The Securities and Commodities Authority (SCA) has unveiled an amended fund regime after repealing the 2016 Concerning the Regulations of Investment Funds regulation, according to law firm Al Tamini & Co.
This follows its announcement in December 2022 that it wants to achieve a 100% increase of the amount of the money managed by local funds and introduce new types of regulated investment funds.
The newly established fund regime aims to revamp the existing legislative framework relating to the incorporation and governance of public and private funds established in the UAE and to grow the local UAE funds market.
Al Tamini said: “The changes include, inter alia, expedited processing periods for the approval of public/private funds, reduction of regulatory requirements and additional types of funds recognised by SCA.
“The new fund regulations have expanded the exemptions of arrangements that would not be considered as a fund to cover joint bank accounts, insurance and pension contracts, joint investments between the parent, holding, subsidiary and sister companies, timeshare properties and other sharing property use, employees share options schemes managed by the issuer or group company and government funds.”
SCA has introduced two fund structures which are:
- Family funds – a local fund where the ownership of its units is restricted to one or more persons from one family; and
- Self-managed funds – where a local fund is established by two or more individuals or corporates.
In addition, the regulation establishes new categories of 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.
Al Tamini & Co added that an “important measure” in the SCA regime is the reduction in capital requirements of fund management companies to AED1m from AED50m (£11m, $13.6m, €12.5m)and fund administration companies to AED1m from AED5m. It also removes foreign ownership restrictions, allowing 100% foreign ownership of such companies.
Furthermore, the application process timelines have been reduced to five working days for private funds and 10 working days for public funds for the approval of establishment of the respective fund. The SCA’s final decision on applications for new types of funds will be issued within 20 working days from the date of submission.
Al Tamini said: “While existing funds would need to conduct suitable due diligence to ensure compliance with the new fund regulations, it is worthy to note that there are some exemptions.
“Additionally, such funds are permitted to continue with activities as per the categorization and investment policy set out in their offering document. In the event no categorisation or investment policy is set out then compliance on such matters in accordance with the new fund regulation shall apply.
“It is expected that the SCA will issue a separate decision on the regulation of joint investment plans and investment funds linked to insurance products established by UAE licensed insurance companies and until further notice, status quo can be maintained.”
Further provisions under the newly established SCA regime include:
- Investment funds may issue and offer sukuk and bonds for the general public;
- Public real estate funds may be offered to the public through the book building mechanism;
- Permitting mergers and acquisitions of local investment funds;
- Buyback rules of investment funds traded on the stock exchange; and
- Capital increases of investment funds may be increased in instalments and tranches.
Separately, the SCA has also issued an administrative decision that contains annexes to the regulations, which contain guidelines on the content of the offering document and Key Investor Information Document (Kiid); the investment policies of the local funds; classifications of local funds; and the evaluation of units of the local public fund.
The regime comes as SCA recently stopped the renewal of foreign investment funds aimed at the public.
Al Tamini said that SCA has also issued the Foreign Funds Promotion Regulation that provides new criteria on the promotion, offering, and registration of foreign funds to investors in the UAE.
The regulator has issued approvals to 1,965 foreign funds to promote and offer their funds through licensed promoters in the UAE. The intention of the Foreign Funds Promotion Regulation is to restrict the access of foreign funds to UAE retail investors.
The promotion of foreign funds in the UAE can only be made by way of private placement to professional and counterparty investors. The law firm said that investors “appear to be restricted from accessing public foreign funds under the Foreign Funds Promotion Regulations”.
UAE licensed promoters have been provided a grace period of six months, from 1 January 2023, to continue with existing promotion arrangements or until the remaining period of those arrangements expire, whichever is earlier.
It is expected that the SCA will issue a circular and will reach out to promoters on existing foreign funds that have been registered with the SCA to provide further guidance.
The Foreign Funds Promotion Regulations is effective as of 17 January 2023.
Foster growth for domestic funds
Tom Bicknell, partner at Pinsent Masons, told International Adviser: “SCA’s recently introduced restriction on the promotion of foreign funds to retail investors comes in parallel to their overhaul of the domestic funds regime.
“Widely seen as a move to foster growth of the domestic funds industry, foreign funds can now only be promoted to professional investors and market counterparties. Promoters have a maximum six-month grace period to cease the promotion of foreign funds to their retail clients.
“SCA’s new funds regime has been released with the intent of doubling the amount of investments managed by funds locally. Indeed, shortened timelines, expanded fund categories and reduction in minimum capital requirements are all directed at aligning SCA’s regime with international best practice.”
Nigel Sillitoe, founder and chief executive of Insight Discovery, told IA: “The main regulator of funds – in this case, SCA – and other policymakers, face an important decision: what sort of funds industry do they want for the UAE?
“On one hand, the industry could be one where most of the funds – in terms of numbers and AuM – are Ucits or other products that are domiciled elsewhere and that are distributed across national borders. On the other hand, the industry could be one where most of the funds are domiciled locally.
“Ucits and other foreign-domiciled funds have a number of attractions. There is no one model of a market for investment funds that is the best for all countries. Nevertheless, and in two landmark decisions made in mid-January, the SCA has made it absolutely clear that it wants the latter – an industry that is dominated by locally based funds.”