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.

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:

In case of an AIF whose investment objective comprises of investing  in assets which are not subject to custody, such an AIF may appoint as depositary an entity performing depositary functions within the context of its professional or business activities the performance of which is subject to professional registration, regulatory oversight or rules of professional conduct and can provide sufficient financial and professional guarantees verifying it will perform its depositary duties sufficiently and meet all obligations arising from such duties.

Is the appointment of a depositary obligatory for all AIFs?

Yes, irrespective of whether an AIF is internally managed or managed by an Alternative Investment Fund Manager (“AIFM”) in accordance with the provisions of the Alternative Fund Managers Law 56(I)/2013 (“AIFM Law”) or even in case of a Registered Alternative Investment Funds (RAIF) there is an overall obligation to appoint a depository. The only exception to this rule is where the AIF is for Limited Number of Persons (“AIFLNP”).

Accordingly, an AIFLNP may not appoint a depositary in cases where:

Are there any rules concerning the domicile of the depositary?

For Cyprus AIFs managed by an AIFM or for internally managed AIFs but which fall within the ambit if the AIFM Law it is mandatory for the depositary to be located in Cyprus.

For AIFs falling outside the ambit of the AIFM Law and for AIFLNPs the depositary can also be located in the European Union or in a third country provided that CySEC has signed with the competent authorities of the third country a Memorandum of Understanding and Exchange of Information and that the entity appointed to act as a depositary is subject to prudential regulation and supervision including minimum capital requirements  and the third country is not listed as a non-cooperative country by the FATF.

What are the duties of a depository?

As mentioned in the introductory paragraph of this article, a depositary is responsible for safekeeping, cash monitoring and oversight of the AIF’s assets.

More specifically, a depositary is in charge of ensuring that all payments made by or on behalf of investors upon the subscription of units of an AIF have been received and that all cash received by the AIF, has been booked in cash accounts opened in the name of the AIF or on that of the AIFM acting on behalf of the AIF or in the name of the AIF.

For financial assets that can be held in custody the depositary must:

For other assets:

In addition to the above, the depositary shall also ensure the following:

Can a depositary delegate its functions?

A depositary may only delegate to third parties the safekeeping functions and this is subject to the following considerations:

In relation to the third-party delegate, the depositary must ensure that at all times:

In relation to the overall decision of the depositary to delegate its functions:

It is also important to note at this point that the third-party delegate can further sub-delegate some or all those functions delegated by the depositary to another party provided that the sub-delegation mirrors the requirements, obligations and responsibilities of the initial delegation.

What is the liability of the depositary?

A depositary must always act honestly, fairly, professionally, independently and in the interests of the AIF and the investors. As it clear from this proposition the depositary shall be liable to the AIF or to the investors of the AIF, for losses suffered by them as a result of the depositary’s negligent or intentional failure to properly fulfil its obligations.

A claim can be brought against the depository either by the unitholders of the AIF or through the external manager. It is important to note at this point, that in case the external manager of the AIF fails to initiate any claims against the depositary within three (3) months from the submission of a written demand by a unitholder to the external manager, the unitholder may initiate a claim against the depositary directly himself.

How is the depositary’s liability affected by delegation arrangements?

The liability of the depositary is not affected by the delegation arrangements whether this includes a total or partial delegation of assets and the depositary remains jointly and severally liable with the third party for any loss caused by the third party. The only exception to this rule is in case of financial instruments held in custody by a third-party delegate.  The delegate may be able to discharge itself of liability if it can prove that:

We at Patrikios Pavlou & Associates LLC, are happy to advise in relation to any matters concerning the duties of a depositary of an AIF and to ensure the maximum legal and regulatory compliance of such entity.