Compliance: CySEC evaluates the policies & procedures established and implemented by AIFMs
The Cyprus Securities and Exchange Commission (‘the CySEC’) has proceeded, through on-site inspections, to evaluate the policies/procedures established and implemented by AIFMs regarding their compliance with some operational aspects to the organisational requirements and the delegation of functions. The purpose of the Inspections was to evaluate the AIFMs’ level of compliance with the requirements for organisation and operation arising from the legal framework contained in the Annex.
I. Risk Management Function
There was no hierarchical separation of risk management from the portfolio management function.
In some cases, certain practises such as the identification and measurement of risks were carried out by functions that were not responsible for.
Annual report of the risk management:
the standard description of risks for each AIF was repeated almost identically to each annual report;
the report did not include any information regarding the evaluation, monitoring and the minimum annual review of the risk management systems.
II. Valuation of the AIF’s Asset Function
It has been observed that AIFMs despite notifying CySEC about the appointment of an external valuer, in fact they did not.
In certain cases, the external valuer did not act independently as the AIFM examined/reviewed the final estimated values that it received by the external valuer.
III. Portfolio Management Function
In the cases where the portfolio management was performed internally but the AIFM appointed external investment advisers, it was found that in some cases the procedure followed did not ensure that the final investment decision was to be made by the AIFM itself.
IV. Compliance Function
When the compliance function was outsourced, the monitoring and evaluation of the adequacy of the measures and procedures that were implemented was not performed on a regular basis.
The establishment of a monitoring program was missing.
The compliance reports did not include information regarding the monitoring and regular evaluations carried out, the findings regarding the adequacy and effectiveness of the measures.
V. Responsibility of the external AIFM regarding managed AIFs in the form of a company/partnership
When the AIF in the form of a company/partnership appointed an external AIFM, it was found that in some cases there were practices which did not ensure that the AIFM is the only one responsible for managing the AIF.
VI. Organisational and operational matters of the AIFM and human resources’ professional expertise
On some occasions it was found that senior management members would perform managerial duties of key departments of the AIFM, a practise which given the principle of proportionality, could potentially harm the effective and independent execution of such functions.
It was found that employees of AIFMs, engaged in the valuation function, seem to not have the necessary skills, knowledge and expertise required to perform the function’s practises.
BEST PRACTICE STANDARDS
I. Control of the AIFM by the Board of Directors.
II. Control from Senior Management.
III. Organisation of the AIFM and human resources’ professional expertise.
THE NEXT STEPS The AIFMs are called to review Circular C409, evaluate their compliance with the relevant governance requirements and to take corrective actions where relevant, taking into consideration the principle of proportionality and the relevant regulations.
Written by Angeliki Georgiou, Independent Legal Consultant