Finance

Regulation and Management of Funds in the DIFC

The DIFC, or Dubai International Financial Centre, is a special economic zone established in 2004. It is a financial hub for the country operating in the financial sector throughout the South Asia, African and Middle East markets. It is a free independent zone that offers 100% ownership to the local partner. The DIFC is inaugurated as a part of the DUBAI’s vision of improving the economic conditions and inviting investment and capital in the region through inviting funds in the DIFC. Because of the status acquired by DIFC as a free economic zone, it can make its own laws and regulatory framework for all civil and commercial matters.

The Dubai International Financial Services Authority (DIFSA) is an independent authority that looks after the development and operational management of the DIFC. On the other hand, Dubai Financial Services Authority (DFSA) is responsible for the operational management of services conducted in the centre. The DFSA further regulates the companies and monitors their compliance with its laws and regulations. Henceforth, to promote investment and capital, the Dubai government has issued a detailed guide on regulating and managing funds in the DIFC.

Who are eligible for managing or distributing funds in the DIFC?

The guide will assist with the following:

1. Those willing to establish a fund management process in DIFC.

2. Those firms who are already dealing in managing or distributing funds in DIFC and are willing to expand their business activity.

3. Trustee, Fund Administrators and Custody Providers.

What is the regulatory framework for funds in the DIFC?

The DFSA introduced the regulatory framework for collective investment schemes in 2006. The scheme was introduced to meet international standards for regulation and provide investor protection. Henceforth, the DFSA provided a business-friendly framework along with remaining compliant with the principles of the International Organisation of Securities Commission for a collective investment scheme.

The different types of funds in the DIFC are:

1. Public Fund Regime: A public fund regime provide greater protection to retail investors. It mandates independent oversight of funds and detailed disclosure in a prospectus.
2. Exempt Fund regime: An Exempt fund regime provides a fast-track notification process wherein DFSA aims to complete the process within 5 days. Also, the regulatory requirements under this regime are less than the public fund.
3. Qualified Investor Fund (QIF) Regime: A qualified fund investor regime provides proportionate regulatory requirements for all QIF managers and QIFs. The DFSA aims to complete the whole process within 2 days. This regime further allows a self-certification process for its systems and controls.

Some of the key features of the scheme are:

1. The DFSA-licensed fund managers can manage funds either in DIFC or outside the jurisdiction of the DIFC.
2. Fund managers from acceptable jurisdictions are allowed to manage funds in the DIFC.
3. The DFSA Licensed firms are allowed to market and sell units of foreign funds either in DIFC or outside.
4. The fund managers of the Umbrella funds are allowed to use the PCC (Protected Cell Company) for open-ended umbrella funds. This helps the investors to diversify their liabilities in each umbrella fund.
5. The specific Sharia Governance structure only applies to Islamic funds.
6. There is a specific regulatory requirement in relation to private equity funds and hedge Funds.
7. The regime also regulates the key financial players in the service sector, namely, fund administrators, custody providers and trustees.

How are funds regulated in the DIFC?

The key financial players in the market are allowed to regulate the fund in the DIFC. The two players who are allowed to manage and establish the fund in the DIFC are enlisted below:

1. DFSA Licensed Fund manager: A license is to be obtained from DFSA for managing funds in the DIFC. Specific requirements are to be made with the DFSA:
   • The firm possesses adequate systems and controls for the funds intended to be established.
   • The Board members and senior management meet the suitable eligibility criteria.
   • Moreover, after obtaining the license, the DFSA will still continuously supervise the firm’s activities.
2. External Fund Manager: An external fund manager can manage funds in the DIFC, provided the fund manager is from acceptable jurisdiction and is eligible to establish and manage domestic funds without the DFSA license. However, specific requirements need to be fulfilled:
   • It needs to be a corporatebody.
   • It manages the domestic fund either from DFSA-recognised jurisdiction or in jurisdiction assessed by DFSA.
   • It is subject to DIFC laws and courts.
   • It shall appoint a DFSA license fund administrator or trustee who will act as the local agent and handle all the regulatory processes with the DFSA. Moreover, it will also undertake certain investor-related functions.

What are the types of funds and their minimum subscription under DIFC?

Type of fund	Level of regulatory requirements	Investors and offer	Minimum Subscription
Public Funds	A detailed regulatory requirement in line with IOSCO principles	Includes retail clientsPossess more than 100 or more unit holdersThese units are offered to investors through a public offer.	–
Exempt Funds	Less stringent than public funds	Includes professional clientsPossess 100 or fewer unit holdersThese units are offered personally through private placement.	USD $ 50,000
Qualified investor Funds (QIF)	Less stringent than exempt funds as it requires proportionate regulatory requirements	Includes professional clientsPossess 50 or fewer unit holdersThese units are offered personally through private placement.	USD $ 500,000

What are the specialist funds in the DIFC?

The specialist funds in the DIFC are enlisted below:

1. Islamic Funds

The Islamic funds in the DIFC are managed by the fund manager subject to obtaining a license for managing the Islamic financial business.

Further, it shall:

a. Appoint a Sharia Supervisory Board (SSB) to manage the Islamic fund according to the sharia governance structure.

b. Establish the Sharia-compliant systems and controls and framing policy for Islamic financial business.

c. Ensure that SSB approves the constitution and prospectus.

2. Hedge Funds

The fund manager of a Hedge fund is responsible for managing the fund risk by:

a. Ensuring adequate segregation of duties between the Investment Function and Fund valuation process.

b. Observing the DFSA Hedge Fund Code of Practice.

c. Observing the appointment of prime brokers with authority

3. Private Equity Funds

Another way of inviting funds in the DIFC is through private equity funds. They are known as exempt funds, and hence the fund manager of the exempt funds shall:

a. Not entrust a property to the eligible custodian and instead appoint an Investment Committee

b. Disclose how the funds are held in the prospectus.

4. Property Funds

The property funds, namely, real estate or its based assets, are close-ended funds, and in addition, they are also regarded as public funds. Hence the property fund must:

a. Be Invested only in real estate, but they are also allowed to hold 40 % of their investment in cash

b. Be an Investment trust or Investment company

c. Be listed in an Authorised market institution or in exchange within 6 months of its establishment.

d. Be valued annually on an independent valuation of the relevant property. e. Have a limit to its borrowings of 80% to its net asset value.

5. Real Estate Investment Trusts

A Real Estate Investment Trust (REIT) is a part of property funds used to generate income. In addition to this, the REIT must:

a. Use Investment Company and Investment Trust as Fund vehicles.

b. Have a public fund listed on an authorised market institution.

c. Distribute 80% of its annual income to unit holders

d. Not borrow more than 70 % of its net asset value.

e. Invest only 30 % of its total asset on property under development.

How are funds in the DIFC marketed?

Domestic Funds: The marketing of public funds in the DIFC are generally subject to disclosure through prospectus requirements. However, the level of disclosure for public funds is higher than the requirements under Exempt Funds and QIFs.

Foreign Funds: The marketing of foreign funds in the DIFC can be done only through DFSA-licensed firms authorised to carry on financial services provided such firms meet the following criteria:

a. The fund is regulated in the DFSA-recognised jurisdiction, or it at least meets the equivalent criteria prescribed by the DFSA.

b. The firm makes recommendations on investment to the investor.

c. The fund is open to less than 100 investors, provided they meet the professional-client test.

d. The minimum subscription for each investor is USD 50,000 and they cannot be offered through a public offer.

What is the regulatory fee for Fund Managers and Funds?

Type of Fee	Fees (in USD)
License application Fee for the fund manager	10,000
Annual license fee for a Fund manager	10,000
Annual fee per fund	4,000
Annual ongoing fee per fund	4,000
Public Fund registration	1,000
Umbrella fund (licensing and annual)	8,000
Each sub-fund (annual)	1,000

Conclusion

The Dubai government has established a free and independent economic zone for inviting capital and investment through domestic and foreign funds. The Dubai International Financial Centre is a financial hub managed by the DFSA. Further, all the management of funds in the DIFC are to be carried out in the DFSA-recognised jurisdictions by the firms. The strict disclosure requirements from DFSA aid in maintaining robust scrutiny over their activities.  

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