SCA REPEALS 2016 INVESTMENT FUNDS REGULATIONS AND BRINGS SWEEPING CHANGE TO THE PROMOTION OF FOREIGN FUNDS IN THE UAE

Hot on the heels of the decision by the UAE Securities and Commodities Authority (“SCA”) to suspend registration renewals aimed at retail investors, major changes to the promotion of foreign funds in the UAE have come into force.

Having registered almost 2000 funds, the SCA has re-centred its focus on the domestic fund market, overhauling existing regulations to encourage the establishment of more UAE based fund managers and to attract greater volumes of capital by the creation of a wider range of domestic funds.

Prior to the introduction of the SCA Chairman of the Board of Directors Decision No. 4/RM of 2023 Concerning the Procedures of Adjustment of Situation to Promote Units of Foreign Funds in the UAE (the “New Funds Regulations”) on 17 January 2023, foreign firms (being non-UAE and UAE financial free zone firms) benefitted from a suite of exemptions which facilitated the promotion of foreign funds to institutional investors in UAE on a cross-border basis without the requirement for a SCA licence.

The New Funds Regulations have largely eradicated these exemptions and the promotion of foreign funds in the UAE is now limited to private distribution by SCA licensed firms and distribution on a documented reverse solicitation basis by foreign firms.

We set out below the most important changes for firms seeking to promote foreign funds in the UAE:

SCA licensed Firms
Only SCA firms licensed to conduct the regulated activity of Promotion may promote foreign funds in the UAE.

Promotion may only be to Professional Investors and Market Counterparties on the basis of a Private Placement (defined in the Glossary of the SCA Rulebook as an “invitation made to a specified person or persons to buy a Security or Foreign Security, inside the State”) in line with the requirements of the SCA Rulebook.

Non SCA licensed Firms
Promotion of foreign funds to all categories of investors by foreign firms is permitted only on the basis of a documented reverse solicitation. Documented reverse solicitation must take place on a cross border basis, with the person making the Promotion not present in onshore UAE.

It is important to reiterate that, for these purposes, “foreign firms” means firms established outside the UAE or inside UAE financial free zones.

We are making enquiries as to whether email confirmation is sufficient to constitute “documented reverse solicitation” and will provide an update on the same.

Registration
All foreign funds will be required to be registered with the SCA. A fast-tracking registration process has been introduced. The SCA is targeting 5-10 business days’ turnaround and a 20 business day turnaround for applications for new types of funds.

Capital Reduction
Capital requirements have been significantly reduced to AED 1m for UAE based fund management and fund administration companies. Foreign ownership restrictions have also been relaxed, permitting 100% foreign ownership of these types of companies.

New Exemptions to Definition of Fund
Joint bank accounts, insurance and pension contracts, joint investments between group companies, timeshare properties and other sharing property use, employees share options schemes managed by the issuer or group company and government funds are not considered to be “funds” for the purpose of the New Funds Regulations.

New Fund Categories
The following new categories of funds have been introduced:

• Family Funds – a domestic fund where unit ownership is limited to one or more persons from the same family

• Self-managed Funds – a domestic fund established by two or more individuals or corporate entities

• Specialised Funds – such as real estate development funds, precious metal funds, direct financing funds, ESG funds, capital protection funds, protected-cell funds, charity investment funds and commodities investment funds.

UAE Financial Free Zone Funds
The New Funds Regulations are silent as to the impact on fund passporting provisions between onshore UAE and the UAE financial free zones permitting Dubai International Financial Centre and Abu Dhabi Global Market funds to be promoted in the UAE without a SCA licence. We are making enquiries in this regard and will provide an update on the same.

Amendment of Documentation
All promoters are required to notify existing clients of the New Funds Regulations and to amend their distribution documentation to comply with the provisions of the New Funds Regulations.

Implementation Grace Period
Firms may continue to perform their obligations under existing arrangements until the earlier of 1 June 2023 and the expiration of such arrangements, subject to the caveat that the registration of the relevant foreign fund(s) is renewed and paid within such timeframe.

In light of the suspension of registration portals, it is anticipated that the SCA will issue a circular in this regard and/or provide direct guidance to promoters with foreign funds registered with the SCA.

Next Steps
There are a number of steps that firms should consider in light of the New Funds Regulations:

- Notify clients of the new SCA requirements

- Review existing distribution documentation in order to ensure compliance with SCA requirements

- Consider entering into distribution arrangements with SCA licensed promoters/distributers if documented reverse solicitation may prove impractical

- Consider establishing a UAE feeder fund

We shall continue to provide updates on this significant regulatory change.

Please contact Natalie Boyd should you wish to discuss the contents of this article or need guidance on its implications.