LEGAL COLUMN: New fund category in DIFC

Schneider SuIn a recent regulatory development in the Dubai International Financial Centre (DIFC), the Dubai Financial Services Authority (DFSA) has initiated a consultation process with the funds management industry on the proposed introduction of a new category of collective investment fund, the Qualified Investor Exempt Fund (QIEF). The proposed amendments to the DIFC Collective Investment Law of 2010 and related rules were published on 22 December 2013 in Consultation Paper No. 93. Any comments from the industry on this proposal are due by 20 February 2014.

In 2010, the DFSA proposed a series of changes to its investment funds regime in Consultation Paper No 69, which were subsequently adopted. A new category of funds was introduced, called Exempt Funds, and the prior Private Funds category was phased out during a two-year transition period. Accordingly, there are two types of domestic funds in the DIFC, Public Funds and Exempt Funds. Public Funds are offered to retail investors and regulated in line with IOSCO standards. Exempt Funds are offered to professional clients (professional investors with net assets of at least $500,000) and less stringently regulated than Public Funds.

The DFSA has acknowledged in this new consultation paper that the 2010 changes failed to provide sufficient flexibility to fund managers. As a result, the DFSA has reconsidered its approach and benchmarked itself against the regimes in Bahrain, British Virgin Islands, the Cayman Islands, Guernsey, Hong Kong, Ireland, Jersey, Luxembourg, the Qatar Financial Centre, Singapore and the UK. Many of these jurisdictions offer fund managers the ability to establish fairly unregulated private funds marketed to a limited number of institutional or professional investors subject to high minimum subscription amounts.

Accordingly, the DFSA has proposed the introduction of a category of fund tailored for a limited number of professional investors that are knowledgeable and experienced and frequently invest substantial amounts in funds. Such a proposed fund, called a QIEF, would be subject to substantially less regulation (than even an Exempt Fund).

Units in a QIEF would only be available for offer to professional clients and would be subject to a higher minimum subscription amount.

The majority of the DIFC Collective Investment Law and its implementing rules would not apply to QIEFs. For instance, the requirements in relation to the constitution and information memoranda of QIEFs would be reduced. However, key high-level requirements under the DIFC Collective Investment Law and its implementing rules would continue to apply. A QIEF fund manager would still have to be licensed by the DFSA and would continue to be subject to a fund manager’s general duties as well as requirements relating to adequacy of systems and controls. The existing requirements in relation to Public Funds and Exempt Funds would not be altered.

There are only ten funds established in the DIFC. It is clear that a change is necessary to the existing regime to grant greater flexibility to fund managers and encourage further funds to be established. Although the proposed QIEF regime would be a step in the right direction, we will have to see whether the industry responds positively.

Kai-Niklas Schneider is a partner and Xi Bing Su is an associate at Clifford Chance and both are members of the investment funds practice

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