Regulation of Fund Administrators in Cyprus
To this date, the Fund Administration Services in Cyprus are not per se regulated by the domestic legal framework, but they are rather caught by the fund managers’ authorization and the respective regulations. This is in opposition to other EU jurisdictions or even non-EU countries, which provide a legal framework for the authorization and operation of Fund Administrators (the “Administrators”). As Cyprus’ fund industry is now growing at an admirably fast pace, it was about time that a relevant legislation would be introduced to reflect the fact that many fund managers prefer to focus on core investment functions (such as portfolio management and risk management) and outsource administrational services to third parties. As a matter of fact, on the 16th of June 2021, the Cyprus Securities and Exchange Commission (“CySEC”) published Consultation Paper CP-02-2021 (the “CP-02-2021”) of a draft law introducing bespoke regulation of the profession of investment fund administrators (the “Proposed IFA Law”) and the provision of the relevant services in or from Cyprus.[1] The said publication was announced through a relevant Press Release.[2]
Overview of the CP-02-2021 and the Proposed IFA Law
The purpose of the publication of the CP-02-2021 was to collect comments from relevant market participants and stakeholders on the policy options incorporated in the Proposed IFA Law.
Accordingly, the Proposed IFA Law relates to the provision of back-office services in the context of collective portfolio management investment funds, also known as undertakings for collective investment (“UCIs”). It is noted that this covers both UCITs and AIFs. The Proposed IFA Law shall apply to and govern the operations of those entities that operate in or from Cyprus and offer to UCIs established in Cyprus or abroad, one or more services that qualify as administration services (“Administration Services”), which in accordance with CySEC’s Press Release,[3] are mainly the following:
- Keeping of the investors’ registry, which evidences ownership of the participation in an investment fund;
- Calculation of a fund’s net asset value (“NAV”), which is in most cases the basis for subscriptions and redemptions by investors;
- Processing of subscription, redemption and transfer orders from investors; and
- Other backoffice services.
As summary of the key provisions of the Proposed IFA Law is presented below:
- Exemptions that consider that fund managers may choose not to outsource the administration services, but rather choose to perform these inhouse or become themselves delegates of another fund manager;
- Bespoke licensing regime, given the variety of a fund’s investable asset classes and their differing characteristics, its investordealing frequency or the range of Administration Services offered. At the same time, an Administrator may obtain CySEC’s ad hoc approval for the provision of other services under certain conditions;
- Bespoke organizational requirements, in order to ensure the prudent management of the Administrator;
- Bespoke prudential requirements, taking into consideration the fact that the two main entities involved in the fund’s operations, i.e. the fund manager and the depositary, are already subject to sufficient capital requirements, whereas the risks relating to the provision of the Administration Service are operational in nature;
- Conduct of business rules, taking into consideration the fact the Administrator can provide simultaneously Administration Services to more than one (competing) funds, so that conflicts of interest need to be addressed; or that an Administrator when performing its backoffice tasks needs to perform relevant due diligence on investors, so that it has to be considered as an ‘obliged entity’ for AML purposes; or that an Administrator needs to be familiar with the obligations and rules laid down in the offering documents of a fund or the regulatory framework governing the fund and/or the fund manager, which may not be Cyprus-based, so that a compliance function needs to be established;
- Requirements relating to the provision of the Administration Services, e.g. as to the NAV calculation process, including cases of rectification of an error in the NAV calculation and the subsequent need to determine a materiality threshold; or the close links between the processing of investor subscription and/or redemption orders and the need to ensure that the funds’ registry is updated accordingly; and
- Reporting obligations related with the Administration Services provided and the type of funds serviced.
It is noted that on the 23rd of July 2021, CySEC issued an announcement on its official website providing the final extension for the submission of comments by interested parties on CP-02-2021 up until the 15th of September 2021.[4]
Final Thoughts
Several arguments can be put forward supporting the decision to regulate Administration Services. For example, the prospect for increased investor trust in the Cyprus fund services as regulation and supervision will enhance both the quality of those services and the overall transparency in the investment sector. Investors will be able to choose more confidently knowing that all the service providers of a fund are under close monitoring by the competent authority. Another reason is, of course, to bring Cyprus in line with other jurisdictions that have already introduced similar legislation, thus rendering Cyprus as a major competitor in the funds industry. It remains to be seen how seamlessly and effectively this legislation will be implemented by the relevant stakeholders once it is fully adopted in the domestic legal framework.
[1] Both the CP-02-2021 and the Proposed IFA Law can be found in CySEC’s official website: https://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=a3fe5dc6-a42a-42d7-a60a-74e7ec169def
[2] https://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=9548852d-3159-42e7-9825-cd122ee522d9
[3] As per point 2 above.
[4] https://www.cysec.gov.cy/CMSPages/GetFile.aspx?guid=1c44665f-497f-45cd-bd8a-705615edbb79