The Securities and Commodities Authority (the “SCA”) has as of 16th January 2023 repealed the Board of Directors’ Decision No.9/RM of 2016 Concerning the Regulations of Investment Funds (“Old Regulations”) and introduced a suite of new regulations which has introduced numerous changes to the fund’s regime across the UAE. The new regime will have a substantial impact on the way in which foreign investment funds in particular, operate within the region.
Under SCA Decision No.04/BC of 2023 (the “New Foreign Funds Law”) the circumstances in which foreign funds can be promoted to UAE-based Retail Customers, Professional Investors and Market Counterparties has been tightened up significantly.
Meanwhile, under SCA Resolution 01/Chairman of 2023 (the “New Local Funds Law”), the SCA has outlined a major overhaul impacting domestic UAE funds by introducing a number of new fund structures. The new structures include Family Funds, ESG Funds, precious metal funds, protected-cell funds, direct-financing funds, real estate development funds, protected-cell funds and commodities investment funds. As well as introducing these new structures, the SCA has also set out a clearer and more streamlined approach for sponsors to structure and launch new funds in the UAE.
The overall impact of these new regulations is to encourage sponsors of funds seeking to access capital from UAE investors to structure their arrangements in the UAE through SCA-licensed entities, rather than the previous practice of foreign funds accessing UAE capital, which was often carried out on an unregulated cross-border basis. It is also intended to encourage those international businesses involved in supporting the international funds sector to invest in the UAE and set up substantive operations in the UAE by reducing minimum capital requirements that were previously challenging, and increasing the breadth of opportunities the funds service providers could seek to engage in locally.
It is important to recognise that this comes against a background of a major increase in regional IPO transactions and liquidity generated as a result, a relaxation of foreign ownership restrictions to boost FDI into the UAE (link), and more recently, a revamp of UAE agency laws to significantly increase the attractiveness of the UAE for international investors (link).
New Foreign Funds Law
Under the New Foreign Funds Law, the promotion of foreign funds in the UAE has been significantly curtailed. Foreign-owned funds may no longer advertise or distribute units in their funds publicly, instead they are limited to private distribution to Professional Investors and/or Market Counterparties. This change is quite consequential for promoters of foreign funds, who now must adjust their arrangements with the foreign funds which they represent, in order to ensure compliance.
- the promotion and distribution of foreign funds to Professional Investors is no longer exempt under the SCA Rulebook. As such only firms licensed by SCA to conduct the regulated activity of “Promotion” may promote such funds to Professional Investors and on a private placement basis;
- the promotion or distribution of foreign funds to retail investors is now prohibited. Reverse solicitation from retail investors is not itself prohibited, however we understand the intentions of the SCA in relation to retail investors is to prohibit any direct dealing between non-SCA-licensed funds and retail investors in the UAE;
- non-UAE distributors of foreign funds may continue to issue units in foreign funds to Professional Investors and Market Counterparties on a reverse solicitation basis; and
- all foreign funds to be distributed in the UAE must be registered with the SCA, except for those that can demonstrate documented reverse solicitation.
We have included further details below:
Existing Foreign Funds can continue to manage accounts with UAE investors that were lawfully created prior to the New Fund Regulations, but should document their relationship carefully and avoid promoting any new products or services.
We understand that licences for retail funds in the UAE are currently not being processed by the SCA while the new regulations are implemented.
“Promotion” of funds to retail investors is now prohibited. Foreign funds would need to engage an SCA-licensed promoter or create a UAE feeder fund to access retail investors in this context.
Interestingly, under the new regulations, reverse solicitation situations are not expressly prohibited, however we understand the intention behind these new regulations is that foreign funds should not deal directly with UAE-based retail clients on any new foreign fund raising.
Professional and Institutional Investors
Previously, the SCA Rulebook contained two exemptions for promoting financial products (including fund units) within the UAE; (1) Professional Investor exemption and (2) Reverse Solicitation. This can continue under the New Fund Regulations for any new funds raised by that foreign fund/asset manager, provided those subscriptions from UAE Professional Investors are in fact generated on a genuine reverse enquiry basis.
Promotion to Professional Investors outside of reverse enquiry can only be carried out on a private placement basis subject to certain requirements within the SCA Rulebook.
Permitted on a genuine reverse enquiry basis or via private placement under the SCA Rulebook.
New Local Funds Law
Who does the New Local Funds Law capture?
The New Local Funds Law applies to all local funds based in the UAE and registered with SCA, local fund service providers (includes amongst others; fund managers and administrative services providers) and “Parties related to the local fund”. This latter category of “Parties related to the local fund” is extremely broad, and includes anyone who is an investor in, director of, lender to or related party of a Local Fund. The New Local Funds Law defines a Local Fund as a public or private investment fund which has been established and licensed by the SCA, within the UAE, in accordance with the provisions of the regulation. Consequently, funds which have been established outside of the UAE are now classified and regulated separately.
Are there any exemptions?
The New Local Funds Law contains a number of exempt arrangements that would not be considered a Fund for the purposes of the Regulations, these include:
- Deposits or joint bank accounts;
- Insurance or Pension contracts;
- Joint investments between the parent, holding, subsidiary and sister companies of a group entity;
- Timeshare and similar programs for shared use of property;
- Employee rewards and incentive programs managed by parent, holding, subsidiary and sister companies of a group entity;
- Investment funds established by local and federal government agencies and their wholly owned companies;
- Any other arrangements that the SCA approves of.
What are the substantial changes under the New Local Funds Law?
Notably, new categories of funds have been introduced under the New Local Funds Law including Family Funds, where the ownership of a fund is restricted to one or more people from one family (similar to a Trust Fund) and self-managed funds, where a local fund is established by two or more individuals or entities. It is important to note that by applying for a licence to form a local family or self-managed fund, the relevant founders are obligated to form a board of directors for the fund. The New Funds Regulations stipulate specific requirements for the board, including a requirement to have a minimum of three board members up to a maximum of eleven and mandating that each board member is non-conflicted and to act independently. Though the SCA does not need to approve of board members, they must be notified once a member begins their tenure.
To further bolster the appeal of establishing a local fund in the UAE, new categories of specialised funds has been established combined with a reduction in the capital requirements required. The new specialised funds include; ESG Funds, precious metal funds, protected-cell funds, direct-financing funds, real estate development funds, protected-cell funds and commodities investment funds. Under the New Local Funds Law, the capital requirements for newly established Local Funds is AED 1 million instead of the previously required AED 50 million which represents a significant change. Fund administration companies must also now adhere to capital requirements of AED 1 million replacing the AED 5 million that was previously required. Foreign ownership restrictions have also been eased, allowing 100% foreign ownership of these companies. All of these changes represent an incentive for firms to create and establish local funds within the UAE without the need for establishing outside of the region, and to encourage foreign service providers to set up substantive operations in the UAE.
The SCA has also sought to streamline the process for registering new funds. The approval timeline has been reduced from ten working days to five working days and SCA has provided that for establishment of a new specialised fund, the SCA will issue a decision within twenty working days from the date of submission.
Under the New Local Funds Law, additional provisions have been implemented which support the SCA’s objective of increasing the amount of money that local funds manage. This includes the allowance of M&A activity for local investment funds, a book building mechanism which allows public real estate funds to be offered to the public and mechanisms which allow capital increases of investment funds in instalments and the buyback of investment funds traded on the stock exchange.
What is the incorporation process for a new Local Fund?
A local fund must be incorporated through one of three distinct methods:
- Through an entity licensed by the SCA to engage in investment management activity of investment funds;
- Utilising an entity licensed by the SCA to engage in family investment management activity in relation to a family fund, which is wholly owned by the relevant family; or
- In relation to a self-managed fund, two or more individuals who fulfil the SCA’s requirements for approval.
Due to the nature of a self-managed fund, the fund managers of the fund must submit an additional application to the SCA to obtain initial approval. This must include information about key investors and investment policy data.
What are the ongoing supervision requirements under the New Local Funds Law?
Pursuant to the New Local Funds Law, the SCA has expanded its powers in relation to the monitoring and inspection of investment funds. Consequently, the SCA may take all measures that it deems necessary to supervise funds and parties related to the fund, including unfettered access to data, documents, and information. Should there be any violations of the requirements discovered by the SCA, the SCA may request the publication of any information it deems necessary to protect investors.
What is the compliance timeline?
Under the New Local Funds Law, SCA-licensed promoters may continue to perform their current obligations as contracted, during a transition period of six months, beginning on the 1st January 2023 or until the arrangement expires, whichever is earlier. However, during this grace period, the relevant foreign-owned funds must renew their licences and pay the prescribed fees to the SCA.
The new laws represent a significant departure from the previous position recognising the SCA’s dual objectives of “onshoring” funds activities into the UAE, while also expanding the range of options available for UAE funds and making the provision of funds and fund-related services more accessible. However as it is still early days since the new regulations came into effect, it is yet to be seen how foreign asset managers and indeed local financial institutions will be impacted by this, or how they might seek to capitalise on the opportunities presented by it. For international funds at least, with the carve-out of professional investors, we may see a shift away from retail and more focus on market counterparties by asset management firms in the region.
Whilst the new laws may appear on the face of it to create more choice for investors, asset managers are likely to launch fewer funds given the expense and operational requirements to comply with, and as such the concern is that the options for investments may be narrower.
We will continue to watch this space as the regulations unfold.