Marketing Foreign Funds in the UAE
“There are two times in a man’s life when he shouldn’t speculate: when he can’t afford it and when he can.”
– Mark Twain
The world of financial markets and investments often induce reserved and divergent responses from the common man. Investing options are often complex due to the regulatory ambiguities of the respective jurisdictions. Therefore, there is a constant need for imparting knowledge and advice, as well as increasing the visibility of such investment products to reduce the intricate and intimidating stigma attached to them. While markets may change for good or for worse, good investing advice will always be beneficial no matter the circumstance.
In a bid to streamline and structure the promotion of foreign funds in UAE, the UAE securities regulator, the Securities and Commodities Authority (SCA) revised the past mutual funds regulation and amendments made thereto (Old Regulations)[i] by enacting the Board of Directors’ Chairman Decision No. 9/R.M of 2016 (MF Regulations). Further, SCA enacted the Promotion and Introduction Regulations (P&I Regulations)[ii], which acts alongside with the MF Regulations to govern the management of mutual and investment funds. This article purports to highlight the pertinent revisions made to the regime of marketing and promotion of foreign funds in the UAE through the implementation of the MF Regulations.
Essentially, the revisions made under the MF Regulations have a substantial impact on the promotion of foreign funds that in the UAE, due to the elimination or limitation of the exclusions of such funds. Under the MF Regulations, the scope of promotion and marketing of a foreign fund has been stated in Article 35 of the said regulations and provides inter alia that no foreign mutual fund shall be promoted within the UAE unless it is registered with SCA and distributed by a locally licensed promoter.[iii] In such cases, the legal representative of the foreign fund must submit an application to the SCA to register the foreign fund on along with supporting documents and statements and enclosed with the prospectus and investment policy of the foreign fund.[iv] If approved, such registration remains valid for a year and will expire on December each year. Further, it should also be renewed before at least one month of expiry.[v]
However, the aforesaid requirements for SCA registration of the foreign fund and contract with a license local promoter shall be exempted in the below circumstances:
- reverse promotion or solicitation - when an investor in the UAE initiated the promotion or has offered to buy foreign funds and such promotion is not at the instance of the foreign issuer or its promoter or distributor, provided relevant documentation can substantiate this reverse promotion or solicitation.[i]
- when the foreign fund is promoted to federal or local governmental agencies or their wholly owned companies.[ii]
For the purpose of the MF Regulations, foreign fund means a mutual fund established out of the UAE or in a (financial or otherwise) free zone within UAE. Prudently, the foreign fund and/or its agents must maintain and retain records and documents towards substantiating reverse solicitations to show evidence that there indeed was a reverse solicitation. As a welcome change, reverse solicitation has been added as an exclusion or exemption for SCA to undertake promotion and marketing of foreign funds.
Further, the provisions of P&I Regulations compliment the scope of MF Regulations regarding the marketing of foreign funds within mainland UAE. The P&I Regulations follow the same premise that promotion of any foreign domiciled fund in the UAE will require registration with the SCA.
For the purpose of this P&I Regulation, the term promotion means and includes the marketing, distributing advertising, and publication of any data, information, or promotional material related to financial products. Further, foreign securities or foreign funds mean and include stocks, bonds, Sukuk, units of investment funds, commodities, contracts, derivatives, and other securities or financial instruments issued by foreign issuers.
However, similar to MF Regulations, the P&I Regulations contain exclusions from SCA’s registration requirement, which is set out below:
- Promoting foreign funds to Qualified Investors other than a natural person with financial solvency (Article 2(3)(c)). This means that the foreign fund would require SCA registration and license to promote and market the funds in case of individual investors only.
- As mentioned above, in reverse promotion or solicitation, where the promotion is initiated by an investor in the UAE who is interested or has offered to buy foreign funds and such promotion is not at the instance of the foreign issuer or its promoter or distributor as long as requisite documents can substantiate the same (Article 2(3)(e))
- In case the financial products are listed in any market (Article 2(3)(b)). However, under the P&I Regulations, a Market[i] defined as SCA licensed UAE exchange, thereby limiting the applicability of the exclusion to funds and securities listed in UAE.
Given the above and for the purpose of the P&I Regulations, more particularly the above exclusions, Qualified Investor[i] is:
I. an investor capable of managing its investments including:-
- the federal government and local governments, governmental corporations, and authorities or their wholly owned subsidiaries;
- international commissions and organizations;
- persons licensed to engage in business in the UAE provided that one of the activities of the entity is investing; and
- a natural person who is solvent with a yearly income of at least AED 1,000,000 (UAE Dirhams one million) or equity or assets, excluding the main residence, of at least AED 5,000,000 (UAE Dirham five million) and declares that he has adequate knowledge and experience to assess the prospectus and the advantages and risks associated with the investment; and
II. any investor represented by an investment manager licensed by the SCA.
Further, a foreign issuer has to adhere to the provisions relating to the promotion of foreign funds set out in Article 12 of the P&I Regulations and provisions regarding both, public offers and private placements of foreign funds. The P&I Regulations has stringent stipulations regarding Public offers of foreign funds[i] that can only be made by funds established outside the UAE or in a UAE free zone (financial or otherwise). However, these funds should be regulated by a governing authority similar to the SCA and should be permitted or licensed in the home jurisdiction for making a public offer. Similarly, the P&I Regulation also sets out conditions to be met for a private placement of foreign funds exclusively made to Qualified Investors (Article 12(2)). However, as explained above, since the exclusion or exemption for registration requirement is only limited to Qualified Investors who are not natural persons, this effectively means that private placements of foreign funds to Qualified Investors as envisaged under article 12 of the P&I Regulations would be limited to individual investors. Another pertinent stipulation to be considered while promoting an SCA licensed foreign fund is that the minimum subscription by an investor in such foreign fund established in a free zone or a financial free zone must be at least of AED 500,000 or AED 1,000,000 (Article 12(14)).
Applicability of the MF Regulations and P&I Regulations on the financial free zones
As mentioned above, the requirements and conditions under the MF Regulations and P&I Regulations shall also apply to firms located in the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Markets (ADGM), if they wish to pursue investors in UAE.
In contrast, the aspect of marketing of foreign funds within ADGM and DIFC financial free zones are subject to respective laws and regulations followed by each zone. As a result, marketing of foreign funds in the ADGM may fall under one or more of these regulated activities depending on the exact method of marketing employed.
Therefore, if a foreign issuer wishes to market the foreign fund within the UAE and does not fall under the exclusion or exemption under the MF Regulations or the P&I Regulation, then the foreign fund needs to be registered with SCA and distributed by an SCA licensed local promoter. In any event, foreign funds are free to undertake any promotion and marketing of its interest outside of UAE mainland. The new regulations have extended the legalities involved in the promotion and marketing of foreign investors to secure the interests of the parties in the transaction. Having said that, both MF Regulations and P&I Regulations are at a developing stage, and SCA may periodically issue further directives or regulations for providing clarifications to ensure ease of undertaking the promotion and marketing of foreign funds within UAE.
[i] Article 12(1) of the P&I Regulations
[i] Article 1 of the P&I Regulations
[i] Board of Directors Resolution No. 37 of 2012 and amended by way of the Board of Directors Resolution No. 13 of 2013
[ii] Chairman Resolution No. 3/R.M of 2017 which came into and came into force on 1 February 2017
[iii] Article 35(1) of the MF Regulations
[iv] Article 35(2) of the MF Regulations
[v] Article 35(3) & 35(4) of the MF Regulations