Smooth Operator: The Fund Industry in Cyprus
Quietly but steadily, in the last five years, the fund industry in Cyprus has been evolving and growing.
Originally, the fund industry in Cyprus was regulated by the International Collective Investment Schemes Law of 1999 (the ICIS Law), a Law largely created to cater for private funds set up to manage the wealth of a few individuals. Supervision lay with the Central Bank of Cyprus and was mainly promoted by a handful of local audit firms providing administrative services to these private funds. Although the ICIS Law provided for the setting up and promotion of funds to the public, that section of the Law was never utilized. Around 100 private ICIS funds were licensed and supervised by the Central Bank of Cyprus.
This situation regarding the local fund industry began to change with the introduction of the Open Ended Undertakings of Collective Investments in Transferable Securities Law of 2012 (the UCITS Law –L. 78(I)/2012). This Law transposes into Cyprus legislation the European Directive on UCITS (2009/65/EC). UCITS is a successful brand in the EU, a retail investment product that affords maximum protection to the retail investor, has elaborate transparency obligations and a clearly defined investment policy, which is spelled out in the Directive. The UCITS Law is comprehensive in the sense that it covers not only the product (the UCITS itself) but also the management company of the UCITS. The UCITS Law is supervised by the Cyprus Securities and Exchange Commission.
Since 2012, local authorities have identified the potential of the fund industry and have been actively trying to modernize and complete the national legal framework. The UCITS Law of 2012 was followed by the enactment of the Alternative Investment Fund Managers Law of 2013 (L. 56(I)/2013), which transposes into Cyprus legislation Directive 2011/61/EE (the AIFMD). This is a Law that regulates the fund managers of alternative investment funds above a certain threshold specified in the Directive. Cyprus was the second member state to transpose into national legislation the said Directive, demonstrating the growing importance afforded by local authorities to that part of the economic industry.
The last piece of the puzzle for the fund industry legal framework has been completed in 2014, with the introduction of the Alternative Investment Funds Law of 2014 (the AIF Law - L. 131(I)/2014). The AIF Law caters for the licensing and operation of alternative investment funds, offering different possibilities as to their legal form and allowing for marketing to both professional and retail investors provided in each case that certain prerequisites are met. The AIF Law provides for the creation of AIFs with unlimited number of investors or AIFs with limited number of investors and with a lighter, more flexible regime of supervision. The AIF Law complements the AIFM Law of 2013 and together they form a complete legal framework that allows for the licensing, managing and promotion of alternative investment funds.
Another important development was that the AIF Law of 2014 repealed the old ICIS Law of 1999 and provided that all existing ICIS funds must either convert and become AIFs or AIFs with limited number of investors, or dissolve. The existing ICIS funds are now being supervised by the Cyprus Securities and Exchange Commission and are considered to be part of the local AIF population that is currently expanding. The Cyprus Securities and Exchange Commission is now the sole supervisor for UCITS, AIFs and their respective fund managers.
Finally, the local legal framework is also complemented by the different EU Regulations on funds, like the European Venture Capital Fund Regulation (EuVECA) and the European Social Entrepreneurial Fund Regulation (EuSEF). The European Long Term Investment Funds Regulation (ELTIF) is anticipated shortly, adding to the range of possible funds that can be created.
