Annual reporting obligations of Cyprus Investment firms

by:CHRISTOS TOURVAS

The Cyprus Securities and Exchange Commission (the “Commission”) is the responsible authority ensuring that Cyprus Investment Firms (CIFs) comply with all the requirements as set out in the Investment Services and Activities and Regulated Markets Law of 2007, as in force (the “Law”) and the relevant Directives.

CIFs shall submit to the Commission all the reports described herein for the assessment of their compliance with the legal requirements and rules of the relevant Directives. This guidance elaborates on the annual reporting requirements of CIFs with regards to their capital adequacy, shareholding and financial status, as well as measures in force for the prevention of money–laundering and terrorist financing.

The said reporting obligations apply to CIFs taking into account the nature, scale and complexity of their respective businesses, and the nature and range of investment services and activities undertaken in the course of their business.

Shareholders Possessing Qualifying Holdings

Section 33(7) of the Law stipulates the obligation of CIFs to notify the Commission at least by January 31st of each year, the names of the shareholders possessing qualifying holdings during the previous calendar year as well as its associates and the sizes of such direct or indirect held holdings. The notification must be submitted along with the group structure, which shall include all the affiliated entities.

Declaration of Tied Agent

Pursuant to section 40 (15) of the Law, a CIF must send a notification to the Commission, until the 31st of January of each calendar year, a table including the details of its tied agents. Such notification should be submitted by a CIF every time that it appoints or dismisses a tied agent, as well as when it becomes aware of changes in the specifics and/or status of its tied agent. Tied agents are also obliged to make available to the Commission their books and records, and every other document or information as this might be requested.

Audited Financial Statements

Furthermore, with reference to the financial status, section 114 of the Law imposes the obligation for the submission to the Commission within four months from the end of the financial year, of the financial accounts that provide a true and fair picture of the CIF’s financial status and these shall be based in accordance with the relevant accounting standards and rules. The said financial accounts must be audited by a qualified auditor and be accompanied by a signed copy of the suitability report. The Directive DI144-2007-01, extends CIFs’ obligations by imposing requirements upon the CIFs to implement and maintain internal accounting policies and procedures, which enable them to deliver in a timely manner to the Commission their financial reports, upon a relevant request.

The Law also imposes the duties on the CIFs’ auditors to report promptly to the Commission any fact or decision in relation to the said CIF of which they became aware during the processing of the information for the preparation of the reports. This duty also extends to undertakings having close links with the CIFs.

Suitability Report

Within four months from the end of each financial year, the auditors must submit to the Commission the suitability report, which describes the measures taken by the CIF with regards to the safeguarding of the client’s ownership rights and prevention of the use of client’s instruments on own account without the prior consent of the client. In accordance with subsection 2 of section 18, the CIFs required to:

  • make adequate arrangements so as to safeguard clients' ownership rights, especially in the event of the CIF's insolvency, and to prevent the use of a client's instruments on own account except with the client's express consent;
  • make adequate arrangements to safeguard the clients' rights and, except in the case of credit institutions, prevent the use of client funds for its own account.

Submission of the capital adequacy and large exposures reports

By virtue of the provisions of section 72 and 73 of the Law, a CIF must make publicly available and submit to the Commission the information relating to its capital adequacy and exposures.

As a result of the implementation of EU Directive 2013/36/EU and the Regulation 575/2013 into National Law, the Commission has issued the Directive DI2014-144-15 and DI2014-2014-14, which have repealed the Directives DI144-2007-05 and 144-2007-06 for capital adequacy and large exposure respectively.

The implementation of the above regulations has increased the prudential requirements of CIFs by, inter alia, imposing enhanced reporting obligations related to capital adequacy and exposure of CIFs. The Commission, in order to ensure that CIFs are transparent, financially healthy and are not exposed to capital risk beyond the regulatory threshold, has issued the following forms:

  • Form 144-14-06.1 Calculation of own funds and capital adequacy ratio
  • Form 144-14-07 Leverage
  • Form 144-14-08.1 Large exposures to institutions and non-institutions
  • Form 144-14-08.2 Exposures to Directors
  • Form 144-14-08.3 Exposures to Shareholders
  • Form 144-14-09 Geographical breakdown of exposures

All the aforementioned forms must be submitted to the Commission Quarterly via the TRS system, along with the following:

  • Trial Balance, 
  • Balance Sheet and
  • Profit and Loss a/c.

For the successful filling and completion of the Forms, CIFs shall be taking, into consideration, including but not limited to, their minimum own funds requirements, eligible capital, the transitional provisions contained in the Capital Requirement Directive IV and the geographical distribution of exposures. It must be noted that the form 144-14-09 concerning the geographical breakdown of exposures needs to be submitted to the Commission regardless of whether the CIF is exceeding the applicable threshold of exposure as this is defined in the Directive DI144-2014-15.

Risk Management Report

The Risk Management Report along with the minutes of the Board of Directors meeting is required to be submitted annually, within twenty days from the date of the relevant meeting of the Board of Directors. A CIF’s risk management report contains the processes, supporting measures and sound proactive practices for limiting risk exposure and ensuring adherence to the regulatory provisions.

The risk management function ensures that all risks are identified, calculated and reported. CIFs must ensure that the risk management function is actively involved in elaborating the CIF's risk strategy and in all material risk management decisions and that it can deliver a complete view of the whole range of risks of the institution.

The risk management report, among others, must contain the following:

  • the mandates of the risk management function,
  • evaluation of risk and reporting of issues and decisions taken by the risk management function,
  • identifying, measuring, assessing, responding to, and reporting on all the risks resulting from the CIF’s activities,
  • the integrity of the risk management information systems, including the accuracy, reliability and completeness of the data used, and;
  • the approval and maintenance of risk models including verification of the consistency, timeliness, independence and reliability of data sources used in such models.

Country-by-Country Reporting

By virtue of the Directive DI2014-144-14, CIFs are required to disclose to the Commission on an annual basis, and consolidated basis, information such as: (a) name(s), nature of activities and geographical location (b) turnover; (c) number of employees on a full time equivalent basis; (d) profit or loss before tax; (e) tax on profit or loss; (f) public subsidies received. Such disclosures shall be designated by the Member State(s) and the third countries in which the CIF has an establishment.

External Auditors Verification Report

In accordance with section 18(2) of the Law, a CIF is obligated to take every possible measure to protect its clients’ funds. To this end, the external auditors are directly obligated to submit to CySEC, within five months from the end of each financial year, a report on the adequacy of arrangements established by the CIF, in relation to the clients’ funds and financial instruments.

The Report should be submitted to the Commission within four months from the beginning of each calendar year and must be accompanied by the following:

  • Reconciliation of clients’ funds between CIFs’ internal records and accounts and those of any third parties by whom those funds are held, as at March.
  • Analysis of client funds balances per credit institution, payment service provider or other authorised third person.

Compliance Function Report

Compliance function means the internal function of an Investment Firm for identifying, assessing, advising, monitoring and reporting on the investment firm’s regulatory compliance risks.

The compliance function report must contain a description of the implementation and effectiveness of the overall control environment for investment services and activities, ancillary services and other business, relevant changes and developments in regulatory requirements over the period covered by the report, the measures to be taken to ensure compliance with the regulatory changes, a summary of the risks that have been identified during on-site inspections or desk-based reviews performed by the compliance function as well as remedial approaches.

The Compliance Report must be prepared on an annual basis and must be submitted to the Commission within the period of twenty days from the meeting of the board of directors of the CIF, in which the report has been discussed, along with the relevant minutes of the meeting.

Annual Money Laundering (“AML”) Compliance Officer Report

The AML compliance officer of the CIF, is obliged to prepare an annual report (‘the AML Annual Report’) for assessing the Regulated Entity’s level of compliance with its obligations laid down in the Prevention And Suppression Of Money Laundering And Terrorist Financing Law 188(I)/2007 and the relevant directive. The AML Annual Report is prepared and submitted for approval to the board of directors, within two months from the end of each calendar year (the latest by the end of February). Following the approval by the board of directors, the report is submitted to the Commission along with the minutes of the board of directors within twenty days from the date of the relevant meeting.

The report should be prepared separately and not be part of any other report that the CIF has a requirement to prepare. The report shall at least cover the subjects provided in Paragraph 10 (4) of the directive DI144-2007-08 of 2012 of the Commission for the Prevention of Money Laundering and Terrorist Financing and subsequent amendments.
In case where, the Annual Report does not contain, at least, the issues mentioned in paragraph 10(4) as above, it cannot be considered that it is in compliance with the said paragraph and subsequently with the relevant directive. In the event of such failure, the board of directors and the Compliance Officer are subject to administrative sanctions as these are provided by the relevant legislation.

PILLAR III disclosures

In accordance with Regulation (EU) No. 575/2013 (the “Capital Requirements Regulation”, “CRR”), which was introduced in late 2014, CIFs are obliged to disclose information relating to its risk management, capital structure, capital adequacy, its risk exposures as well as the most key characteristics of the CIFs corporate governance including its remuneration system. The scope of this report is to promote market discipline and to improve transparency in the industry.
Article 433 of CRR provides that these disclosures shall be published on an annual basis in conjunction with the date of publication of the financial statements by the end of April each year.

The content of this article intends to provide a general guide to the subject matter.

Specialist advice should be sought on each particular case.

For any further information, please contact Mr. Lambros Soteriou at lambros@kyprianou.com.cy or Mr. Christos Tourvas at tourvas@kyprianou.com.cy