SCA's official guidance on marketing of foreign funds in mainland UAE: five key takeaways

2023-04-04 11:53:17 · SCA

In collaboration with the United Arab Emirates (UAE) Securities and Commodities Authority (SCA), we set out below a summary of the forthcoming official guidance on marketing of foreign funds in the UAE mainland and outline five key takeaways for the promotion of foreign funds in the UAE mainland.

Pursuant to SCA Decision No. (02/RM) of 2023, Decision No. (03/RM) of 2023, and Decision No. (04/RM) of 2023 (the New Regulations), issued in mid-January 2023, the SCA implemented key amendments to the Board of Directors No. (13) of 2021 on the Financial Activities Rulebook and Mechanisms of Adjustment (the Rulebook). The New Regulations came into force on February 1, 2023.

BACKGROUND

The New Regulations have been issued in conjunction with an overhaul of the SCA’s funds regime, with the principal purpose of reinvigorating the asset management industry of the UAE, including the financial free zones (FFZs) of the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), and protecting UAE investors by reducing regulatory arbitrage. The New Regulations, along with many other initiatives introduced by the UAE government, are a part of the UAE's “We Are the UAE 2031” vision, which expands upon the UAE’s successful economic growth and diversification plans to date.

The New Regulations also have the practical effect of leveraging international best practices and bringing mainland UAE’s investment management regulations and foreign fund promotion rules closer in line with those of several other Gulf Cooperation Council (GCC) member states, primarily Saudi Arabia; this is a welcome change for international fund houses that have long discussed the value of harmonised foreign fund passporting rules across the GCC. We also understand that a GCC passporting regime is under consideration by GCC member states and may be introduced in the coming months.

KEY TAKEAWAYS

Marketing of Foreign Funds in Mainland UAE
- 1.1. Professional Investor Funds. Funds domiciled anywhere outside mainland UAE (Foreign Funds) may be promoted to professional investors in mainland UAE on a private-placement basis (a) by a person licensed by the SCA to perform promotion activities in mainland UAE and (b) with the approval of the SCA. For the purposes of the New Regulations and this LawFlash, “mainland UAE” means the UAE excluding the FFZs.
- 1.2. Retail Investor Funds. It is not permissible to promote Foreign Funds in mainland UAE in a public offering to retail investors. The SCA has confirmed that the use of ADGM, DIFC, or mainland UAE feeder funds for Foreign Funds targeting mainland UAE retail investors is anticipated and will be permitted, subject to ADGM or DIFC feeder funds complying with the Passporting Regime (as defined below). Mainland UAE feeder funds will have to comply with the SCA fund regulations.
Registration of Foreign Funds with SCA
- 2.1. In order to market a Foreign Fund to professional investors in mainland UAE, the legal representative of the Foreign Fund must (a) submit an application for the registration of the Foreign Fund for the purpose of private promotion to professional investors in mainland UAE, and (b) conduct such promotion through local promoters licensed by the SCA. Prior to registering a Foreign Fund, the authorised representative of the fund (the legal representative) must first register as a legal representative via the SCA online portal. Once approved to act as the legal representative, the representative may proceed with applying for the Foreign Fund registration on the same portal. Once payment for the Foreign Fund registration is complete, the local promoters chosen via the application are notified and are requested to approve an online undertaking to the SCA. When local promoters approve the undertaking, the legal representative is notified to submit the request to register the Foreign Fund for mainland UAE promotion. All of these submissions are conducted through the SCA’s online portal, consistent with the UAE government’s commitment to paperless transactions. Thereafter, the request will be reviewed by the SCA.
- 2.2. As part of the New Regulations, the SCA has reduced both the fees and the review timelines.
- - 2.2.1. The registration fee has been reduced from AED 35,000 (which was nonrefundable even in the event the application was rejected) to AED 12,000, which consists of a nonrefundable examination fee in the amount of AED 2,000 plus AED 10,000 for issuing the registration approval.
  - 2.2.2. The estimated processing time for the SCA to review and approve the application is five business days, which time includes confirmation to the applicant and the local promoter(s) depending on the method of payment chosen by the applicant for paying the registration approval. If the applicant choses to pay the registration approval fee online, then the approval will be issued and delivered immediately. However, if the applicant decides to pay offline, then the registration approval will be issued and delivered upon confirmation of receipt of payment.
  - 2.2.3. A registration is valid until 31 December in the year the registration is issued; the renewal fee is AED 5,000 (reduced from AED 7,500).
- 2.3. There are minimum subscription amounts required for Foreign Funds approved by the SCA for promotion to private investors in mainland UAE. The minimum limit is currently under review, and a single minimum subscription amount of AED 500,000 applicable to all Foreign Funds (wherever domiciled) is expected to be set by supplemental rules to be issued soon.
Exemptions
The SCA has confirmed the following exemptions from requiring a Foreign Fund to be registered with the SCA or to appoint a local promoter:
- 3.1. ADGM and DIFC Fund Passporting Regime. The passporting agreement between the SCA and the regulators in each of the DIFC and ADGM (the Passporting Regime) has not been affected in any way by the New Regulations. It is still in full force and may be used by fund managers domiciled in the DIFC and ADGM for promotion to both retail and professional investors in mainland UAE for funds established and domiciled in the DIFC and ADGM so long as the conditions of the Passporting Regime are met (see Section 5 below).
- 3.2. Reverse Solicitation. Reverse solicitation remains an exemption and applies when a mainland UAE investor directly approaches a Foreign Fund manager or its promoters/distributors outside mainland UAE in order to invest in the Foreign Fund. DIFC and ADGM fund managers may rely on reverse solicitation (subject to the conditions described herein) but only with respect to funds domiciled in the ADGM or DIFC. The Foreign Fund manager and promoter must provide documentary evidence of the reverse solicitation.
- 3.3. Exempt Professional Investors. The SCA has confirmed that marketing to certain professional investors, including federal or local governments, government institutions and agencies, or companies wholly owned by any of them, is exempt from the SCA registration and local promoter requirements otherwise applicable to marketing of Foreign Funds. This is consistent with the approach generally taken under UAE federal legislation with respect to certain entities, particularly government-related entities. Marketing to other categories of professional investors requires SCA registration and the use of a local promoter as described in Section 1.1.
- 3.4. Listed Funds. As set out in the Rulebook, listed funds are not subject to the restrictions on promotion described in Section 1 above.
Transitional Arrangements with Respect to Retail Funds Marketed Prior to February 1
- 4.1. Retail Funds. The New Regulations are clear that promotion of Foreign Funds to retail investors (a) which were registered with the SCA for retail promotion prior to the New Regulations and (b) subject to a binding promotion contract extending beyond February 1, 2023 may continue to be promoted to retail investors in mainland UAE up to June 30, 2023 or the expiration of the relevant promotion contract (whichever is earlier). This is subject to payment of pro rata registration renewal fees. In addition, a Foreign Fund previously registered with the SCA for promotion to retail investors may instead apply to the SCA for registration to market to professional investors and, in this case, there is no need for the mainland UAE retail investors previously admitted to such Foreign Fund to redeem their interests in such Foreign Fund.
DIFC and ADGM
- 5.1. Through the Passporting Regime, Foreign Funds incorporated in the DIFC and ADGM and managed by fund managers incorporated in the DIFC and ADGM may contact their applicable regulator to be included on the passporting register, and the applicable regulator will notify the SCA. The SCA will then confirm the registration of the DIFC or ADGM fund for promotion in mainland UAE within a maximum of three business days. The Passporting Regime is available for marketing ADGM- or DIFC-domiciled funds to both retail and professional investors in mainland UAE (but certain conditions must be met for retail marketing, including the appointment of an SCA-regulated custodian). In fact, since the issuance of the New Regulations on January 16, 2023 until March 22, 2023, there have been five passported investment funds, all domiciled in the DIFC.
- 5.2. DIFC and ADGM funds may, instead of relying on the Passporting Regime, submit a request directly to the SCA to register for promotion to professional investors by an SCA-licensed promoter to perform promotion activities in the UAE (in the same way that a Foreign Fund domiciled outside the ADGM or DIFC would register with the SCA).

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SCA's official guidance on marketing of foreign funds in mainland UAE: five key takeaways

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BACKGROUND

KEY TAKEAWAYS

Marketing of Foreign Funds in Mainland UAE
- 1.1. Professional Investor Funds. Funds domiciled anywhere outside mainland UAE (Foreign Funds) may be promoted to professional investors in mainland UAE on a private-placement basis (a) by a person licensed by the SCA to perform promotion activities in mainland UAE and (b) with the approval of the SCA. For the purposes of the New Regulations and this LawFlash, “mainland UAE” means the UAE excluding the FFZs.
- 1.2. Retail Investor Funds. It is not permissible to promote Foreign Funds in mainland UAE in a public offering to retail investors. The SCA has confirmed that the use of ADGM, DIFC, or mainland UAE feeder funds for Foreign Funds targeting mainland UAE retail investors is anticipated and will be permitted, subject to ADGM or DIFC feeder funds complying with the Passporting Regime (as defined below). Mainland UAE feeder funds will have to comply with the SCA fund regulations.
Registration of Foreign Funds with SCA
- 2.1. In order to market a Foreign Fund to professional investors in mainland UAE, the legal representative of the Foreign Fund must (a) submit an application for the registration of the Foreign Fund for the purpose of private promotion to professional investors in mainland UAE, and (b) conduct such promotion through local promoters licensed by the SCA. Prior to registering a Foreign Fund, the authorised representative of the fund (the legal representative) must first register as a legal representative via the SCA online portal. Once approved to act as the legal representative, the representative may proceed with applying for the Foreign Fund registration on the same portal. Once payment for the Foreign Fund registration is complete, the local promoters chosen via the application are notified and are requested to approve an online undertaking to the SCA. When local promoters approve the undertaking, the legal representative is notified to submit the request to register the Foreign Fund for mainland UAE promotion. All of these submissions are conducted through the SCA’s online portal, consistent with the UAE government’s commitment to paperless transactions. Thereafter, the request will be reviewed by the SCA.
- 2.2. As part of the New Regulations, the SCA has reduced both the fees and the review timelines.
- - 2.2.1. The registration fee has been reduced from AED 35,000 (which was nonrefundable even in the event the application was rejected) to AED 12,000, which consists of a nonrefundable examination fee in the amount of AED 2,000 plus AED 10,000 for issuing the registration approval.
  - 2.2.2. The estimated processing time for the SCA to review and approve the application is five business days, which time includes confirmation to the applicant and the local promoter(s) depending on the method of payment chosen by the applicant for paying the registration approval. If the applicant choses to pay the registration approval fee online, then the approval will be issued and delivered immediately. However, if the applicant decides to pay offline, then the registration approval will be issued and delivered upon confirmation of receipt of payment.
  - 2.2.3. A registration is valid until 31 December in the year the registration is issued; the renewal fee is AED 5,000 (reduced from AED 7,500).
- 2.3. There are minimum subscription amounts required for Foreign Funds approved by the SCA for promotion to private investors in mainland UAE. The minimum limit is currently under review, and a single minimum subscription amount of AED 500,000 applicable to all Foreign Funds (wherever domiciled) is expected to be set by supplemental rules to be issued soon.
Exemptions
The SCA has confirmed the following exemptions from requiring a Foreign Fund to be registered with the SCA or to appoint a local promoter:
- 3.1. ADGM and DIFC Fund Passporting Regime. The passporting agreement between the SCA and the regulators in each of the DIFC and ADGM (the Passporting Regime) has not been affected in any way by the New Regulations. It is still in full force and may be used by fund managers domiciled in the DIFC and ADGM for promotion to both retail and professional investors in mainland UAE for funds established and domiciled in the DIFC and ADGM so long as the conditions of the Passporting Regime are met (see Section 5 below).
- 3.2. Reverse Solicitation. Reverse solicitation remains an exemption and applies when a mainland UAE investor directly approaches a Foreign Fund manager or its promoters/distributors outside mainland UAE in order to invest in the Foreign Fund. DIFC and ADGM fund managers may rely on reverse solicitation (subject to the conditions described herein) but only with respect to funds domiciled in the ADGM or DIFC. The Foreign Fund manager and promoter must provide documentary evidence of the reverse solicitation.
- 3.3. Exempt Professional Investors. The SCA has confirmed that marketing to certain professional investors, including federal or local governments, government institutions and agencies, or companies wholly owned by any of them, is exempt from the SCA registration and local promoter requirements otherwise applicable to marketing of Foreign Funds. This is consistent with the approach generally taken under UAE federal legislation with respect to certain entities, particularly government-related entities. Marketing to other categories of professional investors requires SCA registration and the use of a local promoter as described in Section 1.1.
- 3.4. Listed Funds. As set out in the Rulebook, listed funds are not subject to the restrictions on promotion described in Section 1 above.
Transitional Arrangements with Respect to Retail Funds Marketed Prior to February 1
- 4.1. Retail Funds. The New Regulations are clear that promotion of Foreign Funds to retail investors (a) which were registered with the SCA for retail promotion prior to the New Regulations and (b) subject to a binding promotion contract extending beyond February 1, 2023 may continue to be promoted to retail investors in mainland UAE up to June 30, 2023 or the expiration of the relevant promotion contract (whichever is earlier). This is subject to payment of pro rata registration renewal fees. In addition, a Foreign Fund previously registered with the SCA for promotion to retail investors may instead apply to the SCA for registration to market to professional investors and, in this case, there is no need for the mainland UAE retail investors previously admitted to such Foreign Fund to redeem their interests in such Foreign Fund.
DIFC and ADGM
- 5.1. Through the Passporting Regime, Foreign Funds incorporated in the DIFC and ADGM and managed by fund managers incorporated in the DIFC and ADGM may contact their applicable regulator to be included on the passporting register, and the applicable regulator will notify the SCA. The SCA will then confirm the registration of the DIFC or ADGM fund for promotion in mainland UAE within a maximum of three business days. The Passporting Regime is available for marketing ADGM- or DIFC-domiciled funds to both retail and professional investors in mainland UAE (but certain conditions must be met for retail marketing, including the appointment of an SCA-regulated custodian). In fact, since the issuance of the New Regulations on January 16, 2023 until March 22, 2023, there have been five passported investment funds, all domiciled in the DIFC.
- 5.2. DIFC and ADGM funds may, instead of relying on the Passporting Regime, submit a request directly to the SCA to register for promotion to professional investors by an SCA-licensed promoter to perform promotion activities in the UAE (in the same way that a Foreign Fund domiciled outside the ADGM or DIFC would register with the SCA).