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Consultation Paper No. 14 Rules for Listed Funds

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June 2005

THE DUBAI Financial Services AUTHORITY ("DFSA") CONSULTATION PAPER ADDRESSED TO PARTIES INTERESTED IN THE DEVELOPMENT OF Financial Services AND MARKETS Regulation WITHIN DUBAI'S FINANCIAL FREE ZONE (THE "DIFC")

1. Introduction

This paper consults on the DFSA's proposed Rules for Listed Funds for inclusion in the Offered Securities module (OSR) of the DFSA Rulebook. These Rules are attached as Annex A.

This paper also consults on associated changes to other parts of the DFSA Rulebook. The changes to the Glossary module (GLO) of the DFSA Rulebook are set out in Annex B.

The draft rules are published for consultation purposes only. Please note that, although the draft rules are in near final form, the DFSA reserves the right to amend the drafts at its sole discretion. The rules will be made under powers contained in the Regulatory Law 2004.

Comments are invited on any aspect of the regime proposed in this paper, on both the principles and the detailed drafting. The DFSA would be particularly interested to have the views of firms considering using the proposed rules and views on how this regime compares with those in other major centres. In the light of the comments received, the DFSA may determine to adopt in whole, or in part, the proposals outlined in these papers, or may amend the proposals.

Anyone wishing to submit comments should provide details of the organisation he or she represents. The names of commentators and the content of their submissions may be published on the DFSA website and in other documents to be published by the DFSA. If you wish your name to be withheld from publication, please indicate this when you make your submission.

Any comments should be addressed to:
Mr Nicholas Alves
Legal Counsel
DFSA
PO Box 75850
Dubai, UAE

or e-mailed to nalves@dfsa.ae

All comments should be provided in writing, on or before 26 July 2005.

2. Background and context

The draft rules in relation to Listed collective investment funds and the associated changes to other parts of the DFSA Rulebook need to be considered in the context of the core Financial Services laws - the Regulatory Law 2004, the Markets Law 2004.

The DFSA previously consulted upon these Rules in Consultation Paper No. 12 (October 2004). A number of material changes have since been made to that version of the Rules and these are highlighted in this Consultation Paper. The OSR module came into force on 19 April 2005 without provisions in relation to Listed Funds. The reason for this was that the DFSA wanted to further progress the proposed Collective Investment Fund (CIF) regime before implementing the OSR regime for such funds. Sufficient progress in relation to the proposed Collective Investment Fund regime has been achieved for the DFSA to consult on the proposed amendments to the OSR module.

The Collective Investment Fund regime is expected to be in effect in the 1st Quarter of 2006 at which time certain amendments will need to be carried out to the OSR module to lift the restrictions in regard to collective investment funds. The purpose of these restrictions is to provide a holding regime pending the completion of the CIF regime. The essence of the holding regime is that funds originating from outside the DIFC may be listed on an Exchange and promoted within the DIFC but only to Authorised Firms and by Authorised Firms to their Clients.

The current OSR module may be viewed on the DFSA's website and the previous Consultation Paper No. 12 may be viewed in the archive section although please note that the made Rules now in force may in certain respects differ considerably from the Rules proposed in the Consultation Paper. It is also worth noting that the Markets Law 2004 was amended on 19 April 2005.

3. The DFSA rulebook

The core Financial Services laws provide the DFSA with a wide range of powers, including powers to make rules and to issue Guidance. This Guidance is not binding on the DFSA, nor does it create a "safe harbour" protecting those who comply with it from action for breach of the underlying rule.

The rules together make up a Rulebook containing a number of modules. The DFSA Rulebook may be viewed on the DFSA's website (www.dfsa.ae) along with all the DIFC Laws and Regulations.

The DFSA has power to waive or modify rules, and is prepared to use this to adapt the rules to specific circumstances which may arise.

4. Interpreting the rulebook

Defined terms are identified throughout the Rulebook by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary (GLO). Please note that Annex B contains further definitions. Unless the context otherwise requires, where capitalisation of the initial letter is not used, an expression has its natural meaning.

Every provision in the Rulebook must be interpreted in the light of its purpose. The purpose of any provision is to be gathered first and foremost from the text of the provision in question and its context among other relevant provisions. A provision means every type of provision, including Rules and Guidance.

Where reference is made in the Rulebook to another provision of the Rulebook or other DIFC legislation, it is a reference to that provision as amended from time to time. If a provision in the Rulebook refers to a communication, notice, agreement, or other document 'in writing' then, unless the contrary intention appears, it means in legible form and capable of being reproduced on paper, irrespective of the medium used. Expressions Related to writing must be interpreted accordingly. Any reference to 'dollars' or '$' is a reference to United States Dollars unless the contrary intention appears. References to Articles made throughout the Rulebook are references to Articles in the Regulatory Law 2004 unless otherwise stated.

Unless the contrary intention appears:

• words in the Rulebook importing the masculine gender include the feminine gender and words importing the feminine gender include the masculine; and
• words in the Rulebook in the singular include the plural and words in the plural include the singular.

Unless the contrary intention appears, a day or business day refers to:

• in relation to anything done or to be done in (including to be submitted to a place in) the u.a.e. any day which is not a Friday or Saturday or an official u.a.e. Bank holiday; and
• in relation to anything done or to be done by reference to a market outside the u.a.e. any day on which that market is normally open for business.

5. Purpose and summary of the material provisions of the OSR Rules in relation to collective investment funds.

The purpose of the Rules set out in the OSR module is to provide the necessary operational detail in relation to the framework created by Parts 3 and 4 of the Markets Law 2004. In addition, the OSR module provides the detailed Rules in relation to Parts 5 and 6 of the Markets Law 2004 which apply to Persons on an ongoing basis who have utilised either Part 3 or 4 of the Markets Law 2004 (or both). In general the amendments to the OSR module are intended to facilitate the Listing of Funds and to specify disclosure requirements and implement Corporate Governance and Directors' dealing requirements. Accordingly, the proposed changes to the OSR module are as follows:

• the addition of Guidance under OSR rule 2.3.1 to clarify the position in relation to funds.
• for the avoidance of doubt OSR rule 8.2.3 has been amended so that a Reporting Entity can disclose confidential information to the custodian of the fund to which it owes its obligations.
• the Connected Person concept is defined in the Markets Law 2004 as a Person with specific connections to the Reporting Entity. From a regulatory perspective, in relation to Listed Funds, the DFSA will be interested in persons with an interest in the Listed Fund itself rather than the Reporting Entity, therefore a different concept was created for Listed Funds. The obligations are the same as currently exist in the OSR Rules, the amendments only ensure that the correct entity is identified.
• Consequential amendments have been made to the application provision in OSR rule 9.1.1.
• In Appendix 1 and 2 some additional Guidance has been added for clarity and a new Section to Appendix 2, namely OSR A2.3 (disclosures relating to Listed Funds) has been added.
• Appendix 3 has been amended in much the same way and a new Section namely, OSR A3.3 (consent of holders of Units - events requiring consent of holder of units) has been added. OSR rule A3.3.1 has been amended to include Listed Funds.
• OSR rule A4.1.1(2) applies the Corporate Governance and Directors dealings to Listed Funds which are Body Corporates.
• Annex B contains the new definitions.