Mutual Fund Regulations
For years, it has been pointed out that the majority of funds underperform the market. But not all of them! Well-chosen funds can provide quick and easy exposure to the market's various sectors and industries, lending the portfolio the kind of diversification that can help insulate one from damages during turbulent times. No single piece of faulty corporate news is likely to sink the fund, as it might an individual stock. Not for nothing are mutual funds the investment vehicle of choice for so many. The funds are convenient, cost-effective, and a lot less risky than individual stocks. For the people who have things to do other than check their stocks every five minutes, mutual funds provide peace of mind alternative (or, oh well, supplement). Indeed, for serious long-term investors, mutual funds are just about the perfect investment vehicle. Due to mutual funds and retirement accounts, many Americans have become players on Wall Street.
Mutual Funds in UAE
The UAE has embarked on an ambitious undertaking by introducing novel business amicable mutual funds regulations to promote the UAE funds industry and provide the foundation for a more developed regional funds regime in the Gulf Cooperation Council. The mutual fund's industry facilitates the gathering of monies for investment in various sectors across the Middle Eastern through funds established in the UAE, in addition to foreign funds registered and promoted in the jurisdiction. One eminent development is the issuance of the Emirates Securities and Commodities Authority (SCA) Board of Directors' Chairman Decision No. (9/RM) of 2016 Concerning the Regulations as to Mutual Funds (Fund Regulations), replaces SCA Board Resolution No. 37 of 2012 Concerning the Rules of Investment Funds, as amended. The Fund Regulations became effective on 31 July 2016. The Fund Regulations continue to ensure-
- overseeing the regulation, marketing and licensing of investment funds in the UAE to remain with the SCA. The SCA carries out prudential supervision tasks relevant to the financial position of mutual funds established and licensed as per the provisions of the Fund Regulations;
- Approval by the SCA is a requisite to establish a local investment fund- an investment fund established in UAE, excluding the free zones, licensed by SCA;
- SCA approval is also a requisite for the promotion and marketing of foreign funds to investors in the UAE. The Fund Regulations define a foreign fund as 'a mutual fund established outside the UAE, in a free zone, or a financial free zone within the UAE'; and
- appointment of a UAE-licensed local promoter is a requisite for the marketing of foreign fund to investors in the UAE
The Fund Regulations do not apply to:
- Accumulation of funds for (a) investment in a joint bank account, (b) concluding group insurance contracts, or (c) participation in social security, employee incentive programme or investment plans associated with insurance contracts unless such collected money or investments are directed from such plans to mutual funds;
- Funds established by a federal or local government agency, the companies wholly owned by any of them as well as the foreign funds promoted to one of such entities.
- In the case of reverse solicitation.
The Fund Regulations provide that no foreign fund may be marketed, advertised, distributed or offered within the UAE prior to obtaining the approval from the SCA and appointing a local promoter. However, the Fund Regulations fail to mention, who is eligible to be a local promoter? What are the obligations of the local promoter? What is the minimum subscription per single investor?
The Fund Regulations provide that the term of the SCA approval shall be one year. The term may be renewed by submitting an application to the SCA at least one month prior to expiry. However, the SCA shall have the right to reject the application for renewal as required by the public interest.
Public Funds versus Private Funds
The Fund Regulations apply to both private and public placements. A contrast is made between public funds, open-ended or close-ended funds established in the UAE targeting all investors, and private funds, open-ended or close-ended funds established in the UAE targeting qualified investors.
Application for the license of a public open-ended mutual fund is required to be submitted either by its founders or a corporate entity licensed by the SCA to practice the activity of establishing and managing a similar fund in the UAE. The Fund Regulations provide for the submission of a prospectus, with supporting documents and a key investor information document. Prior to obtaining SCA's approval for the licensing and announcement, it is prohibited to announce the start of initial procedures to obtain a license for a fund, announce its licensing, promote it, subscribe in its units, distribute any promotional materials or announce any information concerning the fund. The term of the license for the fund is one year, and may further be renewed. Similar to open-ended public funds, the scope of investment in public close-ended funds include high-liquid non-tradable securities and tradable securities (stocks, bonds and cash instruments). The scope also includes financial derivatives on tradable securities to control the level of risks outlined in the prospectus or for hedging in an amount not higher than the total net asset value subject to disclosure thereof, declared indexes and bank deposits to ensure liquidity with a maturity of maximum 12 months with licensed banks, subject to determining the investment ratio.
Restrictions for Public close-ended mutual funds:
- The ratio of the investment in securities issued by an entity shall not exceed 10 per cent of the issued capital or 10 percent of the net value of the fund's assets (whichever is lesser).
- The ratio of investment in unlisted securities shall not exceed 10 percent of the fund's net asset value.
- The ratio of investment shall not exceed 20 percent of the fund's net asset value in securities that are listed in a foreign market, provided that the market is subject to a regulator similar in operations to SCA.
- Investment in the financial derivatives is subject to a maximum of 1 percent of the net asset value of the fund.
- Investment in a different mutual fund is not permitted unless the fund is in a manner that serves the interests of the unitholders and is consistent with the investment policy of the fund and
- Engaging in foreign exchange operations is permitted provided, they are incidental and to manage its investments.
The Fund Regulations make provision for various types of mutual funds:
- Master fund- a public mutual fund or part of a group of funds affiliated to an umbrella fund, provided the master fund meets specific criteria;
- Feeder fund- Public mutual fund or part of a group of funds affiliated to an umbrella fund which is excluded from investing in tradable securities and from other investments as determined by the SCA, and also invests a minimum of 85 percent of its assets in the units of a public foreign fund or a public master fund; and
- Umbrella fund.
Promoting the Funds
The SCA issued Chairman of the SCA Board of Directors' Decision No. 3/RM of 2017 Concerning the Regulation of Promotion and Introduction (Promotion Regulations) in January 2017. The Promotion Regulations do not set forth that they substitute the Fund Regulations either wholly or in part and in fact appear to supplement those sections of the Fund Regulations that relate to promoting foreign funds. How so? Well, the Promotion Regulations reconfirm that the marketing of interests in foreign funds to investors in the UAE mandates that such interests be registered with the SCA. Also, the Promotion Regulations reiterate that reverse solicitations set out in the Fund Regulations are applicable.
The Promotion Regulations specify a further exemption. When a foreign fund is offered to a qualified investor, the SCA-licensed promoter does not have to market it by way of a private offering in the UAE.
Who is considered as a qualified investor?
A qualified investor is:
I. An investor who is capable of managing investments by itself and on its own accord, such as:
- The federal and local governments, government institutions and authorities, or the companies wholly owned by any of the aforementioned;
- International bodies and organizations;
- Individual licensed to engage in any commercial business in the UAE provided that investment is one of the purposes of its business; or
- A natural person with an annual income of minimum AED 1 million, or his net equity, with the exception of his residence, valued at AED 5 million and a declaration that he has the adequate knowledge and experience whether solely or through a financial consultant, to assess the offering documents, the risks and advantages associated with or arising from the investment; and
II. represented by an investment manager licensed by the SCA.
Various new SCA regulations relating to funds had been enacted between 2016 and 2018. While the Administrative Decision No. 57/RT of 2017 deals with the Adjustment of Positions Mechanisms for Mutual Funds, Chairman of the Authority's Board of Directors' Decision No. 10/RM of 2016 incorporates the Fees of Mutual Funds, outlining the fees payable to the SCA in respect of application fees and license renewals for public and private mutual funds.
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