The UAE Security and Commodities Authority (SCA) released updated fund regulations covering locally domiciled funds in 2016, and the following year released further regulations covering the promotion of foreign funds in the UAE. As the most recent updates concerning promotion of foreign funds have been in place for nearly three years, this article provides an overview of how those regulations have been implemented in the market.
In short, despite some initial concerns and uncertainties, by and large the status quo surrounding cross-border activities has remained unchanged as regards offering foreign funds into the UAE with limited UAE regulatory impact.
Cross-Border Marketing Continues
The UAE traditionally has been one of the most lightly regulated jurisdictions in the region as regards the marketing of foreign investment funds. This is despite the UAE Central Bank (Central Bank) having formally indicated that it has general jurisdiction over all foreign financial products and investments sold, offered for sale or advertised for sale in the UAE. As a result, such products will require prior approval by the Central Bank irrespective of whether the entity selling, offering, marketing or advertising such products is established within the UAE. The Central Bank and the SCA signed a Memorandum of Understanding (MOU) in 2010, which set forth the respective responsibilities of the regulators in regard to certain financial activities. According to the SCA’s press releases relating to the MOU, it was agreed that investment funds, both local and foreign, would be regulated by the SCA, allowing the Central Bank to focus more on traditional central bank activities.
However, up until 2012, the marketing of foreign financial products and investments in the UAE through private placements was undertaken on a wide scale on the basis of an established market practice (e.g., restricting marketing to sophisticated pre-identified investors, restricting time and footprint in-country on “fly-in-fly-out” visits) rather than under any particular law or regulatory approval. The position changed in respect of foreign investment funds in 2012 with the introduction of specific fund regulations by the SCA.
That year, the SCA introduced its 2012 Fund Regulations1, which governed UAE-domiciled funds and the promotion of foreign funds in the UAE. These were subsequently updated by the SCA’s 2016 Fund Regulations2. The majority of the changes made by the 2016 Fund Regulations related to UAE-domiciled funds, while effectively stripping out the provisions relating to the promotion of foreign funds in the UAE and indicating that further promotion and introduction regulations would be issued. However, as both the 2012 and 2016 Fund Regulations only apply to activities within the UAE, the ability market on a cross-border basis, as had been market practice prior to these regulations, remained unchanged.
The SCA subsequently released 2017 Promotion Regulations3, providing for the regulation of all promotion and introduction activities associated with local and foreign financial services and products (including the foreign funds). Notwithstanding the fact that the 2017 Promotion Regulations directly target foreign funds, as with the 2012 and 2016 Fund Regulations, the 2017 Promotion Regulations apply only to activities undertaken within the UAE.
Therefore, in line with established market practice and a fairly standard set of “dos and don’ts”, where foreign funds are promoted on a true cross-border basis, the status quo remains, provided such activities do not constitute “conducting business” in the UAE.
Passporting Regime
In 2019, the SCA and the regulators for the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) implemented a licensing regime for funds domiciled in the UAE, ADGM and DIFC, which will allow passporting across the UAE. However, this regime only applies to UAE-, ADGM- or DIFC-domiciled funds and does not affect the operations of foreign managers or promotors. There is a hope that, in time, this regime will be extended to foreign-domiciled funds registered in one of the above jurisdictions; however, there is currently no indication as to when this may occur.
Conclusion
Arguably, the 2016 Fund Regulations and the 2017 Promotion Regulations should not be viewed as affecting traditional cross-border activities, and the status quo in that regard should not be considered to have changed. However, these regulations do reflect a greater focus by UAE regulators on activities within the UAE in recent years. Dechert will continue to monitor developments in the regulators’ interpretations, as well as implementation of the 2016 Fund Regulations and the 2017 Promotion Regulations.
Footnotes
