Next month sees the anticipated introduction of important amendments (the 2013 Amendments) to the recently adopted Investment Funds Regulation of the United Arab Emirates (the Regulation), which came into force on 27 August 2012 as Board Resolution No. 37 of 2012 of the UAE Securities and Commodities Authority (the SCA).1 While the Regulation marked the most significant reform yet to the regulatory regime governing investment funds in the UAE, the 2013 Amendments introduce important changes in relation to the marketing of interests in investment funds established outside the UAE (each, a Foreign Fund) to investors in the UAE. The 2013 Amendments will take effect following their publication in the Official Gazette — which is expected imminently — and are introduced pursuant to SCA Board Resolution No. 13 of 2013.
As originally enacted, Article 36 of the Regulation required SCA approval for any promotion in the UAE of interests in a Foreign Fund, with no exemption from the SCA approval requirement for private placements, and indeed made no distinction in this regard between a Foreign Fund marketed to retail investors and a Foreign Fund targeted solely at sophisticated and institutional investors. This marked a significant change from the previous "tolerated practices" regime, potentially causing difficulties for those conducting a private placement of a Foreign Fund to sophisticated investors in the UAE, including UAE-based institutional investors, such as sovereign wealth funds. During the third quarter of 2012, the SCA confirmed publicly that dealing with UAE investors on a reverse-solicitation basis falls outside the scope of the Regulation, but added that records must be kept as proof that the enquiry originated from the investor. However, the industry remained eager for a formal exemption for institutional investors. The 2013 Amendments go further and clarify the SCA’s position in this area.
The 2013 Amendments provide that, in relation to Foreign Funds only, promoting to certain types of investors falls outside the scope of the Regulation entirely. Those investors include:
- authorities and governments (UAE federal and emirate-level);
- institutions whose main purpose includes "investments in securities"; and
- investment managers who have authority to make investment decisions on behalf of their clients.
In relation to UAE federal and emirate-level authorities and governments, the 2013 Amendments remain unclear as to whether this exemption extends to "commercial" entities owned by the UAE Federal Government or emirate-level governments.
An institution or entity whose main purpose is "investments in securities", is exempt from the Regulation, provided that such an institution or entity invests only on behalf of its own investment portfolio and not the portfolio of any of its clients. Notably, while the Regulation does not define "institution," the SCA has indicated that this means any entity other than an individual.
Local agent requirement
Article 37 of the Regulation requires the appointment of a "local promoter" or placement agent in relation to any offering of a Foreign Fund in the UAE. Article 38 sets out the range of entities that may act as a local placement agent for a Foreign Fund. In particular, Article 37(1) of the Regulation, as originally enacted, permitted "[C]ompanies licensed for this purpose by [the] SCA" to act as a local agent. The 2013 Amendments modify this provision, providing that entities licensed by the SCA to offer securities may act as a local agent, provided that such offering is limited to institutions only and includes a minimum subscription amount per investor of AED 10 million (approximately US$ 2.7 million).
The 2013 Amendments also add to such range of entities by permitting a foreign company’s unlicensed branch office to act as a local placement agent, provided that such foreign company has obtained approval for the promotion from the Foreign Fund (or its representative). Further, the 2013 Amendments clarify that a representative or branch office, acting as a local placement agent, may market to investors in the UAE both its own products and third party products.
Duties of the local agent
Article 39 of the Regulation, as originally enacted, imposes a series of obligations on a local placement agent, including:
- a duty of care in selecting a Foreign Fund, to ensure the protection of investors;
- duties in relation to record-keeping, making information available to investors post-investment;
- certain "know-your-client"-type obligations in relation to the underlying investors; and
- a requirement that the local agent to provide investors in a Foreign Fund with relevant documents enabling such investors to exercise directly their rights of ownership in the Foreign Fund. This last obligation caused practical difficulties for local agents attempting to act as nominee investors on behalf of underlying investors in a feeder fund structure.
The 2013 Amendments modify Article 39(6) by limiting the duty of a local agent to provide investors with such information on an ongoing basis (in the case of Foreign Funds only). This change should permit subscriptions in Foreign Funds in the name of local agents acting as nominee investors on behalf of their clients (a common practice in the UAE).
The 2013 Amendments create a prudent balance between maintaining retail investor protection, and promoting the UAE as an attractive financial hub for fund sponsors and managers seeking to promote interests to investors in the UAE.
International fund sponsors and managers that operate from, and funds domiciled in, the Dubai International Financial Centre (the DIFC), a financial free zone separate from ‘onshore’ UAE and treated as a ‘foreign’ jurisdiction under the Regulation, will benefit from the 2013 Amendments. With access to the exempt class of investors in the UAE granted, and thereby restored to some extent, the DIFC’s key selling point as a ‘gateway’ to the wider UAE remains valid.