Dubai’s Revised Collective Investment Funds Regime Eases Rules On Cross-Border Management And Marketing Of Funds

Introduction

Since its launch in 2004, the Dubai International Financial Centre (“DIFC”) has been at the forefront of the drive to develop the financial services industry in the Middle East. It was the first jurisdiction in the region to introduce a modern regulatory framework for the financial services industry, and its efforts have attracted many of the world’s top institutions.

In 2006 the DIFC introduced its first law governing the funds industry. The Collective Investment Law created a legal framework for regulating collective investment funds within the DIFC free zone (see analysis at WSLR, November 2006, page 26).

Despite the international recognition that the DIFC has achieved, its funds regime has always been seen as overly restrictive, with emphasis being placed on fund industry activity of every kind being subject to oversight by the Dubai Financial Services Authority (“DFSA”), the financial services sector regulator within the DIFC. The level of regulation imposed by the DFSA discouraged foreign fund managers from becoming involved in the DIFC funds market and limited the ability of DIFC-based fund managers to manage funds established and domiciled overseas. The ability to market foreign funds in the DIFC was also heavily regulated.

New Regulatory Framework

On July 11, 2010, following a period of consultation (see WSLR, April 2010, page 18), the existing laws governing the funds industry in the DIFC were replaced by a new body of law and regulation embodied in the Collective Investment Law 2010 (DIFC Law No. 2, 2010), the Collective Investment Rules (“CIR”) module of the DFSA Rulebook and amendments to the Regulatory Law (DIFC Law No. 4, 2004) as well as other incidental changes to the DFSA Rulebook modules. These new laws and regulations are collectively referred to in this article as the “New Law”.

For those considering where to establish a new fund or the location from which to manage and market funds, the New Law has made the DIFC a more attractive option.

Among the numerous changes that have been introduced, the following are likely to be of particular significance to the investment funds industry:

• The former “Private Funds” regime is to be phased out over a period of two years and has been replaced by a new exemption regime for funds targeted at sophisticated and high net worth investors (“Exempt Funds”).

• DFSA-authorised fund managers may now manage funds established or domiciled outside the DIFC (“External Funds”).

• A fund manager based outside the DIFC (“External Fund Manager”) may manage DIFC-based Public, Private or Exempt Funds (each a “Domestic Fund”).

• The restrictions on marketing foreign funds in or from the DIFC have been relaxed.

• The DFSA regulatory costs for establishing and managing funds in or from the DIFC have been significantly reduced.

Exempt Funds

Exempt Funds are subject to a lighter regulatory regime than the former Private Funds. Apart from the need to include a mandatory statement regarding the type of client at which the fund is targeted, the offer document for such funds (in the New Law called an information memorandum) is not subject to any specific form or content requirements, but should nevertheless require all the information that an investor would reasonably expect to find in such a document. Under the previous funds regime, a prospectus for a Private Fund was required to include specific requirements itemised in the DFSA Rulebook. Despite this relaxation, it is possible that the DFSA will default to the approach it previously adopted in relation to Private Funds in its regulation of the new Exempt Funds regime.

In order to qualify as an Exempt Fund, a fund must have no more than 100 “Professional Client” investors to whom units in the fund are offered by way of private placement. The additional requirement, which does not apply to Private Funds, is that a Professional Client must make an initial subscription to the fund of at least U.S.$50,000. An Exempt Fund may not be distributed through a public offer.

Managing an External Fund from the DIFC

Fund managers authorised by the DFSA may now sponsor and manage an External Fund domiciled outside the DIFC. Such funds will not be subject to the compliance requirement applicable to Domestic Funds. An External Fund is not a DFSA-regulated fund. However, certain obligations are imposed on DFSA-authorised fund managers with respect to such funds, including:

• the need for the fund manager to have systems and controls that are adequate to ensure compliance with the regulatory requirements of the jurisdiction in which the External Fund is established or domiciled;

• the requirement that the fund manager must inform the DFSA of the jurisdiction in which the External Fund is established or domiciled and the nature of the regulatory requirements applicable to the fund; and

• the need for a prospectus meeting the requirements of CIR being made available to persons to whom units in the fund are offered.

Managing a DIFC Domestic Fund from outside the DIFC

The old DFSA regime prohibited foreign fund managers or trustees who did not have DFSA authorisation from acting as managers or trustees of Domestic Funds in the DIFC. In the early days of the DIFC, this restriction did not detract from the general enthusiasm for the new financial centre venture. However, in recent times the international funds community lost some of its appetite for setting up permanent establishments in new regulated markets.

Under the New Law, a fund manager based outside the DIFC may now establish and manage a Domestic Fund without having to obtain DIFC authorisation. Such fund managers are not required to have a place of business in the DIFC but must manage the fund from a jurisdiction that is recognised by the DIFC and the fund manager must be regulated in that jurisdiction. The non-DFSA-authorised fund manager must also subject itself to DIFC law and to the jurisdiction of the DIFC courts, and must appoint a fund administrator or trustee authorised by the DFSA to undertake certain functions within the DIFC as agent for the foreign fund manager, such as interfacing with the DFSA, acting as service agent for proceedings, maintaining the register of unit holders and making the fund prospectus or information memorandum available to DIFC-based investors.

Marketing of Foreign Funds

Prior to the introduction of the New Law, a Foreign Fund could be marketed in or from the DIFC only if it was a “Designated Fund” that was regulated in a jurisdiction recognised by the DFSA or met certain other DFSA criteria, including that the fund manager and the custodian were authorised and supervised by a financial services regulator in a jurisdiction recognised by the DFSA.

Under the New Law, Foreign Funds may also be marketed in or from the DIFC if one of the following criteria is met:

• the DFSA-authorised firm recommends the suitability of investing in units of a Foreign Fund in light of the particular investor’s investment needs, objectives and circumstances;

• the Foreign Fund is open to no more than 100 investors, each of whom is a “Professional Client” and makes a minimum subscription of U.S.$50,000; or

• the Foreign Fund is not offered to investors by way of public offer.

Operating Costs

In addition to the substantive changes to the regulatory regime under the New Law, the DFSA has also introduced a new fee schedule with the aim of making the DIFC a more competitive location from which to operate. Notable reductions include:

• the fee for applications to become a DFSA-authorised fund manager have been reduced from U.S.$40,000 to U.S.$10,000;

• no fee is payable for becoming an External Fund Manager;

• the registration fee for a Public Fund is reduced from U.S.$5,000 to U.S.$1,000; and

• no fee is payable for establishing an Exempt Fund.

These changes to the DFSA fee structure are welcome. It should, however, be borne in mind that there are other charges for setting up in the DIFC (including the fees payable to the DIFC Authority for establishing entities in the DIFC and rent on office premises within the centre), and the overall cost of establishing a permanent presence can be quite significant.

Conclusion

The New Law offers a welcome relaxation in the level of regulation by the DFSA and brings the DIFC more in line with regulation underpinning other global financial services centres. This, together with lower costs of operating from the DIFC, will undoubtedly attract more interest from the international funds industry and allow the DIFC to maintain its position as a leading regional financial services centre.

It is perhaps interesting to note that in Qatar, the regulatory authority in the Qatar Finance Centre is undertaking a similar consultation process which will eventually result in the adoption of some of the reforms introduced by the New Law (see report in this issue).

The DFSA has also publicly stated that it is monitoring developments in the European Union as regards the Alternative Investment Fund Manager Directive and, once this has been finalised, will consider whether any further amendments to the DFSA funds regime are required and/or desirable so as to permit DFSA-regulated funds access to the E.U. market.

Paul de Cordova is a Partner and Richard Dollimore is an Associate with K&L Gates LLP, Dubai. They may be contacted at paul.decordova@klgates.com and richard.dollimore@klgates.com.