The eagerly awaited Investment Funds Regulation (Regulation), which has been recently implemented by the UAE Securities and Commodities Authority (SCA), applies to all matters relating to domestic investment funds and to the promotion and offering of foreign funds in the UAE.
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.
Regulatory experts from the international law firm Clifford Chance have reviewed the Regulation. Tim Plews, partner at Clifford Chance, describes this transfer as a “vote of confidence in the SCA from the UAE Central Bank.”
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.
While the Regulation, according to Plews, “promises a much more robust, forward-looking and detailed approach to supervision,” he notes that “it has particular implications for funds established in the Dubai International Financial Centre and funds marketed by DIFC firms.”
All foreign funds, including DIFC funds and funds marketed by DIFC firms, 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. These rules deviate substantially from the previous system where foreign firms were able to engage in a limited amount of cross-border business with non-retail investors in the UAE.
Many foreign firms that choose the DIFC as their base for accessing the Middle East market may find that, following the implementation of the new Regulation, the DIFC no longer provides a gateway to the UAE market the way it once did.
Consequently, Plews 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.”
It remains to be seen how the new rules regarding foreign funds will work in practice and whether any passporting arrangements will be put in place for DIFC firms. According to Plews, firms established in the DIFC may, in the meantime, “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.”