Depositary role and requirements for AIFs & RAIFsSalvus Team
During the past year, the legal framework for the Cyprus Alternative Investment Funds (AIFs) has been enhanced significantly. The AIF Law of 2018 includes new rules for authorization as well as enhanced roles and responsibilities for directors, external managers, and depositaries. A major breakthrough in the upgraded law is the introduction of the Registered Alternative Investment Funds (RAIFs) – a cost-effective solution and operationally lean structure. This comes as RAIFs are required to appoint an external AIF manager (AIFM), who in turn is supervised by the Cyprus Securities Exchange Commission (CySEC) under the AIFM Directive.
Within this article, we analyze the responsibilities of a depositary and the requirements for the depositary appointment, for the different alternative investment funds.
The responsibilities of the depositary
The depositary shall always act honestly, fairly, professionally and in the interest of the AIF and the unitholders of the AIF. Further, the depositary is responsible to
– monitor the cash flows in respect of the AIF,
– safeguard and verify ownership of AIF assets,
– verify the ownership of other assets,
– to verify the Net Asset Valuation (NAV) calculations,
– to issue and redeem the units of the AIF,
– to ensure investment compliance.
In cases of an AIFLNP, the responsibilities of the depositary are limited to the safekeeping of financial instruments and the verification of other assets ownership.
It is highly important for the duties and performance between the external AIF manager (AIFM) and the depositary of an AIF to be segregated and not be undertaken by the same person. This is required in order to eliminate any conflicts of interest arising between them.
The authorization for appointing a depositary
The appointment of a depositary is subject to approval by CySEC and it is an integral part of the authorization procedure when applying for the establishment of an AIF with unlimited investors or for an AIF with limited investors (AIFLNP) to a maximum of 50.
CySEC requires the below information to be accompanied with the application for authorization of an AIF or AIFLNP:
– a statement from the depositary confirming that they agree to exercise the depositary duties of the company’s portfolio,
– information for the persons appointed, responsible to monitor the AIF or AIFLNP, on behalf of the depositary, including their CVs.
It is worth noting, that authorization for a depositary appointment is not required when applying for the establishment of RAIFs, as the responsibility lies with the Alternative Investment Fund Manager (AIFM) and their depositary is already authorized by CySEC.
Requirements and entities eligible to be appointed as a depositary
The appointment of a depositary is mandatory, except in cases where an exception is permitted – which we discuss further below.
In detail, when the total assets are not subject to custody, for
A. AIFLNPs with maximum 50 investors (included in all compartments), and
B. AIFs holding assets under the threshold of;
– EUR 100 Million including assets acquired through leverage, or
– EUR 500 Million where no leverage is employed and the unitholders have no redemption rights for 5 years,
the appointed depositary can be;
– a Credit Institution, or
– a MiFID Investment firm (ie. CIF), or
– an entity regulated and supervised as depositary, or
– an entity performs depositary functions within the context of its professional or business activities and recognized by the law.
RAIFs and AIFs who hold assets above the threshold mentioned and are externally managed by an AIFM can only appoint a Credit Institution as a depositary.
An exception not to appoint a depositary at all, is permitted for the AIFLNPs meeting one of the below criteria;
– the total assets do not exceed the amount of EUR 5 Million, including any investment compartments, or
– the total number of investors is limited to 5 persons as per the articles of association, or
– where the total number of investors is limited to 25 persons as per the articles of association, the minimum subscription per investor is EUR 500,000 and assets up to 10% of its total assets are subject to custody.
Location of the depositary
Depending on the type of an AIF, it may be allowed to use depositaries domiciled in Cyprus, in the EU or in a third country. The requirements applied for each type of AIF are as following;
– For AIFs holding assets below the threshold or AIFLNP with maximum 50 investors including all compartments, can appoint a depositary based in Cyprus, in the EU or in a third country with the provision that CySEC has signed a Memorandum of Understanding and Exchange of information with the competent authorities of the third country and is subject to prudential regulation and supervision, including the minimum applicable capital requirements. Additionally, the third country must not listed as a non-cooperative country by the FATF.
– RAIFs and AIFs holding assets above the threshold and are externally managed by an AIFM must appoint a depositary based in Cyprus. In cases where an AIF is located in another EU member state, then the depositary must be in the home member state of the AIF.
– RAIFs which are closed-ended limited partnerships and are externally managed by a UCITS Management Company or an Investment Firm – other than an AIFM – then the depositary can be based in Cyprus, in the EU or in a third country on the assumption that the third country fulfills the above mentioned provisions.
In conclusion, the Cyprus AIF law framework will continue it’s enhancement in the immediate months and years to come. Please, do not hesitate to contact us if you require further information. We will be glad to support you in finding a solution appropriate to your business plans.
The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.