How is an AIFM authorised, and how much capital must it hold?

Each AIF within the AIFM Law has a single AIFM, responsible for complying with the law: either an external AIFM appointed by or for the fund, or the fund itself where its legal form allows internal management and its governing body chooses it. A Cypriot AIFM must be a company limited by shares with its registered office and central administration in Cyprus, authorised by CySEC.

Portfolio management and risk management always go together; an AIFM may never be authorised for one without the other. It may add administration (fund accounting, valuation, registers, dealing and the like), marketing and work linked to the fund's assets, but never these additional functions alone. An external AIFM may also manage UCITS if it holds a UCITS authorisation; a self-managed AIF manages only itself.

An external AIFM may also be licensed for discretionary portfolio management of individual clients, pension funds included, and, only then, for the non-core services of investment advice, safekeeping and administration of fund units, and reception and transmission of orders; never for these services alone. The exam material lists marketing alone and administration without marketing among the banned combinations. The first is caught by the rule against additional functions without the core pair. Since 2013, nothing in the law has tied administration to marketing. Investment firms and banks need no AIFM licence to manage individual portfolios or provide other investment services relating to AIFs.

The application covers the people who effectively conduct the business, shareholders with qualifying holdings and their size, a programme of activity with the organisational structure, remuneration policies and practices, and delegation arrangements, plus information on each fund: strategies and leverage, any master fund, fund rules, depositary arrangements and investor disclosures. A UCITS management company need not resubmit documents already filed that are still up to date.

CySEC authorises only an applicant able to comply, with enough initial capital and own funds, run by people of sufficiently good repute and experience (at least two people decide on the business), with suitable qualifying shareholders and with its head office and registered office in Cyprus. Where the applicant is the subsidiary of, or is controlled by the same person as, a fund manager, investment firm, bank or insurer authorised in another Member State, CySEC first consults that state's supervisor; it refuses where close links would block supervision. It decides within three months of a complete application, extendable by up to three, and reports licences granted or withdrawn to ESMA quarterly. Business may start at once, but not before one month has passed since any missing information on delegation, fund rules, the depositary and investor disclosures was supplied. The exam material loosely calls this information on the services to be provided. The rule has been the same since 2013.

Initial capital is €300,000 for an internally managed AIF and €125,000 for an external AIFM. Above €250 million of portfolios managed, own funds rise by 0.02% of the excess, but initial capital plus this amount never has to exceed €10 million. Portfolios delegated out still count; those managed for others under delegation do not. For example, an external AIFM managing €1.2 billion, €300 million of it under delegation, counts €900 million: 0.02% of €650 million is €130,000, so it needs €255,000. Since 5 November 2021 the fixed-overheads floor for own funds has come from the EU Investment Firms Regulation.

Up to half of the additional own funds, never the initial capital, may be replaced by a guarantee of the same amount from a credit institution or insurer established in an EU or EEA state, or in another country whose prudential rules are equivalent. The exam material applies the 50% to the capital as a whole; since 2013 the law has limited the guarantee to the top-up. Professional liability is covered either by extra own funds of at least 0.01% of the portfolios managed or by indemnity insurance of at least 0.7% per claim and 0.9% a year in total. Own funds are held in liquid or quickly realisable assets, never in speculative positions.

An AIFM may delegate functions if it notifies CySEC beforehand, can justify the structure objectively and picks a delegate with enough resources, repute and experience, among other conditions. Sub-delegation needs the AIFM's prior express consent and advance notice to CySEC. Its liability to the fund and investors is unaffected.