Emirates Securities and Commodities Authority Limits Foreign Fund Marketing in UAE

The Emirates Securities and Commodities Authority (SCA) recently issued eight decisions which, among other things, reform the regulatory regime for investment funds domiciled in the onshore United Arab Emirates (UAE) and significantly limit the ability to market foreign funds (i.e., funds formed in jurisdictions other than onshore UAE) to investors resident in the onshore UAE. This LawFlash focuses on the implications of the new SCA regulations for foreign fund managers and other persons marketing foreign funds in the UAE.

SCA Decision No. (02/RM) of 2023 and SCA Decision No. (04/RM) of 2023 (the New Regulations), issued in mid-January, implemented the following key changes as of February 1, 2023:

1. Marketing foreign funds to professional investors in the UAE now requires appointing a locally licensed promoter and SCA approval of the foreign fund. Foreign funds may be promoted in the UAE only to professional investors on a private placement basis (a) by a person licensed by the SCA to perform promotion activities in the UAE, and (b) with the approval of the SCA. This change is significant, requiring foreign funds to register in order to be offered to sovereign wealth funds and other institutional investors in the UAE that previously fell within a broad exemption.
2. Reverse solicitation. Under the New Regulations, reverse solicitation remains an option for promoting foreign funds without SCA approval, but the scope of this exemption appears to have been narrowed. Under the New Regulations, it only applies on a cross-border basis (meaning, reverse solicitation is not an option for Abu Dhabi Global Markets (ADGM) or Dubai International Financial Centre (DIFC)funds in cases where their managers are targeting onshore UAE investors), and we understand it may only be relied upon with respect to marketing to professional investors and not vis-à-vis retail investors (but we are seeking clarification on this point). The New Regulations also require that the nature of the solicitation “is proved by the concerned entity,” which we read as meaning that the reverse solicitation must be documented. Whilst this is a best practice that is currently followed by most sponsors, in our view this new requirement indicates that the SCA is likely to take a more restrictive approach to reverse solicitation.
3. No marketing of foreign funds to retail investors in the UAE. Foreign funds can be promoted in the UAE only by way of private placement to professional investors as defined under the SCA Rulebook. This means it is now not permissible to offer foreign funds to UAE retail investors. However, we understand that the fund passporting regime as between the two financial free zones, namely the ADGM and DIFC, and the onshore UAE remains unchanged by the new SCA rules, and this regime allows for retail funds formed in the ADGM or DIFC to be marketed to UAE retail investors (but certain conditions must be met including the appointment of an SCA-regulated custodian). However, only fund managers established in the ADGM or DIFC can avail this passporting regime, meaning that any foreign fund managers that have been approved by the regulators in the ADGM or DIFC to operate ADGM or DIFC investment funds (but which managers are not themselves established in such financial freezones) cannot utilise this passporting framework, even for their ADGM or DIFC funds.

Implications

The new restrictions on promoting foreign funds in the UAE represent a material change in the UAE’s securities law regime, which was previously one of the most liberal in the Gulf Co-operation Council (GCC) for the marketing of foreign funds. Now, foreign fund managers have limited alternatives to using a local placement agent (assuming these foreign fund managers do not themselves have an affiliate with the appropriate license from the SCA) and registering their fund offerings with the SCA even when marketing to sovereign and other institutional investors. This result makes the new UAE securities law regime as narrow as, or arguably narrower than, the rules in other key GCC markets, like the Kingdom of Saudi Arabia.

The New Regulations came into force on February 1, 2023. There are limited grandfathering provisions related to the prohibition on marketing foreign funds to retail investors; these allow existing promotion contracts with distributors to be performed until the contract termination date or 30 June 2023, whichever is earlier. However, there are currently no rules or guidance with respect to any grandfathering or transitional provision relating to marketing foreign funds to professional investors.

The New Regulations are intended to encourage the establishment of asset management businesses and the formation of investment funds in onshore UAE, which is why these decisions were released in parallel with the reformulation of the onshore UAE funds regime. In our view, the utilization of ADGM or DIFC feeder funds for foreign funds to access the onshore UAE market (by way of passporting) may become more common, given the nascency of the New Regulations.

We are in regular contact with the key regulatory authorities in the UAE and are seeking clarification on the scope and guidance of the New Regulations. We will publish further updates should additional rules, or guidance on the New Regulations, be made available.