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Two of the new SCA regulations introduce important changes to its rules on the distribution of foreign funds in the UAE. The key changes are:
The SCA enacted the above changes under the following regulations (which at the time of drafting this article are only available in Arabic):
We set out below the highlights of these new SCA regulations, pending the publication of the SCA-approved English versions.
The requirement for an SCA license for the distribution foreign funds
Decision No. 2 carves out the promotion of foreign funds from the scope of exempt financial promotions under the SCA Rulebook and adds a provision to the SCA Rulebook which provides that the offer and distribution of units of foreign funds in the UAE would amount to a financial promotion, and is therefore subject to the SCA financial promotion regime.
Therefore, promoting foreign funds in the UAE to Professional Investors or Market Counterparties is no longer exempt. A foreign funds distributor would need to hold a Category 5 SCA license for carrying on the regulated activity of Promotion, even if it only distributes funds to Professional Investors and Market Counterparties.
Changes to the SCA rules on reverse solicitation
Decision No. 2 also introduces a change to the SCA reverse solicitation exemption, the effect of which is that the reverse solicitation exemption is only available to promoters outside the UAE, promoting on a cross-border basis (i.e. either from outside the UAE or from the FFZs) but not when the person making such promotion is present in Onshore UAE. This position, if correct, seems unduly onerous for UAE based fund promoters and we will be seeking confirmation from the SCA on whether this was the policy intention behind the change.
Distribution of foreign funds now limited to “Private Placements”
Under Decision No. 4, SCA-licensed Promoters may promote foreign funds in the UAE only:
It is not clear to us why these new provisions were not part of Decision No. 2 which also introduced changes to the SCA Rulebook that are relevant to the promotion of foreign funds. We note that it appears that the promotion of foreign funds by non SCA-licensed persons, including promotions to retail clients, would still technically be possible under a documented reverse solicitation, albeit this can now only be carried on from outside of the UAE (i.e. either from abroad or from the FFZs).
At the time of writing this article1, Decision No. 2 has yet to come into force. However, firms are advised to revisit their arrangements for the distribution of foreign funds in the UAE in light of the new restrictions by:
Decision No. 4 is already in force and imposes the following requirements on “parties distributing foreign funds in Onshore UAE”:
We understand that the changes to the SCA regulations on the promotion of foreign funds in the UAE were designed to encourage more fund managers to set up a presence in the country, and to attract more capital to the creation of domestic funds in the UAE. For foreign fund distributors, these new regulations may make the establishment of a UAE-based feeder fund structure an attractive solution.
Finally, it is not clear how these changes will impact the “passporting” provisions which allow Dubai International Financial Centre and Abu Dhabi Global Market funds to be promoted in the UAE without an SCA license, but the answer will become clear in due course.
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