Orion Capital Partners: sub-threshold registration, leverage and depositary independence
Orion Capital Partners Ltd is registered with CySEC under section 8 of Law 56(I)/2013 as a sub-threshold AIFM. It manages two Cyprus AIFs: Orion Core Fund, a closed-ended fund with a six-year lock-up, no redemption rights and €310 million of unleveraged shipping loans; and Orion Flex Fund, a €140 million open-ended fund financed partly by prime-broker borrowing, whose leverage is reported at 320% of net asset value under the commitment method. Orion has four portfolio managers, outsources fund valuation to a Limassol firm in which its chief executive holds 62%, and has never filed Annex IV reports. It now plans to (i) market Flex to retail investors in Cyprus and (ii) market Core to professional investors in the Netherlands using its registration as a passport. Compliance argues that the €500 million threshold lets Orion stay registered indefinitely, that sub-threshold managers fall outside the depositary rules, and that the Dutch notification for Core can be filed once marketing has started, since only professionals are targeted.
1. Is Orion entitled to remain a registered sub-threshold AIFM, or must it be authorised? Show the calculation and the own-funds consequence.
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The two limbs. Article 3(2) AIFMD (as transposed by Law 56(I)/2013) offers registration only where either: (a) total AUM is ≤ €500 million and all the AIFs managed are unleveraged and have no redemption rights exercisable for five years from initial investment; or (b) total AUM, including assets acquired through leverage, is ≤ €100 million.
Applied. Core (€310 million, closed-ended, no redemptions, unleveraged) fits limb (a). Flex does not: it is open-ended and financed by prime-broker borrowing, so it can never be counted under limb (a). Once Flex exists, limb (a) is unavailable for the firm as a whole and the only registration route is limb (b), where leverage must be added in. Orion's AUM of €310 million + €140 million = €450 million is far above €100 million.
Conclusion. Orion does not qualify for registration and must apply for authorisation as an AIFM. The €500 million figure is not headroom that can be blended with a leveraged, redeemable fund; the two limbs are alternatives, not cumulative allowances.
Own funds. Under Article 9 the AIFM must hold the higher of €125,000 and 0.02% of AUM above €250 million. Here 0.02% × (€450m − €250m) = €40,000, so the €125,000 minimum applies, with the additional own-funds requirement if the AIFM is internally managed. Authorisation also brings the remuneration policy, depositary, valuation, delegation and Annex IV reporting obligations, and only then can the marketing passport be used.
2. Orion proposes to keep valuation in-house through a firm its CEO controls, and to use an affiliated entity as depositary for both funds. Which parts of that plan are permissible under AIFMD?
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Depositary: eligibility and number. Each AIF must have a single depositary. Eligible depositaries are credit institutions, MiFID investment firms authorised for safekeeping and administration, or other institutions subject to prudential regulation and ongoing supervision. A reduced regime exists for AIFs that are closed-ended and have no redemption rights for five years: for Core only, an entity such as a lawyer or auditor subject to professional supervision could act. Flex is open-ended, so the reduced regime is unavailable and a full eligible depositary is required.
Independence. The depositary must be independent of the AIFM in function and hierarchy. An entity controlled by Orion's CEO fails that test: it cannot objectively assess the AIFM's conduct, and the arrangement would need an objective-reason analysis which cannot succeed for a related party. The AIFM also cannot be its own depositary. If a prime broker is the counterparty on Flex's financing, it cannot double as depositary.
Valuation. Responsibility for proper valuation stays with the AIFM even when a third party performs it. Article 19 requires the valuation function to be independent of portfolio management and of the remuneration policy. Outsourcing to a firm 62% owned by the CEO is not automatically prohibited, but it must be justified, documented and monitored, the conflict must be managed and disclosed, and CySEC must be informed of the delegation. The governance test is whether the valuer can resist pressure from the person who controls it - on these facts, that cannot be demonstrated without a firewall, separate reporting line and independent sign-off.
Practical answer. The depositary plan must be rebuilt; the valuation plan could survive only with strengthened independence safeguards.
3. What must Orion do before (i) marketing Flex to retail investors in Cyprus and (ii) marketing Core to Dutch professional investors?
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Threshold point. Neither step is available while Orion is merely registered. The AIFMD marketing passport belongs to authorised AIFMs, so the authorisation application comes first; marketing before authorisation would be a breach.
(i) Retail marketing of Flex in Cyprus. Retail distribution of an AIF is permitted only where the AIF and its rules satisfy the national conditions for retail marketing, and the investor must receive a PRIIPs key information document in good time before subscription. Because Flex is open-ended, leveraged at 320% of NAV and reliant on prime-broker financing, Orion must also document its leverage policy and limits, disclose them to investors, and be ready for CySEC to impose leverage limits or require additional information. Liquidity and redemption terms must be consistent with the fund's ability to meet redemptions under stress. The distributor must also complete MiFID suitability and appropriateness checks.
(ii) Passport to the Netherlands. Orion must file the Article 32 notification with CySEC, identifying the AIF, its investment strategy and the intended Dutch marketing, after which CySEC transmits the file to the Dutch AFM, which has 20 working days to review. Marketing cannot start before that transmission. Because Core is closed-ended and unleveraged, its treatment is straightforward, but the notification must be updated if the strategy or the AIF changes.
Cross-cutting. Annex IV reporting must be brought up to date before any supervisory engagement, and the delegation to the valuation firm must be reflected in the notification and in CySEC's supervision.