On 13 March 2013, the UAE's Securities and Commodities Authority ("SCA") issued Board Resolution No.13 of 2013 amending Resolution No.37 of 2012 on the Regulation of Investment Funds (the "Funds Regulation"). The Board Resolution is significant for foreign funds seeking to market onshore in the UAE as it introduces three new exemptions in respect of which the Funds Regulation will not apply. More recently, the SCA has also published the Reverse Enquiry Declaration on its website (currently only available in Arabic). The Declaration provides clarification on the sale of units of a foreign fund as a result of reverse solicitation by UAE resident investors.
In our August 2012 e-bulletin we discussed the new requirements for marketing of foreign funds onshore in the UAE pursuant to the Funds Regulation. The Funds Regulations came into force on 27 August 2012 and defines the promotion of a fund as "the offering, marketing, distributing or advertising of the fund or its units". Board Resolution No.13 of 2013 issued on 13 March 2013 introduces new exemptions which provide that the Funds Regulations will not apply to the promotion of units of foreign funds:
- directed to financial portfolios owned by Federal or local governmental entities (ie sovereign wealth funds);
- to companies, corporations or authorities whose primary purpose or one of it purposes (for example as set out in its constitutional documents) is to invest in securities (provided that the foreign fund engages with only those entities and not the clients of those entities); and
- to investment managers, provided that the investment manager (and not any other party) has the authority to make and implement investment decisions.
These exemptions are significant as they will now provide foreign fund managers with more opportunities to market foreign funds onshore in the UAE without triggering the requirement to engage a local promoter or to obtain the prior approval of the SCA for the promotion of the foreign fund.
Clarification on who may promote to corporations
The SCA has clarified who may promote units of a foreign fund to 'corporations' (this replaces the term 'institutional investors' previously used).
Previously, the marketing of foreign funds in the UAE had to be made through:
- a UAE Central Bank licensed bank;
- a UAE Central Bank licensed investment company;
- a SCA licensed placing agent/promoter; or
- in the case of private offerings to 'institutions' where there was a minimum commitment of AED10 million per subscriber, by a representative office of a foreign company (or any of (a), (b) or (c) above),
(each a "Local Promoter").
It was previously unclear if the reference to 'representative office' meant the representative office of the foreign fund manager or of a third party placing agent. Article 38(2) has now been replaced and provides that a promotion of units of a foreign fund may be undertaken as a 'special offer' through a branch or representative office of a foreign company that has been approved by: (a) the fund; (b) the fund's representative; or (c) an SCA licensed placing agent/promoter. The minimum commitment has been retained at AED10 million per subscriber.
The Reverse Enquiry Declaration
Where the fund’s promotion falls outside one of the three exemptions discussed above, promotions of foreign funds onshore in the UAE will need to comply with the Funds Regulation by ensuring the promotion in the UAE is undertaken by a Local Promoter and that the promotion of the foreign fund has been approved by the SCA. Non-SCA licensed placing agents and distributors should note that attendance at meetings in the UAE, cold calling and the distribution of marketing materials are likely to be considered as a promotion requiring SCA approval.
The broad definition of 'fund promotion' in the Funds Regulation has previously led to the view that dealings with existing clients based in the UAE as a direct result of enquiries received from those clients (referred to as 'reverse solicitation') would fall outside the scope of the Funds Regulations. The SCA has sought to provide more clarification on the issue of reverse solicitation.
In November 2012, the SCA orally confirmed that reverse enquiries falls outside the scope of the Funds Regulations. The SCA has now formalised its comments in the form of the Reverse Enquiry Declaration (the “Declaration”). The Declaration clarifies that the issue of units in a foreign fund as a result of enquiries initiated by a UAE based investor will fall outside the scope of the Funds Regulation (as amended) and will therefore not require prior approval from the SCA, provided that it satisfies the conditions mentioned in the Declaration, that is:
- the enquiry was initiated by the UAE based investor; and
- the UAE investor has had previous communications or undertaken enquiries in relation to that fund with the Fund, its promoters or distributors outside of the UAE with the objective of investing in that fund.
A representative from the SCA has confirmed that while the investor must be UAE based, a pre-existing client relationship is not required. Significantly, where SCA as part of its supervisory activities, undertakes investigations and gathers evidence that an acquisition of units was the result of a reverse enquiry the investor will be considered by the SCA to bear the risk of such transactions. It is therefore considered prudent for firms relying on reverse solicitation to maintain records evidencing that the sale of the units was a result of a reverse enquiry.
The Declaration (while narrowly drafted) provides welcome clarification regarding straightforward situations where units in a foreign fund are acquired as a direct result of an enquiry or action by the UAE investor to purchase units.
Unless one of the new exemptions applies or the Reverse Enquiry Declaration is applicable, marketing activities in the UAE will need to be conducted through a Local Promoter and the promotion of the foreign fund's units will require SCA approval.
Note: Comments attributed to the SCA reflects the SCA’s current interpretation and views. Consultation with the SCA is recommended when considering activities which do not clearly fall within either one of the new exemptions contained in the Fund Regulation or the Reverse Enquiry Declaration.
Timeframe for compliance
Please note that foreign funds that were distributing their units in the UAE before the Fund's regulation came into force have one year to comply with the Fund Regulations. This period will expire on 26 August 2013.