The ‘single EU passport’ has opened up good prospects for Cyprus to be used as a base for setting up funds or for fund management companies seeking to take advantage of the country’s beneficial framework to manage and/or market funds across Europe from Cyprus.
The Undertaking for Collective Investment in Transferable Securities V Directive (UCITS V) and Alternative Investment Fund Managers Directive (AIFMD) ‘management’ and ‘marketing’ passports allow fund managers to manage and/or market funds across the EU, without the burden of establishing extensive administrative functions and allows them to create economies of scale.
Distribution of UCITS and AIFs
UCITS benefit from the ‘passport’ introduced under the UCITS V directive, by allowing them to be freely marketed on a public basis within all EU Member States, without additional authorisation from the competent regulatory authority of each host Member State after successful completion of a streamlined notification process. Outside the EU, distribution of UCITS funds into selective jurisdictions remains via private placement and thus must satisfy local regulations that are significantly more complex and time consuming than the EU passport notification process.
Similarly, the AIFMD introduced a ‘passport’ for the distribution of units of AIFs managed by Alternative Investment Fund Managers (AIFM) to professional investors in the EU. Cyprus AIFMs, once authorised by the Cyprus Securities and Exchange Commission (CySEC), can market their EU AIFs to professional investors in all Member States, using the simplified regulator-to-regulator notification mechanism as opposed to having to seek permission from the regulatory authority in each Member State and comply with different national laws – the so-called National Private Placement Regimes (NPPRs). The AIFMD provides a more complex and delayed transposition schedule applicable to non-EU AIFMs and non-EU AIFs wishing to raise capital in the EU. In this case and in view of the uncertainty as to when and if the passport will be extended to third countries, the NPPR still remains applicable.
The EU regulator-to-regulator notification
- a UCITS authorised in Cyprus proposing to market its units/shares in a Member State other than Cyprus, must submit an advance notification to CySEC
- the notification must include, among others, information on arrangements made for marketing units of the UCITS in the host Member State, including where applicable, the categories of units/shares to be marketed
- in the case that the units/shares of a UCITS are marketed by its Management Company, in the context of its cross- border business within the territory of the UCITS’ host Member State, either through the establishment of a branch or under the freedom to provide services, accordingly the notification shall include an indication of this fact
Notification documents required by UCITS
- constitutional documents
- latest annual and half-yearly report (if applicable)
- Key Investor Information Document (KIID)
Cyprus UCITS units marketed via private placement
This country-by-country strategy by way of private placement is adopted by UCITS that seek to target a small number of larger institutional investors outside the EU. However, there are no harmonised rules within the EU surrounding private placement and thus fund promoters must contend with the specific local regulations governing each jurisdiction of intended distribution.
Cyprus AIFM marketing an EU AIF in the EU
EU regulator-to-regulator notification: The cross-border marketing by a Cyprus AIFM of an EU AIF addressed to professional investors is subject only to a notification procedure, under which relevant information is provided to the host Member State by the AIFM’s regulator (the notification procedure is similar to that for UCITS operators under UCITS V).
Cyprus AIFM marketing a non-EU AIF in the EU
Through Private Placement: a Cyprus AIFM may market a non-EU AIF to professional and other types of investors in the EU under the national private placement regimes (and those EU AIFs which are feeders of a non-EU AIF master-fund) provided that:
it is authorised under, and complies fully with the AIFM Law 56(I)/2013
the third country where the non-EU AIF is established is not listed by the Financial Action Task Force (FATF) as a Non-Cooperative Country and Territory (NCCT)
appropriate cooperation arrangements are in place between CySEC and the regulator in the country of establishment of the non-EU AIF
On 12 July 2019, the Official Journal of the European Union published the new EU cross-border fund distribution regulation and directive Regulation (EU) 2019/1156 of 20 June 2019 on facilitating cross-border distribution of collective investment undertakings and amending European social entrepreneurship funds (EuSEF), European venture capital funds (EuVECA) and packaged retail and insurance-based investment products (‘PRIIPs’) regulations.
The main new requirements introduced by the new Regulation, which became effective as of 1 August 2019, are as follows:
- extension of the deadline for UCITS and AIFs under the same exemption to provide PRIIPs-KIDs from 31 December 2019 to 31 December 2021
- requirement for host regulators to send invoices or any other individual payment instruction relating to regulatory fees to the impacted UCITS´ or AIFM´s contact details indicated in the notification letter, thereby abolishing local requirement to calculate and pay regulatory fees without prior notification by host regulators
- implementation of a 10-business-day review period and deadline for marketing material reviews conducted by host regulators
- requirement for host regulators to publish summaries on local requirements (laws, regulations, administrative provisions, regulatory fees) in English on their websites
- creation and maintenance of ESMA databases detailing local requirements
- introduction of common rules on marketing communications (to be applied only after 2 August 2021)
- amending the EuSEF and EuVECA regulations to include the description and requirements for ‘pre-marketing’ (the same requirements apply as introduced in the AIFMD) (to be applied only after 2 August 2021)
As for the Directive (EU) 2019/1160 of 20 June 2019 amending the UCITS and AIFM directives (UCITS V and AIFMD), EU member states have to transpose the Directive into national law by 2 August 2021. It will apply as from that date to cross-border distribution of UCITS, AIFs, EuSEF and EuVECA.
The main changes the Directive brings to the UCITSD and AIFMD are the following:
- removal of requirement to appoint a local entity fulfilling the paying – and/or information agent function for UCITS and for AIFs distributed to retail investors
- implementation of uniform rules for the de-notification process, in case UCITS or AIFs shall no longer be marketed in a member state
- implementation of uniform definition and conditions for AIF ‘pre-marketing’ to professional investors
On 31 March 2020, the European Securities and Markets Authority (ESMA) has launched a consultation on the standard forms, templates, and procedures that National Competent Authorities (NCAs) should use to publish information on their websites to facilitate cross-border distribution of funds. In particular, the standard information should cover:
- National laws, regulations and administrative provisions governing marketing requirements for AIFs and UCITS and the summaries thereof; and
- Regulatory fees and charges they levy for carrying out their duties in relation to the cross-border activities of fund managers.
ESMA announced that it would consider the feedback it received to this consultation by 30 June 2020 with a view to finalizing the implementing technical standards for submission to the European Commission by 2 February 2021.
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