The Dubai International Finance Centre (DIFC) was set up in 2004 with the aim of harnessing the enormous regional capital and investment potential in the Gulf. However, the rules for the new regime in Dubai with respect to collective investment funds and financial services present issues for promoters and distributors of funds and for offshore jurisdictions generally.
The Dubai Financial Services Authority (DFSA) is responsible for developing the financial services regulatory framework in Dubai. It is also responsible for authorising and licensing collective investment funds – whether these are set up in Dubai or they are foreign funds already set up in other offshore jurisdictions and seeking a market in Dubai.
The DFSA also has a role in investigation and enforcement within the DIFC. It has, for instance, already imposed the first ‘enforceable undertaking’ in relation to an investment adviser who was providing financial services without a DIFC licence. This amounts to the first punishment given by the regulator in the DIFC in relation to non-licensed financial services activity.
Clearly the new regulatory regime will present new trusts, funds and financial services issues to all offshore institutions marketing and working in the Gulf region – and it intends to make its mark.
An offshore fund can only be marketed in the DIFC by an ‘authorised firm’. An authorised firm must be specifically authorised to carry on financial services activities pursuant to the DIFC’s Regulatory Law 2004. An authorised firm can market two categories of offshore funds in the DIFC: a ‘designated fund’ and a fund that has sufficient functionaries authorised in a ‘recognised territory’.
The main relevant legislation in the DIFC are the Collective Investment Law 2006, the associated Dubai Collective Investment Rules, the Conduct of Business Rules and the Recognised Jurisdiction Notice.
Jersey, Guernsey and the Isle of Man
In Jersey, Guernsey and the Isle of Man, the most closely regulated of fund vehicles will tend to qualify as foreign designated funds for distribution by an authorised firm. For instance, both Guernsey class A funds and Jersey recognised funds will automatically qualify as designated funds, as will an Isle of Man Financial Supervision Act 1988 fund. These most closely regulated offshore fund vehicles, however, tend to be aimed at retail investors and typically will have a lower minimum subscription than is intended for a fund marketing to the Gulf region.
The mainstay of the offshore fund industries has, of course, increasingly moved towards the sophisticated investor, private equity, hedge fund and fund of funds products. Jurisdictions such as Jersey, Guernsey and the Isle of Man will have to look at which of their sophisticated investor funds will qualify automatically to be distributed as before in the DIFC.
Dubai is a very lucrative market for targeting sophisticated and institutional investors as well as high-net-worth individuals. This includes the distribution of all types of fund products, but particularly sharia-related collective investment funds. Jersey has seen a great number of these over the last 10 years. However, Dubai may in future be in an enviable position in relation to sharia funds because of its position as a developing Middle East finance centre and may begin to compete on sophisticated investor funds.
Whether or not a jurisdiction’s funds can be distributed automatically in Dubai as designated funds, there are secondary rules that allow funds set up or run in ‘recognised jurisdictions’ to be marketed and distributed provided that the individual funds have a ‘regulated’ and ‘authorised’ investment manager and/or custodian.
Jersey is a recognised jurisdiction for the purposes of being able to provide an investment manager and/or custodian. Guernsey, the Isle of Man and Switzerland are also recognised jurisdictions for the purposes of providing an investment manager and/or custodian for such funds. Wherever a fund is domiciled, a new promoter may look at these jurisdictions when considering custody and investment management.
Cayman, Bermuda and Gibraltar funds
All funds set up in the Cayman Islands, Bermuda or Gibraltar will have to look at the most efficient means of complying with the requirements of the legislation concerning custodial functions and investment managers. These jurisdictions do not qualify automatically as recognised jurisdictions. Hence, such jurisdictions cannot take advantage of the permissive rules allowing for the market and selling of existing funds into Dubai.
This may have an impact on the choice of domicile/jurisdiction for the promoters of all types of hedge funds, fund of hedge funds and alternative strategy-type private equity funds. These products are, in fact, proving increasingly popular in the Gulf region. For reasons of simplicity, it is traditional for such funds to be set up in offshore jurisdictions and to retain custodial, investment management and fund administration functions in those offshore jurisdictions. This is the case even where the hedge fund is established by a firm well known worldwide and with offices and branches in recognised jurisdictions.
Equally, it is regular within the alternative strategies fund industry to see all brokerage, custody and administration functions performed by the same institution. This may cause issues where DIFC rules are applied and lawyers will need to look at these issues.
There are provisions in the DIFC’s Conduct of Business Rules that will allow promoters to take a view on the appropriateness of the existing custodians and brokers on funds. However, the issue is likely to have cost implications for traditional hedge funds and closed-ended funds selling into Dubai and is something that lawyers in all of these offshore jurisdictions will have to take into account. Under Clause 6.9.5.(4)(d) of the Conduct of Business Rules, the distributing authorised firm will be required to take responsibility for satisfying itself of the adequacy of custody and asset security arrangements for a fund.
Alternatively, Cayman, Bermuda and Gibraltar could use the secondary rules that allow, for example, a Cayman fund to be distributed and marketed into Dubai provided that it has a ‘regulated’ and ‘authorised’ investment manager and/or custodian in a recognised jurisdiction. This may mean that Cayman funds will look particularly towards sighting investment managers and custodians in Ireland or Jersey, which are both recognised jurisdictions that also convey confidence and familiarity to Gulf investors.
–Bill Gibbon is a group partner at Voisin