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Cross-border marketing: Focus on restrictions on promotion of foreign funds in the UAE

 Penny Blair, Co-Head FinReg

Author: Penny Blair, Co-Head FinReg

31 May 2023

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Area: Cross-border distribution

Cross-border marketing: Focus on restrictions on promotion of foreign funds in the UAE

Overview

2023 has seen a number of changes being introduced in the UAE with respect to marketing of foreign funds.

In January, the SCA issued two new resolutions relating to foreign fund promotion:

  • Resolution No. 02/R.M provides that only appropriately SCA-licensed firms are able to actively promote foreign funds to professional investors and market counterparties, via private placement. All foreign funds distributed in the UAE via a locally licensed distributor must also be registered with the SCA; and
  • Resolution No. 04/R.M restricts the active promotion of foreign funds to retail investors.

In March, the SCA published an update on its website, providing for some modifications to the new regime, including the introduction of specific exemptions.

At aosphere, we have recently worked with local counsel to update the Rulefinder Marketing Restrictions - Asset Management Memorandum for the UAE to reflect the resolutions and the SCA guidance. We have also updated our onscreen report and summary setting out the key elements of the regime in the UAE.

In this article, we discuss the new resolutions and highlight some key considerations for offshore firms looking to promote foreign funds to investors in the UAE.

1. Restrictions on promotion of foreign funds to professional investors

In January 2023, the SCA issued Decision No. (02/RM) of 2023 (Resolution 2) which amended the SCA rulebook, including with respect to the ability to distribute foreign funds to professional investors and market counterparties in the UAE. The changes include that:

  • the promotion and distribution of foreign funds to professional investors is no longer exempt under the SCA rulebook. As a result, only appropriately SCA-licensed placement agents/promoters are able to actively promote foreign funds to professional investors and market counterparties in the UAE, via private placement; and
  • all foreign funds distributed in the UAE via a locally licensed distributor must be registered with the SCA.

There are certain exemptions available to these requirements, in particular where the foreign fund is being offered in response to a reverse enquiry, is listed or is only being offered to types of government entities. See section 3 below for further detail on the exemptions.

2. Restrictions on promotion of foreign funds to retail investors

On 16 January 2023, the SCA issued Resolution no. 04/R.M of 2023 on the status regularisation mechanisms for promoting foreign funds units in the UAE (Resolution 4).

Resolution 4 sets out that, from 17 January 2023, promotion of foreign funds in the UAE is only possible via private placement to professional and market counterparty investors (as described in section 1). Active promotion of foreign funds to retail investors is as a result generally prohibited and the scope of any exemptions available for retail investors is limited.

Currently, it is expected to be possible to offer foreign funds to retail investors in the UAE where in response to a reverse enquiry, although there is some uncertainty on this point. Certain foreign funds may also apply for a temporary exemption from the prohibition, which is available until 31 March 2024. See section 3 below for further detail on the exemptions.

3. Exemptions and updated guidance

On 31 March 2023, the SCA published an update on its website, indicating some modifications to the new regime for the promotion of foreign funds in the UAE. In particular, there is now reference to exemptions for:

  • marketing to "exempt professional investors" (this includes federal or local governments, government institutions and agencies, or companies wholly owned by any of them);
  • funds distributed via the ADGM and DIFC fund passporting regime;
  • activity in response to a reverse enquiry; and
  • listed funds.

In addition, the SCA issued an amendment to the Resolution 4, effective 4 May 2023, allowing a temporary exemption from the prohibition on offering foreign funds to retail investors. The exemption allows local placement agents/promoters to apply for SCA approval to promote and offer foreign funds (that were registered for promotion in the UAE in the period ending 31 December 2022) to retail investors until 31 March 2024. The SCA may also impose requirements or conditions when granting any approval.

The information on the SCA website also contains:

  • information on process, fees and timeline to register a foreign fund for sale to professional investors; and
  • transitional arrangements for retail funds.

The SCA's update indicates that some further guidance on marketing foreign funds in the UAE may also be forthcoming.

4. New domestic fund rules

The SCA issued a resolution relating to funds established in the UAE on 16 January 2023 (Board Decision No. (01/RM) of 2023 concerning the regulation of investment funds), although this resolution is primarily domestically focused and it is expected to be of more limited relevance to firms cross-border marketing/selling foreign funds.

5. Next steps

We understand that the SCA's changes relating to the promotion of foreign funds in the UAE are intended to encourage more fund managers to set up a local UAE presence and to attract more capital to the creation of domestic funds in the UAE. In addition, the SCA has noted that the new regime is intended to bring the UAE's foreign fund promotion rules closer in line with other GCC member states, primarily Saudi Arabia.

We have recently worked with local counsel to update the Rulefinder Marketing Restrictions - Asset Management Memorandum for the UAE to reflect the resolutions and the revised SCA rulebook. We are also continuing to monitor for any additional developments or guidance from the SCA and will alert our subscribers of any relevant changes.

* As described by IOSCO members and stakeholders.

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