AR

Collective Investment Funds

Key Features of the DFSA Funds Regime

Guide to the DFSA Fund Regime, please click here to view

Q&A - The DFSA's Collective Investment Fund Regime, please click here to view

The DFSA introduced its Collective Investment Funds regime (the Funds regime) in 2006. It was designed to provide adequate investor protection, while meeting international standards for regulation

Some of the key features of the DFSA's Funds regime are as follows:

  • A Public Fund regime, which provides greater protection to retail investors through requirements such as the independent oversight of a Fund and detailed disclosure in a Prospectus;
  • An Exempt Fund regime where Funds enjoy a fast-track notification process, where the DFSA aims to complete the notification process within a period of 5 days, with lesser regulatory requirements than a Public Fund;
  • A Qualified Investor Fund (QIF) regime, which provides proportionate regulation, allowing flexibility for QIF Managers and QIFs, by relying on key requirements in the Collective Investment Law and the DFSA Rulebook. The regime requires self-certification regarding the adequacy of systems and controls. QIFs enjoy a fast-track notification process where the DFSA aims to complete the authorisation process within a period of 2 days;
  • Domestic Fund Managers (i.e. DFSA-licensed Fund Managers) are DIFC-based and are able to establish and manage Funds in the DIFC, as well as in jurisdictions outside the DIFC;
  • Fund Managers coming from acceptable jurisdictions are able to establish and manage Funds in the DIFC under certain circumstances;
  • DFSA-licensed Firms are allowed to market and sell units in a wide range of Foreign Funds in, or from, the DIFC;
  • A competitive fee structure is applied to Fund Managers and Funds;
  • Fund Managers of Umbrella Funds have the flexibility to use the Protected Cell Company (PCC) structure for open-ended Umbrella Funds. This gives investors in each Sub-Fund of the Umbrella legal segregation from liabilities arising in other Sub-Funds and the Umbrella;
  • Bespoke Shari'a governance requirements applying to Islamic Funds, which promote high Shari'a governance standards with flexibility of application;
  • Bespoke regulatory requirements to accommodate specialist Funds, such as Private Equity, Property, REIT, Money Market and Hedge Funds1; and
  • The DFSA also regulates the key players in the Fund management service sector, such as Fund Administrators, custody providers and Trustees. This is to ensure adequate investor protection by promoting high industry standards that meet international best practice.
  • To establish and manage a Fund in the DIFC you need to be either:
  • A Domestic Fund Manager (i.e. a DFSA-licensed Fund Manager); or
  • An External Fund Manager.

Domestic Fund Manager

To become a Domestic Fund Manager i.e. to obtain a DFSA licence, you need to demonstrate to the DFSA that:

  • You have adequate systems and controls to manage the type of Fund you propose to establish; and
  • The individuals performing certain functions within the firm, such as its Board members, senior management and key control functions (e.g. compliance and Anti-Money Laundering), meet the relevant suitability and integrity criteria.

Once you have been granted a licence, the DFSA will supervise on an ongoing basis your activities which relate to the Funds you manage.

External Fund Manager

Under the applicable requirements, a Fund Manager from an acceptable jurisdiction may establish and manage a Domestic Fund established or domiciled in the DIFC, without having to obtain a DFSA licence, provided:

  • it is a body corporate;
  • It manages the Domestic Fund from a place of business located in a jurisdiction which is either:
  • It subjects itself to the DIFC Laws and Courts; and
  • It appoints a DFSA-licensed Fund Administrator or Trustee, who will be required to undertake certain functions. Such functions include acting as the local agent of the External Fund Manager to receive, process, and deal with the DFSA for regulatory processes. The DFSA-licensed Fund Administrator or Trustee will also have to undertake certain investor-relation functions relating to the Fund (those include, but are not limited to, maintaining the Unitholder register and making the Fund's Prospectus available to investors).
Types of Domestic Funds

There are two types of Funds that can be established in the DIFC, and be managed by either a DFSA licensed Fund Manager or an External Fund Manager:

Public Fund regime

  • A Public Fund regime provides greater protection to larger numbers of investors (and may include retail investors) through requirements such as the independent oversight of a Fund and detailed disclosure in a Prospectus.

Exempt Fund regime

  • An Exempt Fund enjoys a fast-track notification process, where the DFSA aims to complete the process within a period of 5 days, with lesser regulatory requirements than a Public Fund.

QIF regime

  • The Qualified Investor Fund (QIF) regime provides proportionate regulation, allowing flexibility for QIF Managers and QIFs, by relying on select key requirements in the Collective Investment Law and the DFSA Rulebook. The regime requires self-certification regarding the adequacy of systems and controls. QIFs enjoy a fast-track notification process where the DFSA aims to complete the process within a period of 2 days

Specialist Funds

  • Note the specialist Fund requirements do not apply to QIFs.

Islamic Funds

  • The Fund Manager of an Islamic Fund needs to have a licence that authorises it to conduct Islamic Business, or an Islamic Window, before setting up an Islamic Fund. The Fund Manager must, in respect of the Islamic Fund:
  • Appoint a Shari’a Supervisory Board (SSB) to the Fund. It may use the Firm’s SSB for Shari’a governance purposes of the Islamic Fund;
  • Establish and maintain Shari’a compliant systems and controls and an Islamic financial business policy and procedures manual for the Fund; and
  • Ensure that the Constitution and Prospectus of the Fund are approved by the Fund’s or Firm’s SSB.

Private Equity Funds

These are generally Exempt Funds and taking account of the practices and associated risks, the Fund Manager of an Exempt Fund, for example:

  • Is not required to entrust the Fund Property to an Eligible Custodian; instead it must appoint an Investment Committee to the Fund; and
  • Must make certain disclosure in its Prospectus relating to how the Fund’s assets are held.

Money Market Funds

All Money Market Funds (i.e. Funds investing in high quality deposits and debentures to preserve the capital of the Fund and provide daily liquidity, while achieving returns that are in line with money market rates) must be structured as Variable Net Asset Value Funds only. Money Market Funds must only invest in certain investments.

Property Funds

All Property Funds (i.e. Funds investing predominantly in real estate or real estate-related assets) must be closed-ended Funds. In addition to being a closed-ended Fund, a Property Fund which is a Public Fund must:

Invest only in Real Property or Property Related Assets, but may retain cash, government and public Securities, up to a maximum of 40%;

Be an Investment Company or Investment Trust;

Be listed, within six months of its establishment, either on an Authorised Market Institution or an Exchange in a Recognised Jurisdiction;

Value the Fund property annually on the basis of an independent valuation, and before acquiring or disposing of any asset; and

Limit its aggregate borrowings to 50% of the gross asset value of the Fund.

Property Funds – Real Estate Investment Trusts (REITs)

REITs are a sub-set of Property Funds, which are designed for income generation. A REIT must, in addition to being closed-ended:

  • Use only Investment Company or Investment Trust as the fund vehicle;
  • Be a Public Fund that is listed and traded on an Authorised Market Institution;
  • Distribute 80% of its audited annual net income to Unitholders;
  • Limit its aggregate borrowings to 50% of the gross asset value of the Fund; and
  • Invest up to 30% of its total assets in ‘property under development’.

In addition to the above specialist classes of funds, the DFSA Fund regime also has specific provisions dealing with Umbrella Funds, Feeder Funds and Fund of Funds.

Domestic Fund Vehicles

Three types of Fund vehicles can be used to establish a Domestic Fund in the DIFC. These are Investment Companies, Investment Trusts and Investment Partnerships.

Each has its unique features, with the most popular to date being the Investment Company model, with Trust structures predominantly utilised for Property Funds and Limited Partnerships being utilised for Hedge Funds and Private Equity Funds.

An Investment Company will need to be incorporated in the DIFC and the Fund Manager must be a corporate director of the Investment Company. An Investment Company established as an Umbrella Fund can also use the PCC structure.

An Investment Trust will need to be established by trust deed between a Fund Manager and a Trustee. A Trustee can be a DFSA licensed Trustee or a custody provider, or a person regulated and supervised in a reputable jurisdiction for custody or depository services. The Trustee is responsible for the safe-keeping of Fund Property and the maintenance of the Unitholder register, and must monitor whether the Fund is managed in accordance with the Trust Deed and the applicable laws.

An Investment Partnership is a Limited Partnership registered in the DIFC, comprised of a General Partner and Limited Partners. The General Partner must be authorised by the DFSA to act as the Fund Manager of the Fund.

External Fund

Domestic Fund Managers are permitted to manage a Fund in a jurisdiction outside the DIFC (i.e. an External Fund), if you are proposing to establish an External Fund, the DFSA will assess the desirability of the relevant jurisdiction in terms of its Financial Action Task Force compliance and whether you have adequate systems and controls to address any risks arising from having the Fund established in that particular jurisdiction.

Fees for Fund Managers and Funds

​Firms will find the costs competitive and comparable with other jurisdictions, as follows:

There are no fees directly applicable to the External Fund Manager's business. However it will of course be responsible for the payment of all Fund related fees payable to the DFSA.

Marketing Funds

The marketing of both Domestic and Foreign Funds are based on generally accepted principles of disclosure through Prospectus requirements. However, the level of Prospectus disclosure required for Public Funds, which are open to more than 100 investors and/or Retail Clients, is higher than the disclosure requirements for Exempt Funds, which are open only to professional investors.

Foreign Funds

Foreign Funds can only be marketed in or from the DIFC by DFSA licensed Firms holding advisory or arranging authorisations. Such Firms can now market units of Foreign Funds if one of the following criteria is met:

  • The Foreign Fund is a regulated Fund in a jurisdiction included in the DFSA's Recognised Jurisdictions List (available on the DFSA website) and the Fund is a Designated Fund in that list; or
  • The Fund Custodian/Investment Manager can meet the required criteria; or
  • The Firm makes a suitability recommendation of the investment in the Units of the Foreign Fund to the particular investor, in light of that investor's investment objectives and circumstances; or
  • The Foreign Fund is open to 100 or fewer investors each of whom meets the Professional Client test and makes a minimum subscription of USD $50,000 and is not offered to investors by way of public offer.

Property Funds cannot be marketed unless they meet specific criteria including 60% or more of assets invested in Property, the Fund is closed ended, the units are either listed or traded in a Recognised Jurisdiction or offered only by means of private placement.

Foreign Funds which cannot be marketed to retail investors in the home jurisdiction of that Fund are prohibited from being marketed to retail investors in or from the DIFC.

Representative Offices can also market Foreign Funds in or from the DIFC.  However it should be noted that the approaches which can be used by Representative Offices are far more restricted to that noted above for advisory / arranging firms.  All Representative Offices should refer to the Representative Office Module of the DFSA Rulebook to understand the limited approaches which can be adopted.

Reporting to the DFSA: Form CIR - Notification of the marketing and selling of Funds

CIR 15.1.10 requires certain information on the marketing of Funds to be reported to the DFSA by Authorised Firms. This information is required to be reported by completing the Form CiR – Notification of the marketing and selling of Funds.

The purpose of this form is to assist an Authorised Firm with its reporting requirements in the Collective Investment Rules of the DFSA Rulebook in relation to the marketing and selling of all Foreign Funds and Domestic Funds it carries on in or from the DIFC.

The report covers the same period for all firms – the preceding calendar year – and is required to be submitted to the DFSA by the 31st of January each year. The form should be submitted to dfsafunds@dfsa.ae

EU Alternative Investment Fund Managers Directive

Given the global nature of activities conducted through the DIFC, the European Union's Alternative Investment Fund Managers Directive ('AIFMD') will affect a number of Firms in the DIFC who manage and/or market investment funds that have a connection to the EU. The DFSA has received a number of questions about how AIFMD is implemented in the UAE and the DIFC.

As EU legislation, AIFMD cannot be interpreted or enforced by the DFSA. We are aware that a number of professional advisers (law Firms, etc.) have been briefing clients on the potential impact of the AIFMD and we would expect this to continue. In the meantime, however, the DFSA has worked to make sure that it can share regulatory information from the DIFC. The DFSA has entered into a separate information sharing Memorandum of Understanding on AIFMD with 28 of the European Economic Area Regulators noted below.

Bilateral MoUs with European Economic Area Regulators under the Alternative Investment Fund Managers Directive

  1. Finanzmarktaufsicht (Austria)
  2. Financial Services and Markets Authority (Belgium)
  3. Financial Supervision Commission (Bulgaria)
  4. Cyprus Securities and Exchange Commission (Cyprus)
  5. Czech National Bank (Czech Republic)
  6. Finanstilsynet (Denmark)
  7. Estonian Financial Supervision Authority (Estonia)
  8. Finanssivalvonta (Finland)
  9. Autorité des marchés financiers (France)
  10. Hellenic Capital Market Commission (Greece)
  11. Pénzügyi Szervezetek Állami Felügyelete (Hungary)
  12. Fjármálaeftirlitið (Iceland)
  13. Commissione Nazionale per le Società e la Borsa (Italy)
  14. Central Bank of Ireland (Ireland)
  15. Finanšu un kapitāla tirgus komisija (Latvia)
  16. Finanzmarktaufsicht (Liechtenstein)
  17. Bank of Lithuania (Lithuania)
  18. Commission de Surveillance du Secteur Financier (Luxembourg)
  19. Malta Financial Services Authority (Malta)
  20. Finanstilsynet (Norway)
  21. Polish Financial Supervision Authority (Poland)
  22. Comissão do Mercado de Valores Mobiliários (Portugal)
  23. Romanian Financial Supervisory Authority (Romania)
  24. Narodna banka Slovenska (Slovak Republic)
  25. Comisión Nacional del Mercado de Valores (Spain)
  26. Finansinspektionen (Sweden)
  27. Autoriteit Financiële Markten (The Netherlands)
  28. Financial Conduct Authority (United Kingdom)

Considerations for DIFC Firms

Although the DFSA is not in a position to interpret the AIFMD, firms may wish to consider the following points:

  • if the DIFC Fund manager is part of a larger operation/group which spans across the EU, it will need to determine whether any of its Fund management services in the EU may be captured under AIFMD;
  • whether delegation arrangements in respect of management activities create any issues against the requirements of the AIFMD;
  • if there are any other non-EU entities (in other third countries) that perform delegated functions, and whether the authorities in those countries have a cooperation agreement with the respective EEA regulator in place;
  • whether an EU member state where the DIFC Fund manager wishes to market a Fund has a private placement regime that the DIFC AIFM may use;
  • the requirements of any relevant national private placement regimes; and
  • whether the Firm need to comply with AIFMD disclosure and transparency provisions.

Form CIR – Notification of the marketing and selling of Funds

The Form CIR – Notification of the marketing and selling of Funds, please click here to view.

Recognised Jurisdiction List

The DFSA's Recognised Jurisdiction List, please click here to view.

Leaflet: A Guide to the DFSA Funds Regime

A Guide to the DFSA Fund Regime, please click here to view.

Q&A – The DFSA’s Collective Investment Fund Regime

The DFSA's Collective Investment Fund Regime Q&A, please click here to view.

Structure Chart of the DFSA's Investment Fund Regime

Structure Chart of the DFSA's Investment Fund Regime, please click here to view.