Sweeping changes to the SCA rules on the distribution of foreign funds in the UAE

Summary of the key changes

Two of the new SCA regulations introduce important changes to its rules on the distribution of foreign funds in the UAE. The key changes are:

1. the promotion and distribution of foreign funds to Professional Investors is no longer exempt under the SCA Rulebook, and therefore, only SCA-licensed firms licensed to conduct the regulated activity of “Promotion” may promote such funds;
2. foreign funds may be promoted or distributed in the UAE by SCA-licensed firms and only to Professional Investors and Market Counterparties on a “private placement” basis; 
3. as a consequence of the changes made to the SCA Rulebook, the promotion or distribution of foreign funds to retail investors is to all intents and purposes prohibited, with the only exception being that a promotion to a retail client can be made on the basis of a documented reverse solicitation from outside the UAE or from the UAE financial free zones (FFZs); 
4. non-UAE distributors (including those in the FFZs) of foreign funds may continue to promote foreign funds to Professional Investors and Market Counterparties on the basis of a documented reverse solicitation; and
5. all foreign funds to be distributed in the UAE must be registered with the SCA.

When do the changes take effect?

The SCA enacted the above changes under the following regulations (which at the time of drafting this article are only available in Arabic):

1. SCA Decision No. (02/RM) of 2023 (Decision No. 2), which amends the SCA Rulebook but has yet to enter into force (since entry into force is set for the day following its publication in the UAE Official Gazette, which at the time of drafting article has yet to happen); and
2. SCA Decision No. (04/RM) of 2023 (Decision No. 4), which is a standalone SCA regulation and which came into force on 17 January 2023 (i.e. the day following its enactment).

What are the details of the key changes?

We set out below the highlights of these new SCA regulations, pending the publication of the SCA-approved English versions.

The requirement for an SCA license for the distribution foreign funds

Decision No. 2 carves out the promotion of foreign funds from the scope of exempt financial promotions under the SCA Rulebook and adds a provision to the SCA Rulebook which provides that the offer and distribution of units of foreign funds in the UAE would amount to a financial promotion, and is therefore subject to the SCA financial promotion regime.

Therefore, promoting foreign funds in the UAE to Professional Investors or Market Counterparties is no longer exempt. A foreign funds distributor would need to hold a Category 5 SCA license for carrying on the regulated activity of Promotion, even if it only distributes funds to Professional Investors and Market Counterparties.

Changes to the SCA rules on reverse solicitation

Decision No. 2 also introduces a change to the SCA reverse solicitation exemption, the effect of which is that the reverse solicitation exemption is only available to promoters outside the UAE, promoting on a cross-border basis (i.e. either from outside the UAE or from the FFZs) but not when the person making such promotion is present in Onshore UAE. This position, if correct, seems unduly onerous for UAE based fund promoters and we will be seeking confirmation from the SCA on whether this was the policy intention behind the change.

Distribution of foreign funds now limited to “Private Placements”

Under Decision No. 4, SCA-licensed Promoters may promote foreign funds in the UAE only:

1. to Professional Investors and Market Counterparties; 
2. on the basis of a “Private Placement” (which is defined in the Glossary of the SCA Rulebook as “the invitation made to a specified person or persons to buy a Security or Foreign Security, inside the State”); and
3. in line with the requirements of the SCA Rulebook.

It is not clear to us why these new provisions were not part of Decision No. 2 which also introduced changes to the SCA Rulebook that are relevant to the promotion of foreign funds. We note that it appears that the promotion of foreign funds by non SCA-licensed persons, including promotions to retail clients, would still technically be possible under a documented reverse solicitation, albeit this can now only be carried on from outside of the UAE (i.e. either from abroad or from the FFZs).

What is the timeframe for compliance?

At the time of writing this article¹, Decision No. 2 has yet to come into force. However, firms are advised to revisit their arrangements for the distribution of foreign funds in the UAE in light of the new restrictions by:

1. entering into distribution agreements with SCA-licensed promoters, or establishing their own SCA-licensed promoters; and
2. registering any foreign funds which are to be distributed in Onshore UAE (including any funds currently being distributed).

Decision No. 4 is already in force and imposes the following requirements on “parties distributing foreign funds in Onshore UAE”:

1. "immediately” disclose the contents of Decision No. 4 to their existing clients. The purpose of this requirement is not immediately clear to us;
2. continue to abide by their obligations under the agreements they have with their clients; and
3. comply with the Promoter’s obligations as these are set out under the SCA Rulebook. We understand these are mainly in relation to licensing but also the conduct of business rules found under Section 3, Chapter 5, Article 6 (2), (3) and (4) on disclosures and prospectus requirements, and the registration of the foreign funds with the SCA.

We understand that the changes to the SCA regulations on the promotion of foreign funds in the UAE were designed to encourage more fund managers to set up a presence in the country, and to attract more capital to the creation of domestic funds in the UAE. For foreign fund distributors, these new regulations may make the establishment of a UAE-based feeder fund structure an attractive solution. 

Finally, it is not clear how these changes will impact the “passporting” provisions which allow Dubai International Financial Centre and Abu Dhabi Global Market funds to be promoted in the UAE without an SCA license, but the answer will become clear in due course.