The asset management sector within the United Arab Emirates (UAE) is responsible for sustainable growth of financial sectors that aids in overseeing financial services and investment regime spread out across the seven Emirates. Investment management or asset management can be broadly apportioned into three sectors in UAE, onshore jurisdiction (exclusive from free zones), Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM). With UAE being an attraction for many foreign investors and for the setting up of private equity and asset management industries, there arises a need for overlooking the management of investments being made here. UAE being a financial centre and trading hub and has ended up creating several sovereign wealth funds and enormous wealth for certain individuals and groups. The DIFC has adopted a Special Purpose Company (SPC) structure which manages such funds and assets. The ADGM has introduced a Special Purpose Vehicle (SPV) which garners more flexibility and rapidity. An SPC structure can get established in a short period of time. An SPV has also acquired substantial interest due to its flexibility. Through the sustenance of growth in financial sectors and fund regulations, managers and investors are able to achieve more confidence and transparency in the management of assets. The fund regulations issued by Dubai and Abu Dhabi have been outlined further below:
Abu Dhabi Global Market
Foreign investment and financial services have been encouraged in the Emirate of Abu Dhabi by the creation of an economic free zone in the name of ADGM. The ADGM has its own rules and regulations that offers numerous investment incentives and the title to a 100 percent foreign ownership by foreign investors willing to invest here. The Financial Services Regulations (FSRA) of 2015 (as amended) have been issued by ADGM under which investment management or asset management is conducted pertaining to the rules laid out by the FSRA. Licensing by both the ADGM and FSRA with respect to holding a commercial license and a license to carry out financial services is a prerequisite. A private Real Estate Investment Trust (REIT) has proved to be rather well accepted in terms of a hub for asset management in the real estate sector. ADGM has also been forward with introducing a Special Purpose Vehicle (SPV) which has garnered significant interest due to its flexibility and speed. An SPV has proved itself to be a robust and efficient benchmark against running alternatives. An analysis of the provisions in relation to asset management have been discussed below:
- Pursuant to the FSRA, an asset is defined as the collateral that is held to cover positions including the right to transfer of assets equivalent to that collateral or the proceeds of the realization of any collateral but not including default fund contributions. Management of assets has been addressed under Schedule 1, Paragraph 56 of the FSRA as a specified kind of activity concerning on a discretionary basis the managing of assets belonging to another person as long as the assets include a financial instrument, virtual asset or rights under a contract of long-term insurance but not being a contract of reinsurance.
- Pursuant to the amendment of 13 January 2020 to the FSRA, asset requirements have been introduced under Regulation Number 38, which lays down the conditions for the management of assets. This provides that the regulator can impose an asset requirement on an authorized person who receives financial services permission. A regulator shall perform all such functions and powers as are conferred on it under the Regulations. He shall have the responsibility to foster and maintain financial stability, including the reduction of systematic risk by the appropriate management of assets and funds. The asset requirements under Regulation 38 imply an imposition of prohibition or disposal of any of the assets that belong to the authorized person whether they lie in ADGM or outside. The authorized person can be referred to as ‘X' here, and the requirements under FSRA prohibit or restrict dealings of assets belonging to X except by the regulator. All or any of X's assets belonging to any customers but held by X shall be transferred to be held by a trustee approved by the regulator post the issuance of a notice to such trustee. Even after the transfer of such assets to a trustee, such assets shall not be dealt or released without the consent and approval of the regulator. The regulator is also entitled to disapprove of any transfer of assets as directed by X if the regulator has reason to believe that such instruction would be incompatible and will not be in X's interest. The regulator shall not be held to be in breach of contract despite X's instructions here.
- Virtual assets are assets via a digital representation of value that can be digitally traded and function as a medium of exchange, a unit of account and/or a store of value, however, does not have legal tender status in any jurisdiction. It is distinguished from fiat currency (not holding any intrinsic value like paper money) and electronic money. It is not issued nor guaranteed by any jurisdiction and fulfils functions by agreement within the community of users of the virtual asset. Regulation 5A provides that the regulator may prescribe an authorized person conducting a regulated activity in relation to virtual assets. Buying or selling of financial instruments or virtual assets is a specified kind of activity which also includes underwriting financial instruments by a principal or agent as has been laid down in Schedule 1, Paragraphs 4 and 12 respectively. An authorized person by the regulator will be entitled to arrange deals in investments by managing virtual assets belonging to another person.
Earlier the overlooking of regulations was conducted by the UAE Central Bank, and it was transferred to Emirates Securities and Commodities Authority (SCA) in where new investment fund regulations have been issued (the 2016 Fund Regulations)
Dubai International Financial Centre
The Dubai Financial Services Authority (DFSA) is an independent financial regulator of all financial services that are conducted in DIFC. There have been regulations that have been issued for the asset management industry in Dubai under DIFC, which is an economic free zone with its own set of rules and regulations for such management. The DIFC has also been successful in adopting a Special Purpose Company (SPC) structure in the management of funds and assets. The authority's board of directors' decision number 1/2014 concerning the regulations for investment management has issued regulations for safeguarding the assets and funds where the investment management activity shall be carried out in the State after the grant of a license by the SCA in accordance with the provisions of this Regulation. Such investment management activity may not be promoted in the State except by persons authorized by the SCA to engage in such activity. Under the said Regulations for investment funds, it is the duty of the investment manager to comply in certain terms of investment under its management to protect the funds and assets of clients and abstain from exploiting them for purposes other than the interests of the clients. It is imperative that the investment manager does not contradict the investment objectives of the clients. The assets or funds are not to be received directly or indirectly from any client provided that the managed assets are deposited in an account with a custodian. Such a custodian shall be licensed by the SCA or by a custodian licensed outside the State if the client's investments lie outside the State. The manager is also to make all possible efforts to analyze and learn the financial position of the companies and assets in which the manager invests the funds of the client under its management. It is to be ensured by the manager that the investments are expanded in order to minimize risks of an investment in line with the investment policy and that the manager is refrained from using such funds for personal use. The manager shall not be allowed to use such funds of clients to affect securities prices in the market. The manager also has to omit to the SCA that he shall submit periodic rights on the distribution of transactions with service providers that are dealt with in the course of such transactions including banks, brokerage firms and the parties offering the service of custody for the assets managed with its knowledge. Therefore, the manager has the sole responsibility of managing funds and assets to the best of his ability, of safeguarding such funds and assets against use in any personal capacity and to protect from exploitation for any other purposes than the client's interest.
Earlier the overseeing of management, regulation and licensing of funds and assets was governed by the UAE Central Bank. This was transferred from the Central Bank to the Emirates Securities and Commodities Authority (SCA) and was governed under the new Investment Fund Regulations (2016 Fund Regulations pursuant to decision number 9 RM of 2016). These Fund Regulations ensured the creation of a management company license (the Management Company License) which permits the licensed entity to manage and establish mutual funds. Through the fund regulations, the management company license permits the management company to manage funds that have been established by such company. However, this shall not include the management of funds not established by the company. It is the responsibility of the management company that the assets of the fund are maintained in a proper manner, separate from the management company. The company is responsible for studying the financial position of the company and along with it the financial position of the assets. This has had a positive impact on the funds market and the management of funds in UAE. The management company has an obligation to assess the assets and calculate the net asset value of the unit. It will also be responsible for maintaining the assets and the profits derived from such assets. Asset managers in UAE were previously licensed by the Central Bank, the paradigm of which has shifted to obtaining a license under the investment management regulations from the SCA. These investment management regulations can be defined as the management of securities portfolios for the account of third parties. This shall also include within its ambit the management of mutual funds in accordance with the investment purposes and policy as described in the agreement of investment management signed between the investment manager and its clients including individuals, mutual funds or establishments. The management company license allows the management company to establish funds and supervise such funds. The management of funds is undertaken by the management company license that permits the management company to manage such funds. In order to obtain a management company license under the Fund Regulations, the company must be operating in the area of securities licensed by the SCA, and the company shall incorporate to establish and manage mutual funds. The management company will, therefore, be responsible for ensuring the net value of the assets of the fund established and managed by the company and shall do so with diligence and care. Prior to the 2016 Fund Regulations, the SCA passed regulations in 2013 and 2014.
Other sources of asset management include privately managed accounts and offshore accounts. Offshore accounts can be created in various countries like Cayman Islands, Bermuda, Panama, which offer a no-tax regime and investment schemes that are successful in management and regulation of assets. There are certain public mutual funds as well that have been established in order to regulate assets. An onshore fund will be managed by the SCA, whereas DIFC and DFSA also promote and manage funds. The DIFC has published a Qualified Investor Fund (QIF) regime which can be established to oversee funds. A QIF, however, would entail only a minimum investment of US$500,000 per investor and a maximum number of 50 investors per fund. Equity licensed by the DFSA would allow managing a QIF. Apart from this, DIFC has adopted a special purpose company (SPC, as explained above) through which managers' effect investment schemes and standardize assets. The ADGM with its Special Purpose Vehicle (SPV) which is also more flexible and quicker than the SPC. The UAE is also home to several sovereign wealth funds that are funded through revenues of the government. The ADGM has also launched a framework to regulate crypto asset activities undertaken by custodians and other intermediaries at ADGM. Therefore, the asset management industry all over UAE is bound to grow and will grow to great diversifications economically and attract foreign investments at the same time.
Originally published by STA Law Firm, July 2020
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