The United Arab Emirates (the “UAE”) federal securities regulator, the Emirates Securities and Commodity Authority (the “SCA”), has issued extensive revisions to the UAE Mutual Funds Regulations 2012 (the “2012 Regulations”) in the form of Board Decision No. 9/C of 2016 concerning Mutual Funds Regulations (the “2016 Regulations”).
The 2016 Regulations impose significant restrictions on firms seeking to promote and distribute foreign funds in the UAE and are likely to be viewed by global managers as a step backwards from the revisions made in 2013 to accommodate similar restrictions on the promotion of foreign funds in the UAE imposed by the 2012 Regulations.
The 2016 Regulations are expected to come into force imminently.
It is anticipated that the SCA will issue supplementary regulations specific to the marketing and registration of foreign funds, together with guidance as to the application of any grandfathering provisions for foreign funds which have been or are in the process of being promoted and/or distributed under the 2012 Regulations. . Timing as to issuance has not been confirmed.
The 2016 Regulations apply to all Mutual Funds and Related Parties.
The term Mutual Funds is broadly drafted to mean “any financial vehicle engaged in the activity of receiving investors’ money for the purpose of investment against the issue of funds units of equal value”. Mutual Funds may be foreign, public or private, open or closed ended funds.
The term “Foreign Funds” includes Mutual Funds established outside of the UAE and in a free zone inside the UAE. This has been purposely drafted to catch offshore UAE funds established in the Dubai International Financial Centre and Abu Dhabi Global Market.
“Related Parties” include the Mutual Fund’s management company, directors, investment manager, administrator, custodian, distributor, auditor, senior and executive management and their spouses, dependent children and first degree relatives.
The 2016 Regulations do not apply to (i) the accumulation of money for the purposes of investment in a joint bank account, (ii) the conclusion of group insurance agreements, (iii) social security schemes, (iv) employee incentive programmes or (v) investment schemes linked with insurance contracts unless such investments or the funds raised from such schemes are directed to Mutual Funds. The underlined caveat implies that mutual funds which underlie insurance-linked products promoted to investors in the UAE will be required to be distributed and registered by an SCA licensed distributor.
Article 35 of the 2016 Regulations provides that, in the absence of an exemption (discussed below),
- No foreign fund may be promoted inside the UAE unless it is registered with the SCA and an agreement with an SCA licensed promoter is concluded; and
- the legal representative (this is assumed to be the SCA licensed promoter ) of the Foreign Fund must submit a registration application to the SCA in the prescribed form, which must be corroborated by supporting documentation/information and accompanied by the offer document and the investment policy.
Following submission of the same, the SCA should issue its decision to approve or reject the registration application within no later than 30 days of the submission. The approval is valid for one year from submission and expires at the end of December each year, meaning that initial approval is valid from the date of its issue until the end of December of the same year.
The 2012 Regulations (as amended in 2013) permitted three types of exemptions:
- financial portfolios owned by federal or local governmental agencies;
- companies, institutions or entities whose main purpose, or one of their purposes, is making investment in securities, provided that dealing with such companies should be limited to their own financial portfolios and not the portfolios of their clients; and
- SCA licensed investment managers, provided that the authority to make and execute the investment decision is vested with the investment manager.
Most significantly, the 2016 Regulations remove the exemptions set out in (ii) and (iii) and provide that, with the exception of reverse solicitation (discussed below), the Regulations shall only not apply to “Mutual Funds established by federal or local government entities or by companies wholly owned by such entities or Foreign Funds promoted to any of such entities”. In effect, the only exemption which Foreign Funds may benefit from in the absence of reverse solicitation is the sovereign exemption set out in the 2012 Regulations.
Reverse solicitation is formally recognised as an exemption to the 2016 Regulations. Article (2)3(C) states that the provisions of the 2016 Regulations do not apply to “reverse solicitation, with an investor inside the UAE soliciting an offer or the purchase of specific units of foreign funds abroad, but not upon a promotion effected by the foreign fund, its promoters or the distributors of its units, which must be evidenced by the party concerned.” It is important to note the underlined wording. In order to benefit from this exemption, the reverse solicitation must be evidenced by the Foreign Fund. This formalises the position in guidance communicated by the SCA in April 2013.
Definition of Qualified Investor
It was hoped that an exempted sophisticated or qualified investor category would be introduced by the replacement to the 2012 Regulations.
The 2016 Regulations have introduced the concept of a Qualified Investor. However, the definition only applies in the context of domestic funds which are authorised by the SCA. In order for a fund to qualify as a Private Mutual Fund, the funds must be directed at a Qualified Investor and the minimum subscription amount must be AED 180,000 (approx. USD 49,000).
A 'Qualified Investor' is defined as an investor who is capable of managing its "investments on its own", meaning
- federal and local governments, government entities and authorities or companies wholly-owned by any such entities;
- international entities and organisations;
- a person licensed to undertake a commercial activity in the UAE, provided that one of such person’s objects is investment;
- a financially sound natural person who acknowledges that his annual income is not less than one million Dirhams (approx. USD 272,000), that his net equity, excluding his main place of residence, amounts to at least five million Dirhams (approx. USD 1.36m), and that he, himself or with the assistance of a financial advisor, has the necessary knowhow and experience to assess the offer document and the ensuing benefits and risks associated with the investment; and
- an investor who is represented by a Qualified Investor.
SCA approval fees for Mutual Funds have been significantly increased under the SCA's Board Decision No. 10/C of 2016 concerning Mutual Funds Fees (the “Fees Regulations”).
Under the Fees Regulations, the following fees will apply to applications for SCA approval to promote and distribute foreign funds within the UAE:
- AED 35,000 (approx. USD 9,500) for non-refundable registration application; and
- AED 7,500 (approximately USD 2,050) for annual renewal application.
The fees payable to SCA are payable in respect of each Mutual Fund to be registered with SCA. If multiple SCA licensed promoters are instructed to promote and distribute a Mutual Fund, registration fees should not be paid each time to each promoter. Promotion and distribution fees are a separate commercial arrangement between the manager and the promoter.
Each sub-fund of an umbrella fund will be treated as a separate fund for the purposes of these provisions and the registration fees will apply accordingly.