In August 2012, the UAE Securities and Commodities Authority (“SCA”) issued Board Resolution No. 37 of 2012 concerning the rules of investment funds (the “Regulation”).
The issuance of the Regulation has been expected for some time and is the culmination of a number of changes taking place in the relationship between the UAE Central Bank (“Central Bank”) the SCA and in relation to financial regulations generally in the UAE.
The Regulation will have a substantial impact on both the establishment of local investment funds and the marketing and promotion of foreign funds in the UAE, particularly where these are being marketed and promoted by foreign entities located offshore or from a representative office located in the UAE. Such institutions will need to re-evaluate their current practices in order to ensure compliance with the Regulation. Previous reliance on ‘tolerated practices’ will no longer be available to such foreign financial institutions – including their representative offices and financial institutions located in the DIFC as well as abroad.
With the Regulation, we now have a highly regulated and prescriptive environment with a number of mandatory third party service providers. We would expect that the cost of managing funds will increase and that the ability for funds to be flexible and target small numbers of investors will be more difficult.
A local fund is defined as one that is established in the UAE (excluding the DIFC) and is licensed by the SCA. Existing funds, which have been approved by the Central Bank, have a period of one year to become compliant with the provisions of the Regulation (including obtaining the approval of the SCA). It is specifically stated that an investment fund established in a free zone in the UAE (i.e. the DIFC) will be considered to be a foreign fund for the purposes of the Regulation.
The definition of a local fund is potentially very wide as it is defined as a financial pool, which engages in the activity of collecting monies from investors in return for the issuance of investment units of equal value and rights for the purpose of investment. In order for any local fund to be established or promoted within the UAE (excluding the free zones), the local fund is to be duly approved and registered with the SCA in accordance with the Regulation.
The Regulation provides for specific requirements for the establishment of the local fund (i.e. management, daily monitoring of activities, offerings, etc.) and imposes limitations on the promotion of such local funds. Each local fund will be required to appoint:
Interestingly, the current UAE Commercial Companies Law does not provide for the establishment of fund companies so it may be the intention that the local fund would not be a separate legal entity (at least until there is a change to the UAE Commercial Companies Law). In relation to the capacity and authority of the local fund, the Regulation notes that the local fund will be governed by a board of directors appointed by the board of the company to oversee the fund. It is important to note that each member of the local fund board of directors is to be approved by the SCA and may not be removed without such approval.
The Regulation also imposes restrictions on the marketing and promotion of foreign funds in the UAE. The definition of a foreign fund will include any funds established in the DIFC as well as funds established outside of the UAE, even if being marketed by a Central Bank regulated representative office in the UAE.
No foreign fund may be marketed or promoted in the UAE without first being approved by the SCA. In order to be eligible for approval by the SCA for a public offering, the fund must be established in a foreign country (including the DIFC) and be subject to the control of a supervisory authority similar to the SCA and licensed to promote a public offering. A private offering of a fund must also have the SCA approval and marketing activities will be limited to direct contact with pre-determined people.
Under the Regulation, a foreign entity (including a DIFC entity) wishing to promote a foreign fund in the UAE will not be able to do so without appointing a local promoter. The local promoter must be either a bank or investment-company licensed by the Central Bank or a company licensed for such purpose by the SCA.
DFSA regulated funds as well as funds from recognised regulated countries with sound regulation are not automatically exempted from the SCA approval process (as is the case in the DIFC). Local promoters may also face difficulties in meeting requirements for foreign funds as they are required to continue to follow up in relation to the performance of the foreign fund following promotion to ensure protection of investor’s monies. This requirement is very vague and may be difficult if the local promoter does not have an on-going relationship with the fund manager. The local promoters are also required to distribute dividend and redemption proceeds to unit-holders if not otherwise undertaken by an entity in the UAE.
It is clear that the previously relaxed ‘tolerated practice’ in relation to the marketing and promotion of foreign funds in the UAE has now undergone a radical change, which will affect existing local funds and those foreign funds that seek to raise investment from the UAE.Print