April 3, 2014
Practice Groups:
Finance;
Financial Services
UAE Securities Regulator Introduces Prohibition
on Unlicensed Investment Management Activities
for Non-Licensed Firms in the UAE
By Natalie R. Boyd, Simon Mabin
In August 2012, the UAE Securities and Commodities Authority (“SCA”) introduced a new
regulatory framework governing the marketing and sale of foreign funds to investors in
the United Arab Emirates (the “UAE”). This was subsequently amended on 13 March
2013 to introduce a private placement exemption for a limited category of investors.
Neither provided any clarity with regard to the regulation of investment management
activities conducted by foreign firms in the UAE and, as such, non-licensed firms have
continued to conduct investment management activities in reliance on tolerated practice
guidelines.
This is now set to change following the recent release by SCA of Decision No.1 of 2014
Concerning the Regulations on Investment Management (the “Regulation”). The
Regulation has been published in the UAE Official Gazette and accordingly is in full force
and effect.
The Regulation prohibits investment management activities from being conducted in the
UAE in the absence of a licence from SCA. The prohibition extends to all firms, whether
they are based inside or outside the UAE, which includes free zones in the UAE.
The Regulation defines “investment management” as the management of securities
portfolios for the account of third parties or the management of mutual funds in
accordance with the investment objectives and policies defined in the investment
management agreement between the investment manager and its client (which includes
individuals, corporate establishments and mutual funds).
There is an exemption with regard to financial portfolios owned by federal and local
government entities. This is largely in line with the relief provided to non-licensed firms
under the Investment Funds Regulation. SCA has confirmed that the exemption does not
extend to non-governmental institutions, family offices and high net worth individuals.
The Regulation requires the following criteria to be satisfied by an applicant for an
investment management licence:
1. The applicant must be a legal person in one of the following forms:
(a)
a joint stock company incorporated in the UAE with the purpose of
conducting investment management business;
(b)
a joint stock company incorporated in the UAE which is, amongst other
purposes, permitted to conduct investment management business but
which is also licensed to deal with securities in accordance with
permitted SCA conflict rules;
(c)
a local bank or a branch of a non-UAE bank or investment company
licensed by the UAE Central Bank;
UAE Securities Regulator Introduces Prohibition on Unlicensed Investment
Management Activities for Non-Licensed Firms in the UAE
(d)
a branch of a company established in a UAE financial free zone or a
branch of a non-UAE company, provided that such branch is licensed
to conduct investment activity in the relevant financial free zone or its
home jurisdiction and is regulated by a recognised supervisory
authority, subject to any other terms or conditions determined by SCA;
2. the applicant has paid up capital of at least AED 5,000,000, with the exception of
local banks and branches of non-UAE banks;
3. the applicant must provide an on-demand unconditional and unrestricted bank
guarantee in an amount of AED 1 million. The guarantee must be issued in
favour of SCA by a UAE bank and may not be cancelled without the approval of
SCA;
4. the applicant must pay the licence fees required by SCA, being AED 50,000;
5. the applicant must appoint competent technical and administrative staff in order
to perform the requisite roles pertaining to the business. The Regulation sets out
certain fitness for task guidelines in this regard;
6. the applicant must maintain adequate premises in the UAE and appropriate
electronic and software programs and technical systems;
7. the applicant must maintain an internal control system, including an operational
guide for risk management, which guarantees appropriate compliance with the
Regulation and associated laws, regulations and rules; and
8. the applicant must comply with any additional conditions or requirements
imposed by SCA.
Applicants may submit an undertaking to meet the conditions set out in 5-8 within a
specified time period determined by SCA, provided that the applicant has already
obtained approval from SCA.
The Regulation provides for a specific format for the licence application and states that
SCA shall issue a decision to approve or reject an application within 30 days from the
date of submission. Should SCA fail to issue a decision within 30 days, the application
shall be considered rejected. Applicants must wait 6 months following rejection of the first
application before submitting a new application.
Licences are granted for a one year period, expiring on the last day of the calendar year.
The licensing fee is charged on a pro-rata basis for licences that are granted after the
first day of each calendar year.
Licenses must be renewed by submission of an application to SCA no later than 1 month
prior to expiry of the existing licence. Renewal fees are AED 25,000. SCA may suspend
a licensed firm from renewing its licence if a renewal application is not submitted within
the specified period.
The Regulation sets out detailed provisions regarding corporate governance, reporting
and client management issues for licensed firms.
Licensed firms are entitled to delegate some of their duties to other licensed investment
management firms, subject to a number of provisions, including obtaining the prior
approval of the delegating firm’s clients, conflict clearance and continuation of the
delegating firm’s responsibilities to SCA and its clients in accordance with the
Regulations.
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UAE Securities Regulator Introduces Prohibition on Unlicensed Investment
Management Activities for Non-Licensed Firms in the UAE
Authors:
Natalie Boyd
natalie.boyd@klgates.com
+971.4.427.2731
Simon Mabin
simon.mabin@klgates.com
+971.4.427.2730
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