<p>In line with international best practices, the UAE Central Bank (&ldquo;Central  Bank&rdquo;) and the Emirates Securities and Commodities Authority (the &ldquo;ESCA&rdquo;), the  financial regulators in the UAE are getting stricter and have issued several  regulations in the recent past to license and regulate activities which were  commonly being conducted by entities from off shore without attracting any  licensing requirements.<br /><br />ESCA issued draft regulations in January 2011 to  regulate investment funds in local and foreign securities (&ldquo;Regulations&rdquo;) and to  take over the responsibility of regulating domestic and foreign funds from the  Central Bank. It is our understanding that these Regulations are currently being  amended and are likely to be finalized and issued before the end of  2011.<br /><br />We broadly highlight various aspects of the new proposed  regulations including the scope of funds that are regulated, the informal  adoption of certain procedures by ESCA, the additional requirements for foreign  funds.<br /><br />There is ambiguity as to whether the scope of the Regulations is  restricted to only cover funds set up for the purpose of investing in listed  securities or whether the intention is to cover a wider group of investment  funds (i.e. private equity, hedge funds, property funds, fund of funds etc).  While there are some provisions where the scope appears to be wider but most  provisions can only be applicable to funds investing in listed securities. An  example is the requirement of daily valuations of investments of a closed-ended  fund, which is impracticable. A closed-ended fund such as a property fund is  usually only required to value property every six months or annually or in some  instances upon acquisition or disposition. Therefore, it is unclear whether the  new amendments will reflect any changes in the general scope of the types of  funds to be further regulated or will retain the current ambiguity.<br /><br />Even  though the final Regulations have not officially been issued, several provisions  are being applied by ESCA on an informal basis. ESCA has issued a form of  application which is to be completed and submitted to them prior to any entity  commencing the marketing of any foreign investment fund in the UAE.&nbsp; ESCA is  applying the provisions of Part V (Promotion of foreign fund units within the  State) of the Regulations in relation to any such application and ESCA must  approve any such marketing proposal prior to any marketing activity taking  place.<br /><br />Approval to market foreign investment funds in the UAE will only  be issued by ESCA to entities holding an appropriate Central Bank license  permitting it to undertake that activity.&nbsp; These entities are commercial banks  and investment companies. Additionally the foreign fund must be licensed and  regulated under a foreign regulatory authority equivalent to ESCA and the  sponsor and the service provider of the foreign fund must be licensed and also  regulated under a foreign regulatory authority equivalent to that of ESCA. These  new conditions provide more regulation comparable with other jurisdictions; for  e.g. exempt funds do not require approval or licensing from foreign regulatory  authorities. It remains to be seen how ESCA will deal with these  issues.<br /><br />The Regulations do not make a distinction between private funds  to be marketed on a private placement basis to a small number of sophisticated  high net worth investors and public funds intended to be marketed to a larger  group and to retail customers.&nbsp; It would be usual for requirements for these two  types of funds to be substantially different given the different target  investor. Typically, sophisticated high net worth investors are savvy enough to  not require stringent regulations that are typically imposed on funds being  offered to the general public. However, the Regulations do not recognize this  differentiation.&nbsp;<br /><br />It isn&rsquo;t clear what the form of a fund will be. If it  is a separate legal entity, will the shares be owned by the unit holders or  investors or will they be owned by the investment manager. How will the  nationality of the fund be determined (i.e. will it have UAE nationality for the  purposes of investment or will it have the nationality of the investors in the  fund)? This is a very important issue given the foreign ownership restrictions  relating to certain asset classes (i.e. land, shares etc).<br /><br />The  distinction between the roles of investment manager, administrative services  company and safe custodian are not well defined.<br /><br />In conclusion, the  Regulations have been long overdue and its release and implementation is widely  anticipated.<br /><br />Please contact the author for any further information on the  subject of the article.</p>