What may an AIF invest in, and how are transactions with related parties controlled?

A UCITS may hold only transferable securities and the other liquid financial assets that the UCITS Directive allows. The AIF Law has no such list. An AIF's policy may cover securities and non-securities alike, for example property, commodities or shares in private companies, as long as it is defined in the fund's documents. For funds offered to retail investors, though, the CySEC directive described next does set eligible assets.

The limits come from CySEC, not the statute. CySEC may restrict AIF investments by directive according to the nature of the assets and the investors targeted, and may classify AIFs by investment objective and by the structure of their investments. Its directive on the classification of AIFs, issued under the previous law and still in force, contains detailed rules, including eligible assets and investment limits for funds offered to retail investors.

A fund investing in other funds may not pay twice. Where an AIF invests in another collective investment undertaking of any kind, AIFs included, run by its own external manager or by a manager linked to it through close links (a holding of 20% or more, or control), the target fund's manager gives up the fee or redemption commission it would normally charge. Unrelated funds are not covered.

The manager, its directors, its group companies and their directors may deal with the fund only as the fund rules allow. Any deal between the AIF and its external manager or the people who effectively direct it, its depositary, its investment adviser, one of its unitholders, or anyone closely linked to them must be on terms normal for that kind of deal and in the unitholders' best interests.

The subject of such a deal is valued by an independent valuer. The depositary chooses the valuer, as the party that watches over the manager; where the counterparty is the depositary or a person connected with it, the choice passes to the external manager, or to the fund if it manages itself. If an independent valuation is not practically possible, the depositary instead certifies that the deal meets both conditions, normal terms and best interests; again the manager or self-managed fund certifies when the depositary side is involved. What is certified is the deal's compliance, not a valuation.

The exam material adds a second case in which the manager chooses the valuer: a fund with no depositary. That was the rule of Law 131(I)/2014. Since 30 July 2018 the second case is a deal with a person connected with the depositary, and every AIF under the main regime must have a depositary.

The information memorandum names the related-party deals likely to occur. The annual and half-yearly reports then give all necessary information on the deals of the period, arranged by category and by counterparty, with any fee or commission paid to each counterparty shown for every deal separately rather than as one total.