The regulatory environment for the marketing of funds in the United Arab Emirates, and the rest of the Middle East, has been undergoing rapid transformation. Advisers, like fund managers, have to regularly keep a close eye on regulators for up-to-date news of developments in the regulatory landscape, which in the UAE in particular, has been changing in a piecemeal nature.
As previously mentioned in 'Marketing private funds in the Middle East', the UAE's new investment fund regulations came into effect on August 27, 2012. Of particular concern to many fund managers was that the regulations do not provide for any form of private placement regime, especially when marketing to sophisticated investors.
In their current form, the regulations apply equally to all categories of investors and make no distinction between a fund manager seeking to market a fund to a local investor for a target commitment of USD 150,000, and another seeking to market a fund to a local sovereign wealth fund or an institutional investor for a commitment of USD 100 million. [remove the new paragraph spacing here]Both fund managers would be required to engage a "promoter" authorized by either the Securities and Commodities Authority (SCA) or the UAE Central Bank to undertake the marketing on their behalf.
Alternatively, the fund manager could bypass the requirement to engage a local promoter by setting up a local representative office and targeting institutional investors, with each investor committing a minimum of AED 10 million (USD 2.67 million).
The regulations, therefore, had a significant impact on the ability of fund managers to market their funds in the UAE. In addition, there was concern from some local investors that they would, as a result, be denied investment opportunities.
New Exemptions
Fund managers will welcome news of SCA Resolution No. 13 of 2013, which is published in Arabic on SCA's website and will come into effect the day after it is published in the UAE Official Gazette.
The resolution amends the investment fund regulations and will offer new exemptions to fund managers seeking to market their funds to sophisticated investors in the UAE.
The resolution provides that the regulations will not apply to fund managers seeking to market foreign funds in the UAE to sovereign wealth funds, such as the Abu Dubai Investment Authority and Abu Dhabi Investment Council; institutions whose main objective or one of its main objectives (as set out in its articles of association) is to invest in securities (as long as the fund engages with only those entities, and not any portfolios held by any clients they may have); and financial managers - so long as the discretion for making financial investments rests with the financial manager, and not any other party.
These new exemptions will simplify the marketing strategies of both local and foreign fund managers looking to market foreign funds in the UAE. They will also provide fund managers free access to many of the largest sources of private equity funding in the region, as well as a slew of other institutional investors, without the burdensome requirement of engaging a local promoter or obtaining the prior approval of SCA.
The resolution also amends the definition of who may set up a representative office (which seeks to target institutional investors, each committing a minimum of AED 10 million) to now include a company who is authorized by a fund to promote interests in the fund on its behalf.
Because of the new institutional investor exemption outlined above, it remains to be seen whether any entity will seek to go to the expense of establishing a representative office for the purposes of marketing funds in the UAE.
Reverse solicitation
As previously noted, representatives from SCA had indicated in November 2012, that the regulations were not intended to catch 'reverse solicitation' based on previous dealings or a pre-existing relationship with an investor. This provides a welcome exemption to the requirement of engaging a local promoter and obtaining the prior approval of SCA before commencing the marketing process.
SCA has recently adopted a relatively restrictive view on what constitutes 'reverse solicitation'. Even if fund managers obtain a letter from a potential investor stating that the investor has taken the initiative in soliciting the marketing - and thereby declines any protection afforded to it under the regulations - in the event of a dispute between the parties, SCA will still have the power to determine whether the facts as presented in the documentation ties up with the reality.
Fund managers and investors are therefore advised to keep necessary records in the event of a dispute between the parties resulting in investigation by SCA at a future date.
It should be noted that proposed legislation is likely to further dim any enthusiasm for the continuation or future use of 'reverse solicitation' strategies. I have been informed that new laws on the promotion of funds will be issued by SCA in the near future which will further restrict the ambit of the 'reverse solicitation' exemption.
What is clear is that the UAE, in line with Europe, the US and elsewhere, is continuing to develop its regulatory landscape and industry participants would be well advised to keep abreast of developments. In the meantime, fund managers should welcome the new exemptions and are advised to proceed with caution when relying on any form of 'reverse solicitation'
Bilkis Ismail is Counsel at the Dubai office of SJ Berwin, where she specializes in the structuring and formation of private equity, infrastructure, and sharia'a compliant funds and co-incentive schemes.
© Zawya 2013
