COLLECTIVE INVESTMENT SCHEMES:
SKYLINING DUBAI INTERNATIONAL FINANCIAL CENTRE (DIFC) LAW
“The first step towards getting somewhere is to decide that you are not going to stay where you are.”
Investments require one to take a risk and it is often advised that this risk should be a calculated one. According to K Geert Rouwenhorst in The Origins of Value, the concept of an investment company dates back late 1700th century Europe, when a Dutch merchant and a broker invited subscriptions from investors to form a trust, thus providing small investors with limited means an opportunity to diversify1. With the pace of economic transitions worldwide, the approach of investors has also varied enormously. The availability of diﬀerent opportunities to make money and the competition in the market inevitably have the scope to create confusion. However, there are many options which allow a person to make comfortable investments in anticipation of easier returns.
In the UAE, the Dubai International Financial Centre (the DIFC) oﬀers an optimal environment for making investments and has been regarded as one of the most developed frameworks in the world. It is based upon the principles of common law and tailored to the region’s speciﬁc need. Economists expect the investment market in the UAE to remain steady and thrive. This should encourage investors who are looking to add risk to their portfolios at present, ahead of the lean summer period. In this article shall discuss the ﬂexibility and operations of Collective Investment Schemes (the CIS) which can be established in the DIFC – an onshore ﬁnancial and business hub connecting the region to the world, and the world to the region.
The DIFC was established by Federal Law and is regarded as an autonomous jurisdiction within the UAE. Funds are regulated by the Dubai Financial Services Authority (the DFSA) which is an independent authority responsible for managing and distributing the funds. As the name itself denotes with regards to the concept, CIS is the collection of money from diﬀerent investors, pooled to create an investment fund. The concept of CIS is considered as a secured investment opportunity because each scheme will have a speciﬁc objective, projected target return and risk proﬁle which is generally set out in the proposition document. CIS is more or less similar to mutual fund type of investments, insofar as that they provide absolute control over the investment from the company pooling to the investing the money. The recent economic downturn around the world has made this need more pressing. One of the considerable advantages of investing in a CIS is that it is a type of passive investment, and one does not have to actively watch every ﬁnancial transaction that takes place. You can simply opt for a good scheme and let the fund manager take care of the rest. If you choose an eﬀective scheme in which to invest your money, you can be sure to look forward to some potential and consistent returns. Although a CIS can be very proﬁtable in certain situations there are a few elements of which a potential investor should be cautious. One of the potential drawbacks of this type of investment is that there are certain fees payable in order to subscribe, in addition to the fund, a management fee other variable hidden charges. Such fees can signiﬁcantly eat into the returns that are generated by the investments. Therefore an investor should pay careful attention to the performance of the fund and make sure that it justiﬁes the fees necessitated. If the fees get too high, a ﬁxed-rate investment with a low-interest rate may be a more suitable option2.
REGULATORY ASPECTS OF CIS IN DIFC
The DFSA introduced the ﬁrst Collective Investment Fund regime (the Fund Regime) in the year 2006. This was designed to provide adequate investor protection, meeting international standards for regulation. However in 20103 certain remarkable changes were implemented into the Fund Regime in order to make it more accessible and market-friendly, and moreover to ensure that greater respect was paid to the principles of the International Organization of Securities Commissions (the IOSCO) for regulating the CIS. The Fund Regime focuses on disclosure, corporate governance, valuations and service providers. The DFSA takes into account a range of matters when licensing and supervising ﬁrms that manage and market funds in or from the DIFC.
The DFSA also regulates the key players in the funds' management service sector, such as fund administrators, asset managers, custody providers, and trustees, in order to ensure adequate investor protection by promoting high industry standards that meet international best practice. The investments of funds is made by specialized management (directors or the managers) and can consist of securities, bonds, and other ﬁnancial instruments. It accumulates funds of high net worth in a collective scheme, which is ﬂexible, with minimum regulatory supervision. CIS may be used as the investment vehicle for property investments.
KEY FEATURES OF THE FUND REGIME
The Fund is the collection with respect to property of any description, including money, and enables those taking part in the arrangements (the Unit Holders) (whether by becoming owners of the property or any part of it, or otherwise) to participate in or receive proﬁts or income arising from the acquisition, holding, management or disposal of the property, or sums paid out of such proﬁts or income. However, the arrangements are such that the Unit Holders do not have day-to-day control over the management of the property irrespective of their rights to be consulted or to give directions.
2. Requirement of Funds
A fund can be established in the DIFC either by becoming: (a) a DFSA licensed Fund Manager; or (b) an External Fund Manager.
3. Types of Funds
There are two types of Funds that can be established in the DIFC, and be managed by either a DFSA-licensed Fund Manager or an External Fund Manager (DFSA licensed fund managers being able to establish and manage funds in the DIFC, as well as in jurisdictions outside the DIFC)5 :
Public Funds: These funds are open to retail investors, and can be marketed by way of public oﬀer. As Public Funds are open to retail investors they must abide by stricter regulatory requirements so as ensure the greater protection and transparency to the retail investors. The requirements honor the principles of IOSCO and meet international standards for retail protection. Detailed disclosure is included in the fund’s prospectus to enable retail investors to make an informed investment decision relating to the fund, and an independent oversight of the fund manager is provided either by a member oversight committee or by the Trustee or Eligible Custodian of the Fund.
Exempt Funds: Exempt Funds replaced the existing Private funds regime, and are open to professional clients who make at least a minimum subscription of $50,000 (US Dollars ﬁfty thousand) each. Such Funds can only have 100 or fewer Unit Holders and cannot be oﬀered to the public, with distribution being only by way of private placement. They are subject to lenient regulatory requirements
4. Fees of Funds
In the recent regime the range for marketing of Foreign Funds in or from the DIFC has been expanded. The Fee structure has been made more competitive as the fund manager application fee reduced from $40,000 (US Dollars forty thousand) to $10,000 (US Dollars ten thousand).
5. Other Requirements
For obtaining a DFSA license, the fund manager has to demonstrate the adequate systems and controls necessary for the management of the type of proposed fund. The individuals performing certain functions within the Firm, such as its Board Members, senior management and key control functions (for example, the compliance and anti-money laundering oﬃcers) meet the relevant suitability and integrity criteria. Once the license has been granted, the DFSA supervises the fund manager’s activities on an ongoing basis. In order to comply with the best international practices the funds must have a registered auditor who is required to prepare a report on the ﬁnancial accounts of the Fund on an annual basis. A Fund Manager is obliged to provide interim and annual reports to Unit Holders and the DFSA. The annual reports must include a valuation of the fund assets which is acceptable to the Fund’s registered auditor.
Investment in CIS is voluntary and requires for there to be a suﬃcient number of citizens with surplus savings to support the same in order for them to remain viable and eﬀective. Additionally, because of the requirements for diversiﬁcation and the need for liquidity to accommodate regular injections and outﬂows of money, CIS requires relatively highly developed stock, bond and money markets to provide an adequate range of investable securities. Therefore such schemes are more common in developed African countries, where higher levels of disposable income for discretionary savings are available. Nonetheless, the introduction of the new structure in DIFC fund regime is a fair indication of Dubai’s inclination to emulate with major global fund domiciles such as Luxembourg and the Cayman Islands, and of the DIFC’s commitment to adapting to market demand. The regime is suﬃciently light to be attractive to fund managers from various aspects but simultaneously ensures that investors are being given greater protection through a robust regulatory framework.
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