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Depositary Duties in the Alternative Investment Funds Realm
Pursuant to the Alternative Investment Funds Law 124(I)/2018 (“AIF Law”), the assets of the AIF must be entrusted for safekeeping to a depositary which has its registered office: (i) in the Republic or (ii) in another member state of the European Union or (iii) in a third country provided that, in the last, certain specific requirements are fulfilled and that the Cyprus Securities and Exchange Commission (“CySEC”) has approved its appointment.
One of the key players in the Alternative Investment Fund’s industry sector is the depositary. A depositary is in essence the entity responsible for the safekeeping, cash monitoring and oversight of the AIF’s assets. As the reader may appreciate, this is perhaps the most important service provider of an AIF as it operates as an independent third-party provider specifically appointed to ensure the investor’s protection bearing also the responsibility to verify that the assets of the AIF are invested in accordance with the AIF’s investment policy.
Pursuant to the Alternative Investment Funds Law 124(I)/2018 (“AIF Law”), the assets of the AIF must be entrusted for safekeeping to a depositary which has its registered office: (i) in the Republic or (ii) in another member state of the European Union or (iii) in a third country provided that, in the last, certain specific requirements are fulfilled and that the Cyprus Securities and Exchange Commission (“CySEC”) has approved its appointment.
Which entities are eligible to be appointed as depositaries of an AIF?
In order for an entity to be eligible to be appointed as depositary of an AIF, it needs to be either:
- a credit institution; or
- an investment firm; or
- another category of institution which is subject to prudential regulation and supervision and which falls within the categories of institutions determined by EU member states as eligible to be appointed as depositaries. An obvious example of such entity eligible to act as a depositary is an investment firm operating in accordance with the Directive 2014/65/EU (MiFID II).
- where its total assets do not exceed the amount of five million euros (€5.000.000) or its equivalent in another currency; in case the AIFLNP operates as an umbrella AIF, the total assets of all investment compartments must be considered; or
- where its instruments of incorporation limit the number of unitholders to a maximum of five (5) natural persons; in case the AIFLNP operates as umbrella AIF, the number of all unitholders participating in all investment compartments must be considered;
- where up to 10% of its total assets are subject to custody, the total number of investors are limited to 25 in accordance with its articles of association and the minimum subscription per investor is set at €500.000.
- keep all financial instruments that can be registered in a financial instruments account opened in the books of the depositary; and
- maintain segregate accounts and accurate accounts for such financial assets so that they can be clearly identified as belonging to a particular AIF.
- the depositary shall verify the ownership of the AIF of such assets and shall maintain a record of those assets;
- for the verification mentioned in point i) it must request the appropriate information and where available obtain external evidence; and
- always keep the records of such assets up-to-date and reconciled.
- that the sale, issue, re-purchase, redemption and cancellation of the units of the AIF are carried out in accordance with the instruments of incorporation of the AIF and in accordance with the principles of the applicable legislation;
- the value of the units or shares of the AIF is calculated in accordance with the instruments of incorporation of the AIF and in accordance with the principles of the applicable legislation;
- in cases where an AIFM is appointed, to carry out the transactions of the AIFM unless they conflict with the instruments of incorporation of the AIF or the applicable legislation;
- ensure that the transactions which the depositary is instructed to perform are performed within the usual time limits; and
- ensure that the income of the AIF is applied in accordance with the applicable national law and the AIF rules or instruments of incorporation.
- the third party has the structure and the expertise to perform the safekeeping functions of the AIF;
- that the third party is subject to effective prudential regulation, including minimum capital requirements and supervision and that the third party is subject to an external periodic audit;
- that the third party segregates the assets of the depositary’s clients from its own clients in a way that those assets can clearly be identified at any given time as belonging to the clients of the depositary;
- the third party does not make use of the assets without the prior consent of the AIF or the AIFM acting on behalf of the AIF; and
- generally, is subject to the same safekeeping requirements as the depositary.
- the functions must not be delegated with the intention to avoid the requirements of the AIF Law or the AIFM Law;
- the depositary can demonstrate that there is an objective reason for the delegation; and
- the depositary has exercised all due skill care and diligence in the selection of the appointment of the delegate and continuously examines the ability of the third-party delegate to perform its functions.
- all the requirements for delegation of its custody functions are met;
- a written contract between the depositary and the third party expressly transfers the liability of the depositary to that third party and makes it possible for the AIF of the AIFM acting on behalf of the AIFM to make claim against third party for loss of financial instruments; and
- a written contract between the depositary and the AIF or the AIFM acting on behalf of the AIF, expressly allows a discharge of the depositary’s liability and establishes the objective reason to contract such a discharge.