:

  • assets do not exceed €5 million;
  • the incorporation documents or partnership agreement restrict the number of shareholders to five people; or
  • assets are not held under custody (eg, real estate).

With regard to other non-retail funds, see question 19.

Governance

What are the main governance requirements for a non-retail fund formed in your jurisdiction?

The governance requirements outlined in question 2o also apply to AIF LNPs. However, managers of AIF LNPs must also retain a special electronic registry, known as the unitholder register. The information in the unitholder register must be kept for at least five years. Moreover, according to the AIFM Law, the manager of an AIF LNP must also report to unitholders the number of units they have in their possession as well as the percentage return of the units.

Reporting

What are the periodic reporting requirements for non-retail funds?

Under section 116 of the AIF Law, an AIF LNP must prepare an annual report that includes information on the financial performance of the AIF, total assets and liabilities and the net asset value of its units for the period covered by the report. The annual report must be audited by an independent auditor and it must be submitted to CySEC within one month of the end of the period it refers to.

See question 21 regarding the reporting requirements of all other types of non-retail funds.

Separately managed accounts

Structure

How are separately managed accounts typically structured in your jurisdiction?

Separately managed accounts, where an investment manager maintains the funds and assets of a specific investor segregated from other investors, would typically take the form of a sub-fund or investment compartment dedicated to each such separately managed account.

The AIF Law permits funds to be established as umbrella funds that maintain a number of legal segregated sub-funds or investment compartments. Each investment compartment of the AIF may issue units that correspond to the assets of the specific compartment, and the value of the units may vary by investment compartment.

The rights and liabilities of each investment compartment are legally segregated; however, this is a new and untested area of law in Cyprus and the reaction of the courts to such segregation provisions is not currently known.

Key legal issues

What are the key legal issues to be determined when structuring a separately managed account?

See question 33.

Regulation

Is the management or marketing of separately managed accounts regulated in your jurisdiction?

Yes, as described in question 33, each multiple investment compartment operates as separate AIF and thus it must comply with the provisions of the AIF Law.

General

Proposed reforms

Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

Draft legislation, which aims to upgrade the regulatory framework governing investment funds in Cyprus, has been released. More specifically, in relation to an increase in the scope of the regulation of funds, CySEC has recently published draft legislation for the creation of a ‘mini manager’ regulatory regime for sub-threshold ‘registered AIFs’.

Public listing

Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

Retail funds

UCITS can be admitted without trading on a stock exchange market operating in Cyprus, any member state or a third country provided that CySEC has signed a memorandum of understanding and exchange of information with the relevant competent authorities. Moreover, UCITS can be admitted for trading in a regulated market of tradable UCITS operating in Cyprus or another member state, provided that certain cumulative conditions are met. Trading of UCITS in another EU member state or third country (as mentioned above) requires prior authorisation from CySEC and the appointment of a market maker, as well as updating of the constitutional documents of the fund.

Non-retail funds

The AIF LNP must not be listed or traded on a stock exchange, but it can be registered on a special registry of the Cyprus stock exchange. On the other hand, AIF LNPs can be traded or listed on a regulated market.

Overseas vehicles

Is it possible to redomicile an overseas vehicle in your jurisdiction?

Yes; foreign AIFs (and possibly even UCITS management companies), whether they are established in another EU member state or outside the EU, can redomicile in Cyprus provided it is permitted by the constitutional documents of the company and the local laws of the country in which the fund is currently established.

Foreign investment

Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

There are no special rules in Cyprus that restrict the ability of investors to invest in funds established or managed in Cyprus on the basis of residency or citizenship. However, there are restrictions on marketing to investors situated in Cyprus, as described above.

Update and trends

Update and trends

Are there any other current developments or emerging trends in your jurisdiction that should be noted? Please include reference to world-wide regulatory concerns, such as high-frequency trading, commodity position limits, capital adequacy for investment firms and ‘shadow banking’.

It is envisaged that Cypriot funds legislation, specifically the AIF Law, will be subject to a comprehensive overhaul that will seek to enhance the Cypriot funds regime. Draft legislation has been released and a consultation has been completed, and it is expected that this revised framework will be passed into law in the coming months. In this respect, key changes include the introduction of a ‘mini-manager’ regime, regulating sub-threshold fund managers; and the introduction of a ‘registered AIF’ product by which individual funds need not undergo a licence procedure with CySEC, provided that they come under the umbrella of a regulated AIFM.

More generally, we note that high-frequency algorithmic trading is now subject to licensing under MiFID II and, further, ESMA announced its intention to impose product intervention measures including a total prohibition on the provision of binary options and restrictions on the provision of contracts for differences for retail investors on 27 March 2018. There are also ongoing discussions at the European level regarding the design of a new prudential framework for investment firms (see European Banking Authority Opinion (EBA/Op/2017/11) of 29 September 2017), as well as the incoming EU Prospectus Regulation, which revises the regime under the Prospectus Directive (relevant to private placement rules) and the EU Securitisation Regulation (seeking to regulate simple, transparent and standardised securitisations).