Asset management quarterly - The Middle East

A brief update on marketing foreign funds in the UAE

Authors Jane Clayton and Ola Al-Kadi

The SCA Board of Directors has issued a new Decision on the Regulation of Investment Funds. In addition, the SCA issued for public consultation, draft regulations concerning the Promotion of Financial Products and the Arranging of Financial Services.

The UAE Securities and Commodities Authority (SCA) has issued SCA Board of Directors Decision No. 9 of 2016 on the Regulation of Investment Funds (New Decision) which came into force on 1 August 2016.  This New Decision repealed SCA Board of Directors Decision No. 37 of 2012 Concerning the Regulation of Investment Funds (Old Decision) in its entirety.

Contrary to the Old Decision, the provisions under the New Decision relating to the promotion of foreign funds onshore in the UAE are very general. The New Decision fails to provide any detailed guidance on the application requirements and conditions applicable to the promotion of foreign funds.

Under the New Decision, a foreign fund wishing to market/offer its units, shares or interests on a private placement basis onshore in the UAE may only do so if:

1. it has been approved for promotion by SCA and distributed through a locally-licensed placement agent; or
2. the promotion is to a UAE federal or local Governmental authority or a company wholly-owned by such authority; or
3. it is promoted on a reverse solicitation basis.

The New Decision does not contain the other exemptions (from SCA approval) that were available under the Old Decision, which are: (i) promotion to companies, corporation and authorities whose main objectives (or one of its objectives) is investing in financial securities, provided that dealings with such entities are limited to such entities’ own financial portfolios, and not those of its customers; and (ii) promotion to investment managers provided that the authority to make investment decisions lies with the investment manager.

Because of the uncertainty created by the lack of detail in relation to the promotion of foreign funds under the New Decision, we understand, from informal discussions we have had with a senior official at SCA, that the CEO of SCA intends to issue further regulations which would supplement the New Decision (Proposed Supplemental Regulations) and provide further details on the marketing of foreign funds onshore in the UAE to fill the current legislative vacuum.  The SCA official expects such regulations to be issued “imminently”.

In addition, SCA has published on its website, for public consultation, draft regulations concerning the Promotion of Financial Products (including securities and units of foreign funds) and the Arranging of Financial Services (Draft Umbrella Securities Regulations). These Draft Umbrella Securities Regulations are subject to a final sign off by SCA’s Board of Directors and may, therefore, be partially or wholly rejected. It is currently unknown when these regulations would come into force.

The Draft Umbrella Securities Regulations appear to overlap with the New Decision in that both regulations appear to apply to the promotion of foreign funds onshore in the UAE. At the current time, it is unclear how the Draft Umbrella Securities Regulations would sit with the New Decision and the Proposed Supplemental Regulations and whether the New Decision and/or the Proposed Supplemental Regulations would be repealed when the Draft Umbrella Securities Regulations come into force.

The New Decision’s reliance on the future publication of the Proposed Supplemental Regulations and the Draft Umbrella Securities Regulations has created significant market uncertainty, and it will only be possible to assess the full impact of the changes made in relation to the foreign funds regime, following the publication of such future regulations.

It is also worth noting that SCA has issued SCA Board of Directors Resolution No. 10 of 2016 Concerning the Fees of Investment Funds, pursuant to which SCA has updated its fees. For example, the SCA fee for the registration of a foreign fund has increased to AED35,000, and SCA now levies a new annual registration renewal fee in the amount of AED7,500 per fund.