Regulatory experts from the international law firm Clifford Chance have reviewed the eagerly awaited Investment Funds Regulation (Regulation) which has been implemented by the UAE Securities and Commodities Authority (SCA) this week. The Regulation applies to all matters relating to domestic investment funds and to the promotion and offering of foreign funds in the UAE, with particular implications for DIFC funds or funds marketed by DIFC firms.
The Regulation transfers regulatory responsibility for the licensing and marketing of investment funds and for a number of related activities from the UAE Central Bank to the SCA.
The Regulation prohibits an entity from establishing a domestic investment fund without first obtaining approval from the SCA. The Regulation further details requirements with respect to domestic funds' offering documents and investment policies, and contains provisions regarding the subscription, trading and redemption of fund units. The roles and obligations of a fund's services providers, specifically the fund's investment manager, management services company and custodian, are also prescribed.
All foreign funds made available to investors in the UAE need to be approved by the SCA and offered through a locally licensed placement agent or, in limited circumstances, a locally established representative office.
In order to promote a fund to the public in the UAE, the foreign fund must be regulated and permitted to make a public offer in its home state.
Unregulated, non-retail foreign funds can be offered in the UAE by way of "private placement". Approval of the SCA is still required and minimum subscription amounts of AED500,000 (in respect of foreign funds) and AED 1 million (in respect of foreign funds incorporated in free zones outside of the UAE) apply.
Irrespective of whether the units of foreign funds are offered publicly or by way of private placement, all offerings must be made through a locally licensed placement agent. Where foreign funds are offered by way of private placement, the offer can be made through a locally established representative office of the fund company, provided the offer is limited to institutional investors; and (ii) a minimum subscription amount of AED 10 million per subscriber is applied. This is likely to be of limited use in practice.
The absence of a full exemption (including an exemption from the SCA approval requirements) for foreign non-retail funds marketed on a cross-border basis, may cause many foreign firms offering funds in the UAE to change their business model and practices. Currently foreign firms engage in a limited amount of cross-border business with non-retail investors in the UAE consistent with practice to date tolerated by the UAE Central Bank.
The DIFC markets itself as "an ideal platform for raising, deploying and managing capital across the region". Indeed, many foreign firms have chosen the DIFC as their base for accessing the Middle East market. These firms may find that the DIFC no longer provides the gateway to the UAE market the way it once did.
The DIFC has also dedicated time and resources to creating a legislative and regulatory regime designed to support and establish a secure environment for the growth of the funds industry. The classification of funds established in the DIFC as "foreign funds" for the purposes of the Regulation may detrimentally affect the growth of the DIFC as a funds centre and inadvertently give competitive advantage to similar free zones, such as the Qatar Financial Centre situated in Doha.
Tim Plews, Clifford Chance Partner, believes that "the implementation of the Investment Funds Regulation is likely to come with renewed calls for some form of passporting arrangement or other special treatment for DIFC funds or funds marketed by DIFC firms. In the meantime, firms established in the DIFC may be weighing up the advantages and disadvantages of opening up an additional establishment onshore in the UAE. Indeed, some sector specific firms may relocate permanently from the DIFC."
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