On 16 June 2021, the Cyprus Securities and Exchange Commission (CySEC) published Consultation Paper CP-02-2021 (available here) 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 (the Administration Services) in or from Cyprus.
CySEC has published the Proposed IFA Law for consultation, in order to address the investor protection, market integrity and compliance issues associated with the provision of Administration Services. Fund administrators in Cyprus have so far been subject to regulation under the Administrative Service Providers Law 2012, however there have been calls for some time now to introduce a bespoke regime regulating the operations of investment fund administrators.
The Proposed IFA Law relates to the provision of back-office services in the context of collective portfolio management, such as the management of investment funds, or "undertakings for collective investment" (UCIs). The Proposed IFA Law will apply to and govern the operations of those entities that operate in or from Cyprus and offer, pursuant to a validly concluded relevant delegation arrangements, to UCIs established in Cyprus or abroad, one or more of the services that qualify as Administration Services for UCITS or Administration Services for Alternative Investment Funds.
The key provisions of the proposed IFA Law include:
- Bespoke licensing regime, given the variety of a Fund’s investable asset classes and their differing characteristics (liquid/illiquid, tradable or not etc.), its investor-dealing frequency (e.g. one-off capital-raising capital round as opposed to open-ended funds open to daily subscriptions and redemptions) or the range of Administration Services offered (e.g. for certain Funds the mere incorporation of values is sufficient for the calculation of the NAV, whereas for other Funds a valuation process needs to take place).
- Bespoke organisational 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 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;
- Exemptions, which take into account the fact that an EU Manager, whose authorisation also includes Administration Services, may prefer to perform Administration Services in-house without proceeding to a delegation or it may act as a delegate of another EU Manager in respect of Administration Services;
- Conduct of business rules, addressing considerations such 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 back-office 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 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, such as requirements relating 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 requirements relating to the existence of close links between the processing of investor subscriptions and/or redemption orders and the need to ensure that the Funds’ registry is updated accordingly.
- Reporting obligations relating to the Administration Services provided and the type of funds serviced.
CySEC advises that the Proposed IFA Law is a nationally initiated piece of legislation aiming at extending regulation throughout the outsourcing chain, in alignment with the existing framework. At the same time, the Proposed IFA Law takes into account current market practice, which is the provision of Administration Services to funds established in other jurisdictions by local Administrators.
Interested parties may submit their comments to the CySEC Policy Department by email at firstname.lastname@example.org. The deadline is 20 July 2021.
The Consultation Paper can be found here.