Fund Administration Law

Dr Charis Savvides
and
Gregores Fylaktou
OVERVIEW

• 2018 AIF Law

• Fund Managers

• Fund Administration (key roles & duties)

• Proposed Fund Administration Law

SECTION 1: 2018 AIF Law
2018 AIF LAW

The legal basis for regulating the respective relationships is the

Alternative Investment Funds Law of 2018 (L. 124(I)/2018) and the
EU Directives.

Moreover, the Alternative Investment Funds Legislation of 2018

allows also for the establishment of Registered Alternative
Investment Funds (RAIF) in Cyprus.

AIFs in Cyprus are governed by the Alternative Investment Funds

Law 124 (I)/2018 (AIF Law), which provides the legislative
framework for:
the recognition, regulation and supervision of AIFs
the persons involved in the activities of AIFs such as directors,
external managers and depositaries
2018 AIF LAW

Three (3) general categories of AIFs

Alternative Investment Funds with Limited Number of

Persons (AIFLNP)*

Alternative Investment Funds with Unlimited Number of

Persons (AIFUNP)

Registered Alternative Investment Funds (RAIFs)

________________________________________________________
* The maximum number of investors in an AIFLNP is 50 natural
persons. The numbers is decreased further (max 25 or max 5)
depending on the use or not of a depositary and the minimum
thresholds for investment per investor.
2018 AIF LAW

Types of AIFs

AIF authorized AIFLNP authorized

RAIF registered
pursuant to Part II of pursuant to Part VII of
pursuant to Part VIII
the AIF Law the AIF Law
of the AIF Law
2018 AIF LAW

AIFs, AIFLNPs and RAIFs may be:

➢ Open-ended: investors have the right to redeem or repurchase

their units upon request and in accordance with the procedure
and the frequency provided for in the instruments of
incorporation or the offering document

OR

➢ Closed-ended: in any other case

2018 AIF LAW

AIFs, AIFLNPs and RAIFs may have a:

➢ Single Scheme: the AIF has solely one investment compartment,

but it is possible to be converted to an umbrella scheme.

OR

➢ Umbrella Scheme: the AIF has more than one investment

compartments. It is possible to be converted to a single scheme.

**Each compartment is considered as a separate AIF for the

purposes of its investment strategy, liabilities towards investors,
the units it issues, the investors it addresses or the dissolution of
the compartment and it may invest to another compartment if the
conditions provided for in the law are fulfilled.
2018 AIF LAW

Type of Investors:

➢ Professional

➢ Well Informed

➢ Retail

** Depending on the type of investors of the AIF, different

requirements apply.
2018 AIF LAW

Professional Investors are regarded as clients who possess the

experience, knowledge and expertise to make their own
investment decisions and who are able to properly assess related
risks.

Well-Informed Investors are regarded the "non-professional"

investors who have confirmed in writing that they are aware of the
nature of their investment operations and assume the appropriate
risks and invest at least €125,000 in an AIF or be successfully
assessed by a bank, investment firm or UCIT management
company as a well-informed investor with the required level of
expertise and knowledge.

Retail Investors are regarded the clients that do not fall within
the category of a professional or a well-informed investor.
2018 AIF LAW – ORGANIZATIONAL STRUCTURE

Board of Directors
~ Executive
A Basic AIFLNP ~ Executive
structure ~ Non-Executive

Portfolio
Management Legal Advisers

Risk Management
External Auditors

Compliance / AML

Fund Administration Internal Audit

Secretary Info. Technology (IT)
2018 AIF LAW – ORGANIZATIONAL STRUCTURE

Internally Managed AIFs

Management Body
It comprises of at least 4 natural persons, at least 2 of
whom should perform executive duties.
•Executive Director – Portfolio Manager
•Executive Director – Risk Manager
Non-executive director(s) are responsible for the
supervision of the AIF’s operations and are not in charge of
any other duties in the AIF

Senior Management
The business of the AIF should be conducted by at least 2
natural persons
2018 AIF LAW – ORGANIZATIONAL STRUCTURE

Internally Managed AIFLNPs

Management Body
It comprises of at least 3 natural persons, at least 2 of
whom should perform executive duties.
•Executive Director – Portfolio Manager
•Executive Director – Risk Manager
Non-executive director(s) are responsible for the
supervision of the AIF’s operations and are not in charge of
any other duties in the AIF

Senior Management
The business of the AIFLNP should be conducted by at
least 2 natural persons
2018 AIF LAW – ORGANIZATIONAL STRUCTURE

Portfolio Manager
The responsibility of the portfolio management function is
assigned to a person with good knowledge of the
investments concerned and the risks involved. [CySEC
Advanced Certification]

❖ Monitor overall performance of the investment portfolio and

any material deviations from return objectives.
❖ Formulate and implement the Fund’s investment policy, asset
allocation, investment goals and objectives.
❖ Oversee, review and monitor the investment portfolio risk and
Fund’s risk tolerance.
2018 AIF LAW – ORGANIZATIONAL STRUCTURE

Risk Manager
The Risk Manager’s responsibility is to identify any potential
risks to the profitability or viability of the Fund, identify and
assess threats, put plans in place for if things go wrong and
advice how to avoid, reduce or transfer risks. [CySEC Advanced
Certification]

❖ Formulating and evaluating the risk management framework.

❖ Use appropriate methods to mitigate and manage risk.
❖ Defining, in cooperation with the Board of Directors, the limits of
risk taking.
❖ Submitting proposals to the Board of Directors for corrective
measures in the event of divergence from the acceptable risk
targets and ensuring their effective implementation.
2018 AIF LAW – ORGANIZATIONAL STRUCTURE

Regulatory Compliance Officer

The Regulatory Compliance Officer monitors on an ongoing
basis the Company’s compliance with the relevant laws and
regulations and takes actions in cases where non-compliance is
identified. In addition, the Compliance Officer identifies and
prioritizes the areas of potential compliance risk, which may
lead to damage of the Company’s reputation or to any financial
loss (i.e. penalties). The Compliance Officer’s duties include
responsibility for the Company’s compliance with the governing
legislation and regulations as well as the Directives issued by
the regulatory bodies from time to time.
[CySEC Advanced Certification]
2018 AIF LAW – ORGANIZATIONAL STRUCTURE

AML Compliance Officer

The AML Compliance Officer is responsible for ensuring
compliance with the Anti-Money Laundering Law and anti-
money laundering Directives issued by CySEC, as well as the
identification and reporting of any money laundering activity to
the relevant authorities. The AML Compliance Officer is also
responsible for the overall monitoring of the Investor acceptance
procedures performed by the Fund Administrator.
[CySEC AML Certification]
2018 AIF LAW – ORGANIZATIONAL STRUCTURE

Internal Auditor
The Internal Auditor monitors internal operations and performs regular
audits to ascertain whether executed operations adhere to prescribed
and documented standards and quality. The Internal Auditor also
notifies the Board of Directors of any detected inconsistencies and
works with the relevant persons and department heads on creation
and execution of plans to correct deviations.

External Auditor
The financial statements of the Company must be audited annually by
the Auditor in accordance with International Financial Reporting
Standards (IFRS). The Auditors have a statutory obligation to report to
the authorities any irregularities which come to their attention during
the audit of the Company or any acts or omissions observed while
performing their duties. The Auditors must also confirm in their report
that the Company is in compliance with the provisions of section 81 of
the Alternative Investment Funds Law 124(I)/2018.
 AIF with limited AIF with unlimited Registered AIF
number of persons number of persons RAIFs

Regulatory Authority CySEC CySEC CySEC (however, no

licensing is required)
Manager External or Self- External or Self- External only
managed managed
Number of Investors Up to 50 natural Unlimited Unlimited
persons*
Eligible Investors Well-informed / Retail / Well-informed Well-informed /
Professional only / Professional Professional only

Maximum Assets Up to €100ml* No restrictions* No restrictions*

under Management
(AuM)
Minimum AuM €250K per €500K per €500K per
compartment compartment compartment
Initial Capital €50K (if self-managed) €125K (if self- Not required
Requirement managed)

Type Single or Umbrella Single or Umbrella Single or Umbrella

SECTION 2: Fund Managers
FUND MANAGERS

AIFs:
• Can be internally managed
• Can be externally managed by:
AIFM or UCITS Manager or Mini Manager or Investment Firm

RAIFs:
• Can only be externally managed by:
AIFM or UCITS Manager or Mini Manager or Investment firm, if established
as a Limited partnership and invests at least 70% of its assets to illiquid
assets and it is closed ended

AIFLNPs:
• Can be internally managed
• Can be externally managed by:
Investment firm or UCITS Manager or Mini Manager or Third country
company providing Investment management services, or sole purpose
company
FUND MANAGERS

Each AIF shall have a single AIFM, which shall be responsible for
ensuring compliance with the provisions of the LAW.

The AIFM shall be either:

(a) An external manager, which is the legal person appointed by the

AIF or on behalf of the AIF and which through this appointment is
responsible for manageing the AIF (external AIFM); OR

(b) Where the legal form of the AIF permits an internal management
and where the AIF‘s governing body chooses not to appoint an
external AIFM, the AIF itself, which shall then be authorised as
AIFM.
FUND MANAGERS

The AIFM (CY) must be a limited liability company with shares, with
registered and central management in the Republic.

Management Functions:

• Portfolio management (oblig.)

• Risk management (oblig.)
• Administration (opt./not only)
• Marketing (opt./not only)
• Activities related to the assets of the AIFs (opt./not only)
• Investment advice, safe-keeping, reception & transmission of
orders re financial instruments (opt./not only)
FUND MANAGERS

Initial Capital:

An AIFM which is an internally managed AIF – EUR 300,000

An AIFM, appointed as external manager of AIFs – EUR 125,000

Additional own funds required if AIFs NAV exceed EUR 250m

FUND MANAGERS

The AIFMD is applicable in its entire scope to the

managers of the externally managed AIFs or to
internally managed AIFs whose assets under
management are either:

➢EUR 100.000.000, including the use of leverage, or

➢EUR 500.000.000, excluding the use of leverage where

the investors have no exercisable redemption rights
during a period of 5 years.
FUND MANAGERS

The role of AIFMs according to Commission‘s Delegated

Regulation (231/2013)

➢AIFMs shall apply a high standard of diligence in the selection

and ongoing monitoring of investments
➢AIFMs shall establish, implement and apply written policies and
procedures on due diligence
➢AIFMs shall implement effective arrangements for ensuring that
investment decisions on behalf of the AIFs are carried out in
compliance with the objectives, the investment strategy and, where
applicable, the risk limits of the AIF.
➢AIFMs shall take into account sustainability risks and factors
complying with current regulations
➢An AIFM shall establish, implement and maintain an adequate and
documented risk management policy which identifies all the
relevant risks to which the AIFs it manages are or may be exposed
SECTION 3: Fund Administration (key roles & duties)
Fund Administration Key Role & Duties

• Fund Administration refers to the services provided by an administrator

in support of running a collective investment scheme (fund). These
services are often outsourced by the fund manager to third party
companies who specialize in providing these services.

• By outsourcing the fund administration function, fund managers can

better focus on their main duties of portfolio management and
investment decision making.

• The function of the fund administrator becomes increasingly more

important given the highly demanding regulatory requirements, the
growth of alternative asset classes, as well as increased sophistication
of both markets and investors.
Fund Administration Key Role & Duties

• Fund managers depend on the competence of their fund

administrator for the smooth running of the daily fund activities
especially in cases where the fund administrator assumes a much
broader role and supports multiple functions within middle office and
compliance.

• It is important to note however, that fund managers cannot outsource

portfolio management and investment decision making to a third
party.
Fund Administration Key Role & Duties

1. Early face tasks and duties of an administrator

• The administrator negotiates and enters into an agreement with the
fund to provide services related to the fund administration
• It liaises with the funds lawyers to establish the fund with all the
necessary documentation
• It reviews the prospectus of the fund
• It lays out an operational, escalation and communication framework
under which the fund, the administrator and other service providers
will operate.
• It assists in the fund structure
Fund Administration Key Role & Duties

2. Investor related duties and tasks of an administrator

• Maintain the investor registry and other statutory services.
• Maintain accurate records of all fund transactions.
• Arrange for the issuance, purchase, transfer, redemption, allotment
and conversion of shares according to the fund’s prospectus or the
instructions provided by the fund. Update the registry accordingly.
• Perform due diligence with regards to administration letters of
communication, dividend mandates, vesting orders, power of
attorney documents, changes of names requests and anything else
affecting the ownership of shares in the fund.
• Track investor lock-up period.
• Calculate the appropriate redemption amounts for each investor in
the case the fund has side pockets.
• Be aware of side letter agreements containing material terms
between investors and fund managers.
Fund Administration Key Role & Duties

2. Investor related duties and tasks of an administrator (cont.)

• Distribute notices of meetings, reports, and circulars to the
respective stakeholders.
• Prepare and distribute shareholder statements and investment
manager reports.
• Distribute interim and end-of-year financial reports to shareholders.
• Responsible for all types of communication to the investors and
investor enquiries.
• Perform diligent customer identification for Anti Money Laundering
(AML) purposes.
• Report suspicious activities.
• Retain documents and records of transactions for at least five years
after the relationship with the customer has ended.
Fund Administration Key Role & Duties

3. Net Asset Value (NAV) calculation

The calculation of the NAV is a core administrator task because
it is the price at which investors buy and sell the shares or units
of the fund. It is also the key determinant in reporting fund
performance, calculating fees and producing financial reports.
The NAV should be calculated on a timely manner.

The main steps in the calculation of NAV are:

-trade capture
-security valuation
-reconciliations
-expense calculation
-NAV Calculation and Reporting
Fund Administration Key Role & Duties

4. Other services of an administrator

• Handle all filings required by CySEC based on AIF Law.
• Manage cash flow and expenses on daily basis as directed by
the fund or its custodian.
• Perform the duties of a proxy agent (for shareholders voting).
• Perform month-end reconciliations of customer accounts.
• Perform accounting tasks.
• Collaborate with auditors to carry out annual financial audits.
• Report on the Anti Money Laundering (AML) process and ensure
compliance with anti-money laundering procedures.
Fund Administration Key Role & Duties

5. Middle office services (not common) provided by an

administrator
Middle office services are traditionally performed by the operations
and finance teams of the investment manager. It is possible for an
administrator to undertake middle office services given that it is
capable of doing so.
Middle office services include:
• trade capture and confirmation procedure
• corporate action procedures
• cash and portfolio positions reconciliation
• portfolio profit and loss calculation
• detailed portfolio reporting
• collateral management
• cash balance and liquidity management
• risk management
• performance measurement
• portfolio pricing procedures
• information technology services
SECTION 4: Proposed Fund Administration Law
Proposed Fund Administration Law

Recap
• Prevailing market practice is for Fund Managers to focus on
portfolio management and risk management and outsource
Fund Administration.

• As a result, Fund Administrators acquire an important position in

the Fund’s business and day-to-day operations:
1. Maintaining and updating the investors’ registry (evidences
ownership).
2. Determining the Net Asset Value of the Fund’s assets
(redemption and subscription).
3. Communication with investors (subscription, redemption,
transfer orders, investment updates, distribution of the
annual and semi-annual reports etc).
4. Assistance in reporting.
Proposed Fund Administration Law

FUND FUND
FUND
MANAGER ADMINISTRATOR

Who ultimately bears responsibility?

Proposed Fund Administration Law

Problems with the current state

1. Investor protection concerns (calculation of NAV, accuracy
of investors’ registry, redemptions and subscriptions).

2. Need to ensure a compliance culture across the

delegation/sub-delegation chain.

3. Profession is of growing relevance but remains

unregulated, contrary to the rest of the service providers.

4. Potential supervisory gaps.

5. Potential for abuse.

Proposed Fund Administration Law

The Draft Law

• The proposed Investment Fund Administrators Law (IFA Law) is
currently in draft form (the Draft Law). CySEC is accepting any
comments to the text of the Draft Law until the 5th July 2021.

• The Draft Law is included in CySEC’s Consultation Paper CP-

02-2021 (Consultation Paper on Regulating the Provision of
Investment Fund Administration Services – Date of issue: 16
June 2021).
Proposed Fund Administration Law

• The Draft Law recognizes Fund Administrators as regulated

entities and introduces provisions governing their authorization
and supervision which aim to:

1. Codify sound business practices which are specific to the

discharge of the Fund Administration function.

2. Extend regulation in a uniform manner, across Fund

Managers and throughout the outsourcing chain.

3. Introduce business and compliance standards.

Proposed Fund Administration Law

• The Draft Law will apply to those entities which

1) operate in or from Cyprus

2) offer, pursuant to a validly concluded delegation agreement,

3) administration services (as those are defined in Annex I of

the Draft Law)

4) to Undertakings for Collective investments (the “UCIs”) i.e.

UCITS or AIF in accordance with the UCI Law and the AIF
Law.
Proposed Fund Administration Law

• Considering the importance of the Fund Administration

function for the uninterrupted operation of a UCI, the Draft Law
concerns all the service providers across the delegation/sub-
delegation chain.

• CySEC has in particular directed its Consultation Paper to

1) Fund Mangers of UCIs established in the Republic of
Cyprus;
2) Entities already operating as fund administrators in or from
the Republic of Cyprus;
3) Non-Cyprus UCIs which have a Cypriot entity as their Fund
Administrator.
Proposed Fund Administration Law – Fund Administration Services
Proposed Fund Administration Law – Fund Administration Services
Proposed Fund Administration Law - Authorization

• Under the envisaged Draft Law, CySEC will be required to maintain a

publicly available register with all authorized Fund Administrators and the
corresponding list of services which they are authorized to offer.

• An entity applying for a Fund Administration license will need to submit at

least the following to CySEC:
1. the investment strategies and type of Funds to which the applicant
intends to offer Fund Administration services.
2. information on the board of directors, senior management and
shareholders of the applicant (appropriateness/suitability/
reputation).
3. statement on whether the applicant will employ an in-house lawyer
or conclude a relevant retainer with an external legal counsel.
4. organizational structure of the applicant.
5. operational manuals.
6. memorandum and Articles of Association.
7. information on its software systems.
8. detailed report on its business continuity systems.
9. information on the contractual arrangements concerning the
execution of administration services.
Proposed Fund Administration Law - Authorization

Additional Requirements

• The Fund Administrator must have their registered office and

headquarters in the Republic.

• The Board of Directors will need to consist of at least 3 natural

persons, at least 1 of which must be independent. 2 of those
natural persons will need to exercise executive duties, in the
sense of truly managing the operations of the Fund
Administrator and have their permanent residence in the
Republic.

• Establishment of an in-house regulatory compliance function.

• A requirement for a Licensed Fund Administrator to have a

Master Service Level Agreement (‘SLA’) in place.
Proposed Fund Administration Law - Authorization

Additional Requirements

• Additional requirements may apply depending on the specific

services that the Fund Administrator will offer.

• Reporting requirements
- Annual report (to be submitted within 4 months following the
end of each calendar year)
- Audited financial statements (to be submitted by the 30th
April of the following year).
Proposed Fund Administration Law - Authorization

Capital Requirements

• A fixed capital amount of 50,000 EUR applies. For those Fund

Administrators wishing to engage in the ancillary activity of
opening and managing UCI bank accounts and holding
investors funds, they will need to maintain at least 125,000
EUR.

• An additional professional indemnity insurance against

negligence is also required.
Proposed Fund Administration Law - Authorization

• Response: CySEC will inform the applicant of its decision to

the application with 6 months from the date of submission (of a
duly completed application).

• Fees (for the examination of the application): To be determined

by CySEC via means of a separate Directive.
Proposed Fund Administration Law – Sub-delegation

• The sub-delegation of the functions of the Fund Administrator

is possible where this is permissible under applicable law and
where the Fund Administrator does not, as a result of the sub-
delegation, become an entity without any substantial
operations.

• Subject to any other contrary provisions of the law applicable

to the delegation of the administration functions, the following
must be complied with in cases of sub-delegation of the
administrative functions from a Fund Administrator to another
entity.
Proposed Fund Administration Law – Sub-delegation

The Draft Law provides for several requirements in cases of sub-

delegation of the administrative functions:

1. The client has provided their express consent.

2. The sub-delegation of the administrative functions from the Fund

Administrator is justified by objective reasons, which relate to the
methods of operations of the Fund Administrator and the client.

3. The Fund Administrator can prove that the third-party provider has
the necessary skills and expertise to execute the administration
functions that it undertakes and that the Fund Administrator has
exercised due care and diligence in selecting the third-party provider.
Also, that the Fund Administrator is able, at any given time, to monitor
effectively the delegated function, and provide further instruction to
the third party and revoke the delegation with immediate effect when
this is to the interests of the UCI or the unitholders.
Proposed Fund Administration Law – Sub-delegation

4. The written contract between the Fund Administrator and the third
party provider of administrative services provides that the Fund
Administrator will remain responsible for the delegated administrative
services.

5. There are mechanisms for, procedures and the ability to exchange

information that will safeguard that the Fund Administrator will be able
to monitor the execution of the delegated administration services
effectively and that the Fund Administrator will retain their right and
ability to intervene effectively.

6. There has been a recording of the risks relating to the sub-delegation.

Proposed Fund Administration Law – Sub-delegation

7. An operational manual has been drafted (which will ensure that the
Fund Administrator can monitor the activities of the third party provider
effectively and can manage effectively the risks which may ensue from
the delegation of the fund administration tasks to the third party).

8. Performance evaluation parameters have been laid out.

9. The information documents of the UCI expressly refer to the sub-

delegation of the administrative functions.

10. The Fund Administrator continuously monitors the services which are
offered by the third party.
 Thank You!
Fund Administration Law

Lecturers: Dr Charis Savvides

and
Gregores Fylaktou

Summer 2022