LEGAL EASE: New fund laws

Kai-SchneiderNew rules governing the marketing of foreign funds in the UAE came into force on August 28, 2012. The regulation was first published for consultation early the previous year, when it met with significant push-back from the industry.

The regulation as implemented this past summer has been largely re-written from that early draft, although its central tenets remain relatively intact.

Key highlights of Securities and Commodities Authority (SCA) Board Resolution No. 37 of 2012 are that (a) SCA approval is now required for the establishment of a local fund in the UAE and for the marketing of a foreign fund to investors in the UAE; and (b) the marketing of a foreign fund to investors in the UAE requires the appointment of a locally licensed placement agent.

While the marketing of foreign funds to UAE investors remains the main focus of international fund sponsors and managers, the bulk of the new regulation is focused instead on the establishment and operation of local funds. It is unlikely that the wider UAE, outside the Dubai International Financial Centre (DIFC), will become a domicile of choice for international investment funds. But these provisions will be relevant for local sponsors, such as banks, seeking to establish local funds to target UAE retail investors.

The regulation seeks to replace the unofficial “tolerated practices” regime that previously applied to the marketing of foreign funds to investors in the UAE. Under this regime, it was generally accepted that UAE authorities would not seek to regulate discreet, reverse-solicitation marketing from outside the UAE to a small number of high-net-worth or sophisticated investors in the UAE.

The regulation provided that any promotion in the UAE of interests in a foreign fund must be approved by the SCA and conducted by a locally licensed placement agent. The regulation does not distinguish in the SCA approval requirement between marketing targeted at retail investors and marketing targeted at sophisticated or institutional investors and thus does not include any exemption from the SCA approval requirement for private placements. However, the regulation is unclear as to what constitutes “promoting in the UAE”, and a discreet, reverse-solicitation marketing strategy by a foreign fund that is conducted from offshore. That is, outside of the UAE, with offering documents made available and subscription agreements signed outside the UAE, should fall outside the scope of the regulation and, therefore, not require SCA approval. The SCA has recently indicated it would interpret such a reverse-solicitation approach widely and that institutional investors, including sovereign wealth funds, may directly solicit foreign funds without the need for either party to seek prior SCA approval or appoint a locally licensed placement agent.

The DIFC operates its own sophisticated regulatory regime governing the formation and marketing of collective investment funds that is entirely separate to the regime in the wider UAE. This regime is overseen by the DIFC’s securities regulator, the Dubai Financial Services Authority. In view of the very small pool of potential investors physically situated within the DIFC, a key selling point of the DIFC in the funds context has been that it is a gateway to the wider UAE and the Middle East region. However, the new regulation effectively treats the DIFC as being an entirely “foreign” jurisdiction, offering few concessions to funds domiciled in the DIFC. Without this gateway advantage, it may be difficult for the DIFC to continue to attract international fund sponsors and managers. It remains to be seen whether the SCA will treat DIFC-based managers the same as other foreign managers and permit them to engage in reverse-solicitation marketing strategies with institutional investors in the UAE.

Kai-Niklas Schneider is a partner at Latham & Watkins and head of the investment funds practice in the Middle East. He is based in Dubai

©2013 funds global MENA

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