February 22, 2023
The UAE Securities and Commodities Authority (SCA) recently issued eight decisions that, among other things, reformed the regulatory regime for onshore United Arab Emirates (UAE) investment funds and significantly limited the ability to sell foreign funds (i.e., Funds established in jurisdictions outside the UAE) to investors resident in the UAE. This LawFlash focuses on the impact of the new SCA regulations on foreign fund managers and others marketing foreign funds in the UAE.
SCA Decision (02/RM) of 2023 and SCA Decision (04/RM) of 2023 (new regulations) were issued in mid-January, implementing the following main changes from 1 February 2023:
- Marketing of foreign funds to professional investors in the UAE now requires designation of locally licensed promoters and SCA approval of the foreign fund. Foreign funds can only be marketed in the UAE on a private placement basis to professional investors (a) by persons licensed by the SCA to conduct marketing activities in the UAE, and (b) approved by the SCA. The change is significant, requiring foreign funds to be registered to be offered to sovereign wealth funds and other institutional investors in the UAE, which previously fell under a broad exemption.
- reverse collection. Under the new rules, reverse solicitation remains an option for promoting foreign funds without SCA approval, but the scope of this exemption appears to have narrowed. Under the new rules, it only applies to cross-border basis (meaning, if the manager of Abu Dhabi Global Market (ADGM) or Dubai International Financial Center (DIFC) funds targets UAE onshore investors, reverse solicitation is not a option), and we know it may only rely on marketing to professional investors, not retail investors (but we are seeking clarification on this point). The new rules also require that the nature of the solicitation be “certified by the relevant entity,” which we understand to mean that reverse solicitation must be documented. While this is the best practice most sponsors currently follow, we believe this new requirement indicates that the SCA may be taking a more stringent approach to reverse bidding.
- Foreign funds must not be marketed to retail investors in the UAE. Foreign funds can only be marketed in the UAE through private placements to professional investors as defined in the SCA rulebook. This means that foreign funds are now not allowed to be provided to retail investors in the UAE. However, we understand that the regime for passage of funds between the two financial free zones (i.e. ADGM and DIFC) and the onshore UAE remains unchanged under the new SCA rules and that the regime allows retail funds established in ADGM or DIFC Selling to retail investors in the UAE (subject to certain conditions including the appointment of an SCA regulated custodian). However, only fund managers established in ADGM or DIFC can take advantage of this pass regime, meaning any foreign fund manager who has been approved by the ADGM or DIFC regulator to operate an ADGM or DIFC investment fund (but the fund managers themselves are not established) In such financial free zones) cannot use this passport framework, even for their ADGM or DIFC funds.
The new restrictions on marketing foreign funds in the UAE represent a major change to the UAE’s securities law regime, which was previously one of the most liberal in the Gulf Cooperation Council (GCC) for the marketing of foreign funds. Now, foreign fund managers, even when marketing to sovereigns and others, have only one option other than using local placement agents (assuming these foreign fund managers themselves do not have properly licensed affiliates with the SCA) and registering their fund products with the SCA. Limited options for investors. This outcome makes the new UAE securities law regime as narrow, or arguably narrower, than the rules in other major GCC markets such as the Kingdom of Saudi Arabia.
The new rules come into effect on February 1, 2023. There are limited grandfather clauses related to prohibiting the marketing of foreign funds to retail investors; these allow existing promotional contracts with distributors to be executed until the earlier of the contract termination date or June 30, 2023. However, there are currently no rules or guidelines regarding any grandfathering or transitional provisions for marketing foreign funds to professional investors.
The new regulations are aimed at encouraging the establishment of asset management businesses and the establishment of investment funds within the UAE, which is why these decisions were issued at the same time as the reformulation of the UAE’s onshore fund regime. We believe that foreign funds using ADGM or DIFC feeder funds to access the UAE onshore market (via passport) may become more common given the nascent nature of the new regulations.
We are in regular contact with key UAE regulators and seek clarification on the scope and guidance of the new regulations. If there are additional rules or guidance from new regulations, we will issue further updates.