Cyprus: Enquiry into Petroleum-related products

On 17 December 2014, the Commission for the Protection of Competition had announced on its official website that it would proceed with a sector enquiry regarding the petroleum products sector, pursuant to the newly introduced Section 32A of the Protection of Competition Laws 2008 and 2014. The announcement stated, among other things, that the common public perception of the relative market and according to the press is that the prices of petroleum-related products increase rapidly when import costs increase, but decrease slowly when import costs fall, a phenomenon branded as ‘rockets and feathers’. It was also noted by the Commission, that the sector enquiry will be general, as it entails data collection and does not directly concern any individual enterprise. Although it is not for sure, following the sector enquiry, the commission may investigate relevant individual cases.

Site investigation of facilities

On 16 January 2015, the commission also announced that it will proceed, on the basis of Section 31 of the Protection of Competition Laws 2008 and 2014, with a site investigation of the facilities of Cosmos Trading Ltd and Fereos Ltd.

The related proceedings commenced on 13January 2015 within the ambit of the preliminary assessment of a complaint filed by the Cyprus Association of Convenience Stores regarding possible infringements of Section 3(1) of the Protection of Competition Law of 2008. The commission has made it clear that the investigation does not indicate that any company has violated competition legislation but rather, the objective is to collect the data needed to conduct the necessary investigation in accordance with the commission’s powers and jurisdiction to apply the relevant legislation.

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European hedge funds shut down at record pace

Hedge funds in Europe are closing down at the fastest-ever pace as rising costs, weak performance and a slowdown in the pace of new investment leads some embattled founders to bail out.

Statistically four in every 10 funds which closed last year were in Europe, home to a large number of smaller funds, as the total number of closures rose to a record 370, Eurekahedge data showed, even as other regions benefited from a rise in global industry assets to a record near $3 trillion US Dollars.

This European trend comes after Eurkeahedge’s European funds index rose just 0.7 per cent in 2014, way below a 5.5 per cent gain by North American peers and notching up an eighth straight year of underperformance.

Anne-Gaelle Pouille, a senior portfolio manager at fund of hedge funds PAAMCO, stated that “Patience of course can only run so deep for many investors,”, “Not all investors, but many investors have struggled to make money in Europe, and when that goes on for a number of years … money is going to exit.”

Amongst the high-profile investors to recently ditch hedge funds, citing poor performance and high costs, were Britain’s Local Pensions Fund Authority and the Dutch pension fund PMT.

Cleaning out the weaker firms in a region with a relatively large number of smaller funds may help those remaining to get a bigger slice of the pie when things take a different course, but it means reduced choice for investors and less business for those who service the industry, such as the investment banks who carry out their trades and are known as prime brokers.

Heading the way in closures with nearly a third of the total are the so-called equity long-short funds, which bet on falling and rising stock prices. Computer-trading funds and those betting on macroeconomic issues also saw heavy casualties.

The majority of the attrition was felt among smaller managers, or those managing US$350 million or less, although blue-chip names were not immune, with US$27 billion Brevan Howard and Bramshott both forced to close funds after recording poor performance.

Data showed that investors pulled a net US$13 billion out of European hedge funds in the second half of last year, having invested a net US$35 billion in the first half and US$64 billion in 2013.

Additionally lower returns in 2014 mean the lucrative performance fees charged by hedge funds in Europe shrank at a faster pace than global peers, leaving them with less money to invest in the business and retain key traders and portfolio managers.

Compounding that financial quandary, smaller funds have found the cost of meeting new rules in Europe, particularly after the introduction of Europe’s Alternative Investment Fund Managers Directive (AIFMD), rise more than elsewhere.

Peter Astleford, a partner at law firm Dechert said “The pendulum towards more onerous rules in the US has stopped swinging. There is, at best, only very limited evidence of this in Europe,” Michele Gesualdi, chief investment officer at investment manager Kairos Partners said however “For those who can ride out the current squeeze, however, the future may be brighter, especially if performance picks up. “This is really the survival of the fittest environment,” Gesualdi said. “This year, European funds might surprise people in terms of generating returns.”

The typical management fee for Hedge funds is between one and two per cent and then a cut of profits of between 15 and 20 per cent. It is a fact however that both earners have been under pressure and have dropped since 2008. While larger funds generate enough from management fees to pay for fixed costs, smaller managers may have to use some of the performance fee.

Last month, a Citigroup survey released, showed that a hedge fund needs about $310 million to turn profitable, although some prime brokers say it’s possible for some simple strategies such as long/short equity hedge funds to break even with US$100 million.

According to data from Eurekahedge, nearly three quarters of the hedge funds in Europe manage US$200 million or less. The region is home to nearly 37 per cent of hedge funds globally by number but hosts just 22.7 per cent of the industry’s assets, data from Eurekahedge also showed, down from 25 per cent in October 2007.

As regulation costs have risen and many funds were burnt after being on the wrong side of an unpredictable rise in the Swiss franc in January, it is apparent that 2015 has started off in a harsh way.

Citigroup estimates funds with US$350 million or less saw compliance costs rise 31 per cent last year and notes they may not be able to break even on management fees alone. Sandy Kaul, head of business advisory services at Citi, said: “That either is going to have to be covered by principals coming up with more money, or we could probably expect to see a pretty substantial wave of small hedge fund closures.”


Cyprus: Investment fund landscape

With reference to the regulatory categorisation of investment funds in the European Union, investment funds are categorised as either an undertaking for collective investment in transferable securities otherwise abbreviated as (UCITS) or alternative investment funds (AIFs). In Cyprus, a ‘UCITS’ is defined in the Law on Open-Ended Undertakings for Collective Investment (UCI Law) (78(I)/2012), which incorporates the EU UCITS IV Directive (2009/65/EC).

The term ‘UCITS’ corresponds to a regulatory category. Thus, in order for an investment fund to qualify as a UCITS within the meaning of the UCI Law, it must be authorised as such pursuant to the law and not merely operate in accordance with its provisions.

The knowledgeable authority for the authorisation and supervision of UCITS in Cyprus is CySEC (Cyprus Securities and Exchange Commission). After its authorisation, it is required that a UCITS must operate in accordance with the UCI Law on an ongoing basis and cannot convert into any other type of investment fund. UCITS can always be distinguished from AIFs, because UCITS are authorised and categorised as such by CySEC. Additionally, they may categorise themselves as UCITS in their marketing documents and communications following the said prior authorisation of CySEC.

On the other hand, the term ‘AIF’ is a legal term introduced by the EU Alternative Investment Fund Managers (AIFM) Directive (2011/61/EU), which has been incorporated into Cypriot law through the AIFM Law as amended (56(I) 2013). According to the AIFM Law, the term ‘AIF’ encompasses, without prejudice to any exemptions provided for therein, all investment funds that do not qualify as UCITS, irrespective of their regulatory categorisation. Therefore, unlike UCITS, which always require authorisation and regulatory categorisation as such by CySEC, an investment fund will qualify as an AIF, within the meaning of the AIFM Law, irrespective of its regulatory categorisation and even if it is not subject to authorisation and supervision; it is sufficient that the vehicle operates as an investment fund without being authorised or registered with any authority. Hence, from a Cypriot perspective, the term ‘AIF’, as defined in the AIFM Law, is a generic legal term encompassing all regulated and unregulated non-UCITS collective investment schemes in Cyprus. However, given that the AIFM Law regulates AIFMs for example, legal persons authorised by CySEC to offer at least risk and portfolio management to AIFs, rather than the investment funds themselves, it does not dictate whether AIFs must be regulated in Cyprus or how many types of regulated AIF are or should be available. That is a subject for national legislation to decide.

Adopted concept of investment fund regulation

UCITS are regulated under the UCI Law and form the first axis of investment fund regulation in Cyprus. The reason for considering UCITS as the first axis of investment fund regulation is not only historical, given that UCITS were introduced under EU law in 1985 but also because it is closely associated with the overall concept of the regulation of investment funds since, as an EU member state, Cyprus is obliged, to provide for the existence, authorisation and supervision of UCITS. According to the UCI Law, UCITS may accept investments from possibly everyone, irrespective of the sophistication or net worth of the prospective investor. On the other hand, the AIFM Directive, leaves it to each EU member state to determine whether it will allow unregulated AIFs within its territory or whether it will subject all AIFs to regulation and supervision. In accordance with the AIFM Directive’s objectives, the AIFM Law seeks to regulate Cyprus-based AIFMs directly; as to Cyprus-based AIFs, these are indirectly regulated through a series of obligations incumbent on the Cyprus or EU-based AIFM of a Cypriot AIF (e.g. safekeeping of assets, disclosure and reporting). These indirect obligations are triggered if the AIFM in question manages aggregate portfolios of AIFs above certain thresholds which are prescribed in the AIFM Law. Otherwise, as mentioned above, the AIFM Law does not intervene in the regulatory status of an investment vehicle qualifying as a Cyprus-based AIF, in order to require its authorisation and supervision. Moreover, the AIFM Law imposes no requirements on a Cypriot AIF whose manager in aggregate manages portfolios of AIFs below the prescribed thresholds or which is below the prescribed thresholds itself, if self-managed. Therefore, it is Cypriot dedicated legislation that decides:

  • as to whether Cypriot AIFs are subject to authorisation;
  • the extent of regulation of Cypriot AIFs whose management falls below the prescribed thresholds; and
  • in the case of Cypriot AIFs whose management falls above the prescribed thresholds, those aspects of regulation which are not covered by or may apply in addition to the indirect obligations imposed by the AIFM Law.

The loyal regulation of AIFs in Cyprus, through the AIF Law (131(I)/2014), subjects any investment vehicle that has been established in accordance with Cypriot law and qualifies as an AIF to regulation and supervision. Besides a small number of AIFs that are regulated by the Cyprus Stock Exchange (CSE) and are known as CSE investment entities, all other vehicles that qualify as AIFs are subject to the AIF Law. AIFs that fall under the AIF Law are subject to licensing and supervision by CySEC and are categorised according to the type or number of investors targeted, as stated below:

  • AIFs targeting private investors (i.e. the public, as made clear in Article 37(1) of the AIF Law);
  • AIFs targeting a limited number of up to 75 well-informed and/or professional investors;
  • AIFs targeting well-informed and/or professional investors.

This therefore means that unregulated investment funds in Cyprus which qualify as AIFs and benefit from no exemptions must apply for authorisation from CySEC.

In conclusion, the axes of direct investment fund regulation in Cyprus are therefore the UCI Law and the AIF Law, with some AIFs falling under the regulation of the CSE, for historical purposes.

Access to all types of EU investors

There are many differences between the UCI Law and the AIF Law. UCITS are subject to fixed regulation, which is provided for in the UCI Law and relevant CySEC directives and circulars. What is meant by ‘Fixed regulation’ is that the applicable provisions do not vary depending on the size of the UCITS itself or on the aggregate assets under management by the manager of the UCITS. Contrariwise, AIFs are subject to ‘variable regulation’. This means that a self-managed AIF whose assets exceed the AIFM Law prescribed thresholds or whose external management manages in aggregate AIFs whose assets under management exceed AIFM Law thresholds will be subject to both the provisions of the AIF Law and the AIFM Law and in the case of a conflict between the AIF Law and the AIFM Law, the latter will prevail. Additionally this will also be the case when the manager of an AIF or the AIF itself, if self-managed, opts in to the AIFM Law, even though the assets under management are below the prescribed thresholds. Equally, if the prescribed thresholds do not apply or there was no option to submit to the AIFM Law, then only the AIF Law will apply. Thus, the applicable provisions for AIFs vary depending on whether the assets under management are above the prescribed thresholds and whether opt-in has been applied.

Additionally, the regulation of UCITS pursuant to the UCI Law does not depend on the type of targeted investor base; nor are investors restricted from investing in UCITS because of their lack of sophistication. Therefore the UCI Law does not distinguish between retail, professional and well-informed investors, so that every investor is eligible for investing in a UCITS. On the contrary, it uses the term ‘public’ meaning, potentially everyone, without distinguishing on quantitative or qualitative grounds. In contrast, the regulation of AIFs under the AIF Law depends on the type and number of investors targeted. There are private investor (public) AIFs, which are heavily regulated and there are AIFs targeting professional and/or well-informed investors that are less regulated; and there is minimal regulation of AIFs that target up to 75 professional and/or well-informed investors. Moreover, an AIF for well-informed and/or professional investors, including an AIF targeting the limited number of 75 of those investors, reserves its units exclusively for such investors. Thus, private investors (i.e. retail) are excluded from participating in these types of AIF.

Regardless of their differences, UCITS and AIFs benefit from the so-called ‘passport’ meaning, the possibility to market their units to investors in other EU member states under observance of a prescribed notification procedure, without being subject to approval by the host member state regulator. In the case of UCITS, the passport possibility is vested in the fund itself. Once a fund has been authorised as a UCITS by CySEC, it may benefit from the passport, notwithstanding the amount of assets under management or the assets managed in aggregate by its manager.

In the case of AIFs, the passport possibility is vested in the regulatory status of its manager as an authorised AIFM, instead of the fund itself. An AIF is therefore granted a passport only when it is managed by an AIFM, whose appointment will be either mandatory because the prescribed thresholds are exceeded or optional because of opting-in. The same notion applies in the case of a self-managed AIF. Thus, for an AIF below the prescribed thresholds that has appointed an entity other than an AIFM as its manager or does not opt-in, if self-managed, no passport will be granted.

Another difference between UCITS and AIFs concerns who cross-border marketing may target when a passport right is exercised. For cross-border marketing of UCITS, the targeted investor base is the public in all EU member states meaning potentially everyone in the EU.

Nevertheless, according to current EU regulations, the cross-border marketing of an AIF may target only professional investors, such investors being professional clients, within the meaning of the EU Markets in Financial Instruments Directive (2004/39/EC) as amended. This will mean that an AIF, which has been authorised by CySEC to target private investors meaning the public in Cyprus and has appointed an AIFM (or is considered to be an AIFM itself if self-managed), may under the passport market its units only to professional investors across the EU. The same restriction applies to well-informed investors, within the meaning of the AIF Law, in an AIF that is authorised by CySEC to target professional and well-informed investors and has appointed an AIFM (or is considered to be an AIFM itself if self-managed). Given that the AIF Law’s definition of a ‘well-informed investor’ is not considered to be a professional investor, this type of AIF can make use of the passport only for its professional investor base. In conclusion, it is apparent that for fund promoters targeting investors that do not qualify as professional investors, the right vehicle would be a UCITS in order for them to market their product by means of a passport.


CySEC Cyprus

All investment funds in Cyprus are subject to regulation and supervision by a common regulator, CySEC. Whereas regulation of UCITS is uniform, regulation of AIFs is a matter on which EU member states have discretion. The decision taken in Cyprus was to subject all non-UCITS investment funds to regulation as AIFs under the AIF Law, as reflected in the relevant provisions. Depending on the sophistication and number of targeted investors, AIFs regulated under the AIF Law are divided into three categories:

  • AIFs open to all types of investors;
  • AIFs open to well-informed and professional investors only; and
  • AIFs open to up to 75 professional and/or well-informed investors.

In opposition, UCITS are open to potentially everyone, without any quantitative or sophistication restrictions. Regardless of the regulatory differences, both UCITS and AIFs can be marketed across the EU on a passport basis. The UCITS passport is a tool for fund promoters that intend to target retail, within the meaning of not being professional investors, since a UCITS may solicit investments from the public. The passport offered to AIFs by means of appointment of an AIFM is a tool for fund promoters intending to solicit professional investors in general, and the AIF targeting professional and/or well informed investors is the appropriate Cypriot AIF investment vehicle to this end.


British Virgin Islands: Court Provides Guidance for Appraisers Valuing Shares

Recently, the BVI Commercial Court issued important guidance to accountancy professionals, BVI companies and their shareholders as to how shares should be valued following a squeeze-out, merger or dissent from other restructuring provisions. This welcome guidance not only means that the process of fixing fair value is more likely to be efficient and conclusive, but it also aims to reduce the risk of an impasse, were unanimity alone to apply.

The BVI Business Companies Act 2004 is designed to be flexible and commercially attractive to the international financial community. Bearing that in mind, the act affords protection to investing shareholders to obtain fair value for their shares if they dissent from the following transactions:

  • merger
  • consolidation
  • a court-permitted arrangement
  • a compulsory buy-out by a majority shareholder or
  • a sale, transfer, lease exchange or other disposition of more than 50% of the value of the company’s assets or business, if not made in the ordinary course of business (subject to other limited exceptions).

In situations of such dissent and where the company’s written offer is not accepted by the dissenting member, the act provides for a statutory appraisal process to fix fair value. The procedure is that the parties appoint two appraisers, who then designate a third appraiser, and the three of them fix fair value of the shares in question.

With reference to the case at hand the BVI Commercial Court gave guidance on that exact process. It was declared by Judge Bannister that the statutory appraisal process provides that in the absence of unanimity, the appraisers may fix fair value by majority decision.

Accounting professionals will no doubt agree that a valuation process may seem to be somewhat puzzling in circumstances where the parameters for fixing fair value are not determined at the outset. However, the risk of valuation inaccuracy is reduced, since inflated valuations are less likely where a majority determination will be determinative absent unanimity. The court’s approach to the interpretation of the act serves to make the appraisal process more efficient and less likely to result in deadlock, and will give valuation professionals the certainty and peace of mind, knowing the statutory parameters to facilitate their engagement in the appraisal process.

The Commercial Court’s proactive stance is consistent with the decision and in assisting parties utilise the restructuring mechanisms provided under the act, having previously given guidance on minority discounts and contracting out of the statutory process.


Transfer Pricing

Over the past 12 months, the transfer pricing environment has undergone a significant change including high-profile developments, such as the introduction of the Organisation of Economic Co-operation and Development’s (OECD) base erosion and profit shifting initiative, which have heavily impacted the transfer pricing arena, providing infinitely more scope for addressing disclosure, intangibles, risk and dispute resolution issues.

While the extent to which countries incorporate the new OECD initiative into their transfer pricing legislation remains to be seen, one thing is apparent: the transfer pricing landscape continues to evolve.

The Organisation of Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) initiative and the progress it is making, is, the most significant development. The BEPS project will have an impact in the medium to long term, as it is yet to be seen if and how countries incorporate the new OECD Guidelines into their transfer pricing legislation. Action 13 of the BEPS project is particularly relevant to all multinational enterprises (MNEs). To the extent countries adopt the recommendations under Action 13 in their legislation, MNEs will actually have more documentation and disclosure requirements than they do today. Furthermore, the level of disclosure recommended under Action 13 by MNEs is likely to open the door to more scrutiny, as the information disclosed in the country-by-country reports, in the absence of a functional and an economic analysis, will raise more questions than provide answers for the tax authorities.

In conclusion and without doubt, the OECD’s BEPS project is the most significant development within the last year, and it is still ongoing. For those organisations that have the resources, the current impact is essentially time being taken reading, considering, absorbing and responding to the numerous, interconnected ‘action’ documents which have been issued.

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