To support UAE’s economic growth, the Securities and Commodities Authority issued new regulations earlier this year
The Securities and Commodities Authority (“SCA”) of the United Arab Emirates (UAE) issued new regulations regarding the promotion of foreign funds in the UAE in January this year, with special focus on the public offering of these funds in the country. A new update to the same was published in March 2023, as mentioned later in this article.
New SCA Regulations
These are the two new SCA Regulations (“New SCA Regulations”):
(i) SCA Decision No. (02/RM) of 2023, Amending the SCA Rulebook (“Decision No. 2”)
(ii) SCA Decision No. (04/RM) of 2023, Regulating Status Adjustment Mechanisms for Promotion of Foreign Fund Units within the State (“Decision No. 4”)
As per the SCA website, the New SCA Regulations aim to:
- leverage international best practices; and
- align mainland UAE’s investment management regulations and foreign fund promotion rules with those of Saudi Arabia in particular, and other Gulf Cooperation Council member states in general.
These New SCA Regulations are part of the UAE’s “We Are the UAE 2031” vision, which expands upon the UAE’s successful economic growth and diversification plans till date.
A reading of the New SCA Regulations makes it clear that foreign funds are more regulated in the UAE now. In particular, the regulations prohibit a public offering of foreign funds in the UAE, unless specifically authorised by SCA.
Public Offering of Foreign Funds in the UAE
Decision No. 2 states that only SCA licensed entities – which are authorised to conduct the regulated activity of “Promotion” – can promote foreign funds in the UAE. This excludes the promotion and distribution of foreign funds to Professional Investors or Market Counterparties from the scope of exempt financial promotions under the Rulebook of Financial Activities, as originally approved by SCA Board Resolution No. (13) of 2021 (“SCA Rulebook”).
Therefore, only an SCA licensed person authorised to conduct the regulated activity of “Promotion” may promote such funds (Category 5 SCA license). Further, all foreign funds distributed in the UAE via a locally licensed distributor must be registered with the SCA.
Decision No. 4 allows for some breather to the restriction set out in Decision No. 2 and permits the promotion of foreign funds inside the UAE by way of private offering to a professional investor and/or counterparty, i.e., private placement.
As Decision No. 4 limits the promotion of foreign funds, inside the UAE, to private placement, it restricts active promotion of these foreign funds to Retail Investors.
However, it permits the promoters who have registered foreign funds with SCA before 31 December 2022 to temporarily continue promoting these funds to Retail Investors up to and including 31 March 2024 (extended from original date of 30 June 2023) or up to the expiry of the ongoing promotion agreement, whichever is earlier. This exemption of promotion of foreign funds to Retail Investors is subject to complying with the requirements set out in Decision No. 4 which includes payment of pro rata registration renewal fees.
UAE Passporting Regime
It is also anticipated that the UAE “Passporting Regime” that was entered into by SCA, the Dubai Financial Services Authority (DFSA) of the Dubai International Financial Centre (DIFC) and the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM), may be used by fund managers domiciled in the DIFC and ADGM for promotion of funds established and domiciled in the DIFC and ADGM, to both retail as well as professional investors in mainland UAE as long as the conditions of the Passporting Regime are met.
In the update provided in March 2023, SCA mentions that through the Passporting Regime, foreign funds established in the DIFC and ADGM, and managed by fund managers domiciled in the DIFC and ADGM, may contact their applicable regulators 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.
Therefore, fund managers licensed in the DIFC or the ADGM may continue to market funds, domiciled in the DIFC or the ADGM, on a private placement basis to professional investors in the UAE or, pursuant to a public offering, to retail investors in the UAE.
In the abovementioned update, SCA also mentioned that DIFC and ADGM funds may, instead of relying on the Passporting Regime, elect to submit a request directly to the SCA to register themselves and be authorized for promotion to professional investors as 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.
Decision No. 2 also introduces a change to the SCA’s ‘Reverse Solicitation’ exemption, making this exemption only available to promoters of foreign funds outside the UAE, who are promoting on a cross-border basis, i.e., either from outside the UAE or from free zones. It’s not applicable to promotion of funds from UAE mainland.
Therefore, if a foreign fund established in a free zone, such as ADGM or DIFC, can prove documented reverse solicitation, then such fund can be made available to Retail Investors, Professional Investors and Market Counterparties.
Reverse solicitation also applies when a mainland UAE investor directly approaches a foreign fund manager or its promoters/distributors outside mainland UAE in order to invest in that particular foreign fund. The foreign fund’s manager or promoter must then provide documentary evidence of reverse solicitation.
In its March 2023 update, SCA confirmed that the restrictions set out in Decision No. 2 and Decision No. 4, do not apply to the following entities:
(a) certain professional investors, including federal or local governments, government institutions and agencies, or companies wholly owned by any of them; and
(b) listed funds.
*The article reflects the personal opinion of the law firm and does not constitute legal advice*
OH LLP has legal consultants in the UAE, offering a wide range of legal services to new and established companies within DIFC and ADGM. For further details, please contact us on: email@example.com or +97124110619
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