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Consultation Paper No. 21 The Collective Investment Law [2005]

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OCTOBER 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 Collective Investment Law [2005]. This draft Law is published for consultation purposes only. Please note that, although the draft Law is in near final form, the DFSA reserves the right to amend the draft at its sole discretion. The Law is attached at Annex A.

This paper does not, however, consult on consequential amendments to the DFSA's Regulatory Law 2004 as these changes will be the subject of a separate consultation. This further consultation will also deal with amendments to the Partnership Law and Regulations, and the Company Regulations, all of which are administered by the DIFC Authority. The purpose of these latter amendments, is to create the legal framework and prescribe detailed provisions to enable the incorporation or registration of Investment Companies and Investment Partnerships.

A third Related Consultation Paper will consult on the Rules made under this Collective Investment Law. The Rules will be set out in the CIF module of the DFSA's Rulebook.

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 operating funds in the DIFC 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 17th November 2005

2. Background and context

The draft Collective Investment Law needs to be considered in the context of the core Financial Services laws - the Regulatory Law 2004, the Markets Law 2004 and the Law Regulating Islamic Financial Business 2004 and the objectives of the DFSA set out therein.

3. General outline of the Funds regime

In general the regime requires that all Domestic Funds (funds established or otherwise operated in the DIFC) must apply for Registered status unless the fund is exempted from this requirement. The reasoning behind having both Registered and Exempt Funds was to create a more flexible environment for Operators whereby they could choose a simple or more complex environment to suit their purpose. Most jurisdictions have implemented two tier regimes in which the upper tier attracts a heavier weight of product Regulation than the lower tier which has a relatively light touch regime.

This dual approach has been adopted but customised to better suit the DIFC's wholesale regime. One aspect of this wholesale marketplace is that participation in the funds will be restricted to Qualified Investors (institutional and high net worth investors) and accordingly retail investors will not be permitted to participate.

Registered status allows a Fund to 'publicly offer' its Units rather than Offer by private placement as in the case of Exempt Funds. Offers of the Units of Exempt Funds equate in general terms to Exempt Offers under the OSRs. Exempt Funds do not, for example, have an Oversight Panel, are unlikely to be able to list on an Authorised Market Institution and do not need to issue a full prospectus; instead they would be required to issue a document equivalent to an exempt Offer statement under the Offered Securities Rules, which is called a short form Prospectus in this Law.

Registered Funds, are required to take the form of either:

(a) an Investment Company; or
(b) an Investment Partnership;

whereas, Exempt Funds may utilise any legal form other than that of a Protected Cell Company. Investment Companies may be of an openended or close ended type (based on the English and European models).

Investment Partnerships are effectively partnerships where the active Partner (the general or designated partner) retains the full liability normally attributed to partners in a general Partnership but the investors (limited partners) are liable only to the extent of their capital contribution as long as they do not involve themselves in the management of the fund. The DFSA opted for the Limited Partner structure because the major jurisdictions employ Limited Partnerships for private equity, Property and venture capital funds. In fact, Limited Partnerships have been the standard vehicle for venture capital funds for many years not only in the UK but also for European funds.

Any of these vehicles may be utilised for Islamic Funds, that is, a fund whose entire business operations and in particular Investment functions are conducted in accordance with Shari'a.

4. Purpose and summary of the material provisions of the Law

The purpose of this Law is to provide a regulatory regime for collective investment funds. In doing so the DFSA has endeavoured:

(a) to establish a regime for collective Investment vehicles that is appropriate to a market where the persons using them have to be institutional or else of high net worth (Qualified Investors);
(b) to allow appropriately authorised operators to establish funds in the DIFC using a variety of internationally recognised vehicles, with a level playing field as among all such vehicles;
(c) to permit foreign funds to be offered to qualified Members of the public, or to be managed in, or to migrate to, the DIFC under appropriate and nondiscriminatory conditions;
(d) to achieve (a) to (c) above by controls over operators, and over offers to investors, using an appropriate mix of oversight by the DFSA or by other persons, such as auditors, on whom the DFSA can place reliance.

The DFSA would be particularly interested in consultees views on the following matters:

• whether it is necessary to provide unit trust vehicles along with the corporate and Partnership vehicles in light of the fact that, in the UK at least, the majority of unit trust have converted into the sub-funds of open-ended collective Investment schemes.
• whether the proposed regime facilitates the DIFC becoming the domicile of choice for sophisticated and institutional investor funds.
• whether a level playing field has been established by this Law and the Markets Law 2004 as between Domestic and Foreign Funds.

Part 1: General

This part sets out the general rule making powers under which the DFSA will make Rules for inclusion in the proposed Collective Investment Fund (CIF) module of the Rulebook. It also sets out the process for waiver, modification and consultation in respect of the Rules. In addition, it explains the relationship between this Law and the Markets Law 2004.

The policy intention is to create a level playing field as between Foreign Funds and Domestic Funds being offered in or from the DIFC. The effect of the Markets Law and the Offered Securities Rules applying to Foreign Funds is such that Foreign Funds will have to, among other things, file with the DFSA a Prospectus or Offer document relating to the Units offered that contains the information specified in the OSR Rules prior to making any Offer unless it is able to fall within the criteria for the Offer to be deemed to be an Exempt Offer, in which case an Exempt Offer statement will need to be produced and provided to the offerees.

Where the DFSA is satisfied that an Offer document or Prospectus produced under legislation in a jurisdiction other than the DIFC meets the standards prescribed in the OSRs, the DFSA may accept such documents as meeting the requirements of an Offer document under such rules. Although such documents may be in a language other than English, the DFSA requires an English translation of any such documents.

Similar provisions will apply to Domestic Funds under the Collective Investment Law. A Registered Fund will need to file a Prospectus with the DFSA before issuing or offering any of its Units and an Exempt Fund will need to produce a short form Prospectus, that is, a document similar to an Exempt Offer statement and notify the DFSA when it commences issuing and offering Units.

Part 2: Collective Investment Funds

This part specifies the types of Investment vehicles which must be used for Registered Funds. This part also prescribes a number of prohibitions in relation to Domestic Funds and one in relation to Foreign Funds. In general terms a Person cannot in or from the DIFC Offer, issue or sell Units in a Domestic Fund unless that Fund is either a Registered or an Exempt Fund and is operated by an Authorised Firm. In respect of Foreign Funds, such Funds must comply with the Markets Law and the Offered Securities Rules made thereunder (as mentioned in Part 1 above) and if the Offeror is located within the DIFC then that Person must be an Authorised Firm. The core definition prescribing the types of arrangements which will be considered to constitute a Collective Investment Fund are set out in this part.

Part 3: Operators of Domestic Funds

This part specifies the duties of an Operator and contains provisions relating to the appointment, retirement and removal of the Operator including Related orders of the Court. This part also permits the delegation of certain of the Operator's functions, including prescribed functions, to another Person (a third party provider), whether that third party provider is located in or outside the DIFC. This part also prescribes the type of Person who may participate in a Domestic Fund (a Qualified Investor) and the duties of the Operator in that respect.

Part 4: Oversight of Domestic Funds

This part introduces the oversight concept whereby a Domestic Fund must appoint and maintain an Oversight Panel in accordance with the provisions of this part. Exempt Funds do not require an Oversight Panel but such functions are to be carried out by the auditor appointed to such Funds. The provisions also deal with the membership and duties of the Oversight Panel and include provisions relating to the additional oversight carried out by a Shari'a Supervisory Board in respect of Islamic Funds.

Part 5: Auditors of Domestic Funds

This part sets out all the provisions relating to the appointment, duties, resignation and removal of auditors. It also includes provisions in respect of a Domestic Fund's co-operation with its auditor and the obligations of disclosure to the DFSA by the auditor.

Part 6: Prospectus Requirements for Domestic Funds

As mentioned in Part 1, there are requirements for a Prospectus or short form Prospectus to be produced, issued and made available to prospective participants. The contents requirements of a Prospectus or short form Prospectus will be set out in the Rules. This part also addresses liability for any misleading statements contained in a Prospectus and also deals with certain matters in relation to mandatory statements which must be contained in prospectuses.

Part 7: Registration of Domestic Funds

This part is administrative in nature and sets out the procedures for applications for the registration of Domestic Funds including the granting, rejection and withdrawal of registration.

Part 8: Exemption of Domestic Funds

This part enables a Domestic Fund to operate as an Exempt Fund if it fulfils prescribed criteria thereby exempting it from the need for registration created under Part 2. The DFSA will specify the criteria for exemption in the Rules which will include, inter alia, limiting the participation in such a fund to 50 or fewer Qualified Investors and offering such participation by way of private placement. It also prescribes the requirement to notify the DFSA prior to the commencement or cessation of operations of a fund.

Part 9: Alteration to a Domestic Fund

Under this part a Domestic Fund must give notice to the DFSA of any proposal to alter the constitution of the fund, to replace the Operator or any Member of the Governing Body or the Shari'a Supervisory Board, or to replace the fund's auditor. Effect cannot be given to any proposal unless the DFSA has approved the proposal and the DFSA may in its absolute discretion refuse to grant approval of a proposed alteration.

Part 10: Transfer Schemes and Winding up of Domestic Funds

This part sets out the provisions in relation to the winding up of a fund either voluntarily or by order of the Court and also deals with transferring a Domestic Fund in whole or in part to another body in accordance with the Law.

Part 11: DFSA Powers in relation to a Fund

This part deals with stop orders, directions and suspension of dealing in relation to Funds. It also sets forth the powers of supervision by the DFSA of a Domestic Fund and its Operator.

Part 12: The Regulatory Appeals Committee

This part sets out the additional jurisdiction of the Regulatory Appeals Committee in accordance with Article 27(2)(k) of the Regulatory Law 2004 in regard to funds, whereby the Committee has jurisdiction to hear appeals from decisions by the DFSA made under the Collective Investment Law.

Part 13: The Financial Markets Tribunal

This part sets out, certain specific orders which may be made by the Court in relation to funds.

Part 14: Miscellaneous

This part sets forth the DFSA's authority to establish Fees and also some matters in relation to the filing of material with the DFSA.

It is followed by Schedule 1 which contains interpretive provisions and the glossary of terms used in the Law.