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 other targeted 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 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 so-called National Private Placement Regimes (NPPRs), 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
From 2 August 2021, Directive (EU) 2019/1160 (CBDD), which amended earlier directives covering cross-border distribution of collective investment undertakings is required to be implemented in all EU Member States. Among other things, the new rules amend AIFMD with the objective of harmonising the ability for EU AIFMs to distribute AIFs across the EU, including by introducing a new regime for 'pre-marketing'. CBDD has not been transposed in Cyprus yet, however this is expected to be done soon.
In addition, Regulation (EU) 2019/1156 (CBDR) on facilitating cross-border distribution of collective investment undertakings came into force and directly applies to all Members States, including Cyprus, with no need for implementing legislations.
The European Securities and Markets Authority (ESMA), has published on 27 May 2021 the final report on its Guidelines under the Regulation on cross-border distribution of funds. The Guidelines specify the requirements that funds’ marketing communications must meet.The purpose of the Guidelines is to clarify the requirements that funds’ marketing communications must meet, which is to:
- be identifiable as such
- describe the risks and rewards of purchasing units or shares of an AIF or units of a UCITS in an equally prominent manner
- contain clear, fair and not misleading information, taking into account the on-line aspects of marketing communications
The Guidelines will be translated into the official languages of the EU and published on ESMA’s website. The publication of the translations will trigger a two-month period during which national competent authorities must notify ESMA whether they comply or intend to comply with the Guidelines. The Guidelines will apply six months after the date of the publication of the translations.
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