SCA’s Additional Guidance on Marketing of Foreign Funds in Mainland UAE: June 2023 Update

As a continuation of our series of updates issued in collaboration with the United Arab Emirates (UAE) Securities and Commodities Authority (SCA), we set out below a summary of additional guidance on marketing of foreign funds in the UAE mainland.

Background

SCA Decision No. (02/RM) of 2023, Decision No. (03/RM) of 2023, and Decision No. (04/RM) of 2023 (the New Regulations), which came into force on February 1, 2023, implemented certain key amendments to the marketing of Foreign Funds (as defined below) in mainland UAE. For the purposes of the New Regulations and this LawFlash, “mainland UAE” means the UAE excluding the financial free zones (FFZs) of the Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC).

This LawFlash is intended to address the most common inquiries relating to the promotion of funds domiciled outside mainland UAE (Foreign Funds) that the SCA and Morgan Lewis have been receiving with respect to the New Regulations.

Marketing of Foreign Retail Funds in Mainland UAE

The New Regulations initially provided that Foreign Funds  that were (1) registered with the SCA for retail promotion prior to the New Regulations and (2) 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), notwithstanding the prohibition on retail promotion of Foreign Funds introduced by the New Regulations.

Following extensive engagement with multiple stakeholders, the SCA has agreed to extend this deadline to March 31, 2024. This is intended to allow managers of Foreign Funds currently targeting retail investors time to form SCA-licensed fund management entities in order to launch mainland UAE retail funds, as requested by multiple asset managers. In order to avail this extended deadline, the manager of a Foreign Fund must submit to the SCA

• a list of Foreign Funds in respect of which it wishes to avail the extended promotion period, which Foreign Funds must have been registered with the SCA for retail promotion on or before December 31, 2022,
• a plan detailing the proposed establishment of a licensed fund management entity based in the UAE that will enable it to offer investment funds, domiciled in the country, to UAE retail investors as an alternative to their current promotion of Foreign Funds to UAE retail investors, before the expiry of the extended deadline of March 31, 2024,
• a timetable for the implementation of the plan within the specified deadline of March 31, 2024, and
• payment of the applicable renewal fees for the promotion of the requested Foreign Funds through March 31, 2024.

It should be noted that, as part of the New Regulations, the SCA has implemented multiple changes intended to rationalize and simplify the regulatory requirements for establishing mainland UAE investment funds, management companies, and service providers to investment funds in the mainland UAE, such as

• reducing the minimum capital required for mainland UAE fund managers to 1 million dirhams from 50 million dirhams,
• reducing the minimum capital required for fund administrators to 1 million dirhams from 5 million dirhams,
• permitting additional types of legal vehicles for mainland UAE fund managers and allowing 100% foreign ownership of such entities,
• reducing requirements to be satisfied by individuals in order to be accredited by the SCA to work in the investment funds sector, including removing the previous requirement for certain exams,
• reducing the period in which the SCA will process applications for a mainland UAE fund manager or fund administrator license to 20 working days,
• reducing the minimum number of mandatory functions (accredited positions) required by an SCA-licensed fund manager and permitting combining certain accredited positions,
• permitting outsourcing certain accredited positions to specialized third parties, and
• permitting new regulatory classifications for mainland UAE funds and fund managers, such as family offices and self-managed funds (similar to “internally managed” or self-managed investment companies).

Foreign Funds targeting retail investors should note that the exception for listed funds (from the restrictions on promotion to both retail and professional investors) set out in the Board of Directors No. (13) of 2021 on the Financial Activities Rulebook and Mechanisms of Adjustment, as amended (the Rulebook), only applies to Foreign Funds that are approved by the SCA for listing on either the Abu Dhabi Securities Exchange (ADX) or Dubai Financial Market (DFM) (for the avoidance of doubt, this includes Foreign Funds that are dual-listed elsewhere). This is because the offering of securities listed on these markets is not considered “promotion” for the purposes of the Rulebook, as such offerings must instead comply with the rules of the applicable market.

Marketing of Foreign Professional Investor Funds in Mainland UAE

The New Regulations confirmed that Foreign Funds may be promoted in mainland UAE to professional investors (as defined in the Rulebook) on a private-placement basis (1) by a person licensed by the SCA to perform promotion activities in mainland UAE and (2) with the approval of the SCA. This now includes Cayman Islands foreign funds (which initially were not approved by the SCA for mainland UAE promotion) provided that good standing certificates issued by the Cayman Island Monetary Authority (CIMA) are provided for the fund and the fund manager as part of the SCA promotion application.

Foreign Funds should note that there is a minimum subscription requirement applicable to Foreign Funds being promoted to professional investors in mainland UAE through the SCA registration and local promoter process of AED 500,000 (approximately $135,000) unless the minimum subscription amount in the PPM is higher.

The registration process for professional investor promotion requires, among other things, that the applicant provide proof of the regulation of the Foreign Fund in its home jurisdiction. The SCA is aware that in a number of jurisdictions an investment fund for professional investors may be unregulated (AIFs). In order to permit such AIFs to be registered with the SCA for promotion to professional investors in mainland UAE, the SCA will require the following:

• The UAE promoter must issue a written undertaking to the SCA confirming that interests in an AIF will only be promoted in mainland UAE to financial institution professional investors and other well-informed professional investors, in each case that are able to adequately assess the risks associated with an investment of this type. We expect that the local UAE promoter will, as a result, require that each professional investor in mainland UAE to whom an AIF is promoted provide a signed statement confirming this.
• AIFs require a minimum subscription of AED 1 million (or its equivalent in the currency of the AIF) or, if higher, the minimum subscription amount in the PPM.
• The local promoter must be fully compliant with any other terms of the offering of the AIF as specified in the AIF’s prospectus or by the regulatory authority in the home jurisdiction of the AIF.

Passporting Regimes

Fund managers domiciled in the FFZs can avail the passporting regime between the SCA and the regulators in each of the DIFC and ADGM to market Foreign Funds domiciled in the FFZs to mainland UAE investors and vice versa (professional and retail) so long as the conditions of the passporting regime are met. Morgan Lewis expects that amendments to the passporting regime may follow in due course in light of the updates to the fund regime in each jurisdiction since the passporting regime was originally implemented.

We understand that a Gulf Cooperation Council (GCC) fund passporting regime is under discussion by the regulators in each of the GCC member states. Further updates as to the detail and timing of this regime are anticipated in due course.