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CORPORATE NEWSLETTER - JUNE 2020

UNDERSTANDING THE DYNAMICS OF FUNDS IN UAE

Financial markets play a vital role in the economic development of a country. They facilitate the allocation

of scarce resources by transferring them from savers to borrowers, thereby accelerating investment

activities in the economy.

Financial markets play a vital role in the economic development of a country. They facilitate the allocation of scarce resources by transferring them from savers to borrowers, thereby accelerating investment activities in the economy. A key aspect in the financial market is incorporation of funds. Individuals, businesses, and governments all use funds to set aside money. Individuals might establish an emergency fund or rainy-day fund to pay for unforeseen expenses or a trust fund to set aside money for a specific purpose. Individual and institutional investors can also place money in different types of funds with the goal of earning money.

Regulators are increasingly focusing on new investment products and different types of funds to stimulate the financial markets. As a result regulators are constantly updating their regulatory frameworks and the investment products and fund vehicles offered continue to evolve. There are several factors that are considered while determining the choice of jurisdiction or regulator for setting up a pooled investment vehicle. A suitable jurisdiction for setting up a fund should primarily allow tax neutrality to the investors. ‘Neutrality’ ensures investors are not subject to any higher taxes than if they were to invest directly. From a regulatory viewpoint, the jurisdiction should allow flexibility in raising commitments from residents as well as non-resident investors, making investments and distribution of profits.

An investment fund is a pool of capital that a number of individual investors pay into, which is used to collectively invest in stocks and bonds. It is a fund in which each investor owns their individual shares, but they don’t have any influence on where the money in the fund is invested. Investment funds are established and managed by investment fund management companies. Funds manage the assets of many investors and invest them in securities, such as equity shares, bonds, treasury bills and other financial instruments.

A TYPICAL FUND STRUCTURE

REGULATION OF FUNDS IN UNITED ARAB EMIRATES

The United Arab Emirates has created an ideal market, infrastructure and tax efficiencies for the setting up and management of such investment funds within their financial free zones in the emirates of Dubai and Abu Dhabi.

Dubai - Dubai International Financial Centre (DIFC)

In the emirate of Dubai, a financial free zone that facilitates the setting up and managing of such funds is the Dubai International Financial Centre (DIFC) and is regulated by the Dubai Financial Services Authority (DFSA) under the DIFC Collective Investment Funds Regime.

The DIFC Collective Investment Funds Regime was first introduced in 2006 and is governed by the Collective Investment Law 2010 (DIFC Law No. 2 of 2010), the Regulatory Law of the DIFC (DIFC Law No. 4 of 2004 and the rules enacted under the Collective Investment Rules (CIR) Module of the DFSA Rulebook. This regime primarily focuses on the formation and structuring of investment funds in DIFC including the management and administration of the funds.

The main objective in adopting and enacting this regime to create an attractive jurisdiction for the establishment of investments funds and alike. The regulatory framework draws on international standards including the International Organization of Securities Commission (IOSCO) principles to balance the facilitation of business with adequate investor protection. Pursuant to this object, the DFSA regulates all the key participants in the fund management service sector including the fund administrators, custodians and trustees.

Under the DIFC Funds Regime, there are two types of Funds: Domestic Funds and Foreign Funds.

A Foreign Fund is a fund which is established or domiciled in a jurisdiction other than the DIFC and is not an External Fund.

The types of Domestic Funds available in DIFC are as follows:

 

Public Funds

Exempt Funds

Qualified Investor Funds

Key Features

The Public Fund regime provides greater protection to retail investors through requirements such as the independent oversight of a fund and the detailed disclosure requirements in a Prospectus.

 

The Exempt Fund regime allows a fast-track notification process, wherein the DFSA aims to complete the process within a period of five business days and implements lesser regulatory requirements than a Public Fund.

 

The Qualified Investor Fund (QIF) regime provides proportionate regulation, allowing flexibility for QIF managers and QIFs.

The regime requires self-certification regarding the adequacy of systems and controls and allows a fast-track notification process where the DFSA aims to complete the process within a period of two business days

 

Level of Regulation

Detailed regulation in line with IOSCO standards

Somewhat less stringent than for Public Funds

 

Significantly less stringent than for Exempt Funds

 

Investors and Offer

·   Unitholders include Retail Clients; or

·   Has, or intends to have, more than 100 unitholders; or

·   Some or all of its units are offered to investors by way of public offer

·   Only Professional Clients;

·   Has 100 or fewer unitholders; and

·   Units are offered to persons only by way of a Private Placement

 

·    Only Professional Clients;

·    Has 50 or fewer unitholders; and

·    Units are offered to persons only by way of a Private Placement

 

Minimum Subscription

N/A

 

USD 50,000

 

USD 500,000

 

 

In addition to this, DIFC also classifies Specialist Fund in other categories such as Islamic Funds, Hedge Funds, Property Funds including Real Estate Investment Trusts (REITs) or Private Equity Funds. The regulatory requirements applicable to these Specialist Funds vary and depend on the risks associated with each type of fund.

These types of funds can be structured using various fund vehicles available to Fund Managers in DIFC. For example, there are three types of vehicles that can be used to establish a Domestic Fund, such as Investment Companies, Investment Trusts and Investment Partnerships. Furthermore, Fund Managers of the open-ended Umbrella Funds additionally have the flexibility to use the Protected Cell Company (PCC) structure. This allows investors in each Sub-Fund of the Umbrella Fund to have legal segregation from liabilities arising in other Sub-Funds.

Abu Dhabi - ABU DHABI GLOBAL MARKET (ADGM)

In the emirate of Abu Dhabi, a financial free zone that facilitates the setting up and managing of such funds is the Abu Dhabi Global Market (ADGM) and is regulated by the Financial Services Regulatory Authority (FSRA) under the ADGM Funds Regime.

The ADGM Funds Regime is governed by the Financial Services and Markets Regulations of 2015 and the rules enacted under the FSRA Legislation. This framework aims to balance a business stimulating environment for the relevant market players whilst still maintaining the necessary levels of investor protection.

Drawing directly from the Common Law system, the FSRA has implemented an innovative Funds Regime that has taken into consideration sector-specific requirements and implemented this into their regulatory requirements. For example, the Venture Capital Fund Manager (VCFM) regime reduces the regulatory requirements applied to qualifying VCFMs and this includes zero regulatory capital requirements. Under the Private REIT regime, the REIT Managers can launch products in private placement without listing requirements.

The ADGM Funds Regime recognizes that the ability for new players to enter the market with ease is fundamental to developing a dynamic and robust funds industry. The FSRA allows Fund Managers licensed from within or outside ADGM to establish funds utilizing a wide range of fund vehicles. The regulatory framework allows fund managers to establish different types of funds, including Sharia-compliant funds.

ADGM authorized Fund Managers can choose to establish and manage funds outside of ADGM, whilst any firm with the appropriate ADGM FSRA permission can also promote and sell units from both ADGM funds and foreign funds.

Under the ADGM Funds Regime, there are two kinds of funds: Domestic Funds; and Foreign Funds.

Domestic Funds are established and domiciled in ADGM and can be managed by either a domestic or foreign fund manager. A Domestic Fund can be set-up as a Public Fund, Exempt Fund or Qualified Investor Fund.

The distinguishing factors between these funds are described below:

 

Public Funds

Exempt Funds

Qualified Investor Funds

Key Features

Public Funds require registration with the FSRA including the requirement of a prospectus and may be subject to risk-diversification requirements regarding its investment and borrowing powers.

A key differentiator for ADGM Exempt Funds and Funds established in other jurisdictions is that there is a relatively low minimum investment level as well as not being constrained by an arbitrary maximum number of investors.

QIFs only require notification to the FSRA prior to the initial offer of units and there are no upper limits on investor numbers.

 

Level of Regulation

Detailed regulation, like a public offering.

Less stringent regulations when compared to that of Public Funds.

Least stringent

Investors and Offer

The unit holders include all client, including retail clients via a Public Offer.

Only offered to professional clients and are offered via a Private Placement.

Only offered to professional clients via a Private Placement.

Minimum Subscription

N/A

USD 50,000

USD 500,000

 

ADGM provides a wide range of structuring options for the establishment of funds including Special-Purpose Vehicles (SPV), Restricted Scope Companies or a General Partner SPV. The regulatory framework enables the umbrella fund structure wherein a single umbrella fund may have more than one distinct sub-fund, each with its own investment objective and policy. ADGM Funds can also operate under the master/feeder structure wherein the fund may act as a feeder to a foreign fund or as a feeder to another ADGM fund.

 

To conclude, the selection of the fund vehicle requires careful planning and is driven by a variety of considerations as the same would have a profound impact on the investors in the fund. While deciding on the optimum structure for a fund, varied objectives such as limited liability for investors, commercial convenience and tax efficiency for investors and managers need to be considered. Fund vehicles have historically been in investor friendly and tax neutral jurisdictions and both, ADGM and DFSA offer pooling of investments via funds by creating an efficient business environment and operating in coherence with international regulatory standards.

Post the financial crisis, regulatory requirements globally have increased and so has the cost of compliance. Regulatory frameworks are tasked with the onerous task of balancing protecting financial markets and investors without strangling innovation and growth. The UAE has achieved this along with their attractive tax regime, to stimulate the funds industry while still ensuring investor protections.

 

Authored by Poojitha Janarthanan, Barkha Doshi

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