The Dubai Financial Services Authority (DFSA) is an independent regulator of the financial and ancillary services which are conducted in or from the Dubai International Financial Center (DIFC). The activities of the DFSA include regulating the firms responsible for managing or distributing Collective Investment Funds (Funds). In this article, we will explore the regulatory regime for Funds in the DIFC and look at the types of funds along with some important details.
Regulatory Regime for funds in the DIFC
In 2006, the DFSA introduced its Funds Regime to meet the international standards for regulation and provide protection to investors. Therefore, the DFSA ensured that it provided a business-friendly and facilitative framework which was compliant with the principles of the International Organization of Securities Commission (IOSCO).
How are Funds regulated?
In order to establish and manage a fund in the DIFC, you must be:
- A DFSA-licensed Fund Manager or
- An External Fund Manager
DFSA-licensed Fund Manager
In order to obtain a DFSA license, you must demonstrate that:
- You have all the systems and controls in place to be able to manage the type of Fund that you want to establish AND
- All the key members (Board members, senior management, etc.) within the firm meet the required suitability and integrity criteria
On receiving the license, the DFSA supervises the activities pertaining to the Funds managed by you on a regular basis.
Also Read: Real estate vs. Mutual Funds
External Fund Manager
A Fund Manager from an acceptable jurisdiction can establish and manage a Domestic Fund without a DFSA license provided:
- It is a body corporate
- It manages the Domestic Fund from a place of business which is located in a jurisdiction:
- Included in the DFSA’s Recognized Jurisdiction List OR
- Assessed by the DFSA as offering proper regulation
- It allows itself to be subjected to the DIFC Laws and Courts
- It appoints a DFSA-licensed Fund Trustee or Administrator who acts as the local agent of the External Fund Manager for regulatory processes pertaining to the DFSA.
Types of Funds
|Type of Fund||Public Funds||Exempt Funds||Qualified Investor Funds|
|Level of Regulation||Detailed regulation. This needs to be compliant with the principles of the IOSCO.||Less stringent regulations as compared to the Public Funds.||Significantly less stringent than the Exempt Funds.|
|Investors and Offer||The unit holders include retail clients OR the Fund intends to have more than 100 unitholders OR some or all of the units are offered to the public via a Public Offer.||Only offered to professional clients. These funds have 100 or fewer unitholders and are offered via a Private Placement.||Only offered to professional clients. These funds have 50 or fewer unitholders and are offered via a Private Placement.|
|Minimum Subscription||N/A||USD 50,000||USD 500,000|
Specialist Funds – Islamic Funds
In case of an Islamic Fund, the Fund Manager must have a license which authorizes it to conduct Islamic Financial Business or an Islamic Window before the Fund is set up. Further, the Fund Manager must:
- Appoint a Shari’a Supervisory board or SSB to the Fund. It can use the firm’s existing SSB for the Shari’a-specific governance of the Islamic Fund
- Establish and maintain systems and controls which are Shari’a compliant. Also, establish Islamic business policies and procedures manual for the said Fund.
- Get the Constitution and Prospectus of the Fund approved by the SSB (of the Fund or the Firm).
The Fund Manager of a Hedge Fund must ensure that he manages the risks which are associated with the fund. This is possible through:
- Making sure that the duties of the investment function and the Fund valuation process are adequately segregated
- Following the best practice guidelines and standards which the DFSA issues (particularly the DFSA Hedge Fund Code of Practice)
- Ensure that the requirements pertaining to the appointment of primary brokers are observed. This includes the authority of the primary brokers to combine the assets of the Fund with any other assets (permitted only in Exempt Funds and NOT in Public Funds).
Also Read: Mutual Funds and their types
Private Equity Funds
Private Equity Funds are Exempt Funds. The Fund Manager of a Private Equity Fund must:
- Appoint an Investment Committee to the Fund and NOT entrust the Fund Property to any eligible custodian
- Ensure that in the Prospectus it discloses the way the Fund’s assets are held
Property Funds invest predominantly in real estate or real estate-related assets and are close-ended Funds. Further, Property Funds which are Public Fund must:
- Invest only in physical property or property-related assets.
- Be an investment company or an investment trust
- Be listed within 6 months of its establishment either on an Authorized Market Institution or an Exchange in a Recognized Institution
- Ensure that the Fund property is valued annually.
- Also, ensure that the Fund property is valued before acquiring or disposing of an asset. This must be on the basis of an independent valuation.
- Finally, limit its borrowing to 80% of its total net asset value
Property Funds – Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts or REITs are a part of Property Funds which are designed to help investors generate income. REITs are close-ended funds and must:
- Ensure that they use an Investment Trust or an Investment Company as the fund vehicle
- Be a Public Fund which is listed and traded on an Authorized Market Institution
- Ensure that it distributes around 80 percent of its audited annual net income among the unit holders
- Limit its borrowing to 70 percent of its net asset value
- Not invest more than 30 percent of the total assets on properties under development