The Securities and Commodities Authority of the United Arab Emirates (“SCA”) recently adopted certain changes to the rules governing the distribution of foreign funds in the UAE, pursuant to which several methods for distribution that were previously available for foreign fund managers and distributers have been repealed or restricted.
The regulatory changes were implemented pursuant to:
i. Resolution No. (02/RM) of 2023 A.D. Amending the Rulebook of Financial Activities as approved by SCA Board Resolution No. (13) of 2021 (the “SCA Rulebook Amendments”), effective as of 31 January 2023; and
ii. Resolution No. (04/RM) of 2023 A.D Regulating Status Adjustment Mechanisms for Promotion of Foreign Fund Units within the State (the “Promotion Regulations Amendments”), effective as of 17 January 2023.
These amendments were introduced without notice or a public consultation period. While some amendments to the SCA rules governing the establishment and offering of funds had been anticipated, a number of the changes were unexpected.
Below we have set out a summary of the most material changes under the SCA Rulebook Amendments and the Promotion Regulations Amendments. The summary is based on the official Arabic publication as well as subsequent SCA Guidance described below. As of the date of this article, the official English translation of the SCA Rulebook Amendments has not been published.
Revocation of Professional Investor Exemption
The most disruptive change for managers and sponsors of private funds is the revocation of the Professional Investor exemption. Under the prior SCA rules, foreign issuers and managers could directly approach and offer foreign fund interests to Professional Investors (which include, among others, sovereign wealth funds, government agencies, corporations, financial institutions and high net worth individuals).
Under the SCA Rulebook Amendments, foreign issuers are no longer permitted to directly market and distribute funds to Professional Investors in the UAE unless the funds are registered with SCA. This is a dramatic change to prior regulations – and was introduced at an inopportune time when many foreign managers were conducting or had scheduled roadshows in the UAE.
Notwithstanding the SCA Rulebook Amendments, SCA subsequently published written guidance on its website (the “SCA Guidance”) providing that marketing to certain professional investors, including federal or local governments, government institutions and agencies, or companies wholly owned by any of them, would be exempt from the SCA registration and local promoter requirements that are otherwise applicable to marketing of foreign funds.
Clarification to Reverse Solicitation Exemption
Foreign issuers can still rely on reverse solicitation as a basis for exemption from registration with SCA. This exemption is codified in the SCA regulations and was not repealed with the introduction of the recent amendments.
Based on the SCA Guidance, the reverse solicitation exemption applies when an investor based in mainland UAE directly approaches a foreign fund manager that is located outside mainland UAE in order to invest in the foreign fund. Fund managers who are domiciled in one of the financial free zones in the UAE (i.e. the Dubai International Financial Centre (“DIFC”) and the Abu Dhabi Global Market (the “ADGM”)) may rely on reverse solicitation, but only with respect to funds domiciled in the ADGM or DIFC.
Restriction on Retail Offerings of Foreign Funds
Under the amendments to the Promotion Regulations, the promotion of foreign funds in the UAE on a retail basis is prohibited unless the offer is made by way of reverse solicitation. Historically, funds which were licensed in their country of domicile to be offered on a public/retail offering basis (e.g. UCITS) could be registered with SCA and offered on a retail basis in the UAE. Under the new rules, SCA will no longer allow for registration of any publicly offered foreign funds. SCA has provided a short grace period and will continue allow for the promotion of foreign funds to retail investors in the UAE until June 30, 2023 if the foreign fund was registered with SCA for retail promotion prior to the regulatory changes.
Key Considerations
It is important to note that the promotion of foreign securities (other than units or interests in foreign funds) is not subject to the recent amendments. Therefore, such foreign securities may continue to be promoted to Professional Investors without the need to register with SCA or to appoint an SCA licensed distributor.
The amendments do not change or revoke the passporting regime arrangements entered into between SCA and the Dubai Financial Services Authority (i.e. the securities regulator of the DIFC) and the Financial Services Regulatory Authority (i.e. the securities regulator of the ADGM). Therefore, funds which are domiciled in the DIFC or ADGM and which apply to their respective regulator to be passported onshore would be permitted to make direct approaches to Professional Investors without registration with SCA.
Effects of the Amendments
In the immediate aftermath of the announcements, managers were uncertain how to conduct offerings in the UAE. The subsequent SCA Guidance provided helpful direction to these managers. However, it remains to be seen how foreign fund managers and distributors will change the manner in which they offer their funds to investors in the UAE.
In the long term, foreign managers may want to consider establishing a presence in the DIFC or ADGM and to establish locally domiciled feeder funds which are offered onshore in the UAE under the passporting regime. The manager of a locally domiciled fund offered under the passporting regime may continue to directly approach investors in the UAE without registration with SCA or relying on reverse solicitation.
We expect there may be further amendments to provide clarity and/or to adopt the subsequently issued SCA Guidance and so it is important to continue to monitor the evolving regulatory landscape before conducting an offering of a foreign fund in the UAE.
