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Dubai Financial Services Authority (DFSA): Contents

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  • Past Papers

    • Consultation Paper No.116 Miscellaneous Changes

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Amendments to GEN.

      Click here to download Appendix 2 – Amendments to MKT.

      Click here to download Appendix 3 – Amendments to PRS.

      Click here to download Appendix 4 – Amendments to FER.

      Click here to download Appendix 5 – Amendments to PIB.

      Click here to download Appendix 6 – Amendments to REP.

      Click here to download Appendix 7 – Amendments to Markets Law.

      Click here to download Appendix 8 – Amendments to GLO.

      Click here to download Appendix 9 – Table of Comments.

    • Consultation Paper No. 114 Liquidity Requirements Review

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Table of Comments.

      Click here to download Appendix 2 – Amendments to PIB Liquidity.

    • Consultation Paper No. 113 Capital Requirements Review

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Table of Comments.

      Click here to download Appendix 2 – Amendments to PIB Capital.

    • Consultation Paper No. 112 Testing Fintech Innovations in the DIFC

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Amendments to GEN.

      Click here to download Annex 1 – Comments Table.

    • Consultation Paper No. 111 Crowdfunding: SME Financing Through Investing

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Amendments to GEN.

      Click here to download Appendix 2 – Amendments to COB.

      Click here to download Appendix 3 – Amendments to GLO.

      Click here to download Appendix 4 – Amendments to PIB.

      Click here to download Appendix 5 – Amendments to FER.

      Click here to download Appendix 6 – Amendments to MKT.

      Click here to download Appendix 7 – Amendments to CMC.

      Click here to download Annex 1 – Comments Table.

    • Consultation Paper No. 110 DFSA Fees

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Amendments to FER.

      Click here to download Appendix 2 – Amendments to PIB.

      Click here to download Appendix 3 – Amendments to PIN.

      Click here to download Appendix 4 – Amendments to REC.

      Click here to download Appendix 5 – Table for Comments.

      • Feedback Statement on CP110 DFSA Fees

        Please click here to view the Feedback Statement to Consultation Paper No.110

    • Consultation Paper No. 109 Crowdfunding: SME Financing Through Lending

      Click here to download the Consultation paper in PDF Format.

      Click here to download Annex 1 – Table for Comments.

      Click here to download Appendix 1 – Amendments to GEN.

      Click here to download Appendix 2 – Amendments to COB.

      Click here to download Appendix 3 – Amendments to GLO.

      Click here to download Appendix 4 – Amendments to PIB.

      Click here to download Appendix 5 – Amendments to FER.

    • Consultation Paper No. 108 Proposed Miscellaneous Amendments

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Table for Comments.

      Click here to download Appendix 2 – Amendments to PIB.

      Click here to download Appendix 3 – Amendments to GEN.

      Click here to download Appendix 4 – Amendments to REC.

      Click here to download Appendix 5 – Amendments to CMC.

      Click here to download Appendix 6 – Amendments to COB.

      Click here to download Appendix 7 – Amendments to IFR.

      Click here to download Appendix 8 – Amendments to AMI.

      Click here to download Appendix 9 – Amendments to MKT.

      Click here to download Appendix 10 – Amendments to CIR.

      Click here to download Appendix 11 – Amendments to GLO.

    • Consultation Paper No. 107 Proposed Changes to the Anti-Money Laundering, Counter-Terrorist Financing and Sanctions Module

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Proposed Amendments to the AML Module.

      Click here to download Appendix 2 – Proposed Amendments to the GLO Module.

      Click here to download Appendix 3 – Draft Amendments to the Regulatory Law 2004.

      Click here to download Appendix 4 – Table for comments.

    • Consultation Paper No. 106 Regulation of Arranging, Representative Office Activities and Financial Promotions

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 2 – Proposed Amendments to the GEN Module.

      Click here to download Appendix 3 – Proposed Amendments to the COB Module.

      Click here to download Appendix 4 – Draft Amendments to the REP Module.

      Click here to download Appendix 5 – Draft Amendments to the GLO Module.

      Click here to download Appendix 6 – Draft Amendments to the PIB Module.

      Click here to download Appendix 7 – Table for comments.

    • Consultation Paper No. 105 Online applications and submission of data to the DFSA

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Draft Amendments to the GEN Module.

      Click here to download Appendix 2 – Draft Amendments to the AML Module.

      Click here to download Appendix 3 – Draft Amendments to the REC Module.

      Click here to download Appendix 4 – Draft Amendments to the REP Module.

      Click here to download Appendix 5 – Draft Amendments to the GLO Module.

      Click here to download Appendix 6 – Draft Amendments to the AUD Module.

      Click here to download Appendix 7 – Format for providing public comments on CP 105 — Online applications and submission of data to the DFSA (word Version).

    • Consultation Paper No. 104 Proposed Miscellaneous Amendments

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Draft Amendments to the GEN Module.

      Click here to download Appendix 2 – Draft Amendments to the FER Module.

      Click here to download Appendix 3 – Draft Amendments to the CIR Module.

      Click here to download Appendix 4 – Draft Amendments to the IFR Module.

      Click here to download Appendix 5 – Draft Amendments to the AMI Module.

      Click here to download Appendix 6 – Draft Amendments to the MKT Module.

      Click here to download Appendix 7 – Draft Amendments to the PRS Module.

      Click here to download Appendix 8 – Draft Amendments to the GLO Module.

      Click here to download Appendix 9 – Draft Amendments to the REP Module.

      Click here to download Appendix 10 – Draft Amendments to the COB Module.

    • Consultation Paper No. 103 Proposals Relating to the Insurance Regime

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 2 – Draft Amendments to the GEN Module.

      Click here to download Appendix 3 – Draft Amendments to the COB Module.

      Click here to download Appendix 4 – Draft Amendments to the GLO Module.

      Click here to download Appendix 5 – Draft Amendments to the PIB Module.

      Click here to download Appendix 6 – Format for providing public comments on CP 103 — Proposals relating to the insurance regime.

      Click here to download Appendix 6 – Format for providing public comments on CP 103 (Word version)

    • Consultation Paper No. 102 Property Funds and Money Market Funds

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Draft Amendments to the CIR Module.

      Click here to download Appendix 2 – Draft Amendments to the IFR Module.

      Click here to download Appendix 3 – Draft Amendments to the GLO Module.

    • Consultation Paper No. 101 Proposed Miscellaneous Amendments

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Draft Amendments to the COB Module.

      Click here to download Appendix 2 – Draft Amendments to the GEN Module.

      Click here to download Appendix 3 – Draft Amendments to the REP Module.

      Click here to download Appendix 4 – Draft Amendments to the FER Module.

      Click here to download Appendix 5 – Draft Amendments to the GLO Module.

      Click here to download Appendix 6 – Draft Amendments to the AML Module.

      Click here to download Appendix 7 – Draft Amendments to the CIR Module.

      Click here to download Appendix 8 – Draft Amendments to the PIB Module.

    • Consultation Paper No. 100 Proposed Amendments to Markets-Related Fees

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Draft Amendments to the FER Module.

      Click here to download Appendix 2 – Draft Amendments to the REC Module.

    • Consultation Paper No. 99 BASEL III — Liquidity Coverage Ratio and Leverage Ratio

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Draft Amendments to the PIB Module.

    • Consultation Paper No. 98 Proposed Code of Market Conduct

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – New CMC Module.

      Click here to download Appendix 2 – Amendments to the MKT Module.

      Click here to download Appendix 3 – Amendments to the GLO Module.

    • Consultation Paper No. 97 Proposed Changes to the Client Classification Regime

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Amendments to the COB Module.

      Click here to download Appendix 2 – Amendments to the GLO Module.

      • DFSA response to public comments on CP 97 — 'Proposed Changes to the Client Classification Regime'

        Click here to view PDF.

    • Consultation Paper No. 96 Proposed Amendments to the DFSA Fee Regime

      Click here to download the Consultation paper in PDF Format.

      Click here to download Appendix 1 – Amendments to the FER Module.

    • Consultation Paper No. 94 Proposed Changes to the FMT Jurisdiction, to the DFSA's Supervisory Powers and to the DFSA's Approach to Decision Making

      Click here to download the Consultation Paper in PDF Format.

      Click here to download Appendix 1 – draft amendments to the Regulatory Law 2004 ("Regulatory Law").

      Click here to download Appendix 2 – draft amendments to the Markets Law 2012 ("Markets Law").

      Click here to download Appendix 3 – draft amendments to the Collective Investment Law 2010 ("CI Law").

      Click here to download Appendix 4 – draft amendments to the Law Regulating Islamic Financial Business 2004.

      Click here to download Appendix 5 – draft amendments to the Investment Trust Law 2006.

      Click here to download Appendix 6 – draft amendments to the Authorised Market Institutions Module ("AMI").

      Click here to download Appendix 7 – draft amendments to the General Module ("GEN").

      Click here to download Appendix 8 – draft amendments to the Markets Rules Module ("MKT").

      Click here to download Appendix 9 – draft amendments to the Price Stabilisation Module ("PRS").

      Click here to download Appendix 10 – draft amendments to the Recognition Module ("REC").

      Click here to download Appendix 11 – draft amendments to the Fees Module ("FER").

      Click here to download Appendix 12 – draft amendments to the Prudential – Investment, Insurance Intermediation and Banking Module ("PIB").

      Click here to download Appendix 13 – draft amendments to the Prudential – Insurance Business Module ("PIN").

      Click here to download Appendix 14 – draft amendments to the Takeover Rules Module ("TKO").

      Click here to download Appendix 15 – draft amendments to the Glossary Module ("GLO").

      Click here to download Appendix 16 – draft amendments to the Anti-Money Laundering, Counter-Terrorist Financing and Sanctions Module ("AML").

    • Consultation Paper No. 95 Minor Changes to CP90 and CP94 Proposals

      Click here to download the Consultation paper in PDF Format.

      Click here Appendix 1 – draft amendments to the Regulatory Law 2004 ("Regulatory Law").

    • Consultation Paper No. 93 Qualified Investor Exempt Funds

      Click here to download the Consultation Paper in PDF Format.

      Click here to download Appendix 1.

      Click here to download Appendix 2.

      Click here to download Appendix 3.

      Click here to download Appendix 4.

      Click here to download Appendix 5.

      Click here to download Appendix 6.

      • DFSA response to public comments on Consultation Paper No. 93 — Qualified Investor Funds

        Click here to view PDF.

        Overview

        1. On 22 December 2013 the DFSA released Consultation Paper 93 (CP93). Public consultation on these proposals closed on 20 February 2014 and we received six sets of written comments. The DFSA thanks stakeholders for providing their thoughtful comments on our proposals. This paper explains the position adopted by the DFSA regarding the key points raised by public comments on CP93 proposals and the rationale for doing so.
        2. We proposed in CP93 introducing a new category of fund — a Qualified Investor Exempt Fund — to be marketed by private placement to professional investors willing to invest at least USD 1 million. We proposed that many of the detailed requirements applicable to Exempt Funds would be disapplied for such a fund, so that the regulatory regime would be more appropriate for this segment of the funds market.
        3. We received a number of comments, in writing and in meetings, that the name of the new fund category should be simpler. We, therefore, proposed changing the name to the simpler Qualified Investor Fund or "QIF". We note that this term, or close variants, is already used in other jurisdictions, such as Ireland (QIF) and the UK (QIS).
        4. His Highness the Ruler of Dubai enacted the changes to the Collective Investment Law 2010 necessary to introduce the new fund category on 24 July 2014. The revised law came into force on 21 August 2014 and relevant changes to the Collective Investment Rules (CIR) Module of the DFSA Rulebook came into effect on the same day. The new category of fund is, therefore, now available to those who wish to make use of it.
        5. In this paper (except where otherwise indicated):
        (a) capitalised terms generally have defined meanings in the DFSA Glossary (GLO) module;
        (b) a reference to a "proposal" is a reference to a CP93 proposal, including any additional changes to those proposals that resulted from public comments.
        6. This paper will be of interest to:
        (a) Fund Managers and asset managers;
        (b) other providers of services to Funds, such as Trustees, Fund Administrators and depositaries;
        (c) institutional and other professional investors; and
        (d) advisors to the above.

        Summary of public responses to the key issues in CP93 and the DFSA's response

        General comments

        7. Consultation respondents were generally positive about the proposed new fund category and associated rule changes. A consistent theme in their comments was that this should make the DIFC a more attractive place to domicile funds. Respondents were also supportive of the proposed changes in the DFSA's process for authorising Fund Managers and Funds in relation to the new category of fund.

        Proposals on custody

        8. We had proposed a model for custody where the Fund Manager of a QIF could:
        (a) appoint an Eligible Custodian; or
        (b) opt to act as custodian itself, in which case the Fund Manager would:
        i. need to move from prudential category 3C (capital requirement of USD 500,000) to category 3B (capital requirement of USD 4 million), to ensure that there is parity with prudential regulation applicable to stand-alone custody providers; and
        ii. face an additional obligation that it must have in place effective arrangements to ensure that the Fund property is not available to creditors of the Fund Manager in the event of the Fund Manager's insolvency.1
        9. We also asked three specific consultation questions in this area, including whether different requirements than those consulted on should apply to QIFs that are Private Equity Funds.
        10. A number of respondents felt that our custody proposals were too prescriptive, and/or too onerous, for the proposed nature of QIFs. Respondents were sceptical that any Fund Manager would choose to act as custodian for a QIF, given the prudential consequences described in paragraph 8(b)(i). We considered their arguments in detail.
        11. We did not think that consultation respondents made the case that there should be no specified custody requirements at all for QIFs. But we did feel that there was merit in the arguments put forward that the proposals were too onerous for QIFs.

        Position at the time of consultation

        12. Our regime at the time of consultation required an Eligible Custodian to hold fund property as compared to the Fund Manager itself holding fund property, and was intended to mitigate at least two risks:
        (a) that fund property would become available to satisfy creditors of the Fund Manager if that manager becomes insolvent, due to co-mingling of the property of the Fund and the assets of the Fund Manager; and
        (b) fraud.
        13. In addition, higher capital requirements for an Eligible Custodian are largely intended to mitigate the operational risks that would arise in such a business.
        14. We already allowed alternative custody arrangements (i.e. not an Eligible Custodian) for both Public Funds and Exempt Funds that are:
        (a) Private Equity funds; or
        (b) Property Funds, where title to fund property is held by a Special Purpose Vehicle.
        15. Benchmarking of the funds regimes in other jurisdictions revealed a wide spectrum of requirements from, at one end, an eligible custodian having to be appointed in every case to, at the other end, no custodian having to be appointed at all. Our view was that some of these requirements were too onerous and some too lenient.
        16. In response to this, the regime now in force allows that the Fund Manager of a QIF can:
        (a) appoint an Eligible Custodian; or
        (b) if the QIF is a Property or Private Equity Fund, act as custodian itself, provided it has in place effective arrangements to ensure that the Fund property is not available to creditors of the Fund Manager in the event of the Fund Manager's insolvency.
        17. We felt that the risks arising could be adequately addressed through compliance with the requirements above, bearing in mind the intended nature of QIF investors. Fund property, where the Fund is a Private Equity or Property Fund, would usually be (relatively) illiquid and transactions relatively infrequent in comparison to, say, a Fund with an active trading strategy in listed securities. The risk of fraud and the operational risks arising from holding custody would, therefore, be substantially reduced. We felt these rules would provide more appropriate regulation of QIFs and would be reflective of the views received from stakeholders.

        Limits on investment and the number of investors

        18. We consulted on a structure that was intended to provide three distinct options for Fund Managers wishing to set up and market Funds from the Centre.

        Type of Fund Public Funds (current) Exempt Funds (current) Qualified Investor Funds (QIFs) (proposed)
        Level of regulation Detailed regulation in line with IOSCO standards Somewhat less stringent than for Public Funds Significantly less stringent than for Exempt Funds
        Investors Retail Clients as investors Professional Clients as investors Professional Clients as investors qualifying through a higher minimum subscription
        Investor limit >1002 ≤100 ≤50
        Minimum subscription limit None ≥USD 50,000 ≥USD 1 million
        19. A number of consultation respondents criticised the proposed maximum number of investors for QIFs, arguing either for a higher number of investors or for no limit on the number of investors. Some respondents argued that we should reduce the minimum investment in a QIF to USD 500,000 from the proposed USD 1 million.
        20. The model proposed was that the level of regulation for QIFs was reduced based on three factors — the size of the Fund in terms of investor numbers; the size of minimum investment and the level of sophistication of investors3, with Public Funds attracting the highest level of regulation.
        21. If we had said that a Fund with more than 100 investors must be a Public Fund, but that a Fund with 100 or fewer investors could be either an Exempt Fund or a QIF, this would have departed somewhat from this model of three distinct options. Similarly, having no limit for the number of investors in a QIF would require us to have reconsidered this element of the funds regime for the other fund categories, which we did not think was necessary or appropriate.
        22. The idea behind the proposed regulatory regime for QIFs was that there would be a sufficiently small number of investors in such funds so that, in practice, they could — if they so wished — come together to take corporate action and also negotiate jointly with the Fund Manager, given their larger investments and professionalism. Similar carve-outs exist in other jurisdictions, but numbers can vary. For example, in Australia, 20 or fewer investors can set up unregulated funds.
        23. The proposed investment limit in CP93 was based not on benchmarking, but on the actual minimum investments proposed by the seven Exempt Funds we have authorised over recent years.
        24. The regime now in force prescribes for QIFs:
        (a) a maximum of 50 investors; and
        (b) a minimum investment of USD 500,000.
        25. We proposed no change to the limit on the number of investors, for the reasons discussed above. On the minimum investment, we felt that a (lower) minimum of USD 500,000 still provided enough differentiation from the Exempt Fund category and so was consistent with our approach of having three distinct categories of fund.

        Other matters raised in consultation responses

        26. A number of comments were made about other aspects of the DFSA's funds regime, including the rules that apply to Property Funds. It was not appropriate to address these points as part of the work on QIFs, but we intend to look at the suggestions made as part of further work on our funds regime later this year and into 2015.

        1 We note that all fund managers, whether they hold custody or not, are already subject to the overarching obligation to clearly identify fund property as fund property, and to hold such property separately from the manager's own assets, and those of any other funds it manages (CI Law Article 22(2)(f)).
        2 It is not strictly accurate to say that a Public Fund must have more than 100 investors. A Fund is a Public Fund if it has one or more of the following features: (i) retail investors; (ii) public offer; or (iii) more than 100 investors.
        3 Although it is clearly not universally the case, we think that it is a reasonable assumption to make that professional investors who can invest US $1 million in a QIF are, on average, somewhat more sophisticated than professional investors who can invest US $50,000 in an Exempt Fund.

    • Consultation Paper No. 92 Regulatory Reporting Under the PIB and PIN Modules

      Click here to download the Consultation Paper in PDF Format.

      Click here to download Appendix 1.

      Click here to download Appendix 2.

      Click here to download Appendix 3.

      Click here to download Appendix 4.

    • Consultation Paper No. 91 Proposed Enhancements to the Auditor Regime

      Click here to download the Consultation Paper in PDF Format.

      Click here to download Appendix 1.

      Click here to download Appendix 2.

      Click here to download Appendix 3.

      Click here to download Appendix 4.

      Click here to download Appendix 5.

      Click here to download Appendix 6.

      Click here to download Appendix 7.

      Click here to download Appendix 8.

      Click here to download Appendix 9.

    • Consultation Paper No. 90 Proposed Changes to the FMT Jurisdiction and Enhancements to the DFSA's Enforcement Powers

      Click here to download the Consultation Paper in PDF Format.

      Click here to download Appendix 1.

      Click here to download Appendix 1 (addendum).

      Click here to download Appendix 2.

      Click here to download Appendix 3.

    • Consultation Paper No. 89 Proposed Changes to the DFSA's Anti-Money Laundering and Ancillary Service Provider Regimes (Second Consultation)

      Click here to download the Consultation Paper in PDF Format.

      Click here to download Appendix 1.

    • Consultation Paper No. 88 Proposed Miscellaneous Amendments

      Click here to download the Consultation Paper in PDF Format.

      Click here to download Appendix 1.
      Click here to download Appendix 2.
      Click here to download Appendix 3.
      Click here to download Appendix 4.
      Click here to download Appendix 5.
      Click here to download Appendix 6.
      Click here to download Appendix 7.
      Click here to download Appendix 8.
      Click here to download Appendix 9.

    • Consultation Paper No. 87 Changes Proposed to the Authorised Market Institutions Regime

      Click here to download the Consultation Paper in PDF Format.

      Click here to download Appendix 1.
      Click here to download Appendix 2.
      Click here to download Appendix 3.
      Click here to download Appendix 4.

      • DFSA response to public comments on Consultation Paper No. 87 - Changes proposed to the Authorised Market Institutions regime

        Overview

        1. On 14 December 2012 the DFSA released a comprehensive package of proposals to enhance its Authorised Market Institutions regime (“the AMI Regime”) in Consultation Paper 87(CP87). Public consultation on these proposals closed on 14 February 2013 and we received 11 sets of public comments. The DFSA thanks the market participants and advisers for providing their thoughtful comments on the DFSA proposals. This paper explains the position adopted by the DFSA regarding the key points raised by public comments on CP87 proposals and the rationale for doing so.
        2. The aim of the proposals in CP87 is to align the AMI regime with international standards that have been significantly enhanced to address changing market practices and issues, particularly in the aftermath of the recent financial market crisis. The key aspects of the international standards which are reflected in the proposed AMI regime include:
        (a) the CPSS-IOSCO Principles1 for Financial Markets Infrastructure (“the FMI Principles”), which were introduced in 2012, as these will eventually form part of the standards against which jurisdictions will be assessed under the Financial Sector Assessment Program (FSAP); and
        (b) the major EU developments, such as the proposed MiFID II2 and MiFIR, the European Market Infrastructure Regulation (EMIR)3 and the proposed Central Securities Depository Directive (CSDD).4 The potential benefit of aligning our regime with the EU regime is that the European Securities and Markets Authority (ESMA) may recognise the DIFC regime as providing an equivalent level of regulation as under the EU regime, so that clearing and settlement facilities in the DIFC would be able to offer their services to EU based market operators and clearing and settlement members.
        3. In response to the public comments on CP87, and also of our own initiative, we have made numerous refinements to the CP87 proposals, to provide greater clarity, certainty and flexibility for industry participants when complying with the regime. We have done so within the parameters set by the relevant international standards so that compliance of the DFSA regime with those standards is not compromised.
        4. In order to promote better transparency, this paper sets out the DFSA's response to:
        (a) public comments it received to the 46 key issues raised in CP87, in the same order in which those key issues were raised in CP87;
        (b) some technical comments raised relating to drafting inconsistencies and anomalies; and
        (c) some general concerns regarding the DFSA's processes and regulatory approach.
        5. In this paper (except where otherwise indicated):
        (a) capitalised terms generally have defined meanings in the DFSA Glossary (GLO) module;
        (b) a reference to a “current” provision or requirement is a reference to the AMI regime (i.e. the provisions in the AMI, General (GEN), Conduct of Business (COB) and GLO modules) in force before the CP87 proposals are implemented;
        (c) a reference to a “proposal” is a reference to a CP87 proposal, including any additional changes to those proposals resulting from public comments.
        6.This paper will be of interest to:
        (a) Authorised Market Institutions (AMIs) licensed to operate Exchanges or to operate Clearing Houses, and applicants for such a Licence;
        (b) Authorised Firms licensed to operate Alternative Trading Systems (ATS), and applicants for such a Licence;
        (c) applicants for a Licence to Provide Custody;
        (d) Persons intending to act as a Trade Repository;
        (e) Persons who are Members of Exchanges, Clearing Houses or ATS, and Persons intending to become Members;
        (f) Persons who are Members of Exchanges, Clearing Houses or ATS, and Persons intending to become Members;
        (g) issuers of Securities who trade or clear their Securities on an AMI and Persons intending to do so;
        (h) Persons who trade or clear Derivatives on an AMI and Persons intending to do so; and
        (i) Financial Services Regulators.

        Summary of public responses to the key issues in CP 87 and the DFSA's response

        Proposals to retain the current form and structure of the AMI regime

        7. We asked whether there are any concerns about the proposal to retain the current three main categories of Financial Services relevant to financial markets (i.e. Operating an Exchange, Operating a Clearing House and Operating an Alternative Trading System), and the current distinction drawn between regulation of AMIs and Authorised Firms.
        8. One commentator noted that it has no concerns about retaining the current three main categories of Financial Services or maintaining the distinction currently drawn between AMIs and Authorised Firms.

        Proposed changes to the definition of Operating an Exchange

        9. We asked whether there were any concerns about the proposed changes to the definition of Operating an Exchange or any concerns about the proposed distinction drawn between Operating an Exchange and Operating a Multilateral Trading Facility (MTF), based on an Exchange having the ability, as opposed to an MTF operator, both to admit Securities to trading on its facilities and, if permitted by the regulator, to maintain an Official List.
        10. One commentator responded and agreed to the distinction proposed between Exchange operations and MTFs, but noted that the current definition of an Exchange is much clearer than the proposed definition of an Exchange.
        11. We have retained the proposed definition of Operating an Exchange, as it is based on the definitions adopted in MiFIR and is also well aligned with the equivalent definitions in EMIR.

        Proposals to sub-classify Clearing House activities into CCP & SSS

        12. We asked whether there were any concerns relating to the proposed subclassification of Operating a Clearing House into two main sub-categories, i.e. Operating as a Central Counterparty (CCP) and Operating a Securities Settlement Service (SSS); two commentators responded.
        13. One commentator said that the distinction drawn between the activities of CCPs and SSSs is not very clear. However, the other supported the proposed definition of a Clearing House on the basis that it is in line with the FMI Principles and so would foster a common understanding. That commentator went on to note that there are three types of activities – CCP, SSS and also central securities depository (CSD) – and, therefore, all three should be clearly recognised.
        14. The FMI Principles recognise the activities of SSS, CCP and CSD as distinct activities, whilst also recognising that there is a significant overlap between them. However, as per the FMI definitions, counterparty risk exposure of a CCP is the main feature that distinguishes a CCP from an SSS, as an SSS does not incur such counterparty risks because it clears and settles third party transactions using a book entry system. This distinction forms the basis of the proposed definitions on which we consulted.
        15. We have retained the proposed sub-classification of Clearing House activities into CCP and SSS, with the CSD function as an additional activity which may be undertaken by a Clearing House, with bespoke requirements applying to that activity. We do so on the basis that the activity of a CSD is to “hold” custody of securities and, should it prefer to undertake clearing and settlement activities, it should be licensed as a Clearing House.

        Proposals to sub-classify ATS activities into MTF and OTF operations

        16. We asked whether there were any concerns relating to the proposed subclassification of Operating an Alternative Trading System (ATS) into operating a Multilateral Trading Facility (MTF) and operating an Organised Trading Facility (OTF), and the proposed conduct requirements for MTF and OTF Operators.
        17. One commentator responded, and noted that it did not have any concerns relating to these proposals.

        Proposals to replace the “by-way-of business” carve-out with a more precise carve-out

        18. We asked whether there were any concerns relating to the proposed replacement of the very broad current “by-way-of-business” carve-out with a more precise carve-out applicable to specified Financial Services that may be carried on as an incidental and integral part of Operating an Exchange or Operating a Clearing House. We also asked whether there are any Financial Services which should be added to, or removed from, the more precise carve-outs proposed.
        19. Two commentators responded; the first noted that the current “by-way-of-business” carve-out should be retained as it is easy to understand. In contrast, the second strongly supported the proposed more precise carveouts on the basis that they promote better risk management, which provides added protection to market participants. It went on to note that, as Clearing Houses can be systemically important financial market infrastructures, it may be appropriate to divide functions of a Clearing House into its “core” and “ancillary” activities to promote better risk management.
        20. We have decided to retain the proposed more precise carve-outs for the Financial Services that may be undertaken by an Operator of an Exchange or a Clearing House but, in doing so, we do not propose to draw a further distinction based on “core” and “ancillary” activities. To do so may lead to a higher level of prescription, which removes the flexibility available to AMIs to organise their business in a manner that takes in to account the nature, scale and complexity of their own operations.

        Proposals to include CSD as part of Clearing House operations and Providing Custody

        21. We asked whether there are any concerns relating to the proposals to expand the current definitions of Operating a Clearing House (a Financial service of an AMI) and Providing Custody (a Financial Service of an Authorised Firm) to include the activities of operating a Central Securities Depository (CSD).
        22. Three commentators responded. Whilst they did not object to the CSD activities being regulated, they raised a number of discrete concerns as follows:
        (a) One commentator suggested that CSD activities should be a standalone third category of clearing and settlement alongside CCP and SSS. Our proposed definitions do not treat the CSD function as a stand-alone clearing and settlement function like that of a CCP or SSS, on the basis that its central activity is to “hold” securities. Our proposed regime allows a Clearing House to operate a CSD, whilst also allowing an Authorised Firm licensed to “Provide Custody” to undertake the activity of operating a CSD. This approach provides flexibility for both AMIs and Authorised Firms, whilst also recognising the close relationship CSD activity has to both Operating a Clearing House and Providing Custody. It also enables us to provide bespoke regulation of CSD activity when undertaken by an appropriately licensed AMI or Authorised Firm in line with the requirements in the FMI Principles.
        (b) Two commentators sought guidance on whether a separate licence is required to operate a CSD. As operation of a CSD is defined as an activity that may be undertaken by a Clearing House or as part of Providing Custody, firms licensed for those two Financial Services do not need to obtain a separate licence to be able to operate a CSD. Where they do operate a CSD, then CSD requirements apply to their CSD activities. We have included Guidance to clarify these aspects.
        (c) Another commentator suggested that the proposed provisions relating to CSDs are far too prescriptive and the prior DFSA approval for establishing CSD links should be removed. We note that the proposed CSD requirements are designed to meet the FMI Principles and the key aspects of the CSDD without being as prescriptive as either of those standards. Therefore, whilst we have not diluted the proposed requirements significantly, to address the concern regarding CSD links, we have replaced the prior DFSA approval requirement for establishing CSD links with a prior notification requirement to the DFSA, to provide greater flexibility.
        (d) One commentator noted that as CSDs do not generally hold collateral (as do CCPs or SSS), the proposed requirements relating to segregation and portability of collateral are not relevant to CSDs. These requirements, which were intended to apply to CCPs, had been proposed for CSDs through an oversight, and we have corrected this.

        Proposal to allow an Exchange also to operate an MTF

        23. We asked whether there are any concerns arising from our proposals to allow an AMI licensed to operate an Exchange to also operate an MTF under an endorsement on its Licence. We also asked whether there are any conflict of interests or other issues arising if the same legal entity undertakes both the operation of an Exchange and the operation of an MTF. One commentator responded, and noted that allowing an Exchange to operate an MTF is a very positive development, and it is not aware of any conflict of interests arising from doing so, whilst wishing to consider the impact of these proposals in more detail later.

        Proposals relating to Trade Repositories

        24. We asked whether there are any concerns arising from our proposals to regulate Trade Repository activities without making this a Financial Service, instead treating it as an activity which may be undertaken by an AMI or Authorised Firm which obtains an endorsement on its Licence permitting it to do so. Where a firm does so, it is also subject to the proposed additional conduct requirements applicable to Trade Repositories. We also asked whether there are any concerns about regulating the activities of Trade Repositories pending consideration of development of a transaction reporting regime.
        25. Only one commentator responded and they noted that, whilst they do not have any objections to regulation of Trade Repositories in the manner proposed, it would be preferable if a transaction reporting regime was first developed before doing so.
        26. We have concluded we should not delay the introduction of the regime for regulating Trade Repositories pending the development of a transaction reporting regime because it:
        (a) enables our regime to meet the growing expectation among international standard setters to create Trade Repositories (TRs) to facilitate better transparency relating to transactions, including OTC derivatives, by requiring Authorised Persons with an endorsement to operate TRs to gather and collate such information to facilitate the use of such information by regulators and market participants; and
        (b) gives us sufficient time to consider the appropriate form and shape of a transaction reporting regime, taking into account transaction reporting regimes including that in EMIR.

        Proposals to approve Key Individuals of AMIs

        27. We asked whether there are any concerns relating to our proposal to introduce a DFSA prior approval requirement relating to Key Individuals (i.e. Members of the Governing Body, SEO, Operations Officer, Finance Officer, Compliance Officer, Risk Officer, MLRO and Internal Auditor). We also asked whether there are any Key Individual functions that should be added to or removed from those identified and, also, whether there are any concerns arising from the proposal that SEO, Compliance Officer and MLRO have to be resident in the U.A.E.
        28. Four commentators responded as follows:
        (a) Two commentators objected to the proposed requirement that the DFSA's prior approval is required for individuals to be appointed to Key Individual functions. They noted that while AMIs should be obliged to appoint Key Individuals meeting prescribed suitability criteria, the AMI, and not the DFSA, should form the view of whether or not the individuals appointed to such positions meet the relevant criteria. They also noted that the DFSA's prior approval process could result in the recruitment process becoming more costly and time consuming, resulting in impediments for AMIs to hire suitably qualified individuals who are in demand.
        (b) Another commentator objected to all members of the AMI's Governing Body having to be subject to the DFSA's prior approval requirement, noting that this seems to equate AMIs to Authorised Firms, which is not warranted as AMIs perform regulatory functions.
        (c) Although the fourth commentator did not object to the DFSA's prior approval for Key Individuals, it had objections to the role of the “Operations Officer” being included as a Key Individual, as a number of individuals within an AMI would share this responsibility.
        29. Whilst retaining the proposals for the DFSA prior approval for Key Individuals, to address some concerns raised by commentators we have provided more flexibility by allowing an AMI to seek the DFSA's “in principle” approval for any individual designated for a Key Individual role. We have also removed the requirement for the Operations Officer to be a Key Individual function for the reasons noted above. As there were no comments on the proposal to require SEO, Compliance Officer and MLRO to be resident in U.A.E, no change has been made to this proposed requirement.

        Proposal to require AMIs to appoint user committees

        30. We asked whether there are any concerns relating to the proposed requirement for AMIs to appoint user committees, comprised of representatives of its key stakeholders, tasked to advise the AMI's Governing Body and senior management on operational matters impacting on Members and other stakeholders. This proposal drew strong objections from several commentators, with one commentator supporting it.
        31. The main objection to the user committees was that the reporting obligations imposed on members of such committees would act as a disincentive to provide proper advice, for the fear that they would be exposed to third party liabilities. There were also concerns that mandatory user committees may impose a significant administrative and financial burden on AMIs, so reducing their ability to attract quality candidates.
        32. The proposal to introduce user committees stemmed from the need to meet FMI Principle 2 relating to Governance, which expressly includes the need for an AMI to obtain stakeholder input in making major decisions, such as those relating to its system's design, rules and overall business strategy. The role of user committees is expressly identified under that Principle as an effective means for an AMI to obtain stakeholder input, and forms part of the best practice included under that Principle. Therefore, we have removed the mandatory requirement for user committees and instead included the role of such committees as part of best practice relating to corporate governance applicable to Authorised Persons (in GEN), which is in line with the FMI Principle. We have also created an incentive for AMIs to establish user committees by allowing an AMI, which establishes user committees that meet best practice standards, to use this to demonstrate to the DFSA that it had undertaken due process to take account of stakeholder input to its decision making.

        Proposals relating to “Proper Markets”

        33. We asked whether there are any concerns relating to the proposals to strengthen “Proper Markets”, which require every Exchange to have rules and procedures designed to promote fair, orderly and efficient trading of Investments on its facilities. These included a range of new provisions relating to liquidity incentive schemes, pre-and post-trade transparency, contract design specifications for Derivative contracts, volatility controls, error trade policies, short selling and position management and foreign ownership restrictions.

        Liquidity incentive schemes

        34. The proposed requirements relating to liquidity incentive schemes drew the most number of public comments, with seven commentators responding. The main objections raised related to:
        (a) the proposed restriction that participation of such schemes be limited to Members of an AMI. Commentators noted that wider participation than Members is needed, and it is often the practice to incentivise non-Members to generate liquidity and volumes of trading in otherwise illiquid Investments;
        (b) the requirement for the AMI to disclose to the public the details of the terms and conditions on which liquidity incentive schemes are offered, as such details often contain commercially sensitive information; and
        (c) the DFSA's prior approval requirement for such schemes, as it would remove flexibility for AMIs in establishing such schemes.
        35. In order to address the concerns raised, we have made substantial changes to the requirements relating to liquidity incentive schemes. These include allowing non-Members to participate in liquidity incentive schemes (provided they agree to comply with the Business Rules of the AMI as applicable to their activities); replacing the prior application period with a shorter application period for the DFSA's prior approval; and removing the requirement for the AMI to publish details relating to terms and conditions of liquidity incentive schemes.

        Proposals relating to contract design specifications

        36. One commentator responded and raised a number of concerns, the key aspects of which related to:
        (a) the unworkability of the economic utility test, as every Derivative contract does not provide for price discovery of the relevant underlying commodity or security; and
        (b) the obligation for an AMI to monitor and evaluate whether settlement and delivery procedures promote a reliable pricing mechanism and price convergence between futures and cash markets, as to do so is not the role of futures markets.
        37. We have removed those requirements to address the concerns raised, particularly as the proposed Derivative contract specification criteria adequately deal with the essential elements for eligibility to be traded or cleared on an AMI. We have also included a number of other amendments to provide greater clarity and remove some unintended effects.

        Short selling and position management

        38. One commentator responded and noted that there is no definition of short selling and that it is not clear whether the provisions dealing with short selling apply to both naked and covered short sales. To address these concerns, we have included a definition of a “short sale” based on the IOSCO definition of that term and added detailed Guidance.

        Proposals relating to foreign ownership restrictions.

        39. We asked whether there are any concerns relating to the proposed requirements to ensure that foreign ownership restrictions applicable to securities traded on an AMI are observed, and such restrictions do not adversely affect the functioning of Proper Markets.
        40. Two commentators responded. They stated that the foreign ownership requirements are far too prescriptive and do not provide sufficient flexibility for AMIs to adopt effective measures to manage foreign ownership restrictions that may apply, such as requiring an investor to divest the relevant securities, rather than halting trading on such securities.
        41. The proposed foreign ownership related requirements are broadly based, containing an overarching obligation that an AMI has adequate mechanisms to monitor and manage such restrictions, with only minimum requirements specified to enable an AMI to meet that overarching obligation. As a result, an AMI is not prevented from adopting additional mechanisms which it considers appropriate to meet the overarching obligation.
        42. Given the importance placed on ownership restrictions in this region, including in the U.A.E., these proposals are not diluted significantly. However, we have made some refinements to the proposed provisions to address any concerns that our requirements impose a direct obligation on an AMI to remedy any breaches of foreign ownership restrictions, as the power to do so is available only to issuers and investors of the relevant Investments and not the AMI.

        Proposals relating to Direct Electronic Access (DEA) through Members

        43. We asked whether there are any concerns relating to the proposed enhancements to Membership related requirements, which include the proposed controls where a Member allows its clients to access a market through DEA (DEA clients).
        44. Two commentators responded supporting the proposals relating to DEA clients, on the basis that those proposals promote greater trading activity and liquidity in markets.

        Proposals relating to Information Technology

        45. We asked whether there are any concerns relating to the proposed enhancements to information technology (IT).
        46. Two commentators responded. One made a general comment that the proposed IT- related requirements are too prescriptive. The other objected on the basis that an AMI is not in a position to undertake testing of trading algorithms used by a Member. Given the importance of IT for proper operation of markets, the proposals are not diluted significantly. However, as the responsibility lies with a Member to test its own trading algorithms, we have added Guidance to remove any ambiguity that an AMI is required to carry out such testing.
        Proposals relating to capital resources
        47. We asked whether there are any concerns relating to the proposed enhancements to capital requirements applicable to AMIs.
        48. Two commentators responded stating that they have concerns about the proposed restriction which would prevent an AMI holding the cash component of its capital resources with a bank if that bank is a Clearing Member, on the grounds that this is overly prescriptive and has no benefit because the Clearing Member is a regulated bank.
        49. We have removed this restriction to address the concern raised. In doing so, we have focused on requiring an AMI to monitor and manage any concentration of credit and liquidity exposures to its Clearing Members.

        Proposed procedures for making changes to existing arrangements and Business Rules

        50. We asked whether there are any concerns relating to the proposed enhancements to the procedures for making:
        (a) any material changes to the AMI's existing arrangements to meet the Regulatory Functions (Licensing Requirements); and
        (b) any changes to Business Rules, which require public consultation unless the DFSA has dispensed with that requirement.
        51. Four commentators responded. Whilst all of them seemed to endorse the DFSA's prior approval requirements for changes, they expressed some concerns relating to the process for obtaining approval, including:
        (a) the application for DFSA approval having to be made 90 days in advance of making a change, on the grounds that this would impede an AMI's ability to respond swiftly to rapidly changing market conditions. We have reduced the advance application period for DFSA approval from 90 to 30 days.
        (b) Having to make public any submissions received by an AMI on any proposed changes to its Business Rules, as such submissions are confidential in nature. We have removed this requirement to address this concern.
        (c) A number of other aspects relating to changes to Business Rules, such as minor and administrative changes to Business Rules having to be approved by the DFSA and the stringency of the test applied by the DFSA for approval of any proposed changes to Business Rules. We have made a number of amendments and clarification to the procedural aspects of the DFSA approval process to address these concerns.

        Proposed risk management requirements for Clearing Houses

        52. We asked whether there are any concerns relating to the proposals to address risks specific to Clearing Houses, including in relation to CCP operations, and whether there are any areas of risk which are not addressed by the proposed requirements.
        53. We received a number of technical comments on the proposals relating to Clearing Houses, including an objection to having to make public any legal opinion received by a Clearing House on the legal enforceability of its operations. We note that making public legal opinions was included in Guidance as good practice and; as such, it is not a mandatory requirement. However, to allay this concern, we have made further amendments to the relevant Guidance.

        Proposed requirements for ATS operators

        54. We asked a number of questions relating to the proposed requirements applicable to ATS operators to bring those in line with the enhanced requirements proposed for operators of Exchanges, as both types of facilities pose similar risks.
        55. One commentator responded and endors ed the proposed requirements for ATS operators.

        Proposed transitional arrangements

        56. We asked whether the proposals not to grandfather any of the existing arrangements and to allow a period of six months for AMIs to move to the new regime are appropriate.
        57. Three commentators responded. One objected to the six month transitional period as inadequate, given the scale and prescriptiveness of the changes proposed, noting also that there would be a significant cost burden involved which needs to be addressed through timing and what is applicable. A second commentator suggested that there should be further discussions relating to how the transitional arrangements would work, and a third noted that they are unable to assess whether the six month period allowed is adequate.
        58. Upon reflection, we thought that one of the administrative burdens in making the transition to the new regime would be to obtain the DFSA's approval for individuals already occupying the Key Individual positions at the point of transition. To remove this burden, we have provided for grandfathering of individuals occupying those positions at the commencement of the new regime. We consider that a six month period should be sufficient for the transition, but note that – should an AMI be unable to make the transition within this period – it could seek an extension of the relevant period by applying for a modification of the relevant rule.

        Technical comments and the DFSA's response

        59. Commentators raised a range of technical issues on various aspects of the proposed AMI regime, with a fair bit of overlap with the responses they provided to key issues raised in CP87 (such as Key Individual approval, and others discussed above). Most of the technical issues raised by commentators identified areas that needed further clarification or refinement to the proposed drafting, rather than any fundamental changes to the regime, with one exception noted below.
        60. One commentator noted that the requirement imposed on a Clearing House acting as a CCP to perform stress testing on a daily basis, in order to assess and manage its credit and market exposures, is unwarranted. Instead, they said a CCP should have more flexibility to perform stress testing at regular intervals as it deems appropriate. Whilst the key considerations underpinning FMI Principle 11 require a CCP to undertake daily stress testing, we have concluded that some flexibility could be accommodated in this context. We have recast the obligation on a CCP to perform stress testing “on a regular basis as appropriate to the nature, scale and complexity of its operations”, with the expectation, stated in Guidance, that a CCP with complex and widely spread operations should aim to perform such stress testing on a daily basis.
        61. We do not propose to identify separately the clarifications and refinements made to the drafting to address technical comments, as they are myriad.

        The DFSA response to general concerns relating to its process and regulatory approach

        Whether a 60 day public consultation period is adequate

        62. Some commentators noted that the 60 day response period allowed for public consultation under CP87 was inadequate on the grounds that the proposed changes were extensive and the period fell over Christmas holidays. We note that the appropriate public consultation period is determined on a case by case basis, subject to an overriding requirement applicable to the DFSA, under the Regulatory Law 2004, which requires a minimum public consultation period of 30 days, and the ability for the DFSA to dispense with public consultation in cases where it determined on reasonable grounds that any delay resulting from public consultation is detrimental to the interests of the DIFC markets.
        63. We set a 60 day period for public consultation for CP87 based on a number of considerations, including the extensive nature of the changes proposed and the one-to-one briefings already held with key industry participants, including the two AMIs. Therefore, we do not consider that the 60 day period was unduly short.

        The desirability of providing a marked-up version of the proposed AMI module against the existing AMI module

        64. Some commentators noted it would have been made easier for them to analyse the proposed AMI regime if there was a marked-up version showing the old and new. We note that, where it is proposed to replace an entire module with a new module, it is not the DFSA's general practice to release a marked-up version, as the substantial changes proposed render a marked-up version impractical. However, to address similar concerns in the future, where such a replacement of a module is proposed, we propose to include appropriate footnotes indicating the new and old provisions.
        The need for public briefing sessions for market participants
        65. Some commentators noted that, as there is a significant impact resulting from the proposed changes to the AMI regime, it would have been highly desirable if public briefings were held by the DFSA. We note that extensive one-to-one briefing sessions were held with key market participants before and during the public consultation period. However, to address similar concerns arising in the future, we propose to hold, where appropriate, outreach sessions to market participants and other stakeholders during public consultation.

        The need for greater transparency of the DFSA process

        66. A concern was raised by a commentator that there was a general lack of transparency on the part of the DFSA as it did not publish a statement setting out the position it reached in response to public comments received on CPs. This statement is published partly in response to that comment. We expect to take this approach when appropriate in the future.

        Whether the DFSA is moving towards a more rules-driven approach to regulation.

        67. Some commentators were concerned that the DFSA is moving away from a principles-based approach to more prescriptive regulation which may not provide sufficient flexibility for market participants. We note that both the FMI Principles and the relevant EU requirements, with which we seek closer alignment, are far more prescriptive and detailed regimes than what we have proposed. We have tried to provide flexibility without prescription. For example, we have only incorporated into our proposed regime the FMI Principles and the Key Considerations underpinning those Principles, leaving out much of the associated detailed material published as guidance under those Principles.
        68. We have removed some requirements seen as overly prescriptive where we could do so without risking non-compliance with the relevant international standards. A number of the changes highlighted in the earlier part of this paper are examples of this approach, through which we intend to keep prescription to a necessary minimum and maximise flexibility for Authorised Persons.

        Click here to download the document in PDF Format.

        1. http://www.bis.org/publ/cpss101a.pdf

        2. http://regulatoryreform.wordpress.com/2013/05/10/eu-council-update-on-mifid-ii/ and http://ec.europa.eu/internal_market/securities/isd/mifid_en.htm

        3. http://ec.europa.eu/internal_market/financial-markets/derivatives/index_en.htm

        4. http://ec.europa.eu/internal_market/financialmarkets/central_securities_depositories/index_en.htm

    • Consultation Paper No. 86 Proposed Changes to the DFSA's Anti-Money Laundering and Ancillary Service Provider Regimes

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      Click here to view Appendix 1
      Click here to view Appendix 2
      Click here to view Appendix 3
      Click here to view Appendix 4
      Click here to view Appendix 5
      Click here to view Appendix 6
      Click here to view Appendix 7
      Click here to view Appendix 8

    • Consultation Paper No. 85 Notice of Proposed Amendment to Legislation

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      Background

      The DFSA is proposing an urgent minor amendment to the Regulatory Law 2004 to be presented to the Ruler for his consideration for enactment. The amendment relates to the definition of a "Privileged Communication" in Schedule 1 of the Regulatory Law 2004. The term "Privileged Communication" is used in Articles 67, 82 and 104 of the Regulatory Law 2004.

      The proposal stems from the DFSA's involvement in a UAE working group led by the UAE Ministry of Finance. This group is dealing with the assessment of the UAE by the OECD Global Forum on Transparency and the Exchange of Information for Tax Purposes (OECD Global Forum) against 10 principles under three broad categories:

      (a) Availability of Information (i.e. whether jurisdictions have ownership and identity information, accounting records and detailed banking information for companies, partnerships, trusts, foundations and other entities);
      (b) Access to Information (i.e. whether jurisdictions have the power to obtain information and records from relevant persons); and
      (c) Exchanging Information (i.e. whether jurisdictions have effective international tax agreements and protect the confidentiality of information).

      The assessment of the UAE's legislative requirements commenced in 2011 (Phase 1 review). The OECD Global Forum will also test whether the UAE's legislative requirements enable the effective exchange of tax information (Phase 2 review).

      The OECD Global Forum has published its Phase 1 review report on the UAE. The report highlights the following matter which requires action by the DFSA under the laws it administers. The UAE report highlights the issue as follows:

      264. Where the DFSA requires a lawyer to give information or to produce a document or to answer a question, and the giving of the information or the production of the document or the answer to the question would involve disclosing a privileged communication made by, on behalf of, or to, the lawyer in his capacity as a lawyer, the lawyer is entitled to refuse to comply with the requirement unless (Art.82 (2) DFSA Law):
      •    the person to whom, or by, or on behalf of whom, the communication was made is a body corporate that is under official management or is being wound up, the official manager or liquidator of the body as the case may be consents to the lawyer complying with the requirement; or
      •    otherwise, the person to whom, or by, or on behalf of whom, the communication was made consents to the lawyer complying with the requirement.
      265. The DFSA Law defines privileged communication as a communication attracting a privilege arising from the provision of professional legal advice and any other advice or from the relationship of lawyer and client or other similar relationship, but does not include a general duty of confidentiality. As any other advice given by the lawyer to a client is also covered by definition of privileged communication, this suggests the scope of legal privilege is wider than the international standard and this has the potential to hinder effective exchange of information.

      In order to comply with the relevant OECD Global Forum Standards, the DFSA proposes to amend the definition of a Privileged Communication in Schedule 1 of the Regulatory Law 2004 as follows:

      "a communication attracting a privilege arising from the provision of professional legal advice and any other privilege applicable at law advice or from the relationship of lawyer and client or other similar relationship, but does not include a general duty of confidentiality."

      The DFSA considers that the proposed amendment is necessary to ensure that the DIFC, and therefore the UAE, complies with the standards set by the OECD Global Forum in the timeframe set by the OECD. The DFSA is providing for public consultation pursuant to Article 7 of Dubai Law No 9. Given the nature of the amendment sought and its urgency, the deadline for providing comments on the proposal is 23rd September 2012.

      All comments should be in writing and sent to the email specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      Comments to be emailed to:
      Email: consultation@dfsa.ae

      Consultation Paper No.85


      Issued
      13 September 2012

    • Consultation Paper No.84 Proposed Enhancements to the DFSA Rulebook to meet International Best Practice Standards

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      Appendix 1 — Regulatory Law Amendment Law PDF Format
      Appendix 2 — Conduct of Business Module (COB) PDF Format
      Appendix 3 — General Module (GEN) PDF Format
      Appendix 4 — Markets Rules (MKT) PDF Format
      Appendix 5 — Prudential - Insurance Business Module (PIN) PDF Format

    • Consultation Paper No. 83 Proposed changes to the PIB Module of the Rulebook

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      Appendix 1 — Prudential — Investment, Insurance Intermediation and Banking Module (PIB) PDF Format
      Appendix 2 — Islamic Finance Rules (IFR) PDF Format

    • Consultation Paper No. 82 Proposals to Regulate Credit Rating Agencies

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      Appendix 1 — General Module (GEN) PDF Format
      Appendix 2 — Conduct of Business Module (COB) PDF Format
      Appendix 3 — Fees Module (FER) PDF Format
      Appendix 4 — Prudential — Investment, Insurance Intermediation and Banking Module (PIB) PDF Format
      Appendix 5 — Anti Money Laundering Module (AML) PDF Format
      Appendix 6 — Glossary Module (GLO) PDF Format

    • Consultation Paper No. 81 The Exercise of Regulatory Powers, Enhancement to the Regulatory Law 2004 and RPP Sourcebook

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      Appendix 1 — Regulatory Policy and Process (RPP) — Chapter 4: Supervisory and Enforcement Powers PDF Format
      Appendix 2 — Regulatory Policy and Process (RPP) — Chapter 5: Enforcement PDF Format
      Appendix 3 — Regulatory Policy and Process (RPP) — Chapter 6: Decision Making PDF Format
      Appendix 4 — Regulatory Law Amendment Law PDF Format
      Appendix 5 — Destination Table PDF Format
      Appendix 6 — General Module (GEN) PDF Format
      Appendix 7 — Glossary Module (GLO) PDF Format

    • Consultation Paper No. 80 Proposals Relating to Controllers and Legal Forms of Authorised Persons

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      Appendix 1 — Reg Law Module PDF Format
      Appendix 2 — GEN Module PDF Format
      Appendix 3 — AMI Module PDF Format
      Appendix 4 — RPP Module PDF Format
      Appendix 5 — GLO Module PDF Format

    • Consultation Paper No. 79 Shari'a Governance and Accounting and Auditing Standards for Islamic Firms and Securities

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      Appendix 1 — IFR Module PDF Format
      Appendix 2 — GEN Module PDF Format
      Appendix 3 — MKT Module PDF Format
      Appendix 4 — CIR Module PDF Format
      Appendix 5 — GLO Module PDF Format

    • Consultation Paper No. 78 Proposed DFSA Listing Rules

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      Appendix 1 — Listing Rules PDF Format
      Appendix 2 — GLO Module PDF Format
      Appendix 3 — FER Module PDF Format
      Appendix 4 — Markets Law PDF Format
      Appendix 5 — Comparison Table PDF Format

    • Consultation Paper No. 77 Proposals Relating to Corporate Governance and Remuneration Standards Applicable to Authorised Persons

      Why are we issuing this paper?

      1. The DFSA proposes to make enhancements to corporate governance standards applicable to Authorised Firms and Authorised Market Institutions ("Authorised Persons"). The current corporate governance requirements are contained in the GEN and AMI modules of the DFSA Rulebook and are supported by the policies and procedures for administering those requirements contained in the RPP Sourcebook.
      2. Our proposals to enhance corporate governance standards applicable to Authorised Persons arose as a result of the enhancements adopted by international standard setting bodies ("international standard setters") in the financial sector, in particular:
      (a) the Financial Services Board ("FSB");
      (b) Basel Committee on Banking Supervision ("Basel");
      (c) The International Association of Insurance Supervisors ("IAIS"); and
      (d) International Organisation of Securities Commissions ("IOSCO").
      3. In the aftermath of the financial markets crisis that began in 2007, poor governance in financial institutions was found to have been a major contributor to that crisis. As a result, these international standard setters have adopted a range of measures to enhance corporate governance practices among financial institutions, with a higher focus on systemically important financial institutions to mitigate systemic risks emanating from such firms where they are poorly and imprudently managed. These measures include:
      (a) corporate governance standard issued by IAIS (ICP 7) in early 2011;
      (b) 'Principles for enhancing corporate governance', issued by Basel in late 2010;
      (c) principles for sound compensation practices issued by the FSB in late 2009, which are to be implemented by IAIS, Basel and IOSCO;
      (d) the recent peer review carried out by the FSB's Standing Committee on Standards Implementation on compensation practices adopted by SIFIs in G20 jurisdictions; and
      (e) the guidelines issued by the Organisation for Economic Corporation and Development ("OECD") relating to corporate governance, which are adopted by IOSCO.
      4. The objectives of our proposals in this paper are two fold:
      (a) first, they are designed to better align our current regime with the enhancements promoted by the international standard setters noted above. This is particularly important as the International Monetary Fund ("IMF"), when carrying out its next Financial Sector Assessment Programme assessment ("FSAP") of the UAE (which is expected to occur in 2012) will be assessing compliance of our regime against those standards; and
      (b) secondly, we believe that the proposed enhancements to corporate governance standards would strengthen the prudent and sound management of the financial institutions within the DIFC. This would also be in the best interests of the UAE as it would enhance the international reputation of the UAE as a whole.

      Who should read this paper?

      5. The proposals in this paper would be of interest to:
      (a) Authorised Firms and Authorised Market Institutions, including those applying to obtain licences as Authorised Firms or Authorised Market Institutions;
      (b) individuals who are or propose to be members of the Governing Body or senior management of an Authorised Firm or Authorised Market Institutions (such as Directors, Partners senior executives of the firm);
      (c) persons providing compliance, audit and other risk management and control services to Authorised Firms or Authorised Market Institutions;
      (d) Persons providing legal, accounting and audit services or acting or proposing to act as third party advisers in respect of offers of Securities; and
      (e) Financial Services Regulators, particularly in the GCC.

      How to provide comments?

      6. All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use the Consultation Paper number in the subject line. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      Comments to be addressed or emailed to:

      Consultation Paper No. 77
      Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE
      Email: consultation@dfsa.ae

      Tel: +971(0)4 3621500

      What happens next?

      7. The deadline for providing comments on the proposals is 14 August 2011. Once we receive your comments, we shall consider if any further refinements are required to these proposals. We shall then proceed to enact the relevant changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes the DFSA Rulebook are made. We shall issue a notice on our website telling you when this happens.

      Structure of the paper

      8. The corporate governance enhancements which we propose are reflected in the amendments to the GEN module (Appendix 1) and the Authorised Market Institution (AMI) module (Appendix 2) of the DFSA Rulebook and the RPP Sourcebook (Appendix 3). The considerations that underpin these enhancements and the key aspects of these proposals are set out as follows:
      (a) Terminology – see paragraph 9;
      (b) scope of corporate governance – see paragraphs 10 – 12;
      (c) proportionate application to firms depending on the nature, scale and complexity of their operations – see paragraphs 13 and 14;
      (d) expansions to the current overarching corporate governance standard – see paragraphs 15 – 17;
      (e) a new overarching standard relating to remuneration practices – see paragraphs 18 and 19;
      (f) a detailed corporate governance related requirement and best practice – see paragraphs 20 – 22;
      (g) a detailed remuneration related requirement and best practice – see paragraphs 23 – 26;
      (h) other related enhancements – see paragraphs 27 – 30;
      (i) enhancements relating to the DFSA's authorisation and supervision process – see paragraph 31; and
      (j) transitional arrangements – see paragraph 32.

      Terminology in this paper

      9. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in GLO or in the proposed amendments in this paper. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Scope of corporate governance

      10. What lies at the heart of sound corporate governance is a cohesive set of systems, policies, procedures and controls (collectively referred to as a corporate governance framework) through which a financial institution is expected to promote sound and prudent management of its business in the interest of its stakeholders. For this purpose, such a framework encompasses:
      (a) placing clear responsibility for the proper management, and the oversight of the management, of the firm on the individuals at the helm of the firm, i.e. the Governing Body and its members and the senior management of the firm;
      (b) certain checks and balances, in the form of increased accountability and independence from the management of the firm for persons undertaking control functions relating to the firm (such as risk management, compliance and internal audit); and
      (c) increased supervisory attention to the governance structure and governance practices adopted by financial institutions.
      11. The DFSA regime already contains adequate requirements covering some of the above aspects, particularly those relating to checks and balances provided by risk, compliance and internal audit functions – see GEN Rules 5.3.45.3.15) and adequate supervisory powers and oversight. Accordingly, the focus of the proposals in this paper is to enhance other areas of corporate governance, particularly relating to the accountability and internal governance of the Governing Body and that of the senior management of a firm.
      12. Prudent and sound management of a firm by its Employees requires a sound remuneration structure and strategy to reward their performance in such a way so as to promote optimal performance outcomes without exposing the firm to unacceptable financial, reputational or other risks. Therefore, the remuneration structure and strategy of a firm form an important aspect of sound corporate governance, although the proposals relating to remuneration are set out separately from the corporate governance enhancement proposals.
      Issue for consideration
      1. Do you think that there are any other aspects relating to corporate governance that are not taken into account in our approach? If so, what are they and why should they be taken into account?

      Proportionate application to firms depending on the nature, scale and complexity of their operations

      13. The corporate governance standards needed to ensure that large financial institutions (including international groups) are managed prudently and soundly are generally more extensive and rigorous than those required for smaller financial institutions with tightly held ownership (with the consequences of a failure of large financial institution or an international group being much more drastic from a systemic and investor detriment perspective than that of a failure of a smaller institution). Structures adopted by institutions carrying on financial services are also different, requiring differential application of corporate governance standards to different institutions.
      14. Accordingly, the corporate governance standards adopted by international standard setters provide for a proportionate and scalable application of those standards, taking due account of the nature, scale and complexity of the operations of the financial institution and its organisational structure. We have adopted a similar approach in our proposals.
      Issue for consideration
      2. Do you have any concerns that the proportionate application of the corporate governance and remuneration standards to firms as proposed may cause practical difficulties for firms in complying with those standards? If so, what are those difficulties, and how should they be addressed?

      Overarching corporate governance standard

      15. Under the current regime, Authorised Firms are subject to an overarching corporate governance requirement set out as one of the 11 high level Principles applying to such firms (see Principle 11 in GEN Rule 4.2.11). A requirement in identical terms (although not set out as a high level Principle), applies to AMIs under AMI Rule 7.2.2(1)(d). This standard provides that a firm must meet applicable standards of corporate governance as appropriate considering the nature, size and complexity of the firm's activities.
      16. This current overarching corporate governance requirement falls somewhat short of the enhanced corporate governance standards required by international standard setters because it does not specify the objective intended to be achieved by the corporate governance standards, which is to promote the prudent and sound management of the firm in the interests of the firm and for the protection of its customers and other stakeholders.
      17. Therefore, we propose that the current overarching corporate governance requirement applicable to Authorised Firms in GEN Rule 4.2.11 (Principle 11) and AMIs's in AMI Rule 7.2.2(1)(d) be replaced with a more expansive overarching provision in line with the international standard setters' enhanced standards as follows:
      (a) in the case of Authorised Firms, with a Principle that provides that "An Authorised Firm must have a corporate governance framework as appropriate to the nature, scale and complexity of its business and structure, which are adequate to promote the sound and prudent management and oversight of the Authorised Firm's business and protect the interests of its customers and stakeholders." (see GEN Rule 4.2.11); and
      (b) in the case of Authorised Market Institutions, a similar requirement, with the omission of the words "customers" in the relevant provision, as Authorised Market Institutions do not have "customers" as such, but only members (see AMI Rule 7.2.2(1)(d).
      Issue for consideration
      3. Do you have any concerns relating to the changes proposed to the overarching corporate governance standard? If so what are they and how should they be addressed?

      Overarching remuneration related standard

      18. Having sound remuneration practices forms an integral aspect of prudent and sound management of financial institutions. As became evident in the aftermath of the financial market crisis that began in 2007, some of the large financial institutions whose failure led to that crisis were found to have had remuneration strategies that led to excessive risk taking by their staff. This led to the adoption by the FSB of nine detailed and high level principles relating to 'sound compensation practices' for financial institutions, especially for systemically important financial institutions, which are now reflected in the international standard setters' requirements.
      19. Under the current regime, the DFSA does not have any remuneration specific requirements applying to Authorised Firms and Authorised Market Institutions. To address this gap, we propose that an overarching outcome based remuneration standard be adopted:
      (a) in the case of Authorised Firms, by way of an additional Principle for Authorised Firms (see GEN Rule 4.2.11 - Principle 12) which would provide that "An Authorised Firm must have a remuneration structure and strategies which are well aligned with the long term interests of the firm, and are appropriate to the nature, scale and complexity of its business" (see GEN Rule 4.2.12); and
      (b) in the case of Authorised Market Institutions, as an additional requirement in similar terms (see AMI Rule 7.2.2(e)).
      Issues for consideration
      4. Do you have any concerns relating to the proposed overarching remuneration related standard? If so what are they and how should they be addressed?

      Detailed requirement and best practice relating to corporate governance

      20. The above overarching corporate governance and remuneration standards provide both the mechanism and flexibility for setting more detailed requirements and best practice by way of Guidance. They also provide firms more flexibility for achieving the outcome intended by those standards, taking due account of the nature, scale and complexity of their own operations and structure.
      21. Using the above overarching corporate governance standard, and in line with the international standard setters' approach to corporate governance enhancements, we propose more detailed corporate governance requirements applicable to Authorised Persons (See GEN Rule 5.3.30.) This proposed new Rule:
      (a) assigns to the Governing Body of an Authorised Person the clear responsibility for:
      (i) setting/approving the business objectives of the firm, and the strategies for achieving those objectives; and
      (ii) providing effective oversight of the management of the firm to ensure that the senior management carries out the day-to-day management of the firm's business in accordance with the objectives and strategies set/approved by the Governing Body;
      (b) sets out two sets of broad requirements relating to the Governing Body:
      (i) the composition of the Governing Body (in terms of the number and mix of individuals with adequate knowledge, skills, expertise and time commitment necessary); and
      (ii) the resources, powers and internal governance procedures that the Governing Body must have, in order to be able discharge its duties and functions effectively; and
      (c) assigns to the senior management of the Authorised Person the responsibility for effectively carrying out the day-to-day management of the business of the firm in accordance with the objectives and strategies set/approved by the Governing Body.
      22. The Guidance items no 1 – 9 under proposed GEN Rule 5.3.30 provides clarification as to how the DFSA will apply the requirements in that Rule to Authorised Persons. Detailed best practice which Authorised Persons may adopt to achieve compliance with that Rule are set out in App3.1. These Guidance give flexibility for Authorised Persons to adopt governance structures and procedures that are appropriate to the nature, scale and complexity of their operations. In particular we note that unlike large operations, it would be neither feasible nor appropriate for smaller firms with a tightly held ownership structure to comply with all best practice specified in Guidance. As best practice guidance does not have the status of Rules, such firms will not be required to adhere to those aspects of best practice that are not appropriate, or not feasible, for compliance by them. However, appropriate overall measures to achieve the sound and prudent management of the business would still be needed.
      Issues for consideration
      5. Do you think that the detailed corporate governance requirements proposed in GEN Rule 5.3.30 contain all the relevant elements that are needed to promote sound corporate governance? If not, what are the changes needed and the reasons for such changes?
      6. Do you think the level of detail in Guidance under GEN Rule 5.3.30 and App3.1 is sufficient to enable firms to adopt a proportionate application of the requirements in that Rule to suit their operations? If not, what improvements are needed?

      Detailed remuneration related requirement and best practice

      23. Consistent with the approach we have adopted in relation to corporate governance enhancements, the overarching remuneration related standard is supported by more detailed requirements proposed in GEN Rule 5.3.31, which spell out the key elements which an Authorised Peron must take into account in establishing and implementing its remuneration structure and practices. These key elements require the Governing Body of the Authorised Person to ensure that the remuneration structure and the strategy of the firm:
      (a) is consistent with its business objectives and risk strategy;
      (b) provides for the effective alignment of the remuneration structure of Employees and the risk outcomes associated with the roles and functions assigned to those Employees;
      (c) covers, at a minimum, the members of the Governing Body, senior management, Persons Undertaking Key Control Functions in the firm and any major risk-taking Employees of the firm; and
      (d) is implemented effectively on an on-going basis.
      24. The Guidance items no 1 – 5 under proposed GEN Rule 5.3.31 provides clarification as to how the DFSA will apply the remuneration-related requirements in that Rule to Authorised Persons. Detailed best practice which Authorised Persons may adopt to achieve compliance with that Rule are set out in App3.2. As with the Guidance on corporate governance, Guidance on remuneration provides the flexibility for Authorised Persons to tailor their remuneration structure and strategies to suit the nature, scale and complexity of their operations. For example, the best practice in Guidance items no. 5 and 6 of App3.2 will be neither relevant nor needed for a firm which does not adopt performance based variable remuneration in compensating its Employees. Similarly, a firm which does not provide significant severance pay-outs need not adopt the best practice in Guidance item no. 7 in App3.2.
      25. We also propose that "the Governing Body of an Authorised Person must provide to the DFSA and relevant stakeholders sufficient information about its remuneration structure and strategies to demonstrate that such structure and strategies meet the requirements in GEN rule 5.3.30(1) on an on-going basis." The DFSA expectations for disclosure of information relating to the remuneration structure and strategies of an Authorised Firm are set out in Guidance items No. 3 – 5 under GEN Rule 5.3.31.
      26. These remuneration related requirements and best practice substantially cover the requirements set out in FSB's sound compensation principles and are consistent with the standards adopted by international standard setters. We note that what is proposed in this paper are not as prescriptive or detailed as those adopted in other some jurisdictions such as the UK or Australia relating to remuneration. We believe that the approach reflected in our proposals is more suited to and appropriate for the financial institutions within the DIFC.
      Issues for consideration
      7. Do you think that the detailed remuneration related requirement proposed in GEN Rule 5.3.31 contains all the relevant elements that are needed to promote sound remuneration practices within an Authorised Person? If not, what are the changes needed and the reasons for such changes?
      8. Do you think the level of detail in Guidance under GEN Rule 5.3.31 is sufficient to enable firms to adopt a proportionate application of the requirements in that Rule to suit their operations? If not, what improvements are needed?

      Other enhancements

      27. We also propose some further enhancements to a number of other provisions in the GEN module, dealing with overall systems and controls, where they have an impact on corporate governance enhancements proposed.
      28. One of the key enhancements we propose relates to GEN Rules 5.3.2 which deals with the organisational requirements applicable to Authorised Persons. Under the standards adopted by international standard setters, a key aspect of a sound and prudent corporate governance framework is to ensure that there is a clear division of roles and responsibilities assigned to Employees, and in doing so, that Employees are not assigned conflicting duties which impair the effectiveness of the performance of the relevant roles and functions.
      29. While we already have requirements relating to apportionment of responsibilities at a high level (see GEN Rules 5.2.1 and 5.2.2), the enhancements proposed to GEN Rule 5.3.2 expand the current requirements to explicitly require a clear definition of roles and functions as appropriate to the nature, scale and complexity of the firm's business and the roles assigned to the individuals. In doing so, firms are required to avoid assigning roles and functions to individuals where those roles and functions conflict with each other, thereby impairing the effective discharge of such roles and functions by the relevant individuals. The Guidance set out under GEN Rule 5.3.2 provides best practice in achieving compliance with these Rules taking account of the nature, scale and complexity of the operations of a firm.
      30. The other enhancement we propose is to require any significant changes to the corporate governance framework and remuneration strategies of an Authorised Firm (see GEN Rule 11.10.20) or Authorised Market Institution (see AMI Rule 10.5.3(1)(b)) to be provided to the DFSA as soon as practicable. This enables the DFSA to address any concerns it may have in relation to such changes in consultation with the Authorised Person. A Branch is required to provide such information only if the change is relevant to the activities and operations of the Branch.
      Issues for consideration
      9. Do you have any concerns relating to the enhancements proposed, described in paragraphs 27 – 30 above? If so, what are they and how should they be addressed?

      Enhancements relating to the DFSA's authorisation and supervision process

      31. The enhancements which we propose to the RPP Sourcebook (and to the AMI module which contains some aspects of supervision process for AMIs) are designed to ensure that when authorising and supervising an Authorised Person, the DFSA assesses the firm's ability to meet, on an on-going basis, the requirements relating to corporate governance framework and remuneration structure proposed in this paper. See sections 2.2.13(b) and 2.2.14(g) and (h) of the RPP Sourcebook for corporate governance related aspects and sections 2.2.13(f) and 2.2.14(l) for remuneration related aspects which the DFSA will take into account in assessing the suitability of an applicant to be an Authorised Person. Similar enhancements are made to the RPP Sourcebook and the AMI module to capture these enhancements as part of the overall supervision of Authorised Persons (see section 3.2.3(l) RPP Sourcebook and AMI Rule 10.5.3).
      Issues for consideration
      10. Do you have any concerns relating to the proposed changes described in paragraph 31? If so, what are they and how should they be addressed?

      Transitional arrangements

      32. The proposals in this paper require some transitional arrangements as far as existing Authorised Persons are concerned as they contain enhancements relating to existing corporate governance requirements and new remuneration-related requirements. Therefore, in order to ensure a smooth transition for existing firms, we propose that a maximum transitional period of one year be allowed from the date on which the enhancements come into effect for existing firms to achieve compliance with the new requirements. With regard to any new applications for licences after the proposed enhancements come into effect, we propose that they apply immediately to such applicants. See GEN Rule 10.7.2 for transitional arrangements for existing firms.
      Issues for consideration
      11. Do you think that the proposed transitional period of one year is adequate? If not, what transition period would be suitable?

      Click here to download the Consultation Paper in PDF Format.

      Appendix 1 — GEN Module PDF Format
      Appendix 2 — AMI Module PDF Format
      Appendix 3 — RPP Sourcebook PDF Format
      Appendix 4 — GLO Module PDF Format

    • Consultation Paper No. 76 Proposed Changes to the Markets Law Regime Part 2 — Recognition and Auditing

      Why are we issuing this paper?

      1. This Consultation Paper is the second consultation forming part of our review of the DIFC markets regime. This consultation seeks public comments on the DFSA's proposals to amend and simplify the Law and Rules in relation to:
      (a) the recognition of overseas exchanges, clearing houses and members of Authorised Market Institutions; and
      (b) expand the DFSA's supervisory oversight of auditors to include audit firms for DIFC incorporated companies that are listed on an AMI .or any other exchange.
      This paper also sets out the proposed changes to the Regulatory Law 2004, the Markets Law [2011] and the Rules to achieve the proposed amendments.

      Who should read this paper?

      2. The proposals in this paper would be of interest to:
      (a) Recognised Bodies and Recognised Members ("Recognised Persons");
      (b) Persons considering making an application to be recognised as a Recognised Person;
      (c) Authorised Market Institutions;
      (d) operators of a non-DIFC multilateral trading facility or alternative trading system;
      (e) DIFC incorporated companies listed on an AMI or any other exchange;
      (f) Auditors of DIFC incorporated companies in (e); and
      (g) advisors to Persons in (a) to (f) above.

      How is this paper structured?

      3. In this paper, we set out:

      PART 1 – RECOGNITION
      (a) some background regarding the Recognition Regime (paragraphs 8 - 13);
      (b) an outline of our proposed changes (paragraphs 14 - 25);
      (c) an outline of the key changes to the REC module (paragraphs 26 - 35); and
      (d) other related changes including transitional provisions (paragraphs 36 - 39).
      The proposed changes to the Regulatory Law 2004, additions to the new Markets Law [2011] and Rules are in Appendices 1 - 4.

      PART 2 – AUDITING

      (a) the purpose of the proposed changes (paragraphs 40 - 45);
      (b) the proposed changes (paragraphs 46 - 48);
      (c) some background regarding the expansion of the DFSA's supervisory oversight of auditors and the rationale for the proposed amendments (paragraphs 49 -52);
      (d) some benchmarking with key international organisations and jurisdictions (paragraphs 53 – 58); and
      (e) the impact of the proposed changes (paragraphs 59 - 623).
      The proposed changes to the Regulatory Law 2004 and Rules including the new Markets Rules are in Appendices 1-7.

      How to provide comments?

      4. All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use the Consultation Paper No. in the subject line. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      Comments to be addressed or emailed to:

      Consultation Paper No. 76
      Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE

      Email: consultation@dfsa.ae

      Tel: +971(0)4 3621500

      What happens next?

      5. The deadline for providing comments on the proposals is 4 August 2011. Once we receive your comments, we shall consider if any further refinements are required to these proposals. We shall then proceed to recommend the proposed changes to the Regulatory Law 2004 and the Markets Law [2011] to the President for enactment by the Ruler. If the proposed changes to the law are enacted, we shall then proceed to enact the relevant changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the law and DFSA Rulebook are made. We shall issue a notice on our website telling you when this happens.

      Terminology in this paper

      6. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary Module ("GLO") or in the proposed amendments. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Structure of this paper

      7. This Consultation Paper is the second consultation forming part of our review of the DIFC markets regime. This Consultation Paper is split into two parts. Part 1 deals with our proposals in relation to changes to Recognition and Part 2 deals with changes regarding the Auditing of Reporting Entities.

      Part 1 – Recognition

      Background

      8. Following a periodic review of our Recognition Module ("REC") the DFSA proposes to amend and simplify the Law and Rules in relation to the recognition of overseas exchanges, clearing houses and members of an AMI (the "Recognition Regime"). Our proposed changes to the Recognition Regime are proportionate in light of the risks posed to the DIFC and the DFSA's objectives and:
      (a) take into account the rapid evolution in the international trading landscape. The last decade has seen the rise of electronic trading, order routing, and internet-based trading interfaces. The electronic nature of modern trading has blurred the geographic boundaries of cross-border trading;
      (b) are designed to expand the regime to include the recognition of alternative trading systems, the quasi exchanges which are developing an increasingly important role in trading of financial instruments on the international capital markets; and
      (c) ensure that the Recognition Regime is aligned with Article 4(5) of the Federal Law, which requires that a person undertaking financial services business in the DIFC has a place of business in the DIFC.
      9. In summary, the current DFSA Recognition Regime operates as follows:
      (a) it permits non-DIFC exchanges and clearing houses meeting certain regulatory standards to provide access to their facilities to persons located in the DIFC. Such exchanges and clearing houses are generically defined as "Recognised Bodies"; and
      (b) it permits non-DIFC firms meeting certain regulatory requirements to be remote members of an Authorised Market Institution ("AMI") in order to trade Investments on a DIFC exchange from a place of business outside the DIFC. Such remote members are generically defined as "Recognised Members".
      10. The persons in (a) and (b) above are defined as "Recognised Persons" and the rationale for the regime is that it permits Recognised Persons to carry on prescribed limited cross-border activities without the need to be authorised or otherwise licensed by the DFSA. The DFSA considers that to license such persons would impose a disproportionate regulatory burden given that the substantive activities carried on pursuant to their recognition occur outside the DIFC under the laws and supervision of the Financial Services Regulator in their home jurisdiction.
      11. The rationale for recognition is that:
      (a) the status provides Recognised Persons with greater legal certainty in respect of any perimeter issues;
      (b) the status provides Recognised Persons with an exemption from the Financial Promotions Prohibition;
      (c) recognition, or a similar status, is accepted practice in a number of key jurisdictions; and
      (d) recognition increases market access, and liquidity, for market participants.
      12. The Recognition Regime, which was implemented in 2004, was originally cast as a carve-out from the Financial Services Prohibition in Article 41 of the Regulatory Law 2004. This approach was deliberately conservative, reflecting the nascent state of the DIFC legal framework. However, our experience and legal analysis of Recognised Persons show that in fact no Financial Service is carried on by such persons in or from the DIFC in the ordinary course of their activities, with one exception which we discuss in paragraph 17 below.
      13. Recognised Persons might, however, breach the Financial Promotions Prohibition in Article 41A of the Regulatory Law 2004, in carrying on their activities unless an exemption in GEN 3.4 applies.

      Outline of our proposed changes

      Structural changes

      14. The DFSA does not expect the proposed changes to have a material impact on Recognised Persons. The proposed changes to the Regulatory Law 2004 and the proposed new Markets Law [2011] are found at Appendix 1 and Appendix 2. The proposed new REC module is at Appendix 3. Changes to the AMI module are at Appendix 4, changes to the GLO module are at Appendix 5 and changes to the GEN module are at Appendix 7.
      15. The legal framework of the Recognition Regime is currently contained in the Regulatory Law 2004. However, the Recognition Regime is fundamentally about access to capital markets and the legal framework for such regime is more closely aligned to the provisions contained in the Markets Law [2011] than the Regulatory Law 2004. As a result we propose to move the substantive law relating to Recognised Persons from Chapter 9 (Article 61) of the Regulatory Law 2004 into Part 3 of the proposed new Markets Law [2011], in relation to which we are currently consulting on other matters under Consultation Paper 75. We also propose to move the more rule-like requirements currently contained at the Law level into the Rulebook.

      Financial Services Prohibition

      16. Article 41 of the Regulatory Law 2004 currently provides an exemption for Recognised Persons from the Financial Services Prohibition (the "Prohibition"). However, given that the legitimate activities of a Recognised Person under the Recognition Regime take place materially outside the DIFC, such activities would not normally result in a breach of the Prohibition. Therefore, the DFSA considers that the exemption from the Prohibition is unnecessary. As a result we propose to remove it from the Regulatory Law 2004. The DFSA considers that while there is no doubt that when a Recognised Member deals as principal on an AMI there is a resulting transaction created under DIFC law and on a DIFC exchange, this does not necessarily mean that such a person is carrying on a Financial Service in or from the DIFC. Likewise, the same analysis applies where the Recognised Member deals as agent on behalf of a client on an AMI. Merely placing an order on an exchange through a server (wherever located) does not bring a person located outside the DIFC into the DIFC for the purposes of Article 41 of the Regulatory Law 2004.
      17. However, the DFSA considers that if a Recognised Member deals on an AMI with a customer who is located in the DIFC, then such activity might breach the Prohibition because the substantive Financial Service would take place, at least in part, in the DIFC. To address this, we propose to restrict the activities of Recognised Members to dealing with non-DIFC customers and DIFC customers for whom it deals as a result of an unsolicited request for execution-only services. From this restriction we propose to carve out Recognised Members who are regulated by a Financial Services Regulator in the UAE, as is envisaged by the Federal Law. We also propose to carve out Recognised Members who have a Branch which is an Authorised Firm because such Recognised Members would have a place of business in the DIFC (see proposed new REC Rules 2.5.1 and 2.5.3 in Appendix 3).
      18. Because we have removed the explicit exemption from the Prohibition we propose to add a new requirement in the Markets Law [2011] which mandates that a person who operates an exchange, clearing house or alternative trading system from a place of business outside the DIFC can only provide direct access to its facilities to persons in the DIFC if it is admitted to the list of Recognised Persons (see Article 37(2) of the Markets Law [2011] in Appendix 2). By "direct access" the DFSA means admitting as a member or giving a person direct market access in the DIFC (via a terminal). We do not consider third-party access to the market to be "direct access". The rationale for requiring exchanges, clearing houses or alternative trading systems which offer direct access to persons in the DIFC to be recognised is that this permits the DFSA to have limited regulatory oversight and information-sharing arrangements for such persons.

      Financial Promotions Prohibition

      19. Because of the proposed new restrictions on Recognised Members dealing with customers in the DIFC, we also propose to remove the exemption from the Financial Promotions Prohibition for Recognised Members in GEN 3.4.1(2)(b). However, Recognised Bodies will continue to benefit from this exemption. For Recognised Members from the UAE a separate exemption from the Financial Promotions Prohibition in GEN 3.4.1(2)(a) may be relied on when undertaking marketing in the DIFC. For all other Recognised Members, other exemptions exist which may be appropriate, such as GEN 3.4.1(3)(b), which exempts Financial Promotions made to certain Professional Clients.
      20. Without an explicit exemption from the Prohibition, Recognised Persons would need to consider their activities carefully to ensure that they do not carry on a Financial Service in or from the DIFC without a relevant Licence. The DFSA considers that one of the key "indicators" as to whether a Person is carrying on a Financial Service in or from the DIFC is whether such person is carrying on the activity "by way of business" in or from the DIFC GEN Rule 2.3.1 contains the by way of business test.
      21. The Rules regarding recognition will remain in the REC module of the DFSA Rulebook. However, because of the substantial structural changes proposed to the Recognition Regime, we propose to replace the current REC module with a new REC module. The new REC module will be structured on the basis of subject matter rather than category of Recognised Person, will contain only five chapters (compared to 10 at present) and will be considerably shorter. Further details regarding the structure of the REC module are set out below.
      Issues for consideration
      1. Do you have any concerns or comments about our proposed structural changes to the Recognition Regime?

      Alternative trading systems

      22. The DFSA proposes to permit alternative trading system ("ATS") operators located outside of the DIFC to provide remote access to their facilities to Persons located in the DIFC. This proposal would create a level playing field with traditional exchanges and reflects the growing influence and presence of ATS in the capital markets.
      23. The rise in the last decade of the number of ATS operators in the global capital markets, stimulated by the 2007 implementation of the Markets in Financial Instruments Directive ("MiFID") in Europe, has changed the global landscape for trading securities. In particular, MiFID removed the concentration of trading on single exchange operators and put in place a more formal legislative framework (and regulations) for ATS operators. This has brought various benefits to investors including reduced trading costs, improved execution speed and increased choice of trading venue. Under MiFID, ATS are called Multilateral Trading Facilities ("MTF").
      24. In Europe, the role of MTFs is now growing in importance and in some cases is as important as trading on a regulated market. The US underwent a similar re-balancing of trading venues with the introduction of its ATS regulations in 1998.
      25. To reflect this regulatory convergence between exchanges and ATS, the DFSA proposes to permit ATS operators located outside the DIFC to be recognised as Recognised Bodies. However, to create a level playing field, the DFSA proposes that exchanges and ATS located outside the DIFC should have to meet the same Recognition Criteria, including meeting standards in their home jurisdiction which would broadly meet the Licensing Requirements for an AMI (see AMI Chapter 7).
      Issues for consideration
      2.
      (a) Do you agree with our proposals to permit ATS operators to be recognised as a Recognised Bodies thereby allowing them to provide remote access to their facilities to Persons located in the DIFC?
      (b) Is it appropriate for the DFSA to apply the same Recognition Criteria to both overseas ATS operators and exchanges? In particular, we would like you to comment on the applicability of the AMI Licensing Requirements to an ATS operator (see proposed REC Rule 4.1.1(f))?

      Proposed Changes to the REC Module

      26. The DFSA proposes to create a new REC module. However, the content of the proposed new REC Module is not substantially different from the existing module, and it is predominantly the layout of the Rules that will be changed. For efficiency we propose to group the Rules based on subject matter rather than category of Recognised Person. However, we are proposing to amend and delete some of the current Rules. The more substantial proposed changes are set out in this section.

      Recognition Criteria

      27. One of the key proposed changes to the REC module is that the current Recognition Requirements for Recognised Persons will be amended and simplified. The Recognition Requirements will now be referred to as "Recognition Criteria". There will be six criteria for Recognised Bodies and seven for Recognised Members (see proposed REC Rule 2.4 or 2.5).
      28. We propose that Recognised Persons will no longer be recognised by way of a formal Recognition Notice. Instead, for a Person to become recognised as a Recognised Person, it will be necessary for such Person to apply to be admitted to, and appear on, the list of Recognised Persons maintained by the DFSA. The DFSA will only admit a Person to the list of Recognised Persons if it appears to the DFSA that such Person satisfies and will continue to satisfy the proposed Recognition Criteria.
      29. We are also proposing to remove from the REC Module criteria that are not relevant for the DFSA in its consideration of a Recognised Person. For example the requirement relating to fitness and propriety of a Recognised Body in current REC Rule 3.2.4. The Recognition Regime is based on the reliance by the DFSA on the regulatory framework in the jurisdiction in which the Recognised Person is located. The DFSA will continue to rely upon the licence or other authorisation granted by the Financial Services Regulator in the home jurisdiction rather than undertaking an independent assessment of the fitness and propriety of the applicant for recognition.
      30. The Recognition Criteria for a Recognised Body have also been augmented by the inclusion of specific criteria relating to the arrangements in place for cooperation between the DFSA and the Financial Services Regulator responsible for the licensing or authorisation of the Recognised Body and also criteria relating to the equivalence of the law and practice under which the Recognised Body is licensed or authorised. These additional criteria were already considered by the DFSA pursuant to Rule 3.2.2 in considering whether a jurisdiction is acceptable to the DFSA, so the inclusion of specific Rules has only clarified the criteria the DFSA will take into account.
      31. For Recognised Members we are also proposing to add a further requirement relating to the equivalence of the law or practice under which the Recognised Member is licensed or authorised.
      32. Once admitted to the list of Recognised Persons, if a Recognised Person fails to meet the Recognition Criteria, the DFSA may remove them from the list. This will be subject, of course, to the DFSA providing a reasonable period for a person in breach to achieve compliance and the usual procedural fairness considerations. The DFSA may also remove a person from the list of Recognised Persons in other circumstances where it is necessary or desirable in the pursuit of the DFSA objectives. A decision to admit a person to, or remove a person from, the list of Recognised Persons will be appealable to the Regulatory Appeals Committee.

      Miscellaneous

      33. We are proposing to remove the Rule relating to changes of scope of recognition for a Recognised Body. This is because, under the proposed new regime, recognition will not be granted on the basis of a particular scope of activity. Consequently, this Rule will no longer be necessary.
      34. We are also proposing to remove certain reporting and notification requirements. The DFSA relies upon the Recognised Person's lead or home state Financial Services Regulator to supervise a Recognised Person. The focus of the DFSA's interest is on the DIFC and on those activities of the Recognised Person that may have an impact on the DIFC. The new reporting requirements reflect this position.
      35. We also propose to remove the guidance on waivers in the REC module. This guidance is merely signposting and the substantive right to seek a waiver of a Rule in REC (or AMI) is found in the Regulatory Law 2004. Finally, under these proposals the DFSA's "extended jurisdiction" in Article 63 of the Regulatory Law 2004 will no longer apply to Recognised Persons. We propose, in future, to rely on our general powers in relation to formerly Recognised Persons when necessary.

      Other matters

      Changes to the AMI module

      36. At present, pursuant to AMI Rule 7.2.7, an AMI may only admit as a member Authorised Persons and Recognised Persons. Under our proposals this restriction on AMI membership will remain but we propose to add a new category of permitted member to allow AMI's to admit persons who meet the criteria in GEN Rule 2.3.2(2). GEN Rule 2.3.2(2) exempts persons who are undertaking principal trading in Commodity Derivatives from the requirement to be Authorised. Because we do not Authorise such persons, we do not propose that persons who are undertaking principal trading in Commodity Derivatives on an AMI should be required to be Recognised Members. However, we do propose that an AMI should be able to admit them as members.
      37. Currently Recognised Members which meet the requirements in REC Rule 7.2.3(b) are required to have an agent for service in the DIFC as well as submit to the jurisdiction of the DIFC for activities relating to their Membership of an AMI. As these requirements are important mechanisms for the DFSA and the relevant AMI in investigating and enforcing market misconduct, we are proposing to keep these requirements. It is proposed that the AMI Rules be amended to include a prohibition on an AMI from permitting as a Member a person who meets the criteria in GEN Rule 2.3.2(2) or a Recognised Member, unless such person meets certain requirements including submitting to the jurisdiction of the DIFC Courts and DFSA and appointing an agent for service of process in the DIFC.

      Transitional provisions

      38. The proposals contained in this consultation will create a new framework and criteria for recognition. Therefore the DFSA has included transitional provisions which will permit all persons currently recognised to transition to the new regime under grandfathering provisions. Where a person so grandfathered fails to meet any of the Recognition Criteria they must, pursuant to the new Rules, notify the DFSA of such failure (see proposed new REC Rule 3.4.4(a)) and include in the notification any necessary remedial action. The DFSA will provide such a person with a reasonable period in which to achieve compliance.
      39. Further, because the DFSA is removing some of the process around recognition, such as the issue of a Recognition Notice and "in principle Recognition", existing Recognition Notices will cease to have effect upon implementation of the new Recognition Regime and all Recognised Persons should refer to the DFSA register for evidence of admittance to the list of Recognised Persons. If a Recognised Person requires proof of their recognised status in the DIFC for regulatory or other purposes, the DFSA will be able to provide a stamped copy of the evidence of admittance to the list of Recognised Persons on request. However, the DFSA register will be the definitive list.
      Issues for consideration
      3.
      (a) Do you have any concerns or comments about our proposed changes to the Recognition Regime?
      (b) Do the proposed changes create any unintended consequences?

      Part 2 – Auditors of listed companies incorporated in the DIFC

      Current Auditor Regulation

      40. Currently, the DFSA only registers and supervises audit firms of Authorised Firms (AFs) and Authorised Market Institutions (AMIs) that are domestic entities. These audit firms may be located in or outside the DIFC with the DFSA undertaking comprehensive independent oversight of such registered auditors' audit activities relating to AF's and AMI's. The DFSA does not have any supervisory oversight of auditors of companies incorporated in the DIFC which are listed on an AMI or any other exchange, unless they are AF's or AMI's. The auditors of DIFC incorporated companies not caught by the DFSA's oversight are required to be registered through the DIFC Registrar of Companies ("ROC").

      Scope and Purpose

      41. Currently, in the European Union ("EU") auditors for a listed company in an EU member state may be from another member state or be from a jurisdiction outside the EU If the auditors are from a jurisdiction outside the EU they must be overseen by a regulator of equivalent quality and status.
      42. In the DIFC, the DFSA has a comprehensive regime in place for the supervision of Auditors. Accordingly, to ensure that the DIFC is considered by the EU as equivalent, the DFSA proposes to undertake regulatory oversight of auditors of DIFC incorporated companies listed on an AMI or any other exchange. These changes will be made in combination with other changes to the Regulatory Law 2004 in relation to confidentiality.
      43. The changes which are proposed to achieve equivalence with the relevant EU directive will only affect Reporting Entities who are incorporated in the DIFC and whose securities are admitted to trade on an AMI. All other Reporting Entities are not affected by these changes.
      44. Such independent regulatory oversight of auditors of listed companies incorporated in the DIFC would allow for the passporting of auditors registered by the DFSA into the EU, thus enabling those auditors to conduct audits of DIFC based companies where they seek listings in the EU.
      45. Second, these changes will also allow the DFSA to meet Principle 8 of the Core Principles of Independent Audit Regulators by the International Forum for Independent Audit Regulators ("IFIAR") of which the DFSA is a member. This change will result in the DFSA audit regime being in line with all the IFIAR Core Principles.

      Proposed Changes

      46. The proposed changes are to expand the DFSA's supervisory oversight of auditors to include auditors for companies incorporated in the DIFC which seek listing on an AMI or an exchange in another jurisdiction.
      47. The proposed amendments are contained in Appendix 1 – 7
      48. The changes to the current regulatory regime necessary to achieve this will also encompass consequential changes to the current audit regime applying to DIFC established companies (under the DIFC Companies Law 2009 and Companies Regulations) as appropriate.

      Background

      49. These changes are as a result of communication with the European Commission ("EC") and to also allow us to meet the Core Principles of IFIAR. The EC is considering the recognition of DFSA registered audit firms and their ability to be considered equivalent to EU audit firms1.
      50. Since the financial crisis of 2008, IFIAR has issued a number of Core Principles for audit regulators globally and is working towards the common goal of serving the public interest and enhancing investor protection by improving audit quality, including through independent inspections of auditors and/or audit firms. This is being achieved by specifically promoting collaboration and consistency in regulatory activity through cross-border collaboration and exchange of information, particularly in the area of inspections of auditors and audit firms.
      51. In April 2011, IFIAR published its Core Principles, including Principle 1, which requires that the responsibilities and powers of audit regulators should, at a minimum, require independent oversight of the audits of public interest entities, for example, listed companies incorporated in the DIFC.
      52. As a member of IFIAR, the DFSA where possible, will adhere to these Core Principles. We believe the proposed changes would be in keeping with the Core Principles.

      Benchmarking

      53. The EC has been evaluating the situation of auditor oversight systems in non member countries/jurisdictions, including the DIFC, with the aim of allowing international co-operation and in particular passporting on the supervision of audit firms in cases where the auditor oversight systems in the non member countries/jurisdictions are considered equivalent to that in the EU. The goal is to avoid duplication of supervisory work and unnecessary burden on audit firms and above all to promote a high degree of investor protection by ensuring high quality audits.
      54. The EC has the status of an observer with IFIAR and its individual member states within the EU are members. EU directives require each member state to ensure that all statutory auditors and audit firms of listed companies are subject to a system of quality assurance. For example, the criteria for quality assurance include independence of the audit regulator from audit firms with respect to their funding and inspections.
      55. The EC ensures a harmonized approach to the independent oversight of auditors of publicly listed entities in the EU and allows for the passporting of auditors registered in non member countries/jurisdictions into the EU, in order to allow those auditors to conduct audits of listed companies in the relevant member states. Each member state will determine whether to disapply any requirements in respect of those audits of third country/jurisdiction companies, which fall within the remit of the third country/jurisdiction regulatory authority. Some member states may determine that registration is not required.
      56. In the United Kingdom (UK), the Audit Inspection Unit (AIU) of the Professional Oversight Board (POB), which is a part of the Financial Reporting Council (FRC) oversees the audits of all UK incorporated companies with listed equity and/or listed debt and public interest entities such as non listed banks, building societies and pension schemes. FRC and its relevant bodies namely the POB and AIU are independent from the profession, and FRC is a member of IFIAR.
      57. In the US, the Public Company Accounting Oversight Board (PCAOB) was set up by the Sarbanes-Oxley Act of 2002, to oversee the auditors of publicly listed companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair and independent audit reports. PCAOB allows for the registration of auditors from third countries/jurisdictions but still conducts its own supervision. The PCAOB is a body corporate and operates as a non profit corporation. It is independent from the profession and a member of IFIAR.
      58. In Australia, pursuant to the Corporations Act 2001, the Australian Securities and Investments Commission ("ASIC") has responsibility for the surveillance, investigation and enforcement of auditors of publicly listed companies. ASIC is independent from the profession and a member of IFIAR. If a foreign company lists on the Australian Stock Exchange, the audit may be conducted by a foreign based auditor, provided that the ASX is satisfied that the standards of audit from the foreign jurisdiction are determined to be equivalent.

      Impact of Proposals

      59. The benefits of including these audit firms within the DFSA's remit are as follows:
      a. The DIFC would have a consistent audit supervisory regime for DFSA regulated entities and companies incorporated in the DIFC where their securities are to be listed (on an AMI or exchange acceptable by the DFSA).
      b. The DFSA would comply with the recently published IFIAR Core Principles and in particular the obligation to be the independent audit regulator for companies incorporated in the DIFC and seeking listings.
      c. An audit firm registered with the DFSA would be able to continue their audit activities of DIFC based companies seeking listings on exchanges outside the DIFC.
      60. Under these proposals the DFSA would be supervising auditors of listed companies incorporated in the DIFC that may not be carrying out financial services. This will require expertise for oversight of non-financial service audits. The DFSA is of the view that it has the necessary resources to achieve this oversight.
      61. The ROC would continue to be the audit regulator for those audit firms that conduct audits of entities that are not DFSA AFs, AMIs or listed companies incorporated in the DIFC.
      62. Currently, these changes will only affect a small number of primary listings (both debt and equity), where the listed company is incorporated in the DIFC.
      63. As a result of the introduction of these rules in MKT for auditors the DFSA has identified a number of improvement opportunities for the current auditor regime in the GEN Module. To address those improvements we also propose to make a number of changes to Chapter 8 of GEN.
      Issues for consideration
      4. Do you consider these changes appropriate for the purposes outlined above? If not why?

      1 Pursuant to Chapter XI of the EU directive 2006/43/EC


      Click here to download the Consultation Paper in PDF Format.

      Appendix 1 — Regulatory Law PDF Format
      Appendix 2 — Markets Law PDF Format
      Appendix 3 — REC Module PDF Format
      Appendix 4 — AMI Module PDF Format
      Appendix 5 — GLO Module PDF Format
      Appendix 6 — Markets Rules (MKT) PDF Format
      Appendix 7 — GEN Module PDF Format

    • Consultation Paper No. 75 Proposed Changes to the Markets Law Regime

      Why are we issuing this paper?

      1. The DFSA proposes to make significant changes to the requirements applicable in respect of:
      (a) the Offer of Securities to the Public in or from the DIFC;
      (b) the admission to trading of Securities on an Authorised Market Institution;
      (c) the governance of Reporting Entities;
      (d) market disclosure of information; and
      (e) the requirements applicable to Listed Funds.
      A substantial part of these requirements is currently contained in the Markets Law 2004 and in the Offer of Securities Rules (OSR) module of the DFSA Rulebook. For convenience, these provisions are collectively referred to as the “Markets Law Regime”.
      2. The changes proposed in this paper are designed primarily to bring the DFSA's Markets Law Regime into closer alignment with the EU requirements in the Prospectus Directive (“PD”) and the Market Abuse Directive (“MAD”), while retaining features necessary to accommodate regional needs and circumstances.

      Who should read this paper?

      3. The proposals in this paper would be of interest to:
      (a) companies incorporated both in the DIFC and in other jurisdictions who wish to raise capital by offering their Securities to the public in or from the DIFC;
      (b) companies whose Securities are, or are to be, admitted to trading on an Authorised Market Institution;
      (c) Fund Managers where Units of the Funds they manage are or are to be admitted to trading on an Authorised Market Institution;
      (d) Persons investing or intending to invest in Securities offered in or from the DIFC;
      (e) Authorised Market Institutions and Regulated Exchanges and clearing houses, particularly in the in the GCC;
      (f) Authorised Firms acting as Financial Intermediaries in respect of offers of Securities or dealing or trading in Securities which are admitted to trading on an Authorised Market Institution or Regulated Exchange;
      (g) Recognised Bodies and Recognised Members;
      (h) Persons providing legal, accounting and audit services or acting or proposing to act as sponsors or other third party advisers in respect of offers of Securities; and
      (i) Financial Services Regulators, particularly in the GCC.

      How to provide comments?

      4. All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use the Consultation Paper number in the subject line. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      Comments to be addressed or emailed to:

      Consultation Paper No. 75
      Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE

      Email: consultation@dfsa.ae

      Tel: +971(0)4 3621500

      What happens next?

      5. The deadline for providing comments on the proposals is 18 July 2011. Once we receive your comments, we shall consider if any further refinements are required to these proposals. We shall then proceed to recommend the proposed changes to the Markets Law 2004 to the President for enactment by the Ruler. If the proposed changes to the Markets Law 2004 are enacted, we shall then proceed to enact the relevant changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the Markets Law 2004 and DFSA Rulebook are made. We shall issue a notice on our website telling you when this happens.

      Background

      6. The proposals in this paper stem from a comprehensive review of the Markets Law 2004 and the OSR undertaken as part of the DFSA's rolling review of the legislation it administers, including its Rulebook modules, to ensure their adequacy and relevance in light of current regulatory and market developments.

      Replacement of the Markets Law 2004 and the OSR module

      7. Because the proposals involve significant augmentation and refinements to many of the current provisions in the Markets Law 2004 and the OSR, and a thematic re-arrangement of those provisions (see paragraph 60), we intend to repeal and replace this legislation in its entirety. The Markets Law 2004 will be replaced with the Markets Law 2011 (see Annex A) and the OSR will be replaced with the Markets Rules (MKT) module (see Annex (B)).
      8. We also propose less extensive changes to other modules of the DFSA Rulebook, such as the Authorised Market Institutions (AMI) module (see Annex C) and the Glossary (GLO) module (see Annex D).

      Structure of the paper

      9. The proposals in this paper are structured, for convenience, to substantially mirror the chapter headings used in the Markets Rules (MKT) module as follows:
      (a) Terminology — paragraph 10;
      (b) Part 1: Prospectus requirements — Paragraphs 11 – 32;
      (d) Part 2: Authorised Market Institutions — Paragraphs 33 & 34;
      (e) Part 3: Obligations of Reporting Entities — Paragraphs 35 – 56;
      (f) Part 4: Market disclosure — Paragraphs 57 – 60;
      (g) Part 5: Accounting periods and financial reporting — Paragraph 61;
      (h) Part 6: Market abuse provisions — Paragraphs 62 & 63;
      (i) Part 7: Listed Funds — Paragraph 64 & 65; and
      (k) Part 8: Other changes — Paragraphs 66 – 68.

      Terminology in this paper

      10. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in GLO or in the proposed amendments in this paper. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning. Any italicised words are terms not used in our legislation, but used in the EU Directives.

      Part 1: Prospectus requirements

      Trigger for a Prospectus

      11. The proposed Prospectus disclosure regime reflects a significant change from the current Prospectus requirements in that it no longer classifies offers of Securities into three classes, i.e., “public offers”, “exempt offers” and “unregulated offers”. Instead, we are proposing a structure which is better aligned with the approach of the European Union's Prospectus Directive (“PD”) and is centred around two types of activities which would trigger the need to have a Prospectus:
      (a) an Offer of Securities to the Public in or from the DIFC; and
      (b) having Securities admitted to trading on an Authorised Market Institution.
      12. We propose that a Prospectus be required for the purposes of having any Securities admitted to trading on an Authorised Market Institution. This requirement is an essential feature for admission to trading of Securities in the European Union and other major jurisdictions to ensure full and proper disclosure relating to Securities at the point of their admission to trading on an exchange. The absence of such a requirement in the current OSR regime has led to significant difficulties in ensuring full and proper disclosure of information to markets, especially where Securities issued to professional/wholesale investors under limited disclosure are subsequently admitted to trading on an Authorised Market Institution and become open to retail investors.

      A new definition of “Offers of Securities to the Public”

      13. Under the current OSR, activities that constitute an “Offer of Securities” are defined in terms of “offers” and “invitations” directly or indirectly targeting investors. Where such offers are directed at or targeted to Retail Clients in the DIFC, they are classified as Public Offers. We propose to include in the Markets Law a new definition of activities constituting “Offers of Securities to the Public” in line with the PD definition. Under the proposed definition, “a communication to any person in any form or by any means, presenting information on the terms of the offer and the Securities offered, so as to enable an investor to decide to buy or subscribe for those Securities…” is an Offer of Securities to the Public and triggers the Prospectus requirement.
      14. As this definition is very wide, in line with the PD, we have excluded from the definition of an “Offer of Securities to the Public” those communications made in connection with the trading of Securities on an Authorised Market Institution or other Regulated Exchange. This is to remove from its ambit communications made for the purposes of, or in connection with, the trading of Securities where such trading occurs on a fully informed basis on the secondary market, with the benefit of the disclosures made to, and under the supervision and scrutiny of, an Authorised Market Institution or other Regulated Exchange.

      Exemptions from the Prospectus requirements

      15. We propose to provide specific exemptions from the Prospectus requirement:
      (a) in the case of an Offer of Securities to the Public where the offer qualifies as an Exempt Offer (see MKT Rule 2.3.1); and
      (b) in the case of having Securities admitted to trading on an Authorised Market Institution where the Securities qualify as “Exempt Securities” (see MKT Rule 2.4.1).
      16. In addition to the exemptions noted above, the requirements relating to Prospectuses in the Markets Law and MKT do not apply to an Exempt Offeror (i.e. a recognised government or other Person included in the DFSA's Exempt Offeror list). Accordingly, the Securities of an Exempt Offeror, or Securities which are unconditionally and irrevocably guaranteed by such an Exempt Offeror, are not subject to the Prospectus requirements, and can be offered to the public or admitted to trading on an Authorised Market Institution without having to comply with the Prospectus requirements in the Markets Law and MKT. However, should such an Exempt Offeror wish to voluntarily subject itself to the Prospectus regime, the DFSA has the power to modify the Markets Law to achieve this effect (see Guidance item no 4(b) under MKT Rule 1.1.3).
      17. While these exemptions are substantially similar to the exemptions provided under the PD, we propose some adaptations to accommodate regional circumstances and the nature of DIFC markets (see paragraph 18 relating to natural Person Professional Clients).

      Individual Professional Clients

      18. Under the PD approach, there is an exemption from the Prospectus requirement for offers made exclusively to “qualified” investors. This PD definition is analogous to our definition of a “Professional Client” and includes both institutional and individual investors. We propose to follow the PD approach except in one respect. We propose not to apply the exemption from the Prospectus requirement in the case of an Offer of Securities made to a Professional Client who is a natural person. This is because our current criteria for Professional Clients do not have a particularly high net asset test (currently set at US$500,000 based roughly on the MiFID test of EU500,000 portfolio of assets); and as such, does not warrant the removal of the benefit of Prospectus disclosure to such investors. (See MKT Rule 2.3.1(a)).
      19. We note that although the PD provides an exemption from the Prospectus disclosure for offers made exclusively to qualified investors, it draws a distinction between natural person investors and institutional investors, in that it applies an opt-in approach for natural person investors to become qualified investors. Therefore we believe that the underlying intent of the PD and our approach are not inconsistent.

      Increase in the monetary threshold for non-retail investments

      20. We propose to increase the monetary threshold for investments that qualify as “non-retail” investments (such as those currently available under the OSR for Debentures and Commercial Paper for minimum consideration of US$50,000) in line with the recent changes made to the PD. Under these changes, the monetary threshold for the exemptions from the Prospectus requirement, where the minimum consideration paid or payable by an investor is at least EUR50,000 or where the Securities are denominated in amounts of at least EUR50,000, has been increased to EUR100,000. This is because, as noted by the Council of the EU, EUR50,000 is too low a threshold to be a true reflection of the distinction between retail investors and qualified investors in terms of investor capacity, as retail investors were found to have made investments more than EUR50,000 in one single transaction.
      21. Accordingly, our proposals include exemptions from the Prospectus requirement to Offers of Securities to the Public where the consideration payable by an investor, or the denomination of the relevant Securities, is at least US100,000 (which is a rough equivalent to EUR100,000) (see MKT Rule 2.3.1(c)and (d)). See also under the small scale offerings discussed below where the monetary threshold to qualify as a small scale offer has been increased.

      Small scale offerings

      22. Under the current OSR regime, there are a number of exemptions for “small scale” capital raisings where:
      (a) no Prospectus is required for 50 or fewer private placements made in the DIFC within 12 months, with the total capital raised via those placements not exceeding US$1 million; and
      (b) less detailed disclosure than in a full Prospectus is required (based on an Exempt Offer Statement) for:
      (i) 50 Offers in the DIFC within 12 months; or
      (ii) a capital raising where the total consideration paid is less than US$1 million.
      23. Under the PD, there are certain small scale capital raisings which are totally exempt from the Prospectus requirement as follows:
      (a) offers directed at fewer than 100 investors of any class (which number has recently been increased to fewer than 150 investors);
      (b) offers where the total capital raised is less than EUR1 million over a period of 12 months (where the monetary threshold is now increased to EUR 5 million);
      (c) offers of non-equity (i.e. debt) Securities issued by continuous issuers which are credit institutions and the total capital raised is at least EUR50 million (where the monetary threshold is now increased to EUR75 million); and
      (d) in the case of Securities admitted to trading, additional capital raising, over a period of 12 months, involving less than 10% of the number of Securities of the same class already admitted to trading.
      24. Our proposed exemptions reflect, with one exception, the recent changes to the PD noted above. We propose to retain the current limit of 50 or fewer offers in or from the DIFC within 12 months, so that mass marketing in or from the DIFC without a Prospectus cannot be undertaken using this exemption. See MKT Rule 2.3.1(b) Guidance which clarifies that it is the number of offers made, rather than the actual issues or sales resulting from such offers, that would be relevant for the purposes of this exemption.

      Secondary sales to retail investors

      25. Under the current OSR regime, where Securities have previously been offered by way of a Prospectus, no subsequent (i.e. secondary) offers of those Securities are treated as new offers.
      26. We propose, in line with the PD, that any secondary Offer of Securities to the Public where those Securities were previously offered without a Prospectus in reliance on an available exemption should be treated as a new Offer of Securities to the Public. As a result, unless the new offer in itself is an Exempt Offer as prescribed in MKT Rule 2.3.1, the subsequent offer would trigger the requirement for a Prospectus under our proposals (see MKT Rule 2.3.2).
      27. Under the PD, where Securities are placed through a Financial Intermediary for subsequent resale to retail investors, the Financial Intermediary is permitted to use a Prospectus prepared by the initial issuer, provided the Prospectus meets the requirements relating to retail offerings, the issuer has consented to the use of the Prospectus by the Financial Intermediary and the Prospectus is current. This is to provide greater flexibility and clarity to issuers and Financial Intermediaries, whilst promoting adequate retail investor protection in secondary sales. We therefore propose to follow the PD approach by allowing Financial Intermediaries to use a Prospectus prepared by the Issuer subject to similar conditions. See MKT Rule 2.6.5.

      Key Information to be included in the Summary and civil liability

      28. The recent changes to the PD encompass more tailored and detailed key information to be included in a Prospectus in the form of a Summary. This enables investors to make informed decisions and more easily compare the Securities offered under the Prospectus with similar investments. In accordance with the PD approach, we propose to include a requirement for a more comprehensive Summary to be included in a Prospectus containing certain Key Information specified (see MKT Rule 2.5.2(1)(b)). We also propose provisions, in line with the PD, to ensure that Persons liable for the Prospectus are not exposed to civil liability in respect of the content of the Summary, unless the Summary, when read in conjunction with the other parts of the Prospectus, is misleading, inaccurate or inconsistent.

      Validity of a Prospectus

      29. The current OSR regime does not contain a requirement that limits the validity of a Prospectus to a specific period. Accordingly, a Prospectus, provided it contains all the relevant information required under the current regime, can be used without any need to replace it after a particular period. Under the recent changes to the PD, a Prospectus is valid for a period of 12 months from the date of its approval for the purposes of making an Offer of Securities to the Public or for having Securities admitted to trading on an exchange, provided it contains all the relevant information. In line with the PD approach, as well as the Prospectus requirements applicable to Funds, we propose to limit the validity of a Prospectus to a period of 12 months from the date of its approval by the DFSA (see the Prospectus approval discussed below). However, should there be any developments between the approval of the Prospectus by the DFSA and the Offer of the Securities to the Public or the admission of the Securities to an Official List of Securities, the Prospectus must be updated by a Supplementary Prospectus (see MKT Rule 2.9.1). We also note that all the information in a Prospectus has to be up to date during the 12 month currency of a Prospectus. For example, the historical financial information that is included in a Prospectus cannot be older than 18 months from the date of the Registration Statement (or Prospectus) if audited interim financial accounts are included in it. See Guidance under MKT Rule 2.9.1.

      Prospectus approval

      30. We propose to change the current approach relating to Prospectus filing under which the DFSA accepts a Prospectus for filing but does not formally “approve” the Prospectus. Instead, we propose formally to approve a Prospectus before it can be used for the purposes of making a Public Offer to:
      (a) better align the DFSA's approach with the EU approach; and
      (b) enable the DFSA to be satisfied that the Prospectus is “fit for purpose” after a more comprehensive review of its content, especially where the issuers are less experienced.
      31. The DFSA approval of a Prospectus signifies that the DFSA is satisfied that the Prospectus, at the time of its approval, meets the applicable requirements in the Markets Law and the MKT. It does not mean that the DFSA accepts responsibility for the accuracy, comprehensiveness or merits of the information included in the Prospectus. The liability for the content of the Prospectus lies with the issuer of the Prospectus and other Persons such as those whose opinions or statements are included in the Prospectus with their consent. To ensure that investors relying on the Prospectus to make investment decisions are made clearly aware of this, a Prospectus is required to include in its front page a clear and prominent statement that the DFSA does not accept any responsibility for the accuracy and comprehensiveness of the content of a Prospectus (see MKT Rule 2.5.1(3)(d).
      32. The proposed approval process requires a formal application containing the draft Prospectus and the relevant information to be filed with the DFSA within a certain specified time before the intended date of the Prospectus Offer (see MKT Rule 2.6.1), and the DFSA approving the Prospectus only where it is reasonably satisfied that the Prospectus meets all the applicable requirements in the Law and the Rules (see MKT Rule 2.6.2). A Person intending to make a Prospectus Offer may file a draft version of the Prospectus with the DFSA for its early review to avoid unnecessary delays in getting the Prospectus approved (see Guidance to MKT Rule 2.6.2). The DFSA will, as soon as practicable after processing the application for approval, notify in writing the Person who submitted the application of its decision either to approve or not to approve the Prospectus (see MKT Rule 2.6.2(2)&(3)). A decision by the DFSA not to approve a Prospectus is appealable to the Regulatory Appeals Committee (see MKT Rule 2.6.2(4)).
      Issues for consideration

      1. Do you have any concerns relating to any of the changes proposed, in particular:
      a. requiring a Prospectus for having Securities admitted to trading on an Authorised Market Institution?
      b. the proposed definition of an Offer of Securities to the Public, and the exclusion of certain communications from that definition?
      c. requiring a Prospectus in the case of an Offer of Securities to the Public which is directed at a Professional Client who is a natural Person?
      d. the increase in the monetary threshold for high-worth offerings in line with the increase under the PD?
      e. treating any secondary offer of Securities which were previously offered under a Prospectus or any available exemption as a new Offer of Securities to the Public?
      f. introducing a Summary containing Key Information in a standardised format to facilitate comparison and well informed decision making by retail investors? and
      g. introducing a 12 month validity period for a Prospectus?
      2. Do you have any concerns about the DFSA formally approving a Prospectus or any of the procedures proposed for the purposes of formally approving a Prospectus? If so, what are they and how should they be addressed?
      3. Do you have any concerns about the adequacy of the warning that the DFSA is not liable for the content of the Prospectus, and if so how should such concerns be addressed?
      4. Do you have any other concerns relating to the above issues or any other aspects of the proposals relating to the Prospectus regime? If so, what are they, and how should they be addressed?

      Part 2: Authorised Market Institutions

      Supervision of Authorised Market Institutions

      33. As part of the streamlining and enhancement process we have undertaken relating to the markets provisions, we have placed in the AMI the provisions dealing with the listing procedures that are currently found in the OSR. In doing so, we have also removed some unintended effects and duplications. See chapter 8 of the AMI at Annex C.
      34. There is one noteworthy change we have made to the Markets Law relating to Securities which are included in an Official List of Securities. The current OSR does not require any Securities admitted to an Official List of Securities to be also admitted to trading on an Authorised Market Institution. We propose that any Securities which are admitted to an Official List of Securities ought also to be admitted to trading on an Authorised Market Institution. This new requirement does not prevent Securities admitted to trading on an Authorised Market Institution from being also admitted to trading on other exchanges, including those outside the DIFC. It is designed to promote, consistently with international practice, a greater degree of transparency relating to the trading of the relevant Securities wherever such trading occurs (see Article 33(3) of the Markets Law). We have also included transitional provisions so that existing listings of debt Securities which are not admitted to trading on an Authorised Market Institution could continue to maintain their current status (see chapter 9 of the MKT).
      Issues for consideration

      5. Do you have any concerns about our proposal to require Securities admitted to an Official List of Securities to be also admitted to trading on an Authorised Market Institution? If so, what are those concerns and how should they be addressed?

      Part 3: Obligations of Reporting Entities

      Overview

      35. Where a Person makes an Offer of Securities to the Public or has Securities admitted to trading on an Authorised Market Institution, such a Person becomes a Reporting Entity. In the case of a Fund, the Fund Manager of a Fund becomes a Reporting Entity only where the Units of the Fund are admitted to trading on an Authorised Market Institution (see Part 7 of this paper for requirements relating to Reporting Entities of Listed Funds).
      36. A Reporting Entity attracts a range of obligations under the Markets Law> and the Rules. These include matters relating to how a Reporting Entity is governed the disclosures to be made to markets of material information relating to matters such as its operations, developments and financial position and prospects (see Part 4 of the Markets Law and the associated Rules). The key aspects of these requirements, including the significant enhancements proposed, are set out below.

      Definition of a Reporting Entity

      37. We propose to insert in the Markets Law a substantive definition of a Reporting Entity, extending the current definition to cover Reporting Entities of Listed Funds. It also confers on the DFSA a power to declare a Person to be “a Reporting Entity” or, conversely, a Person who otherwise qualifies as a Reporting Entity to “not be a Reporting Entity”. This power is particularly important to deal with situations where a Person other than an issuer of the Securities is the more appropriate Person to be declared as the Reporting Entity because that Person has access to all the relevant information required to be disclosed in respect of any Securities. An example is a Person who sets up a Special Purpose Vehicle (SPV) for securitisation of an asset held by that Person, where the SPV will be the mere issuer of the Securities, with the Person setting up the SPV having access to all the relevant information in respect of such Securities. The declaration power is to be exercised by the DFSA subject to due process requirements, i.e. providing the relevant parties a right of representation and rights of appeal to the Regulatory Appeals Committee (see Article 37 of the Markets Law).

      Governance of Reporting Entities

      38. We issued for public consultation in March 2010 a version of corporate governance principles and best practice standards under CP68, on the basis that further changes might be made as part of the full package of reforms to the Markets Law regime which we now propose.
      39. We now propose to amend the corporate governance framework to bring our regime into closer alignment with the UK Corporate Governance Code (the UK code) issued by the Financial Reporting Council on which our corporate governance regime is primarily modelled. The current version of the UK code was finalised only in June 2010. We have also taken into account:
      (a) the direction of international developments in corporate governance; and
      (b) regional circumstances relevant to the DIFC markets.

      Overarching outcome based governance principles

      40. We have brought together a range of standards and requirements relating to the governance of a Reporting Entity under a new overarching outcome based provision in the Markets Law (“the overarching governance requirement”). This provision requires a Reporting Entity to have “… a corporate governance framework which is adequate to promote prudent and sound management of the Reporting Entity in the long-term interests of the Reporting Entity and its shareholders.” (see Article 38(1) of the Markets Law).
      41. In designing this overarching principle, we took into account the 'purpose of corporate governance' as stated in the UK Code, which states that the “purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.” We have considered it more appropriate to use the term “long-term interests” instead of the “long-term success” as used in the UK code, in line with the OECD considerations dealing with corporate governance issues in the aftermath of the financial market crisis. These considerations focus on the need to minimise poor governance practices that adversely affect the “longterm objectives and viability” of companies and organisations, at the expense of short term financial profit or success.

      Ambit of corporate governance requirements

      42. The proposed overarching governance principle has enabled us to bring under it a wide spectrum of matters that go to the heart of good governance. These include provisions dealing with Directors' duties, conflicts of interests (see the provisions relating to Related Party Transactions and dealings by Restricted Persons) and shareholder protection provisions. These are not new provisions as such, but provisions currently located in various parts of the OSR. In re-arranging these requirements under the overarching governance principle, we have also made changes to address identified weaknesses, gaps and anomalies.

      Corporate Governance Principles

      43. We propose to incorporate 7 corporate governance principles (the “Principles”) that apply to Reporting Entities. These Principles will have the status of Rules and apply to Persons who become Reporting Entities in respect of Shares and not in respect of other Securities. These Principles are also formulated, like the overarching governance requirement in the Markets Law, as high level outcome based requirements designed to achieve the following:
      (a) placing clear accountability on the Board of a Reporting Entity for ensuring that the Reporting Entity's business is managed prudently and soundly — Principle 1;
      (b) establishing a clear division between the Board's responsibilities (which are to set the strategic objectives of the Reporting Entity and to provide oversight of the management of the Reporting Entity) and the Senior Management's responsibility (which is to manage the Reporting Entity's business in accordance with the strategic aims and risk parameters set by the Board) — Principle 2;
      (c) setting the requirements relating to the Board composition, and the expertise and resources it must have, to be able to discharge its responsibilities effectively — Principle 3; and
      (d) establishing a range of specific Board responsibilities such as those relating to sound risk management and internal controls (Principle 4), effective communication with shareholders (Principle 5), accurate and sound reporting on financial positions and prospects of the Reporting Entity (Principle 6) and sound remuneration practices (Principle 7).

      Proportionality

      44. The best practice standards included in App4 to the MKT set out measures which a Reporting Entity may adopt in order to achieve the outcomes intended by the Principles. These best practice standards provide greater flexibility for application by Reporting Entities taking into account the nature, scale and complexity of their own operations.

      Comply or explain approach

      45. The best practice standards in App4 are underpinned by a “comply or explain” approach which is similar to the approach reflected in the UK code. This essentially means that while it is mandatory for a Reporting Entity to achieve the outcomes intended by the Principles, it is free to adopt practices or procedures other than those set out in App4 to suit its own operations. For example, where the size of a Board of a particular Reporting Entity does not permit the creation of multiple committees of the Board, it may have a fewer number of Board committees undertaking multiple functions, provided there are no conflicting obligations. Where there is such a valid reason for deviation from the best practice standards in App4, the Reporting Entity should be able to clearly explain those reasons.

      Remuneration related issues

      46. The version of the corporate governance principles on which we sought public comments under CP68 in March 2010 did not contain a principle relating to remuneration (although it contained some best practice standards relating to remuneration). We propose to bring to the principle-level a new outcome based remuneration related principle, which requires the Board “to ensure that the Reporting Entity has remuneration structures and strategies that are well aligned with the long-term interests of the entity”. While there is significant debate and divergence relating to the level of detailed regulation of remuneration practices needed within corporations, the need to better align remuneration to long-term corporate and individual performance to promote sustainable performance is reflected in most corporate governance codes, including the UK code. Hence our proposal to include a specific high level remuneration related principle.

      Directors' duties and treating shareholders fairly

      47. The provisions dealing with Directors' duties and fair treatment of shareholders in section 3.3 of MKT are not new and are currently found scattered in various appendices in the OSR, are now brought together under the overarching governance requirement in the Markets Law. They impose on the Directors of a Reporting Entity a range of duties including those relating to acting in good faith and on an informed basis and exercising due diligence in discharging their functions. There are also other provisions explicitly dealing with shareholder approval and other procedures required in matters relating to normal conduct of affairs of a company, such as reduction in share capital and exercise of pre-emption rights.
      48. These obligations are, in most jurisdictions, found in the company law regimes. Should the legal requirements applicable to a Reporting Entity in the jurisdiction of its incorporation contain more stringent requirements than these, compliance with those more stringent requirements suffices. Conversely, compliance with these minimum standards is required in the absence of any comparable or more stringent requirements (see Guidance item 2 under MKT Rule 3.3.1).

      Conflicts of interests

      Purpose

      49. The proposed requirements relating to dealings by Restricted Persons (section 3.4) and Related Parties (section 3.5) are designed to address the critical issue of conflicts of interests having an adverse impact on the assets and interests of a Reporting Entity.
      50. Restricted Persons are members of the senior management of the Reporting Entity (such as executive Directors and senior managers of the Reporting entity). As these Persons may have access to inside information due to their position, such persons are prohibited from dealing in Securities of the Reporting Entity except where certain clearance procedures are followed.
      51. Related Parties of a Reporting Entity include a Director or senior manager of the Reporting Entity or a member of its Group, and Persons who hold 5% or more voting rights in the Reporting Entity or a member of its Group. These are Persons who could exert influence on the Reporting Entity to obtain more beneficial terms than those available to independent third parties when they or their Associates transact with the Reporting Entity.
      52. Accordingly, the requirements relating to Restricted Persons and Related Parties are designed to mitigate the risk of such Persons being able to gain personal benefits through self-interested transactions directly or indirectly at the expense of the Reporting Entity. Disclosure to the markets is also required of such dealings and transactions.
      53. In contrast, the Connected Person disclosure provisions that are dealt with in paragraph 58 below are distinctly different from the provisions dealing with Restricted Persons and Related Parties. The Connected Persons provisions are designed to provide disclosure to markets, the DFSA and the Reporting Entity of the identity of the Persons in positions of control or influence relating to the Reporting Entity. While there is some overlap of the Persons included within the respective definitions of the terms “Related Parties” and “Restricted Persons” (which are designed for dealing with conflicts of interests), and the definition of “Connected Persons” (which is designed to deal with disclosure of controllers), these are purpose built definitions designed to address different risks, in line with the benchmarked jurisdictions, particularly the UK regime.

      Dealings by Restricted Persons

      54. The proposed provisions relating to dealings by Restricted Persons are, as noted above, designed to address the risk that individuals within a Reporting Entity may be able to gain personal advantage by dealing in the Securities of the Reporting Entity. These are not new provisions and are currently found in the appendices to the OSR which are now brought into the main text, with some enhancements. The key enhancements made are:
      (a) the inclusion of a definition of a “Restricted Person”, which covers individuals in senior management functions such as the executive Directors and senior managers of a Reporting Entity (see MKT Rule 3.4.1(2)), which is an expansion from the current restriction which applies only to Directors of a Reporting Entity;
      (b) the expansion of the current 'close period' to ensure that when information relating to the financial position of the Reporting Entity is likely to be accessible to Restricted Persons, which is generally from the end of the relevant financial reporting periods, such Persons being subject to controls relating to their dealings in the Securities of the Reporting Entity; and
      (c) the elevation of clearance procedures for dealings by Restricted Persons from Guidance to Rule status (see MKT Rule 3.4.3).

      Related Party Transactions

      55. The proposed provisions dealing with Related Party Transactions are, as noted before, designed to address the risk that Persons closely associated with a Reporting Entity may be able to gain personal advantage to the detriment of the Reporting Entity in their commercial dealings and transactions with the Reporting Entity. We have made a number of enhancements, consistent with the UK approach (but less complex), to the current provisions dealing with related party transactions which are found in an appendix to the OSR. These enhancements include:
      (a) providing a clear definition of Persons who qualify as a “Related-Party” of a Reporting Entity — see MKT Rule 3.5.2(a). This definition now captures persons who are likely to be able to obtain more advantageous terms than those available to independent third parties dealing with the Reporting Entity on an arm's length commercial basis, in line with the equivalent definitions under the UK regime;
      (b) providing an improved definition of “Related Party Transactions” — see MKT Rule 3.5.2(b);
      (c) setting out procedures that draw a distinction between two types of Related Party Transactions, i.e:
      (i) those which are of a value of 5% or above of the net asset value of the Reporting Entity as at its last financial reports, which require prior shareholder consent by a majority vote (see MKT Rule 3.5.3(a)); and
      (ii) those which are below the 5% threshold, which require a less costly procedure of notifications to the DFSA (see MKT Rule 3.5.3(b)); and
      (d) providing exemptions from the procedures noted above for:
      (i) insignificant transactions (i.e. transactions below the values of 0.25% of net asset value of the Reporting Entity);
      (ii) transactions on commercial terms made in the ordinary course of business on terms no less favourable than those available to independent third parties; and
      (iii) those relating to employee share or other incentive schemes and exercise of pre-emption rights (see MKT Rule 3.5.4).
      56. While we have retained consistency with the UK approach, we have deviated from that approach in one regard, i.e. in relation to the 5% threshold of the voting rights attaching to the Reporting Entity or its holding companies, which forms one of the thresholds for a Person to qualify as a Related Party. Under the UK regime (and also in Hong Kong and Australia), the equivalent threshold is 10% of the voting rights, instead of the 5% of the holdings in the Reporting Entity or the holding companies. We have preferred to retain the current threshold of 5% given the nascent nature of the DIFC capital markets, and hence the need to cast the definition of Related Party a bit wider than in more established capital markets.
      Issues for consideration

      6. Do you have any concerns about the definition of Reporting Entities, including its extended coverage? If so, what are they and how should they be addressed?
      7. Do you agree with our approach to include in the Markets Law an overarching corporate governance requirement that requires Reporting Entities to promote prudent and sound management of the Reporting Entity in the long-term interest of the Reporting Entity and its shareholders? If not, what are your concerns and how should they be addressed?
      8. Do you agree with the substance and approach reflected in the 7 high level corporate governance principles? If not, what are your reasons?
      9. Do you have any concerns relating to any aspects of the best practice standards proposed in App4, and if so how should such concerns be addressed. For example, is it appropriate or inappropriate for the roles of the Chair of the Board and the Chief Executive Officer to be held by the same person? What are your reasons?
      10. Do you have any concerns relating to the “comply or explain” adopted in relation to the best practice standards included in App4 to achieve the outcomes required by the seven corporate governance principles proposed? If so, what are they and how should they be addressed?
      11. Do you agree with the proposed definitions of Restricted Persons and Related Parties and the related procedures? If not, what are your reasons and what changes should be made to the proposed definitions and related procedures to address your concerns?
      12. In particular, do you agree with our proposal to retain the current threshold for becoming a Related Party at 5% of voting rights? If not, what is the appropriate threshold?

      Part 4: Market disclosure

      Disclosure of Inside Information

      57. We propose to make some refinements and enhancement to the market disclosure regime (under the current regime called “continuous disclosure”), consistently with the approach adopted in the EU in line with the requirements in MAD and in particular, the UK regime. The key aspects of the enhancements we propose include:
      (a) replacing the concepts of “Material Information” and “Price Sensitive Information” with a single concept of “Inside Information” to simplify our market disclosure regime and to bring our requirements into line with MAD;
      (b) replacing the current requirement for market disclosure of Inside Information “without delay” with the requirement for such disclosure to be made “as soon possible”. This accommodates the exigencies that may permit a short delay, for example, where a Reporting Entity is affected by an unexpected event and needs to clarify the situation or take legal advice, so that the information released to the market is accurate and not misleading — (see MKT Rule 4.2.1 and associated guidance);
      (c) including an explicit power enabling the DFSA to direct a Reporting Entity to make market disclosure (see MKT Rule 4.5.1), instead of the current more limited power (see Article 48 of the Markets Law and section 4.5 of MKT);
      (d) providing the DFSA the power to approve additional Regulatory Announcement Services through which market disclosure can be made by Reporting Entities (see MKT Rule 4.7.2); and
      (e) adding a definition of an “insider” and requirements relating to control of Inside Information, which require Reporting Entities to have adequate systems and controls for managing Inside Information and providing training for employees. The proposed Rules contain minimum standards, and in some cases are simply incorporating what was previously included in an appendix to the OSR as guidance on Price Sensitive Information.
      58. Although we have remained substantially true to the EU and UK approach, we have made a deviation with regard to the handling of commercially sensitive information, where the disclosure of such information is considered to be unduly detrimental to the legitimate interests of a Reporting Entity. A Reporting Entity is permitted to withhold disclosure of such information provided:
      (a) it files with the DFSA a confidential report containing the details of the commercially sensitive information and the reasons for non-disclosure;
      (b) It obtains the DFSA's prior approval for non-disclosure of the commercially sensitive information for a specified period determined by the DFSA; and
      (c) no intervening circumstance occurs that requires the disclosure of such information prior to the end of the specified period under (b) (see MKT Rule 4.2.4(2)).
      59. Under the UK regime, no such report is required to be filed with the regulator and hence the onus lies with the Reporting Entity alone to make the judgement as to whether or not it may reasonably rely on that exemption. We propose to retain the current position as it is not easy to identify when a Reporting Entity is relying on this exemption without such a report being filed with the DFSA, particularly given the nascent nature of the capital markets in the DIFC. We have also removed the current requirement that the DFSA approves the non disclosure of commercially sensitive information for 5 business days, instead leaving the DFSA the discretion to determine the appropriate period.

      Disclosure by Connected Persons

      60. The purpose of these provisions, as noted in paragraph 49, is to provide disclosure to the market, the DFSA and the Reporting Entity of the identity of the Persons in positions of control or influence relating to the Reporting Entity. We propose a number of changes to the current Connected Person disclosure requirements rationalising those provisions and, in the process, making some clarifications and enhancements, taking due account of the purpose of these provisions. The key aspects of the changes we propose include:
      (a) removing from the Markets Law the current definition of Connected Persons and inserting it, with the enhancements noted below, in the Rules;
      (b) enhancing the definition of Connected Persons by clearly identifying the Persons who are in a position of influence or control relating to the Reporting Entity either:
      (i) by being a Director of the Reporting Entity or a controller of the Reporting Entity; or
      (ii) by owning more than 5% of the voting rights of the Reporting Entity or its controllers (see MKT Rule 4.3.2(b)); and
      (c) specifying the circumstances in which disclosure is required and removing some anomalies, such as the previous requirement for disclosure to the Reporting Entity when a person becomes or ceases to be a Director of the Reporting Entity (see MKT Rule 4.3.3).
      Issues for consideration

      13. Do you agree with the approach we have adopted in relation to market disclosure of Inside Information? If not, what are your concerns and how should they be addressed?
      14. Do you have any concerns relating to the proposed enhancements relating to the Connected Person provisions including the definitions? If so, what are those concerns, and how should they be addressed?

      Part 5: Accounting periods and financial reports

      Financial reporting

      61. While we have not made any substantial changes to the periodic financial reporting requirements applicable to Reporting Entities, we propose some enhancements, the key aspects of which include:
      (a) changing the terminology of “Disclosure Documents” in the Markets Law to the more appropriate and commonly used terminology of “Financial Reports”;
      (b) bringing into the Rules some substantive requirements relating to accounting periods and financial reports which are currently located in various appendices to OSR; and
      (c) including provisions dealing with the content of semi-annual financial reports.
      See chapter 5 of Part 4 of the Markets Law and chapter 5 of MKT.
      Issues for consideration

      15. Do you have any concerns or issues relating to the proposed changes relating to accounting periods and financial reports? If so, what are they and how should they be addressed?

      Part 6: Market abuse provisions

      Prevention of market abuse

      62. We propose a number of enhancements to the current market misconduct provisions (contained in Part 8 of the current Markets Law) to better align those provisions with the EU approach reflected in the Markets Abuse Directive (MAD), as implemented by the UK regime. These provisions apply not only to Reporting Entities and Persons associated with Reporting Entities, but also to any Person dealing with Securities or Investments to address abusive and unacceptable behaviour in financial markets. The more substantive changes we propose are:
      (a) the insertion of a prohibition against the use of fictitious devices and other forms of deception (see Article 54); and
      (b) the insertion of a provision dealing with “Misuse of Information”, which acts as a useful catch-all provision to deal with market abuse which does not otherwise fall within the definition of insider dealing but nonetheless relates to abuse of information which is “not generally available”. Examples would be information relating to possible future developments which are not currently required to be disclosed because they are insufficiently precise, information on an issuer's imminent addition to a stock market index, or information which is to be the subject of official announcement by governments or central monetary or fiscal authorities (see Article 59 of the Markets Law); and
      (c) amendment to the provision dealing with insider dealing to remove the reference to an Investment “of a Reporting Entity”. This link to the Reporting Entity was designed to focus the prohibition on Investments which are listed on an Authorised Market Institution. We propose to remove this link in order to open up the insider dealing prohibition to capture conduct dealing with any Investments, in line with MAD and other key jurisdictions (see Article 56 of the Markets Law).
      63. Various other enhancements and amendments we propose include:
      (a) expanding the scope of the definition of Inside Information to include information relating to the “issuer”, in addition to the Reporting Entity, as the issuer may not always be the Reporting Entity. See Article 61(1)(a) of the Regulatory Law;
      (b) re-aligning various existing provisions to adopt the same or similar language to MAD, to first align the various tests with those in MAD and, second, to import some of the EU interpretational and other relevant material relating to market abuse provisions into the DIFC regime;
      (c) moving offences dealing with “Misleading or deceptive statements” and “Statements relating to future matters” in Prospectuses to the Prospectus provisions, along with the associated defences (see Articles 20 to 23 of the Markets Law);
      (d) changing the current reference to these provisions from “market misconduct” to “market abuse”; and
      (e) conferring on the DFSA the power to issue a code of market conduct (see Article 8(2)(f) of the Markets Law).
      Issues for consideration

      16. Do you have any concerns or issues relating to the proposed changes to the markets abuse provisions? If so, what are they and how should they be addressed?

      Part 7: Listed Funds

      Listed Funds

      64. We propose to bring together in a discrete chapter (see chapter 6 of MKT) all the requirements that apply to Reporting Entities of Listed Funds, with the exception of chapter 7 (sponsors) and chapter 8 (systems and controls) containing requirements applicable to all Reporting Entities, including a Listed Fund.
      65. The requirements in chapter 6, although similar in some respects to the requirements that apply to other Reporting Entities, are sufficiently different to warrant being brought together in a distinct chapter, as adaptations were necessary to accommodate Fund specific aspects. For example:
      (a) the Reporting Entity concept applies to a Fund only if the Units of the Fund are admitted to trading on an Authorised Market Institution. In contrast, in the case of Securities other than Units, there are two triggers for becoming a Reporting Entity, i.e. Offering Securities to the Public and having Securities admitted to trading on an Authorised Market Institution. This difference has required us to disapply the provisions in the Markets Law and the Rules relating to the Prospectus requirements for Funds where those are offered to the public but are not admitted to trading on an Authorised Market Institution;
      (b) although a Person does not attract the Prospectus requirements in the Markets Law and the Rules referred to above, a Reporting Entity is required to have a Prospectus for the purposes of having Units of a Fund admitted to trading on an Authorised Market Institution. This has necessitated the introduction of provisions to ensure that a Reporting Entity of a Listed Fund must prepare and file with the DFSA and the Listing Authority a Prospectus which is prepared in accordance with the requirements in the Collective Investments Law 2010 and the CIR;
      (c) the Reporting Entity of a Listed Fund is the Fund Manager of the Listed Fund, which is a separate legal entity distinct from the Listed Fund itself. The substantive requirements applicable to a Reporting Entity of a Listed Fund therefore apply to the Fund Manager in respect of the Listed Fund, and not in respect of itself. This contrasts with issuers of other Securities who become the Reporting Entity in respect of the issuer itself upon the offer of it's Securities to the Public or having such Securities admitted to trading on an Authorised Market Institution (see the definition of a Reporting entity in respect of a Fund in Article 37(1) of the Markets Law); and
      (d) the requirements relating to the DFSA approval of a Fund Prospectus for the purposes of having Units admitted to trading on an Authorised Market Institution, particularly as the Collective Investment Law 2010 and the Rules made for the purposes of that law do not require formal approval of a Prospectus (see section 6.3 of the MKT).
      Issues for consideration

      17. Do you agree with the approach we have adopted in relation to the tailoring of Fund specific requirements for Listed Funds, and segregating them under a single chapter of the MKT (chapter 6)? If not what are your reasons?
      18. Are there any aspects relating to Listed Funds which have not been adequately dealt with? If so what are they and how should they be addressed?

      Part 8: Other changes

      Sponsor regime and third-party certification

      66. We propose to retain the current sponsor regime, which the DFSA may use on a discretionary basis where appropriate to require a Person making an Offer of Securities to the Public or having Securities admitted to trading on an Authorised Market Institution to appoint a sponsor or other third party adviser. Generally, the DFSA may do so in cases such as where the Reporting Entity is inexperienced or does not have a proven track-record (such as a start-up). We also propose to extend the DFSA's power to require third party certification on specific matters, such as the adequacy of working capital and systems and controls to ensure on-going compliance by the Reporting Entity with its financial reporting requirements.

      Thematic rearrangements and other consequential changes

      67. One of the predominant features of the revised regime is rationalising and thematically re-arranging the relevant provisions. This entailed:
      (a) whilst retaining in the Markets Law substantive or fundamental provisions, moving to the relevant Rulebook modules the detailed requirements, including procedures to give effect to those substantive provisions In the Markets Law. See, for example, the Corporate Governance Principles which are now located in Chapter 3 of the MKT, which were previously contained in the Markets Law; and
      (b) removing from the current OSR appendices substantive Rules and placing them in the MKT. For example, the provisions dealing with Related Party Transactions, dealings by Restricted Persons, and treating shareholders fairly, as well as some of the financial reporting requirements have been removed from the OSR appendices and placed as substantive Rules in the MKT.

      Consequential changes

      68. We also propose a range of consequential changes, such as the inclusion in the GLO revised or new defined terms used (see Annex D), changes to other Rulebook modules such as the IFR, to reflect the changes proposed.
      Issues for consideration

      19. Do you have any concerns or issues relating to the proposed retention of the sponsor regime? If so, what are they and how should they be addressed?
      20. Do you consider that there are other relevant issues which have not been adequately dealt with under the proposed changes? If so, what are they and how should they be addressed?

      Click here to download the Consultation Paper in PDF Format.

      Annex A — Markets Law PDF Format
      Annex B — Markets Rules PDF Format
      Annex C — Authorised Market Institutions PDF Format
      Annex D — Glossary Module PDF Format

    • Consultation Paper No. 73 The Regulatory Policy and Processes Sourcebook and Enhancements to DFSA's Rulebook

      Why are we issuing this paper?

      1. This Consultation Paper presents the DFSA's new Sourcebook module, namely the Regulatory Policy and Process (RPP) module.
      2. This paper also seeks public comment on the DFSA's proposal to relocate the Rules currently set out in the Authorisation (AUT) and Supervision (SUP) modules of the Rulebook into the General (GEN) module.
      3. Furthermore, public comment is also sought on proposed amendments to the Rules mentioned above.

      Who should read this paper?

      4. The proposals in this paper would be of interest to:
      (a) Persons carrying on, or considering carrying on, Financial Services in or from the DIFC;
      (b) Persons carrying on or considering carrying on, Ancillary Services in or from the DIFC,
      (c) Registered Auditors, or auditors considering becoming a Registered Auditor;
      (d) Reporting Entities, and Authorised Market Institutions, or Persons considering becoming a Reporting Entity or Authorised Market Institution; and
      (e) advisors to the Persons in (a) (b) (c) and (d).

      How is this paper structured?

      5. In this paper, we set out:
      (a) the background to the creation of the RPP module (paragraphs 9 – 16);
      (b) overview of the GEN module changes (paragraphs 17 – 20);
      (c) enhancements to the Rules in GEN (paragraphs 21 – 33); and
      (d) other matters (paragraphs 34 – 35).

      How to provide comments?

      6. All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use the Consultation Paper number in the subject line. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      Comments to be addressed or emailed to:

      Consultation Paper No. 73
      Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE

      Email: consultation@dfsa.ae

      Tel: +971(0)4 3621500

      What happens next?

      7. The deadline for providing comments on the proposals is 17th January 2011. Once we receive your comments, we shall consider if any further refinements are required to these proposals. We shall then proceed to recommend the proposed changes to the Regulatory Law 2004 to the President for enactment by the Ruler. If the proposed changes to the Regulatory Law 2004 are enacted, we shall then proceed to enact the relevant changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the Regulatory Law 2004 and DFSA Rulebook are made. We shall issue a notice on our website telling you when this happens.

      Terminology in this paper

      8. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in GLO or in the proposed amendments. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Background

      9. The DFSA Rulebook contains Rules and Guidance. Guidance is indicative and non-binding, pursuant to Schedule 1 of the Regulatory Law 2004. Such Guidance may consist of:
      (a) guidance made and issued by the Chief Executive as notations to the Rules; and
      (b) any standard or code of practice issued by the DFSA Board of Directors which has not been incorporated into the Rules.
      10. Currently, Guidance as notations to the Rules covers:
      (a) the operation of the DFSA's Rules and Laws;
      (b) signposting to other Rules or Laws; and
      (c) information on DFSA's policies, processes and regulatory approach.
      11. In contrast to the Rulebook, the Sourcebook contains information such as instructional guidelines and forms as set out in the Applications, Forms and Notices (AFN) module and Prudential Returns (PRU) module.

      Creation of RPP Module

      12. The DFSA is creating a new module of the Sourcebook to be known as the Regulatory Policy and Process (RPP) module. The DFSA intends to relocate the information on DFSA policy, process and its regulatory approach (see 10(c) above) from the Rulebook into the RPP module of the Sourcebook.
      13. The DFSA also proposes to consolidate information on matters which the DFSA may take into account when considering to exercise specific discretionary powers. For example, this would include those matters which the DFSA may take into consideration when making an assessment of whether an Authorised Person or Authorised Individual is fit and proper.
      14. In creating the RPP module of the Sourcebook, the DFSA is consolidating information currently contained in a number of Rulebook modules into one Sourcebook module. Such material has been reviewed and inserted into RPP in chapter 2 and 3 and generally does not alter existing policy. The RPP module (see Appendix 1) will initially contain the following chapters:
      (a) Chapter 1 — Introduction;
      (b) Chapter 2 — Authorisation — Becoming Regulated; and
      (c) Chapter 3 — Supervision — Being Regulated.
      15. The Executive proposes to release additional chapters for RPP later next year including chapters on information handling and disclosure and enforcement.
      16. Where possible, the DFSA has taken the opportunity to consolidate information on similar themes which were previously repeated across different modules of the Rulebook. Examples of such changes in RPP include:
      (a) section 2.2 which sets out the matters which the DFSA takes into consideration when assessing the fitness and propriety of both Authorised Firms and Authorised Market Institutions; and
      (b) section 3.1 which sets out DFSA's overall risk based approach to the supervision of Authorised Persons, Ancillary Service Providers and Registered Auditors.

      The GEN module changes

      17. The creation of the RPP module provides an opportunity to relocate the Rules, currently located in AUT and SUP, to the GEN module. It is proposed to relocate the AUT Rules to chapter 7 of the GEN module (see Appendix 2) and the SUP Rules to chapter 11 of the GEN module (see Appendix 3).
      18. We have also taken the opportunity to reorganise some of the Rules in these chapters to better reflect where such Rules are likely to impact a regulated Person through the regulatory cycle. For example, we propose to move the following Rules to the Supervision chapter of the GEN module, namely:
      (a) application to change the scope of a Licence (proposed section 11.3 of the GEN module);
      (b) withdrawal of a Licence at an Authorised Firm's request (proposed section 11.4 of the GEN module);
      (c) changes to an Authorised Individual status (proposed section 11.5 of the GEN module);
      (d) temporary cover (proposed section 11.6 of the GEN module);
      (e) dismissal or resignation of an Authorised Individual (proposed section 11.7 of the GEN module); and
      (f) change in control (proposed section 11.8 of the GEN module).
      19. To help readers follow the proposed changes to the AUT and SUP modules, we have prepared two destination tables which are attached to this Consultation Paper (see Appendix 4 and 5).
      20. The proposed additions to the GEN module will result in the DFSA no longer having an AUT or SUP module in its Rulebook.
      Issues for consideration

      1. Do you have any concerns or comments about our proposed re-structuring and changes to chapters 7 and 11 of the GEN module?

      Enhancement to the Rules in GEN

      21. There are two associated consultation papers to take into account when considering the changes relating to the GEN module:
      (a) Consultation Paper 71 (Financial Services) consulted on modification to the definition of Financial Services. The consultation period ended on 23 November 2010 and after due consideration of consultees comments the final version of the Rules will be included in GEN; and
      (b) Consultation Paper 72 (Financial Promotions) consulted on introducing a financial promotion prohibition into the regime. The consultation period ended on 23 November 2010 and after due consideration of consultees comments the final version of the Rules will be included in GEN.
      22. In addition to the above, we have also taken the opportunity to rectify anomalies and unintended consequences in the AUT and SUP modules. Such proposed changes upon which the DFSA seeks public comment are set out below.

      Outsourcing requirements

      23. Following an earlier review of the outsourcing requirements relating to Funds under the CIR module and as part of our aim to have uniform outsourcing requirements across our Rulebook, the DFSA has taken the opportunity to:
      (a) consolidate and centralise its general outsourcing requirements in chapter 5 of the GEN module. Currently, the DFSA has outsourcing requirements and Guidance spread across GEN Rules 5.3.21 and 5.3.22 and also in SUP Rule 2.4.1;
      (b) review its general outsourcing requirements against the Guiding Principles for Outsourcing in Financial Services issued by the Joint Forum and equivalent regulations such as the Markets in Financial Instruments Directive (Mifid) in Europe. To better align our requirements with such international standards, we have identified some Guidance in our existing requirements which we consider should be elevated to Rules; and
      (c) adopt common terminology relating to outsourcing. For example, similar to the CIR module, the term “service provider” will be used in GEN chapter 5 to refer to the outsourced party rather than various other terms currently used such as “third party provider” or “third party provider or supplier” (see Appendix 6).

      Temporary Cover

      24. Pursuant to AUT section 9.4, an Authorised Firm may appoint an individual who is not an Authorised Individual to carry out the functions of an Authorised Individual, subject to certain conditions being met. As currently drafted AUT section 9.4 does not place an obligation on an Authorised Firm to notify the DFSA when it is benefiting from the relief provided by that section.
      25. We are proposing to amend AUT Rule 9.4.1 (this Rule is now 11.6.1 in Appendix 3) to introduce a Rule that places an obligation on an Authorised Firm to provide the DFSA with the name and contact details of the individual when one is appointed under this section. Placing an obligation on the Authorised Firm to notify us of this information will assist the DFSA greatly in ensuring we are in possession of key information on a timely basis and the DFSA contact records reflect the correct details.

      Content of Safe Custody Auditor's Report

      26. In 2009 the DFSA enhanced the requirement for certain Authorised Firms to require their auditors to produce a Safe Custody Auditor's Report. The requirement, which is contained in GEN Rule 8.6.1 (f), now requires not only Authorised Firms carrying on the Financial Service of Providing Custody but also Authorised Firms carrying on the Financial Service of Arranging Custody to produce a Safe Custody Auditor's Report.
      27. Recently the DFSA conducted a thematic review in relation to Client Assets and during the course of that review it became apparent that guidance on what needs to be contained in a Safe Custody Auditor's Report for a firm Arranging Custody would assist Authorised Firms in meeting this requirement. The DFSA is including Guidance under GEN Rule 8.6.1 (see Appendix 6) in respect of paragraph (f) to assist Authorised Firms to understand their obligations in producing a Safe Custody Auditor's Report.

      Time line for receipt of information

      28. AUT Rule 9.3.2 provides that if additional information is requested by the DFSA in relation to an Authorised Individual's application and such information is not provided within 28 days, then the application is deemed to be withdrawn unless otherwise agreed by the DFSA.
      29. The DFSA considers there is no regulatory benefit in retaining this Rule and proposes that it be removed. In considering an application by an Authorised Individual, the DFSA proposes that any request for additional material or an extension of time in which to provide such material will be considered on a case by case basis.

      Copying documents

      30. SUP Rule 2.2.1 (d) provides that an Authorised Person must where reasonable permit the DFSA to copy documents or other material on the premises of such Person at the DFSA's reasonable expense. An anomaly was created in 2005 by incorrect replacement of “its” with “the DFSA's” where “its” was meant to refer to the Authorised Person.
      31. The DFSA proposes to correct this anomaly in SUP Rule 2.2.1(d) (this Rule is now 11.1.2(d) in Appendix 3), by replacing the words “at the DFSA's reasonable expense with “at the Authorised Person's expense”.

      Notification upon the occurrence of certain events

      32. SUP Rule 7.3.1 prescribes certain events the occurrence of which requires an Authorised Person to provide immediate notification to the DFSA. We currently have some Guidance to this Rule which requires an Authorised Person to notify us of any major, new or revised IT system or new technology affecting the person's business, risk profile or resources.
      33. The DFSA proposes to remove this Guidance as it is not captured by any of the types of events in SUP Rule 7.3.1. However, we note that an Authorised Firm and Authorised Market Institution are required to comply with the high level principles in GEN Rule 4.2.10 and AMI Rule 10.2.1, respectively. These Rules require an Authorised Person to deal with the DFSA in an open and cooperative manner and keep the DFSA promptly informed of significant events or anything else relating to such person of which the DFSA would reasonably expect to be notified.
      Issues for consideration

      2. Do you have any concerns or comments about our miscellaneous changes to the AUT and SUP modules?

      Other matters

      34. It is proposed that the enhancements to the various modules of DFSA's Rulebook will come into effect to coincide with the coming into force of the proposed changes to the Regulatory Law 2004 and the GEN module resulting from:
      (a) Consultation Paper No 71 — Financial Service Definitions review; and
      (b) Consultation Paper No 72 — Changes to the DFSA Financial Promotions regime.
      35. The DFSA will keep the regulated community updated on progress and provide sufficient time for changes to relevant policies, procedures, systems and controls and other matters prior to the coming into force of the Rules and the RPP Sourcebook module.

      Click here to download the Consultation Paper in PDF Format.

      Appendix 1 — Regulatory Policy and Process PDF Format
      Appendix 2 — GEN Module — Authorisation PDF Format
      Appendix 3 — GEN Module — Supervision PDF Format
      Appendix 4 — Destination Table — AUT and GEN PDF Format
      Appendix 5 — Destination Table — SUP and GEN PDF Format
      Appendix 6 — GEN Module — Outsourcing, Accounting and Auditing PDF Format

    • Consultation Paper No. 72 Changes to the DFSA Financial Promotions Regime

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comments on the DFSA's proposals to enhance its regulation in respect of the making of Financial Promotions in or from the DIFC. This paper also sets out the proposed changes to the Regulatory Law 2004 and the Rules to achieve the proposed requirements.
      Who should read this paper?
      2. The proposals in this paper would be of interest to:
      (a) a Person who makes, or proposes to make, a Financial Promotion in the DIFC;
      (b) an Authorised Firm which approves, or proposes to approve, a Financial Promotion by another Person; and
      (c) advisors to Persons in (a) or (b) above.

      How is this paper structured?

      3. In this paper, we set out:
      (a) a summary of our proposals and rationale (paragraphs 7–11);
      (b) some background regarding current Financial Promotions restrictions in the DIFC and the rationale for the proposed new regime (paragraphs 12–15);
      (c) an outline of the key elements of our proposals (paragraphs 16–24); and
      (d) other miscellaneous matters (paragraphs 25–26).
      The proposed changes to the Regulatory Law 2004 and the new Rules are in Appendices 1–3.

      How to provide comments?

      4. All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use the Consultation Paper number in the subject line. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      Comments to be addressed or emailed to:

      Consultation Paper No. 72
      Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE

      Email: consultation@dfsa.ae

      Tel: +971(0)4 3621500

      What happens next?

      5. The deadline for providing comments on the proposals is 23 November 2010. Once we receive your comments, we shall consider if any further refinements are required to these proposals. We shall then proceed to recommend the proposed changes to the Regulatory Law 2004 to the President for enactment by the Ruler. If the proposed changes to the Regulatory Law 2004 are enacted, we shall then proceed to enact the relevant changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the Regulatory Law 2004 and DFSA Rulebook are made. We shall issue a notice on our website telling you when this happens.

      Terminology in this paper

      6. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary Module (GLO) or in the proposed amendments. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Summary of proposed changes

      7. The DFSA is proposing to introduce a Financial Promotions Prohibition in the DIFC. The scope of the proposed Financial Promotions Prohibition is wide and is loosely based on the UK's "Restrictions on financial promotion" in Section 21 of the Financial Services and Markets Act 2000. The proposed prohibition is essentially a "gatekeeper" provision the effect of which is to prohibit the making of a Financial Promotion by any person unless that person is an Authorised Person or is otherwise permitted by the Rules to make the promotion.
      8. The DFSA currently has restrictions on offers made by way of a "financial promotion" in relation to certain Securities but not all financial products. These proposals are, therefore, designed to create a comprehensive regime covering Financial Promotions relating to financial services and financial products which fall outside the offer restrictions contained in the Collective Investment Law 2010 and the Markets Law 2004; for example, investment advice in relation to specific Securities or Funds, investment research, corporate finance advice, underwriting and market making. It will also cover Credit Facilities and Deposit products, Profit Sharing Investment Accounts and insurance products.
      9. The proposals fill a gap in the regime, and provide the DFSA with a power to bring enforcement action against persons making Financial Promotions which breach the Rules, which at present we cannot effectively do. This will enable the DFSA to better police the perimeter, an area where we have experienced issues. The perimeter issues to date have involved unauthorised persons setting up a marketing presence in the DIFC, "unregulated" conferences, pressure sales into the DIFC by unregulated persons, and financial scams. Part of the rationale for the proposed regime is that the DFSA does not want the DIFC to be used for unregulated financial promotions and wants to limit the ability for boiler rooms to market into (or from) the DIFC.
      10. The proposed regime will be based on a high-level prohibition in the Regulatory Law 2004 similar to the Financial Services Prohibition in Article 41. To supplement this we propose Rules set out in a new chapter of GEN. GEN will set out certain exemptions from the prohibition, key definitions, Rules on approval of Financial Promotions by Authorised Firms, and other relevant Rules and Guidance.
      11. Our proposals are de minimis and will provide greater clarity as to who can make a Financial Promotion in the DIFC and under what circumstances. The proposals will have the greatest regulatory impact on non DFSA-regulated persons, communicating with potential customers who are natural persons.

      Background

      12. The DFSA already has two specific restrictions on the making of an offer by way of a "financial promotion" in Article 50 of the Collective Investment Law 2010 in relation to Units in a Fund, and Article 19(2) of the Markets Law 2004, in relation to offers of Securities. These restrictions will continue to apply to all persons (including Authorised Firms) as will the detailed rules associated with offers which flow from the above provisions. However, the proposed changes set out in this paper are intended to provide the DFSA with a wider scope of restriction on the making of a financial promotion in the DIFC and to strengthen our regulatory regime. Many international jurisdictions have an extensive regime covering advertising or other forms of Financial Promotion which provide strong protection to retail customers in particular.
      13. For a non-Authorised person wishing to make a Financial Promotion in the DIFC, there is currently a lack of certainty as to whether the carrying on of the promotional or marketing activity in the DIFC is permitted or would lead them to breach the Financial Services Prohibition in Article 41 of the Regulatory Law 2004, which prohibits the carrying on of a Financial Service by non-Authorised persons in the DIFC. This is because, depending on the nature of the Financial Promotion and the manner in which it is communicated, the communicator may be carrying on the Financial Service of Arranging Credit or Deals in Investments or Operating a Representative Office. Depending on the nature and scale of the activities, a person who makes Financial Promotions on a regular basis or for a prolonged period while physically located in the DIFC, for example by way of a booth, meetings or conferences, would need to consider whether such activities constitute the Financial Service of Operating a Representative Office. The DFSA considers that in the context of Financial Promotions, "a regular basis" would be anything more than occasional and "a prolonged period" would be anything more than a week.
      14. Our proposed Rules would remove the uncertainty described in paragraph 13 above, by expressly permitting the making of certain Financial Promotions, such as the mere communication of information about a financial service or product, without a requirement to be authorised, by persons permitted to under the Rules. However, the proposed Rules would not permit the person to carry on the Financial Service of Arranging Credit or Deals in Investments or Operating a Representative Office. Our proposals will also permit the DFSA to strengthen the regulatory perimeter and to limit the ability for non-Authorised Persons to make Financial Promotions.
      15. The overall outcome of our proposals is that the DFSA will have a greater degree of regulatory oversight and control over who may conduct Financial Promotions in or from the DIFC, and in particular oversight of the standards which such promotions must meet with respect to retail investors. The DFSA will also have greater scope to bring enforcement action in a Financial Promotion case when it deems it necessary in light of its statutory objectives.

      Outline of our proposed changes

      The Financial Promotions Prohibition

      16. The proposed Financial Promotions Prohibition is summarised in paragraph 7. We propose to define a Financial Promotion as:

      "any communication, however made, which invites or induces a person to:

      (a) enter into, or offer to enter into, an agreement in relation to the provision of a financial service; or
      (b) exercise any rights conferred by a financial product or acquire, dispose of, underwrite or convert a financial product."
      17. The proposed definition of a Financial Promotion is designed to be a very broad "umbrella" provision. Its scope covers any "financial service" which would cover any Financial Service as defined in the DIFC or any service which is a financial service in any other jurisdiction. There need not be an offer made and the Financial Promotion may take any form, for example; advertisements, letters, mailshots, emails, faxes, telephone calls, webcasts, face-to-face meetings, roadshows or conferences would all be caught. This, combined with the gatekeeper provision referred to in paragraph 7, creates a broad framework for the Financial Promotions prohibition, from which we carve out "exemptions".
      Issues for consideration

      1. Do you have any concerns or comments about our proposed definition of a Financial Promotion?

      Exemptions

      18. Under our current regulatory framework, when making Financial Promotions, Authorised Firms are required, amongst other things, to comply with relevant provisions in COB 3.2. We also make a determination that such firms are fit and proper at the date of authorisation and on an ongoing basis. Therefore, we do not propose to add any further regulatory burden for Authorised Firms under these proposals other than for firms which choose to approve Financial Promotions on behalf of unregulated third parties.
      19. However, we do propose to "exempt" certain persons who either comply with certain criteria or who make a prescribed form of communication, an "exempt Financial Promotion". However, such exempt persons (with one exception) must ensure that any Financial Promotion is clear, fair and not misleading.
      20. The broad prohibition framework is also cut back by a Rule that the person making a Financial Promotion does not breach the Financial Promotions Prohibition if the Financial Promotion is not made for a commercial or business purpose. It is not our intention to capture non-commercial communications such as a conversation or correspondence between friends.
      21. Additionally, we do not propose to capture within the scope of the prohibition a person who causes a Financial Promotion to be made in the course of providing a facility which is a mere conduit for the making of a Financial Promotion, for example, a venue which hosts a presentation on Financial Services or a website which hosts banner advertisements on financial services.
      22. Due to the unique nature of our jurisdiction it may not be evident to a financial promoter that they are targeting persons within the DIFC. It is not our intention to police promotional material where the location of a recipient is unknown to the originator. An example would include the promotional text messages which are commonly distributed in the broader UAE. Therefore, we propose to exempt any promotion which appears, on reasonable grounds, to be a communication which is not intended to be acted upon by, or targeted at, Persons in the DIFC.
      Issues for consideration

      2. Do you have any concerns or comments about our proposed exemptions from the Financial Promotions Prohibition?

      Persons permitted to make Financial Promotions in the DIFC

      23. It is proposed that the following persons will be permitted to make Financial Promotions in the DIFC:
      (a) UAE-regulated firms — we do not propose to prevent firms licensed in the wider UAE from making Financial Promotions to existing or potential clients in the DIFC. However, any Financial Promotion made by a UAE-regulated firm to a prospective client in the DIFC is only exempt where it complies with certain supplementary "clear, fair and not misleading" and past performance Rules (the "CFNM Rules"). Of course such persons will not be permitted to carry on a Financial Service in the DIFC;
      (b) A Recognised Person and External Fund Manager — these persons are subject to DFSA jurisdiction in some form and, therefore, we propose that their Financial Promotions be exempt provided that they comply with the CFNM Rules;
      (c) A Reporting Entity — we propose that Reporting Entities which make a communication which may constitute a Financial Promotion when discharging their mandatory reporting obligations should be exempt provided that they comply with the CFNM Rules; and
      (d) A Person communicating an "exempt Financial Promotion", described in paragraph 24 below, which complies with the CFNM Rules.
      Issues for consideration

      3.
      (a) Do you have any concerns or comments about our proposed carve out from the Financial Promotions Prohibition?
      (b) Are our proposed additional CFNM Rules adequate in the circumstances?
      (c) Should the DFSA impose any other conditions on permitted Financial Promotions?

      Exempt Financial Promotions

      24. We propose that if a person makes an Exempt Financial Promotion of the following type, that person will be exempt from the Financial Promotions prohibition:
      (a) Promotions approved by an Authorised Firm — the DFSA believes that reliance can be placed on an Authorised Person to assess a Financial Promotion's compliance with our Rules. However, we propose that the Financial Promotion should clearly state that it has been approved by an Authorised Firm and that the Authorised Firm must ensure that the Financial Promotion complies with the Rules on an ongoing basis;
      (b) Promotions directed exclusively at Professional Clients — one of the main objectives of a Financial Promotions regime is the protection of Retail Clients. Professional Clients arguably need less regulatory protection. However, the DFSA also considered that Professional Clients who are natural persons would benefit from the prohibition's protection. Therefore, we propose to carve out Financial Promotions which are directed at and capable of acceptance exclusively by Professional Clients of the type listed in COB Rule 2.3.2(2), i.e. non-natural persons;
      (c) Promotions made to a Person in the DIFC who expressly solicited the Financial Promotion — we propose that Financial Promotions specifically solicited by or on behalf of the recipient should also be exempt. For example, we would not want to capture within the proposed regime a bank which makes a Financial Promotion to a person in the DIFC who expressly wished to receive the information; and
      (d) Government or Government-Related Entities — we propose that any Financial Promotion communicated by, or on behalf of, a government or non-commercial, government-related entity, should be exempt.
      Issues for consideration

      4.
      (a) Do you have any concerns or comments about our proposed Exempt Financial Promotions?
      (b) Should all or fewer Clients be afforded protection under our Rules?

      Other matters

      25. We are proposing that any contract which is entered as a result of a Financial Promotion which breaches the prohibition should be voidable at the option of the person who relied on it.
      26. We have also incorporated into our proposed new Rules, some basic requirements which Authorised Firms must comply with when approving a Financial Promotion on behalf of another person. The key Rules in relation to approval include that the Authorised Firm which approves a Financial Promotion must ensure that the Financial Promotion complies with the relevant requirements on an on-going basis and that it includes a clear and prominent statement that it has been "approved by" the relevant Authorised Firm. Firms approving Financial Promotions aimed at Retail Clients will also need to have a retail endorsement on their Licence.
      Issues for consideration

      5.
      (a) Do you have any concerns or comments about our proposed Financial Promotions restrictions?
      (b) Do the proposed changes create any unintended consequences?

      Click here to download the Consultation Paper in PDF Format.

      Appendix 1 — Regulatory Law Amendment Law PDF Format
      Appendix 2 — GEN Module PDF Format
      Appendix 3 — GLO Module PDF Format

    • Consultation Paper No. 71 Financial Service Definitions Review

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comments on the DFSA proposal to make changes to the current definitions of Financial Services in the General Module (GEN) of the DFSA Rulebook. As part of this review the DFSA also proposes changes to the prudential categories in Chapter 1 of Prudential — Investment, Insurance Intermediation and Banking Module (PIB).
      2. The changes proposed are to enhance the current Financial Service definitions framework, to ensure the DFSA is able to regulate in an effective and efficient manner, and to reflect the DFSA's risk based approach to regulation. Another consequence of these changes is where possible to reduce the regulatory burden and costs on Authorised Firms conducting business in or from the DIFC.

      Who should read this paper?

      3. The proposals in this paper would be of interest to Persons:
      (a) carrying on, or considering carrying on, Financial Services in or from the DIFC; and
      (b) Advisors to Persons carrying on, or considering carrying on, Financial Services in or from the DIFC.

      How is this paper structured?

      4. In this paper, we set out:
      (a) the background to the proposals and overview (paragraphs 8 - 9);
      (b) the proposed changes to the GEN and PIB Modules (paragraphs 10 - 51), in relation to the following Financial Services;
      (i) Dealing In Investments as Principal;
      (ii) Dealing in Investments as Agent;
      (iii) Advising on Financial Products and Credit;
      (iv) Providing Credit;
      (v) Arranging Custody; and
      (c) proposed additional guidance in relation to Islamic Finance (paragraphs 52- 54);
      (d) proposed changes to Providing Trust Services (paragraphs 55 - 60)
      (e) proposed miscellaneous enhancements (paragraphs 61- 62)

      How to provide comments?

      5. All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use the Consultation Paper number in the subject line. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      Comments to be addressed to:

      Consultation Paper No. 71
      Policy and Legal Services
      Dubai Financial Services Authority
      PO Box 75850
      Dubai, UAE
      or e-mailed to: consultation@dfsa.ae
      Tel: +971 (0)4 3621500

      What happens next?

      6. The deadline for providing comments on the proposals is 23 November 2010. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Terminology in this paper

      7. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in GLO or in the proposed amendments. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Background

      8. As part of its ongoing review of the regulatory framework within the DIFC, the DFSA has reviewed the definitions for Financial Services activities in the General Module (GEN) of the DFSA Rulebook. As part of this review, we have also considered whether changes are warranted to the prudential categories to which Financial Services activities are allocated.
      9. This review of GEN was focused on enhancing the current Financial Service definitions by identifying and remedying any areas of overlap, technical irregularities or unintended consequences in drafting. In this context, the DFSA has noted the regulated activities regime administered by the Financial Services Authority in the UK, upon which a number of our definitions and our "by way of business" exclusions are largely based. We have also considered similar definitions introduced by European Directives such as MiFID.

      Proposed changes

      A. Dealing in Investments as Principal

      A1. Regulatory treatment of private equity investments by a fund manager

      10. Authorised Firms (Firms) that Manage Assets of a Private Equity Fund, may make an initial subscription of Units in that fund. This type of investment typically occurs where a private equity fund manager seeks to seed, at least partially, such a fund with its own capital. A number of private equity Firms in the DIFC have raised this matter with the DFSA as material to their operations. The motivation behind the investment appears to have two main drivers:
      (a) establishing a track record of performance for a fund; and
      (b) showing investors a private equity Firm's willingness to share the risk of investment decisions.
      11. Currently, this type of Investment is captured by the Financial Service activity of Dealing in Investments as Principal. This results in the Authorised Firm being subject to a higher prudential category, namely Category 2 rather than the lower prudential Category 3 which would reflect their core activity of Managing Assets. The Base Capital Requirement for a Category 2 Firm is US$2 million whereas for a Category 3 Firm it is US$500,000. In addition, both categories of Firms are subject to the variable capital requirements in PIB such as credit risk and market risk.
      12. A private equity fund manager investing in its own fund may face market risk, in so far as market movements may have an adverse impact on the value of its holding in the fund. However, such an investment does not seem to fit well with the aim of the regulatory mitigant, which is to minimise risks in a trading book, for example, solvency risk. An investment by the private equity fund manager in its own fund is not generally held for trading purposes, and is probably difficult to value on a 'real-time' basis. Typically private equity funds are closed ended structures and, therefore, realisation of the assets and redemptions to its investors do not occur until the end of the funds investment lifecycle.
      13. The current regulatory treatment of initial private equity investment appears inconsistent with benchmarked jurisdictions such as the FSA (UK). In its Perimeter Guidance (PERG) the FSA (UK) has stated that it does not consider that Dealing on Own Account is likely to be relevant in cases where a person acquires a long term stake in a company for strategic purposes or for most venture capital or private equity activity. We would agree with this policy.
      14. For example, private equity Firms already have the benefit of being able to make particular Investments which do not fall within the activity of Dealing in Investments as Principal. For example, the exclusion set out at GEN Rule 2.3.3, enables a private equity Firm carrying out investment strategies such as leveraged buyouts, to buy a majority control of an existing company.
      15. In order to adequately address the above, the DFSA proposes that the activity of a fund manager making an initial subscription of Units in a Private Equity Fund for a period of more than 12 months should be specifically excluded from the Financial Services activity of Dealing in Investments as Principal.
      16. We, therefore, propose to add a further exclusion to the Financial Service of Dealing in Investments as Principal.
      17. The proposed amendments are contained in Appendix 1.

      Issues for consideration

      1. Should the exclusion proposed apply only to private equity fund managers? If not, why?
      2. If so, are the proposed circumstances under which they are to be allowed to do so appropriate? If not, why?
      3. Should the investment by a private equity fund manager only be excluded at the initial subscription into the fund? If not, why?
      4. If so, are the proposed circumstances to be allowed to do so appropriate? If not, why?

      A2. Commodity Derivatives Principal Trading on Exchanges

      18. Currently, where a firm only carries on principal trading involving commodity derivatives the DFSA treats the activity in two ways as follows:
      (a) Recognised Members of an Authorised Market Institution who do not have a physical presence in the DIFC but have a place of business in another jurisdiction and meet the requirements set out under REC 7.2.3 (b) in order to be exempted from the Financial Services Prohibitions; or
      (b) Members of an Authorised Market Institution or Recognised Bodies based in the DIFC can apply for a modification of GEN Rule 2.3.2 that provides an exclusion to the 'by way of business' test which in effect means the Firm is not carrying on a Financial Service. A number of Firms have sought and been granted such a modification.
      19. The current approach, for Recognised Members and Authorised Firms, appears inconsistent with several benchmarked jurisdictions, such as the U.S.A., Singapore and those European countries that have adopted MiFID. Benchmarking suggests that in many jurisdictions, principal trading (excluding market-making) in commodities or commodity derivatives, where it is the sole Financial Service being carried out, is exempt from the requirement for authorisation. Historically, the aim has been not to require authorisation of commodity producers or users of commodities in manufacturing, where those producers are only dealing for their own trading book.
      20. The regulatory rationale for such exclusion is that the only monies at risk are the Firm's own, and that the conduct risks are adequately addressed through exchange membership requirements and ongoing market supervision. Any financial risk is mitigated by the fact that all trades conducted on the exchange are cleared and settled through a clearing house. For example, with respect to the DME, such trades are cleared and settled through NYMEX.
      21. Furthermore, a Firm trading on a principal basis, in or from the DIFC, in commodity derivatives not listed on an Authorised Market Institution currently requires authorisation, because this activity constitutes a Financial Service namely Dealing as Principal. We currently do not have any Firms operating such a business model in the DIFC.
      22. The DFSA proposes to amend Chapter 2 of the GEN Module to provide for a further exclusion to the by way of business requirements for Financial Services. In doing so the DFSA will be further in line with other jurisdictions, notably the U.S.A., Singapore and those European countries that have adopted MiFID. It is intended that this exemption would only apply if the Person does not undertake any other Financial Service.
      23. If these proposed amendments to GEN are implemented, consequential amendments will be required to the Recognition regime in REC in order to bring REC into alignment with GEN.
      24. The proposed amendments are contained in Appendix 1.

      Issues for consideration

      5. Should the exclusion be limited to Commodity Derivatives Principal trading? If not, why?

      B. Dealing in Investments as Agent and Arranging Deals in Investments

      25. A few Firms have raised an issue in regard to receiving and transmitting client orders on behalf of clients. These Firms are generally authorised only to advise and arrange, and the actual execution of the client order takes place in another jurisdiction, where the client has a relationship with the broker who will execute the order on the client's behalf. The issue is whether such receipt and transaction constitutes Dealing as Agent.
      26. We note that in our Consultation Paper No 65 of 2009 in relation to our Representative Office regime we advised that, activities amounting to order routing or passing in relation to Investments, were outside the scope of a Representative Office's authorised activities.
      27. In order to provide clarity to Firms that such activity does not constitute Dealing, but merely Arranging, it is proposed that an exclusion be added to the Financial Service definition of Dealing as Agent and also some appropriate modification to the Financial Service definition of Arranging Credit or Deals in Investments.
      28. The proposed amendments are contained in Appendix 1.

      Issues for consideration

      6. Have the proposed changes clarified the Rules adequately? If not, why?

      C. Advising on Financial Products and Credit

      29. We propose to include Deposits and Profit Sharing Investment Accounts as financial products within the Financial Service activity of Advising on Financial Products or Credit. Currently, the scope of 'financial products' as set out at GEN 2.11.1(5) includes Investments, and it also captures Long Term Insurance products.
      30. In the UK, advising on deposits is not a regulated activity. However, the UK FSA has recently introduced a conduct of business regime for banking which addresses, for example, financial promotion of deposits. Further, they have provided guidance indicating that where an authorised deposit-taker decides to make a personal recommendation to a customer who is entitled to rely upon its judgement, it should take reasonable steps to ensure that the recommendation is suitable. In both Australia and Singapore a person is generally required to be licensed to advise on deposits particularly where the person makes a personal recommendation. However, a number of exclusions apply both for retail and professional clients.
      31. Notwithstanding, there is no consistency in international models, the DFSA is of the view that advising on Deposits needs to be addressed to maintain an appropriate level of regulatory protection. For example, the nature of wholesale deposits is becoming more complex with respect to the terms and the rates of return on offer, as well as the insured nature of those deposits. The DIFC is an international centre where wholesale banking activity is undertaken by a variety of institutions with access and links to a number of jurisdictions. Accordingly, we propose to include advising on Deposits as a Financial Service.
      32. In regard to inclusion of Profit Sharing Investment Accounts within the term 'financial product', the DFSA takes the view that Profit Sharing Investment Accounts are a form of investment vehicle. Thus, for example, we already bring Managing a Profit Sharing Investment Account within our definition of Investment Business and require a firm doing this to notify a client that he alone will bear any risk of loss from the Profit Sharing Investment Account.
      33. Furthermore, when introducing the Representative Office regime, the DFSA incorporated within the term "financial product" in GEN 2.26.1(3) Deposits and Profit Sharing Investment Accounts.
      34. Therefore, to capture within the definition any activities related to advising Clients on Deposits or Profit Sharing Investment Accounts, and provide greater protection to Clients and consistency the DFSA proposes that the term 'financial products' be broadened by making an amendment to the existing GEN Rule 2.11.1(5), to include Deposits and Profit Sharing Investment Accounts.
      35. The proposed amendment is contained in Appendix 1.

      Issues for consideration

      7. Should Deposits be included in the Financial Services activity of Advising on financial products? If not, why?

      D. Providing Credit

      D1. Exclusion in GEN 2.5.2

      36. The current exclusion in GEN 2.5.2 provides that an Authorised Firm does not Provide Credit where the Financial Service it provides a client is incidental to or in connection with another Financial Service other than Accepting Deposits.
      37. It has become apparent from our dialogue with Firms that the current exclusion in GEN 2.5.2 may be too broad, with the unintended consequence of potentially permitting any Firms licensed for other Financial Services to Provide Credit. It is understood this exclusion was originally intended only for brokers who provide margin lending as an ancillary service to their main brokerage activity.
      38. In addition, the reference in GEN Rule 2.5.2 with respect to Accepting Deposits is now obsolete and is a historical legacy from when Banking Business (now a deleted definition) was defined as Accepting Deposits and Providing Credit.
      39. We, therefore, propose to amend the current exclusion to the Financial Services definition of Providing Credit by limiting the exclusion to trading activities relating to Investments or conducting Insurance Business.
      40. The proposed amendments are contained in Appendix 1.

      Issues for consideration

      8. Have the proposed changes clarified the Rules adequately? If not, why?
      9. Are there any activities other than brokerage services that may require the exclusion? If so, please explain which activities and why.

      D2. Prudential Category

      41. Currently, a Firm that is Providing Credit in the DIFC is in prudential Category 1, pursuant to PIB Rule 1.3.1 where the Base Capital Requirement is US$10 million.
      42. Historically, in other jurisdictions for example in United Kingdom and Australia the provision of credit has not been considered a prudential category 1 financial service. Typically, licensing for the provision of credit in those jurisdictions was overseen by a consumer protection agency whose remit is one of essentially ensuring that credit agreements are not unfair.
      43. Providing Credit was initially coupled with Accepting Deposits in the DFSA regime and defined as Banking Business (now a deleted definition). This caused its allocation to Category 1. In addition, the DFSA's regime does not allow Providing Credit to Retail Clients, unless the Retail Client is an Undertaking and the Credit Facility is provided for a business purpose.
      44. When considering the appropriate prudential category for a Financial Service it is useful to revisit the underlying principles for prudential regulation, namely that consumers (both a customer and other market participants) are not in practice in a position to judge the safety and soundness of financial firms. Accordingly, a lender would appear to represent a lower level of risk than a Person who is a deposit taker for a consumer. The agency/fiduciary risks do not appear as significant, as the consumer has not entrusted his property in the Firm; in fact assets have moved from the lender to the consumer.
      45. Regardless of these proposals, it is the DFSA's intention to ensure that any systemic risks that may arise with respect to any lending institution in the DIFC are appropriately identified and mitigated. The recent financial crisis has highlighted the knock on effect and adverse systemic consequences of liquidity stresses at lending institutions, and this cannot be underestimated.
      46. The proposal to change Providing Credit to Category 2 would nevertheless keep in place the same prudential requirements that apply, save lowering the Base Capital Requirement to US$2 million from US$10 million and introducing an Expenditure Based test which requires a Firm to hold at least 13 weeks of its Annual Audited Expenditure.
      47. We, therefore, propose that the prudential category for Firms Providing Credit but not also Accepting Deposits is changed to Prudential Category 2.
      48. The proposed amendments are contained in Appendix 2.

      E. Arranging Custody

      49. The Financial Service activity of Arranging Custody generally arises in respect of the introduction of a Person to a custodian, unless, for example, there is no fee derived by the introducer. A drafting improvement has been identified in relation to the exclusion to Financial Service of Arranging Custody as set out in GEN 2.14.2. The current exclusion employs a triple negative which may make the definition hard to follow. Furthermore, the provision is conjunctive in relation to the introducer being a member of the same group as the custodian and remunerated by the custodian. We propose to adopt a similar approach to the UK, which provides that a custodian is connected to the introducer either by being in the same group as the introducer or where he remunerates the introducer.
      50. We, therefore, propose to amend the current Financial Service of Arranging Custody by making changes to its current exclusion in GEN 2.14.2.
      51. The proposed amendments are contained in Appendix 1.

      Issues for consideration

      10. Have the proposed changes clarified the Rules adequately? If not, why?

      F. Islamic Financial Services and Substance over Form

      52. The DFSA believes that there is a need to provide Guidance to explain the DFSA's "substance over form" approach when determining whether an activity constitutes the carrying on of a Financial Service. This is particularly so when considering the treatment of Islamic Financial Business arrangements.
      53. We, therefore, propose to add guidance to the Islamic Finance Rules module explaining our approach.
      54. The proposed amendments are contained in Appendix 3.

      Issues for consideration

      11. Have the proposed changes clarified the Rules adequately? If not, why?

      G. Providing Trust Services

      55. The current prudential category for Providing Trust Services is Category 3, which has a Base Capital Requirement of US$500,000. We believe that this prudential category may not accurately reflect, and is not proportionate to, the prudential risks that a Firm undertaking such activity represents, and is therefore unduly burdensome.
      56. Providing Trust Services in the DIFC has the following component categories:
      (a) the provision of services with respect to the creation of an express trust;
      (b) arranging for a Person to act as a trustee in respect of any express trust;
      (c) acting as trustee in respect of an express trust;
      (d) the provision of Trust Administration Services in respect of an express trust; or
      (e) acting as protector or enforcer in respect of an express trust.
      57. By comparison, other jurisdictions, which have a regulatory regime for the provision of trust services, such as Jersey, Guernsey and Isle of Man, do not impose a capital requirement equivalent to the DFSA's Base Capital Requirement. All three benchmarked jurisdictions addressed capital resource concerns through the mandatory requirement of professional indemnity insurance. The DFSA also places a mandatory requirement pursuant to COB 5.4, for professional indemnity insurance but this is in addition to the Base Capital Requirement.
      58. Nevertheless, in relation to the activities described in paragraph 56 above, only sub-paragraph (c) "acting as a trustee in respect of an express trust" represents any significant level of risk through the fiduciary relationship created and the oversight and control of third party assets. This is particularly relevant where, for example, there is a winding down of a firm that is acting as trustee.
      59. It is recommended that Providing Trust Services is altered to Category 4 except where a Firm acts as a trustee in respect of an express trust, in which case it will remain in prudential Category 3 because of the fiduciary relationship created and the oversight and control of third party assets, a trustee provides.
      60. The proposed amendments are contained in Appendix 2.

      Issues for consideration

      12. Do you consider these changes adequate to address any risks posed by these activities? If not why?

      H. Miscellaneous Enhancements

      61. The DFSA has identified a number of improvement opportunities in GEN and PIB with respect to providing greater consistency and correcting anomalies and is proposing appropriate amendments in this regard.
      62. The proposed amendments are contained in Appendices 1 and 2.

      Issues for consideration

      13. Have the proposed changes clarified the Rules adequately? If not, why?

      Click here to download the Consultation Paper in PDF Format.

      Appendix 1 — GEN Module PDF Format
      Appendix 2 — PIB Module PDF Format
      Appendix 3 — IFR Module PDF Format

    • Consultation Paper No. 70 Proposed Changes to Enforcement Framework

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comments on the DFSA proposal to make changes to certain laws and Rules with respect to the DFSA enforcement framework. The proposed changes are designed to enhance the current framework to ensure the DFSA is able to regulate in an effective and efficient manner, and to reflect the DFSA's risk based approach to regulation.

      Where can the changes be found?

      2. This Consultation Paper details proposed changes to the following:
      (a) Regulatory Law 2004; and
      (b) Enforcement Module (ENF).

      Who should read this paper?

      3. The proposals in this paper would be of interest to Persons:
      (a) Carrying on, or considering carrying on, any Financial Services, Ancillary Services or audits of Authorised Firms and Authorised Market Institutions; and
      (b) Legal practitioners advising clients on enforcement related matters with respect to the DFSA.

      How is this paper structured?

      4. In this paper, we set out:
      (a) the background to the proposals and overview (paragraphs 8 - 9);
      (b) the proposed changes to the Regulatory Law 2004 and the Enforcement Module (paragraphs 10-34);

      How to provide comments?

      5. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      6. The deadline for providing comments on the proposals is 25 May 2010. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the Regulatory Law 2004 and DFSA's Rulebook. You should not act on these proposals until the relevant changes to the Regulatory Law and DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:

      Emmanuel Givanakis
      Senior Legal Counsel
      DFSA
      PO Box 75850
      Dubai, UAE
      +971(0)4 3621533

      or

      e-mailed to: egivanakis@dfsa.ae

      Terminology in this paper

      7. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in GLO or in the proposed amendments. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Background

      8. The Regulatory Law 2004 and the Enforcement Module of the DFSA Rulebook were enacted in September 2004. As part of the DFSA's ongoing review of the regulatory framework within the DIFC, we have reviewed the enforcement framework within which the DFSA operates.
      9. As part of the review, consideration was given to recent enforcement and supervision activities undertaken by the DFSA. This was done in order to improve the effectiveness of the DFSA's enforcement capability and to better align enforcement related Laws and Rules with the DFSA's risk based approach to regulation.

      Proposed changes

      10. The key changes proposed are as follows:
      (a) increasing the amount that a Person may be fined, under the Regulatory Law 2004;
      (b) widening the scope of contraventions and breaches for which an administrative fine or censure can be imposed; and
      (c) enabling the DFSA to commence proceeding in the DIFC Court or before the Financial Markets Tribunal following a Notice of Objection to a fine for a contravention of the law or breach of the Rules.

      A. Increasing the amount a Person may be fined

      11. The Regulatory Law 2004 provides the DFSA with the power to impose administrative fines. These fines are intended to be imposed in circumstances where the conduct involved in a contravention of the Laws or Rules administered by the DFSA is considered less serious in nature. These administrative powers are exercised within the parameters of ensuring the affected party is accorded procedural fairness and natural justice.
      12. There have been no amendments to the quantum of fines since the law was enacted in September 2004. Currently, pursuant to Article 90(2) of the Regulatory Law 2004 the maximum amount that can be imposed is limited to US $5,000 for a natural person and US $25,000 for a body corporate.
      13. In considering any increases to the amount that the DFSA can fine a Person we have reviewed several international jurisdictions and have ascertained that, by and large, financial services regulators internationally have considerable scope with respect to the amount that they can fine a Person (see Appendix 3). The benchmarking revealed the following:
      (a) The UK Financial Services Authority (UKFSA) and the US Office of the Comptroller of the Currency (OCC) have the ability to impose financial penalties for various amounts and for a broad range of contraventions and the amount is generally proportional to the regulator's view of the seriousness of the conduct that leads to these contraventions. Both regulators undertake an analysis of the particular factors and circumstances surrounding each matter in determining the seriousness of the conduct that led to the contravention and the appropriate amount of the fine. The factors and circumstances considered are contained in their respective policies and procedures manuals and include, for example, the gain or benefit to the offending party, any concealment of the contravention, the impact on other persons and the level of cooperation with the regulator.
      (b) The Hong Kong Securities and Futures Commission (SFC) may impose fines of up to US$1.3 million or three times the amount of the profit gained or loss avoided regardless of the seriousness of the conduct. These fines can be imposed for market misconduct and/or where the regulated person is found not to be fit and proper.
      (c) The Monetary Authority of Singapore (MAS) can fine for a broad range of contraventions. The maximum amount that can be imposed administratively is dependant on the contravention, with maximums ranging from US$8,900 to US$36,000. However, the MAS is only able to impose these fines by way of a settlement, otherwise it must commence proceedings in the court.
      (d) The Australian Securities and Investments Commission (ASIC), due to constitutional constraints, is only empowered to impose small fines for breaches of minor contraventions, for example, the failure to lodge an annual return. However, recently there have been efforts by the Australian Federal authorities to expand ASIC's powers to some degree with respect to market misconduct.
      (e) The US Securities and Exchange Commission (SEC) after a hearing by an Administrative Law Judge, has the power to impose a civil penalty on a person on a broad range of contraventions. The amount of the penalty can range from US$5,000 to US$100,000 for an individual and US$50,000 to US$500,000 for a company depending on the seriousness of the conduct.
      (f) The Ontario Securities Commission (OSC) after a hearing by a tribunal of the Commission, has the power to impose fines for a wide variety of offences where it is in the public interest to do so. The maximum amount that can be imposed is US$984,000. The amount imposed depends on the seriousness of the conduct.
      (g) Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) has a broad range of administrative fining powers with respect to the various legislative responsibilities it has in banking, insurance and securities. BaFin can impose administrative fines in relation to breaches of the legislation it administers that are designated as an 'Administrative Offence'. The amounts that can be imposed vary from US$67,000 to US$1.35 million, depending on the seriousness of the contravention as prescribed in the legislation and the conduct that led to the breach.
      14. Furthermore, in light of the DFSA's proposal to expand the scope of administrative fines (as discussed further in section B below), the DFSA will have the flexibility to impose fines in relation to a much greater variety of conduct that is less serious in nature. The DFSA will consider a number of factors and circumstances before it imposes an administrative fine.
      15. The DFSA considers that the seriousness of the conduct involved in a contravention can vary, depending on the particular facts and circumstances. Isolated, one-off, or unintended breaches would generally be considered as being less serious whilst repeated, systemic and intentional breaches would be considered as being more severe and aggravated in nature. When determining whether to impose an administrative fine and the quantum of such a fine the DFSA will take into account a number of circumstances and factors, including, for example, whether the conduct was deliberate or reckless and whether the contravention is continuing.
      16. Where the circumstances and factors in a matter are of a more serious nature the DFSA would not consider proceeding by way of administrative fine. Instead the DFSA would consider commencing proceedings in either the Financial Markets Tribunal or the DIFC Court, unless the matter is settled by way of Enforceable Undertaking.
      17. In light of our review and the need to provide an appropriate and credible deterrent for less serious conduct, we propose to increase the amounts available to the DFSA with respect to administrative fines. The maximum amounts proposed are US$20,000 for a natural person and US$100,000 for a body corporate.
      18. The DFSA is mindful of its duty to use its powers in a manner proportionate to its regulatory objectives and will be cognisant of this when imposing administrative fines. Furthermore, from a policy perspective, the DFSA would not generally seek to impose more than one administrative fine in relation to multiple contraventions which are closely connected to the same set of facts and circumstances. This is because to do so could raise the level of financial penalty disproportionately in relation to less serious conduct.
      19. The DFSA does not propose to reduce any of the safeguards that a person currently has pursuant to the Rules. The current process for administrative fines does not necessitate an appeal by the Person. This is due to the Person having the right to file a Notice of Objection with the DFSA, which has the effect of ending the administrative process. As a result, the filing of a Notice of Objection places the onus on the DFSA to commence proceedings afresh in the Financial Markets Tribunal, or to take note of the objections and not pursue the matter further.
      20. The proposed amendments are contained in Appendix 1 and Appendix 2

      B. Widening the scope of Administrative Fines and Censures

      21. The range of contraventions for which the DFSA may impose administrative fines and censures is limited by ENF Rules 7.12.1 and 7.13.1. The benchmarked jurisdictions referred to earlier in this paper generally do not limit, to the same extent, the contraventions against which administrative fines may be imposed. For example, the UKFSA has the ability to impose administrative fines or censures for any misconduct, which is broadly defined, covering the full scope of the UKFSA Handbook Rules, including the principles that apply to authorised firms and approved persons.
      22. The DFSA considers that it should have the power to impose administrative fines and censures in relation to a wide variety of contraventions where the conduct is of a less serious nature. This is particularly so where a negotiated outcome cannot be reached. However, the DFSA acknowledges that there are limits with respect to the subjective view of seriousness, and is mindful of this when determining whether to impose an administrative fine. An administrative fine or censure can be a proportionate, efficient and effective way of concluding a matter rather than commencing proceedings in the Financial Markets Tribunal or DIFC Court.
      23. Where the conduct with respect to any contravention is serious, however, the DFSA would not rely on administrative fining and censuring powers under Rule 7.12 and 7.13, but would pursue the matter before the Financial Markets Tribunal or the DIFC Court, unless the matter was settled by way of an Enforceable Undertaking.
      24. The DFSA intends to retain the status quo in relation to contraventions of Article 30 and 35 of the Regulatory Law 2004. Accordingly, these contraventions cannot attract an administrative fine or censure. Article 30 relates to the Regulatory Appeals Committee (RAC) regarding situations where a person contravenes, for example, an order, prohibition or requirement of the RAC. Article 35 relates to the Financial Markets Tribunal and refers to situations where a person contravenes, for example, an order, notice, prohibition or requirement of the Financial Markets Tribunal.
      25. The proposed amendments are contained in Appendix 2 (ENF Module).

      C Commencement of Proceedings in the DIFC Court

      26. Where a Notice of Objection is filed by a person upon whom an administrative fine has been imposed, the Rules in Chapter 7 of the Enforcement Module enable the DFSA to commence proceedings only in the Financial Markets Tribunal, or to take note of the objections and decline to pursue the matter.
      27. We believe the Rules and Guidance should be amended to add to the options available to the DFSA that it be able to commence proceedings in the DIFC Court.
      28. The rationale for this inclusion is that the Financial Markets Tribunal does not sit permanently and does not have the DIFC Court's range of interlocutory powers. In particular the Financial Markets Tribunal's power to make interlocutory orders is limited to procedural matters. The DFSA may need to take urgent interlocutory action where there are ongoing contraventions of the Law or Rules, after a Notice of Objection has been filed by the Person.
      29. Similarly, in relation to administrative censures, the Enforcement Module under Rules 7.13.3, 7.13.4 and 7.13.5, only refers to commencing proceedings in the Financial Markets Tribunal. The DFSA believes these Rules and Guidance should be amended to allow the DFSA to also be able to commence proceedings in the DIFC Court.
      30. In the event that a written notice regarding an administrative censure or fine is objected to, and the DFSA wishes to pursue the matter, the DFSA believes that it should not be limited in the range of fora available to it.
      31. The proposed amendments are contained in Appendix 2 (ENF Module)

      D Information Gathering and Investigation Powers

      32. It is proposed that Guidance under section 5.1 of the Enforcement Module be amended by deleting "In general, the DFSA will use only those powers that allow it to achieve its objectives whilst causing the least possible interference with the activities of the participants in the DIFC.".
      33. It is the DFSA's view that, although this is reflective of its general approach, it may fetter its broad discretion when exercising its regulatory powers to achieve its objectives. The general tenor of the statement is already encapsulated in the overriding guiding principles of the DFSA, found under Article 8(4) of the Regulatory Law of 2004.
      34. The proposed amendments are contained in Appendix 2 (ENF Module).

      Click here to download the Consultation Paper in PDF Format.

      Appendix 1 — Regulatory Law PDF Format
      Appendix 2 — Enforcement Module PDF Format
      Appendix 3 — International Benchmarking PDF Format

    • Consultation Paper No. 69 Proposed Enhancements to the Collective Investment Funds Regime

      Why are we issuing this paper?

      1. The DFSA proposes to make significant enhancements to the DIFC's Collective Investment Funds regime ("the Funds Regime") to better align it with international trends and practices, thereby making it more attractive to both fund managers and participants in the funds industry. The Funds Regime is mainly contained in the Collective Investment Law 2006 ("the CI Law") and the Collective Investment Rules (CIR) module of the DFSA Rulebook. Other modules of the DFSA Rulebook are also relevant, for example, the IFR module, which contains the Rules relating to Islamic Funds and the FER module, which contains Rules relating to fees applicable to Funds.
      2. These proposals stem from a recent review of the Funds Regime by a Market Practitioner Panel ("the Panel") appointed by the DFSA, who recommended wide-ranging changes to the Funds Regime.

      Who should read this paper?

      3. The proposals in this paper would be of interest to:
      a. Authorised Firms currently operating Funds in the DIFC or marketing Units of Funds in or from the DIFC;
      b. Authorised Firms providing financial services to Funds (such as Fund Administrators, Eligible Custodians and Trustees);
      c. Persons who intend to set up Funds in the DIFC, provide services to Funds in the DIFC or elsewhere, or market Units of Funds in or from the DIFC; and
      d. Persons providing legal, accounting, audit, oversight or compliance services to Funds in the DIFC or who wish to provide such services.

      How is this paper structured?

      4. The proposals in this paper are set out mainly by reference to the Panel recommendations and are structured as follows:
      a. Background to the proposals – Paragraphs 10 – 13;
      b. Issues 1.1 & 1.2: Domicile of Funds and Fund Managers – Paragraphs 14 – 22;
      c. Issue 1.3: Investment Trusts and Trustee domicile - Paragraphs 23 – 27;
      d. Issue 1.4: Terminology – Paragraphs 28 – 33;
      a. Issue 2: Distribution of Foreign Funds – Paragraphs 34 – 40;
      b. Issue 3: Processes and costs – Paragraphs 41 – 45;
      c. Issue 4: Protected Cell Companies and Umbrella Funds – Paragraphs 46 – 54;
      d. Issue 5: Exempt Funds – Paragraphs 55 – 72;
      e. Issue 6: Oversight Committee – Paragraphs 73 – 88;
      f. Issue 7: Shari'a Compliance – Paragraphs 89 – 102;
      g. Issue 9: Other Issues – Paragraphs 103 – 105; and
      h. Other enhancements to the Funds Regime – Paragraphs 106 – 109.
      5. The changes we propose require amendments to a range of DIFC legislation. These changes, and the Panel Report, are set out in the following Appendices:
      a. the Collective Investment Law 2006 ("the CI Law") – Annex 1;
      b. the Regulatory Law 2004 – Annex 2;
      c. the Collective Investment Rules (CIR) module – Annex 3;
      d. the Investment Trust Law 2006 – Annex 4;
      e. the GEN (GEN) module – Annex 5;
      f. the Islamic Finance Rules (IFR) module – Annex 6;
      g. the Glossary (GLO) module – Annex 7;
      h. the Fees (FER) module – Annex 8;
      i. Companies Regulations – Annex 9; and
      j. the Panel Report – Annex 10.

      How to provide comments?

      6. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent when providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.
      7. This consultation paper also contains proposed amendments to chapters 12 &13 of the Companies Regulations (COR). These regulations are made under the Companies Law 2009 which is administered by DIFCA and the Registrar of Companies. These proposed amendments (set out in Appendix 9) are included in this DFSA consultation paper rather than in a separate DIFCA consultation paper for convenience. Accordingly, the proposals in Appendix 9 are being consulted upon jointly by the DFSA and DIFCA. The DIFCA and Companies Registrar will be consulted in regard to any comments received.

      What happens next?

      8. The deadline for providing comments on the proposals is 6 May 2010. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to put forward the changes to laws to the Ruler for enactment and to enact the changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the specified laws and the DFSA Rulebook modules are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:
      Ms Dhammika Amukotuwa
      Associate Director, Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE
      TEL No. 04 362 1509

      or

      e-mailed to: damukotuwa@dfsa.ae

      Terminology in this paper

      9. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in GLO or in the proposed amendments. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning. Please note that, while the term Operator is used in this paper when referring to the current requirements, the term Fund Manager is generally used when referring to the proposed future regime. This is because we intend to replace the term Operator with the term Fund Manager.

      Background

      10. In June 2009, the DFSA established the Panel, which comprised members with industry-wide expertise relating to the managed funds industry. The remit of the Panel was to review the DFSA's Funds Regime and present to the DFSA recommendations that would better promote the growth of the Funds industry in the DIFC, while remaining fully compliant with the relevant principles of the International Organisation of Securities Commissions (IOSCO).
      11. The Panel presented its Report to the DFSA on 30 September 2009 (see Appendix 10 for the full Panel Report). It contains wide-ranging recommendations arranged under 10 issues. While the Panel found our Funds Regime fit for purpose, these recommendations suggest significant enhancements to that regime, to make it more usable by fund managers and industry practitioners.
      12. The DFSA published the Panel Report on 19 October 2009, seeking public comments on the Panel recommendations. The period for public comment closed on 4 December and we received 4 sets of comments. While most of those comments were strongly supportive of the Panel recommendations, there were some differing views as to the nature of improvements that could be made to the Funds Regime. We have taken into account those comments in formulating the proposals in this paper.
      13. The Panel Report contained recommendations under 10 discrete issues. While most of those issues dealt with the legislative framework of the DIFC's Funds Regime and therefore lie within the DFSA's powers, some of the recommendations went beyond those powers. The proposals in this paper focus on only those issues and recommendations in the Panel Report which require legislative changes to the Funds Regime, and are arranged under the same headings as in the Panel Report. In addition to the Panel recommendations, there are some additional issues, either arising from the public comments or identified by us, which are addressed in our proposals. These are set out under Issue 9 – Other Issues.

      Issues 1.1 & 1.2: Domicile of Funds and Fund Managers

      Analysis of the Panel recommendations

      14. At present, the general prohibitions in Article 17(1) of the CI Law prevent a DFSA licensed Operator or Trustee from acting as an Operator or Trustee of a Foreign Fund and, similarly, prevent foreign fund managers or trustees from acting as Operators or Trustees of Domestic Funds, unless they establish a base in the DIFC. The Panel considered that these general prohibitions act as a barrier against the development of the DIFC as a truly international centre. In their view, such prohibitions are inconsistent with the objective of promoting the DIFC as an international hub for the funds industry and its participants (such as fund administrators, custodians and asset managers and valuers).
      15. Accordingly, the Panel recommended that the DFSA removes these prohibitions, subject to adequate safeguards to ensure investor protection. As a result:
      a. DIFC based Fund Operators would have the flexibility to establish some of their Funds outside the DIFC; and
      b. adequately regulated foreign fund managers would have the flexibility to domicile Funds in the DIFC without having to establish a place of business in the DIFC.
      See the Key Recommendations under Issue 1, paragraph 27 of the Panel Report.
      16. The Panel recommended the following measures to address any risks that would arise where the jurisdictional prohibitions are removed:
      a. in the case of a DIFC Fund Operator proposing to establish and manage a Fund in a jurisdiction outside the DIFC, to permit such activities only if the host jurisdiction of the Fund is not blacklisted or otherwise excluded by FATF, the UN, OECD, OFAC or other similar regulatory agency specified by the DFSA; and
      b. in the case of a foreign fund manager proposing to establish or manage a Domestic Fund from a place of business outside the DIFC, to permit such activities only if the jurisdiction in which the foreign fund manager is domiciled applies an equivalent level of regulation to the activities of that foreign fund manager. The Panel proposed that an expanded version of the Recognised Jurisdictions list should be used in this context to ascertain where a jurisdiction has an equivalent level of regulation.
      17. We propose to adopt the Panel recommendations to remove the jurisdictional prohibitions, subject to a number of additional safeguards to augment investor protection and regulatory compliance. These are set out in detail under our proposed changes in paragraph 20 – 23 below.
      18. We believe that this approach reduces the possibility that the DIFC may become, in the long run, simply a "parking lot" for Funds, rather than a hub where substantive fund management and related activities are undertaken. Several off-shore fund regimes require at least some key service providers (such as asset managers, custodians or administrators) to a locally-registered Fund to be persons domiciled and regulated in their jurisdiction.
      19. Public comments supported the Panel recommendation to remove the jurisdictional barriers. However, one commentator suggested that if DIFC Fund Operators are allowed to manage Funds established outside the DIFC, they should be subject to additional requirements to have "independent" custodians and independent valuers appointed to such Funds. We did not see the need to impose such requirements as the current requirements relating to Eligible Custodians of Funds are sufficiently stringent and any move to increase these requirements would lead to increased compliance costs without sufficient additional benefit.

      Proposed changes

      20. We propose, in-line with the Panel recommendations, to:
      a. permit a DFSA licensed Fund Operator to set up and manage a Fund in a jurisdiction outside the DIFC provided the host jurisdiction of the Fund is either included in the DFSA's Recognised Jurisdictions list or is otherwise acceptable to the DFSA. Such a Fund will be called an "External Domestic Fund" and be subject to the same requirements as those applying to a Domestic Fund, except where otherwise provided – see Article 14 of the CI Law and CIR Rule 6.2.2; and
      b. require the Fund Manager of an External Domestic Fund to:
      i. notify the DFSA of the jurisdiction outside the DIFC in which it proposes to establish the Fund – see CIR Rules10.2.1(3)(c), 11.1.1(d) and 12.1.2;
      ii. include, in its compliance procedures manual, provisions necessary to ensure compliance with the regulatory requirements applying in the host jurisdiction, including any measures required to address conflicting requirements applying in the host jurisdiction and the DIFC – see CIR Rule 6.2.2; and
      iii. include in the Fund's constituent and disclosure documents clear information as to where the Fund is located and whether the Fund is required to comply with any regulatory requirements applicable in its host jurisdiction – see CIR Rule A5.1.1(A)(8).
      21. We also propose to permit a foreign fund manager to establish and manage a Domestic Fund in the DIFC without having to establish a place of business in the DIFC. To do so, such a person, who will be called an "External Fund Manager" (see Article 20(5) of the CI Law) must:
      a. be a body corporate which is regulated for the relevant activities by a Financial Services Regulator in a Recognised Jurisdiction or a jurisdiction otherwise acceptable to the DFSA (see Article 20(5)(a) and CIR Rule 6.1.2(a));
      b. subject itself to the DIFC laws and the jurisdiction of the DIFC Courts (see CIR Rule 6.1.2(b));
      c. appoint to the Fund a DFSA licensed Fund Administrator or Custody Provider (see CIR Rule 6.1.3(1)(a)); and
      d. require the Fund Administrator or Custody Provider appointed to the Fund to both:
      i. act as its agent for service of process and dealings with the DFSA and Unitholders of the Fund (see CIR Rule 6.1.3(1)(b)); and
      ii. undertake specified tasks relating to the Fund, such as providing Unit pricing and access to Unit register and Fund disclosure in the DIFC (see CIR Rule 6.1.3(1)(c)).
      22. The proposed Articles 41(9) and 42(3)(b) of the Regulatory Law (see Annex 2) provide an exemption from the Financial Services Prohibition to a person meeting the above requirements, so that such a person does not need to be licensed by the DFSA for the purposes of managing a Domestic Fund.

      Issues for consideration

      1. Should Authorised Firms be permitted to operate/manage Funds established in other jurisdictions?
      2. If so, are the proposed circumstances under which they are to be allowed do so appropriate? If not, why?
      3. Should foreign fund managers in reputable jurisdictions be allowed to manage Domestic Funds? If not, why?
      4. If so, are the proposed circumstances under which foreign fund managers are to be allowed to manage Domestic Funds appropriate? If not, why?

      Issue 1.3: Investment Trusts and Trustee domicile

      Analysis of the Panel recommendations

      23. A jurisdictional prohibition similar to that discussed above applies to a Domestic Fund structured as an Investment Trust. As a result, an Operator of such a Fund is currently prohibited from appointing to the Fund a Person who is not licensed as a Trustee by the DFSA. Similarly, a DFSA licensed Trustee cannot provide its trust services to foreign funds.
      24. The Panel recommended that DIFC licensed Fund Managers should have the flexibility to use foreign trustees, provided the trustee is licensed and supervised with regard to its trust and custody services. Similarly DFSA licensed Trustees should be permitted to provide their trust and custody services without any jurisdictional barriers.
      25. The public comments supported the Panel recommendation to remove the jurisdictional barriers applying to Trustees.

      Proposed changes

      26. In-line with the Panel recommendations, we propose to permit a Domestic Fund structured as an Investment Trust to appoint as its trustee either a person licensed by the DFSA as a Trustee, or a foreign trustee where such a trustee is subject to regulation by a Financial Services Regulator in a Recognised Jurisdiction in respect of its custody services. This approach provides greater flexibility for Fund Managers to appoint trustees, taking account of factors such as the nature and location of the trust property/assets, particularly if such property is located outside the DIFC – see Article 21(1)(a) and (b) of the CI Law and Article 18(a) of the Investment Trust Law 2006.
      27. Similarly we propose to allow DFSA licensed Trustees to provide their trust services to persons domiciled outside the DIFC. This approach is in line with the flexibility currently provided for Authorised Firms Providing Custody or Providing Trust Services, as they are not subject to any jurisdictional limitations in regard to the persons to whom they provide their trust/custody services.
      Issues for consideration

      5. Should domestic Investment Trusts be permitted to use adequately regulated foreign custody providers as their Trustees? If not, why?
      6. Should DFSA licensed Trustees be permitted to provide their services to Foreign Funds? If not, why?

      Issue 1.4: Terminology

      Analysis of the Panel recommendations

      28. The Panel identified that the term "Operator of a Fund" currently used to refer to the person legally accountable to investors for the establishment and management of a Fund is inconsistent with the international terminology. To remove any unnecessary confusion, the Panel recommended that terminology that focuses on the 'fund management' function should be used instead of the term "Operator". The Panel also noted the need to ensure better clarity between the functions of an Operator of a Fund and the activities undertaken by a person providing the Fund with the Financial Service of "Managing Assets".
      29. The terminology used to refer to the person accountable to investors for collective management of the fund property varies from jurisdiction to jurisdiction. Commonly used terms in this context include Management Company, Fund Manager, Investment Manager and Responsible Entity.
      30. The term Fund Manager is appropriate for our Funds Regime because it is the term more commonly used under the UK regime, on which our Funds Regime is primarily modelled, particularly in relation to regulated Authorised Unit Trusts and Open Ended Investment Companies.
      31. We also acknowledge, as identified by the Panel, that there is a need for greater clarity relating to the distinction between "Managing Assets", i.e. the activity of asset or investment management, and the functions undertaken by the Fund Operator (the title of which we propose to change to Fund Manager under these proposals). This is particularly so as the asset management function is an activity which the Operator can either undertake under its own licence, or alternatively delegate to another entity under a permitted delegation arrangement.
      32. The public comments supported the current distinction between Operating Funds and providing the Financial Service of managing assets/investments to a Fund and noted that this distinction should remain unchanged. This is because this distinction gives the Operator the necessary degree of flexibility either to carry on the function of Managing Assets under its own licence, or to delegate that function to a third party service provider. However, the need for greater clarity, as recommended by the Panel, was supported.

      Proposed changes

      33. In line with the Panel recommendations, we propose to:
      a. adopt the terminology of "Fund Manager" to replace the term "Operator of a Fund" – see Article 20(2) and (4) of the CI Law; and
      b. provide greater clarity between the role undertaken by such a Fund Manager and a person providing asset or investment management services to a Fund under a delegation arrangement – see proposed Guidance under GEN Rule 2.10.2.

      Issues for consideration

      7. Should we change the current terminology from Operator to Fund Manager? If not, why?
      8. Are there any ambiguities or concerns relating to the respective roles of the Fund Managers vis-à-vis service providers to the Fund which are not adequately addressed by the proposed changes? If so, what are they, and how should they be resolved?

      Issue 2: Distribution of Foreign Funds

      Analysis of the Panel recommendations

      34. The Panel considered the current limitations on the types of Foreign Funds that can be marketed or distributed by an Authorised Firm, to be overly restrictive, thereby inhibiting the DIFC's growth as a Funds hub.
      35. Under the current CI Law (see Articles 18 and 19 of the CI Law and chapter 3 of the CIR module), Authorised Firms can only market Units of Foreign Funds that meet the prescribed qualification criteria. These encompass two main limbs, i.e. the Designated Foreign Funds test or the Non-Designated Foreign Funds test. Both these tests aim to ensure that those Foreign Funds which can be marketed by an Authorised Firm have the benefit of equivalent regulation or investment grade rating of the Fund.
      36. The Panel recommended that rather than focussing mainly on the equivalence of regulation applying to a Foreign Fund, which is reflected in the current approach, due account should also be taken of other factors that provide adequate investor protection and thereby minimise any reputational risks to the DIFC. Accordingly, the Panel recommended that an Authorised Firm should be permitted to market Units of a Foreign Fund under one of the following four additional grounds.
      a. Where the marketing is to a new class of investors called "Qualified Investors", in reliance on such investors' having the necessary expertise and resources to assess the risks and benefits associated with such investments. In this context, the Panel proposed a test comprising a minimum asset test of US$1 million (which is higher than the current asset test for Professional Clients set at US$500,000), and an expertise test, as currently applied to Professional Clients.
      b. Where the Authorised Firm makes a personal recommendation of the suitability of the investment in the Unit of a Foreign Fund to a particular Client. In this context, the firm must undertake the suitability assessment required under the COB Rules before making a personal recommendation. The Panel considered that this would provide an adequate level of investor protection to the Client, while giving a commensurate benefit to both the Client and the firm, in terms of access to a wider range of foreign investments than is currently allowed.
      c. Where the Foreign Fund is one which, if it were established in the DIFC, would fall within the proposed definition of an Exempt Fund, i.e. a Fund open only to Qualified Investors, with a minimum initial subscription of at least US$50,000, and the restrictions relating to marketing (eg. by private placement) are met.
      d. Where the Authorised Firm is also the manager of the Foreign Fund, under the External Domestic Fund proposal.
      37. While we agree with the Panel's overall rationale for widening the scope for Authorised Firms to market Units of Foreign Funds in or from the DIFC, we do not propose to adopt the Panel's recommendation for the introduction of a new classification of Clients called Qualified Investors. This is because it would result in three types of Clients for marketing purposes, i.e. Retail, Professional and Qualified, which would unnecessarily complicate the current Funds Regime.
      38. The public comments strongly supported the proposed expansion of the circumstances in which Units of Foreign Funds can be marketed by Authorised Firms.

      Proposed changes

      39. In line with the Panel recommendations, we propose to permit an Authorised Firm to market a Unit of a Foreign Fund where:
      a. the Authorised Firm gives a personal recommendation that the investment in the Unit of the relevant Foreign Fund is suitable to the Client in light of that particular Client's investment needs, objectives and circumstances – see Article 54(1)(b) of the CI Law and CIR Rule 15.1.8; or
      b. the Foreign Fund is one that would meet the Exempt Fund criteria proposed and the firm meets the parameters applying to the Offer of Units in such a Fund – see Article 54(1)(c)(i) and (ii) of the CI Law and CIR Rule 15.1.9; or
      c. the Foreign Fund is an External Domestic Fund, in which case both the Fund Manager of that Fund and an Authorised Firm with an appropriate licence can market the Units of that Fund – see Article 14 and Article 50(1) of the CI Law.
      40. In addition to the proposed expansions above, we would retain the current Designated and Non-designated routes. We also propose to extend the disclosure and warning requirements that currently apply to marketing of Units of Foreign Funds to the new categories proposed under paragraph 39 to promote adequate investor protection – see CIR Rule 15.1.2.

      Issues for consideration

      9. Do you consider the circumstances in which we propose to expand the criteria under which Authorised Firms could market Units of Foreign Funds in or from the DIFC to be appropriate? If not, why?
      10. Do you consider any additional categories of Foreign Funds should be allowed to be marketed by Authorised Firms in or from the DIFC? If so, what are the types of Foreign Funds which should be included and, why should they be so included?
      11. Given the proposals to expand the current categories of Foreign Funds that can be marketed in or from the DIFC by Authorised Firms, do you think it is appropriate for us to reduce some of the subcategories that qualify under the criteria applicable to non-designated Foreign Funds? If so, which sub-categories should be removed?

      Issue 3 – Processes and Cost

      Analysis of the Panel recommendations

      41. The Panel found that costs a Fund Operator has to incur in setting up and carrying on their fund management business in the DIFC to be higher than those which such managers have to incur to set up and carry on similar business in comparable jurisdictions. These higher costs include not only the DFSA's licensing fees but also other associated fees such as the Fund vehicle registration fees, which are charged by DIFCA. The Panel considered the current cost structure in the DIFC acted as a significant inhibitor in attracting fund management business to the DIFC, notwithstanding the significant tax and other advantages offered by the DIFC. It therefore recommended that the DFSA should better align its fees and charges with those applied in other comparable jurisdictions.
      42. Our benchmarking supported the Panel's findings. In summary, our fees currently comprise:
      a. a licensing application fee for an Operator's licence of US$40,000 (with an additional fee component calculated based on the application fee pro-rated for the number of months remaining in the year from the grant of the licence);
      b. a periodic fee payable thereafter on an annual basis which is also set at US$40,000 (with an additional variable component based on annual expenditure); and
      c. an additional on-going periodic fee annually on each Domestic Fund which is 0.1% of the NAV subject to a minimum of US$10,000 and a maximum of US$50,000.
      43. By contrast, the highest of the licensing fees paid in the jurisdictions we have considered appear to be no more than US$10,000.
      44. The public comments supported the Panel recommendation to reduce costs. One commentator noted that not only are the fund set up fees in the DIFC currently greater than in comparable jurisdictions, non-DFSA costs such as rents and other service charges are also high.

      Proposed changes

      45. In line with the Panel recommendations, we propose to reduce the DFSA's licensing and on-going fees applicable to Operators of Funds and Funds (other than Umbrella Funds, the fees of which are addressed under Issue 4 below) as follows:
      a. a reduction of the application fee for Operating (Managing) a Fund from the current US$40,000 to US$10,000 (with the pro-rated additional component of the application fee also being reduced similarly – see FER Rule 2.1.1;
      b. a reduction of the periodic fees for Operating (Managing) a Fund from the current US$40,000 to US$10,000 (with the variable expenditure-based component of the periodic fees remaining unchanged) – see FER Rule 3.2.1;
      c. a reduction of the cost of registering a Public Fund from $5,000 to $1,000 – see FER Rule 2.4.1;
      d. the removal of the winding up of a Fund fee of US$10,000 (as there are no such fees charged by the regulator in other jurisdictions) – see FER Rule 2.5.1; and
      e. a change to the periodic fee applicable to each Domestic Fund by reducing the minimum from the current US$10,000 to US$1,000 and increasing the maximum from the current US$50,000 to US$100,000. We consider the reduction in the minimum fee would provide adequate relief for start-up Funds where fee relief is most needed, while the increase in the maximum would bear only on Funds that had been successful in attracting substantial assets. See FER Rules 3.9.1 and 3.10.1.

      Issues for consideration

      12. Do you think that there are other areas in which fee reductions could be made? If so, what are they and what reductions should be made?

      Issue 4 – Protected Cell Companies and Umbrella Funds

      Analysis of the Panel recommendations

      46. The Panel considered the advantages of allowing Umbrella Funds to use a Protected Cell Company (PCC) structure. Umbrella Funds are used by fund managers in other jurisdictions to have the flexibility to offer distinctly different investment strategies (such as conservative or speculative) to suit different investors while minimising infrastructure costs by centralising such costs within the Umbrella company. However, under our current requirements, while each Sub-Fund is notionally different from the other Sub-Funds operated under the same Umbrella, each Sub-Fund is not a separate legal entity. As a result, assets and liabilities in any one Sub-Fund are not insulated from those of any other Sub-Fund under the same Umbrella, nor are they insulated from any liabilities of the Umbrella itself. In contrast, the PCC structure, which involves cells operated by the core company, provides for legal segregation of the assets and liabilities of each separate cell.
      47. While the DIFC has a PCC regime under the DIFC Companies Regulations (see COR chapter 12), the use of that structure is currently restricted to Insurers. The Panel identified that if the PCC structure were to be allowed to be used by Umbrella Funds, this would better promote legal certainty for investors investing in Sub-Funds. The Panel also noted that jurisdictions such as Ireland, Guernsey and Luxembourg allow the use of the PCC structure for Umbrella Funds, and the UK is currently proposing to do so.
      48. Accordingly, the Panel recommended that the DFSA:
      a. allow the protected cell or compartment structure to be used by Umbrella Funds (both Public and Private);
      b. provide a more accessible arrangement of Umbrella Fund-related provisions under the CIR module;
      c. remove unnecessary procedural impediments to setting-up Umbrella Funds by allowing individual Sub-Funds to be added without having to require any amendment to the Umbrella Fund's constituent documents; and
      d. lower the current fees and minimum requirements for approval of the offering documents of Umbrella Funds, particularly if they are Private Funds or Funds that meet the proposed Exempt Fund criteria (see under Issue 5).
      49. We agree with the Panel's view that the use of the PCC structure should be extended to Umbrella Funds as it provides a greater degree of legal certainty to investors in Sub-Funds, so that their assets will be insulated from risks associated with investment strategies adopted by other Sub-Funds in the Umbrella structure. While we believe that the PCC structure should be available to all Domestic Funds, we do not think that it is necessary to make it mandatory for all Umbrella Funds to use the PCC structure. This would give greater flexibility as some Umbrella Funds may prefer to adopt the more traditional route, with different share classes specific to individual Sub-Funds.
      50. The Panel also recommended that we should remove the unnecessary procedural impediment arising from the fact that the Umbrella Fund Constitution has to contain detailed information relating to the types of investments which each Sub-Fund can make. This means that when a new Sub-Fund is added, changes must be made to the Umbrella Fund Constitution. This was not originally intended and hence we propose to address it by relocating those provisions more appropriately as Prospectus disclosure requirements relating to the relevant Sub-Fund.
      51. The Panel found the fees associated with Umbrella Funds to be significantly higher than those charged in comparable jurisdictions. The current fees for Umbrella Funds and their Operators are the same as for other Funds, as described in paragraph 42 above.
      52. We agree with the Panel's findings and propose to lower the Umbrella Fund fees as set out in paragraph 54. We propose to apply the proposed fee reductions to all Umbrella Funds, not merely to those using the PCC structure.
      53. We have also considered whether the current PCC provisions contained in the Companies Regulations, which we propose to retain, are adequate to deal with Umbrella Fund specific requirements. We have identified that some enhancements to the PCC regulations would be needed to address a few gaps, such as the provisions relating to redemption of Units based on the net asset value (NAV) and the application of the prohibitions against cross-investments in sub-funds.

      Proposed changes

      54. We propose, as recommended by the Panel, to:
      a. permit a Domestic Fund to use the PCC structure provided its Sub- Funds are open-ended – see Articles 26(2), 37(4), 59 of the CI Law which provide the overarching structure for the PCC related changes;
      b. request DIFCA to make the necessary amendments to the existing COR provisions dealing with PCCs to:
      i. remove the current prohibition so that Umbrella Funds can use the PCC structure;
      ii. enhance the PCC provisions to address redemption of Units of open-ended Sub-Funds in accordance with NAV calculations as required under CIR; and
      iii. ensure that the CIR prohibitions relating to cross investments of one Sub-Fund's assets in other Sub-Funds in the same Umbrella Fund are applicable to Umbrella Funds using the PCC structure.
      As these regulations are made under the Companies Law 2009 which is administered by DIFCA and the Registrar of Companies, the proposed amendments to COR set out in Annex 9 are being consulted upon jointly by the DFSA and DIFCA.
      c. arrange the Umbrella Fund provisions in CIR in a more cohesive and accessible manner as appropriate (see – Table in CIR Rule 13.7.2).
      d. remove the current requirement in CIR to include in the Umbrella Fund constitution detailed information relating to investments in Sub-Funds; this information will instead be disclosed in the relevant Prospectus – see App 7 – CIR Rule A7.1.1(2)(h).
      e. reduce fees applicable to Umbrella Funds (whether using the PCC structure or otherwise) as follows:
      i. For the Umbrella – a fee of US$8,000 per year (both in the initial and each subsequent year) + a sum prorated from US$8,000 to each month remaining in the initial year, and US$1000 for every US$1,000,000 of the aggregated total expenditure for each of the Sub-Fund under management in the subsequent years – see FER Rules 2.1.1 and 3.2.1.
      ii. For each Sub-Fund of an Umbrella – upon registration, a fee of US$1,000. See FER Rule 2.4.1.
      iii. Removal of the US$10,000 cost of winding up the Umbrella – see FER Rule 2.5.1.
      iv. Reduction of the periodic fee applicable to each Umbrella Fund by reducing the minimum from the current US$10,000 to US$1,000 and increasing the maximum from the current US$50,000 to US$100,000 for the reasons given under Issue 3 above – see FER Rules 3.9.1 and 3.10.1.
      Issues for consideration

      13. Do you agree with the proposals to allow the use of the PCC structure for Umbrella Funds? If not, why?
      14. Are there other issues which need to be addressed in allowing the use of the PCC structure for Umbrella Funds? If so, what are they and how should they be addressed?

      Issue 5 – Exempt Funds

      Analysis of the Panel recommendations

      55. The Panel, after a review of the practices adopted in other jurisdictions, found creating an Exempt Funds regime would act as a key attraction for fund managers to establish and operate their funds in the DIFC. Such categories are available in many fund hubs. They noted that while there is no generally-used test for defining an Exempt Fund, commonly applied criteria included: in the case of individual investors, a high net worth test coupled with sophistication as evidenced by the size and frequency of transactions in their investment portfolio; in the case of institutional investors, tests based on assets under management or operational size of the entity; and a minimum level of investments in the Fund.
      56. The Panel therefore recommended that the DFSA create an Exempt Fund regime, distinct from, and in addition to, the existing Public and Private Fund categories. The key features they proposed for such an Exempt Fund regime were:
      a. confinement of investments in an Exempt Fund to Qualified Investors, defined as persons with at least US$1 million net assets and, with the same level of sophistication as required under the current Professional Client test;
      b. distribution of Units in an Exempt Fund only by private placement and not by public offer (as in the case of distribution of Units of Private Funds);
      c. requirement for a minimum initial subscription of at least US$50,000 from each Qualified Investor; and
      d. the Operator of an Exempt Fund being a DFSA licensed Operator (Fund Manager).
      57. The Panel proposed that where a Fund has the above features, it should attract a lighter regulatory regime than the regime currently applied to Public and Private Funds. The Panel considered that persons meeting the "Qualified Investor" test should be regarded as having the necessary expertise and resources to be able to:
      a. negotiate the terms of engagement of the Fund Manager, including required disclosure;
      b. assess whether the Fund Manager's performance meets the agreed standards and delivers the expected outcomes; and
      c. take appropriate action against the Fund Manager if required.
      58. The Panel noted that the level of prescription currently applied to Private Funds is inappropriate for Exempt Funds, particularly in terms of Fund governance and disclosure relating to the Constitution, Prospectus, internal operations and administration and delegation and outsourcing. Instead, an Exempt Fund should only be subject to minimum regulation, in terms of having a registered auditor and its annual reports having to be filed with the regulator and made available to investors in the Fund.
      59. The Panel also canvassed a fast-track process for obtaining a DFSA licence to operate Exempt Funds, where the activity to be undertaken is confined to managing Exempt Funds. Finally, the Panel recommended that the Exempt Fund structure be available to specialist types of Funds, such as Islamic, Hedge, Property and Private Equity.

      Do we need a third regime of Funds?

      60. When establishing the DFSA Funds Regime, the option of creating an Exempt Funds regime was considered. A decision against the creation of such a regime was made for two reasons: to retain the simplicity of the dual structure, and because the Private Funds were considered as providing an adequately light level of regulation.
      61. We agree with the Panel that an overly prescriptive level of Fund governance and disclosure requirements is applied to Private Funds. As a result, our Private Fund requirements do not compare favourably with the lighter touch regimes provided in other jurisdictions.
      62. We believe that having Private Funds alongside the Public and Exempt Funds may complicate the Funds Regime to no good purpose. Therefore, our proposal is to retain the simplicity of the dual structure, and, in the longer term, to have only Public and Exempt Funds.
      63. However, there are already a number of Private Funds established and operated in the DIFC. Removing the Private Fund category without providing appropriate transitional arrangements may cause practical difficulties for the Operators of those Private Funds and affect their Unitholders. To address such practical difficulties, we propose to retain the Private Fund category within the current regulatory regime as a temporary measure, with the objective of phasing this category out, in consultation with the relevant stakeholders, as soon as possible.

      What are the appropriate features for Exempt Funds?

      64. Type of Clients: While the Panel recommended an increase in the net asset test from US$500,000 to US$1 million and a minimum subscription of US$50,000 for investors in Exempt Funds, we are reluctant to create a new category of Client, and consider that the minimum subscription of US$50,000 is in itself a significant element of the eligibility test. We therefore propose to retain the Professional Client criteria to determine whether a person is permitted to invest in an Exempt Fund, subject to the minimum US$50,000 subscription requirement.
      65. Manner of distribution: We agree with the Panel recommendation that the appropriate manner of distribution of Units of Exempt Funds is by way of private placement. In addition, we propose that the number of investors that could invest in an Exempt Fund be limited to 50 or fewer. This is because in Funds with larger numbers of investors involved, particularly going beyond 50, it may generally not be as easy for Fund Managers to negotiate terms of placement with individual investors, and also, for investors in such Funds to arrange collective action against the Fund Manager. This number limitation is used in other jurisdictions to draw a distinction between private and public offerings and other arrangements.
      66. Level of regulation: We also considered whether it is appropriate to adopt a lighter touch regulation for Exempt Funds as recommended by the Panel, particularly against the current regulatory environment. Under the Panel recommendations, the key controls against potential for abuse are the licensing (or equivalent regulation) of the Fund Manager of an Exempt Fund and the abilities of the type of investors allowed to invest in Exempt Funds to monitor and assess the performance of the Fund Manager.
      67. We believe that these measures alone would not be adequate to mitigate the potential risks of abuse, particularly those risks that may arise in relation to valuations and unauthorised trading in the investment portfolio of Exempt Funds, which could go undetected by investors.
      68. Risk mitigation measures: To address such risks, we propose, that in addition to the minimum level of regulation proposed by the Panel (encompassing only the audit by a Registered Auditor and the periodic reports), an Exempt Fund should be required to:
      a. have an Eligible Custodian or Trustee, in the same manner as Public and Private Funds; and
      b. be subject to a Fund valuation requirement at least every 6 months (with the report being available to investors), carried out by a DFSA licensed Fund Administrator or a person subject to an equivalent level of regulation (e.g. in a Recognised Jurisdiction), except where the Fund's investments are:
      i. financial instruments that are traded using a facility provided by a regulated exchange; or
      ii. financial instruments where the loss or gain of the investors in the financial instrument is determined by reference to a factor in relation to which there is a reliable and readily available public information (such as an index, interest or exchange rate or any combination of such factors).
      69. Disclosure: We have also considered in the light of a public comment received whether the Offer documents of Exempt Funds should at a minimum be required to contain disclosure relating to the Fund's investment strategy, leverage limits, investment risks and expenses, including fees and charges. Given that one of the key premises of Exempt Funds is private placement and hence the scope and flexibility for individual investors to negotiate the terms of investment, we do not think any degree of prescription in this regard is necessary. However, we propose to extend to Exempt Funds the overarching disclosure obligation that the investors should be provided with an offer document that contains adequate information to enable them and their advisers to make well informed investment decisions regarding investment in the Exempt Fund.
      70. Public comments strongly supported the Panel recommendation to create an Exempt Fund regime. One commentator noted that this proposal is the most interesting of the Panel recommendations and could have the potential for Fund Managers to attract far greater levels of investments to the DIFC. Another commentator suggested that there should be minimum disclosure covering investment strategy, leverage, investment risks and fees and expenses in the Exempt Fund offer documents. For the reasons highlighted above, we do not think such a specific requirement is needed.

      Proposed changes

      71. We propose to introduce an Exempt Funds regime substantially in line with the Panel recommendations but with some changes, incorporating the following features:
      a. investors in an Exempt Fund being limited to 50 or fewer Professional Clients, each making an initial subscription of at least US$50,000 – see Article 16(4)(a), (c) and (d) of the CI Law;
      b. Units in the Exempt Fund being offered by the Fund Manager or an Authorised Firm only by way of private placement – see Article 16(4)(b) of the CI Law;
      c. an Exempt Fund being required to:
      i. be audited by a Registered Auditor and prepare annual and interim reports as required by chapter 9 of the CIR module;
      ii. have an Eligible Custodian or Trustee, except where the Exempt Fund is a Property Fund with special arrangements or a Private Equity Fund – see CIR Rules 8.2.2(2), 8.2.3, 13.4.2 and 13.3.1(1); and
      iii. be subject to a fund valuation requirement at least every 6 months (with the report being available to investors and the regulator), carried out by a DFSA licensed Fund Administrator or a person subject to an equivalent level of regulation (e.g. in a Recognised Jurisdiction) except where the Fund's investments are financial instruments:
      •    that are traded using a facility provided by a regulated exchange; or
      •    where the loss or gain of the investors in the instrument is determined by reference to a factor in relation to which there is reliable and readily available public information (such as an index, interest or exchange rate or any combination of such factors) – see CIR Rule 8.4.1(1)(a)(ii); and
      d. the Exempt Fund being required to have an offer document which contains any information investors, or their advisers, would reasonably require for the purposes of making an informed decision to make an investment in the Fund – see Article 52(2) of the CI Law.
      72. We propose to undertake consultation with the Operators of Private Funds in the DIFC to ascertain what appropriate transitional arrangements would be needed by them for their Private Funds to be converted to either an Exempt a Public Fund. We also propose to establish a fast-track licensing/approval process for Persons who wish to operate/manage only Exempt Funds.

      Issues for consideration

      15. Do you agree with our proposals to establish Exempt Funds? If not, why?
      16. Do you consider the proposed parameters for Exempt Funds to be appropriate? If not, why?
      17. Do you have any concerns relating to the transitional arrangements for phasing out Private Funds? What are they, and how should they be addressed?

      Issue 6 – Oversight Committee

      Analysis of the Panel recommendations

      73. All Domestic Funds which are Public Funds must have oversight arrangements that meet the criteria specified in CIR. The rationale for these oversight requirements is to ensure that significant parameters (such as investment guidelines and borrowing restrictions) within which an Operator must manage investors' funds are not exceeded or disregarded to the detriment of those investors, particularly where they include Retail Clients.
      74. While the Panel conceded that having an independent oversight function relating to Public Funds that have Retail Clients is common in most jurisdictions, they were concerned that our requirements, are more prescriptive and restrictive than those applied in many other jurisdictions. They also noted that in a relatively new and small jurisdiction, it is difficult to find service providers with the necessary expertise and familiarity with the DIFC Funds Regime to be able to undertake the oversight function as currently prescribed.
      75. The Panel also identified that, although Eligible Custodians are permitted to undertake the oversight function, in reality custodians did not wish to do so, given its currently onerous nature. They also noted that custodians may not have the required degree of independence from the Fund Operator to undertake the oversight function as they are appointed by the Operator. It was also thought that the procedural requirements, such as having to hold certain number of meetings in the DIFC at the same time as the meetings of the governing body of the Fund, are too onerous.
      76. Accordingly, the Panel recommended that the DFSA:
      a. remove the requirement for an independent oversight function for Public Funds at least in certain cases, such as where more stringent and transparent investment guidelines are applied, for example in relation to funds investing in transferrable securities traded on recognised exchanges;
      b. in other cases, make the oversight function less prescriptive, so that more flexibility is available to Fund Managers to satisfy the oversight requirement; and
      c. consider removing the Eligible Custodian from the category of persons who could undertake the oversight function due to the possible conflicting nature of custody services and oversight functions.
      77. Under the current requirements, the independent oversight function in every Public Fund must be carried out:
      a. if it is an Investment Company, by (i) a panel consisting of a majority of independent non-executive members of the Fund's board of Directors, (ii) a supervisory board comprising a majority of independent non-executive Directors of the Fund to supervise the Fund's board of Directors or (iii) an Eligible Custodian;
      b. if it is an Investment Partnership, by (i) a committee consisting of a majority of Limited Partners who are independent of the Operator or (ii) an Eligible Custodian; and
      c. if it is an Investment Trust, by (i) the Trustee of the Fund or (ii) by having a majority of independent directors on the Operator's Board.
      78. The current obligations of the independent oversight provider include:
      a. monitoring whether the Operator complies with the Fund's Constitution and Prospectus and any obligation or requirement imposed on the Fund under any legislation administered by the DFSA, including any requirements to establish and maintain proper systems and controls;
      b. reporting to the Operator of any breaches of the requirements in the Prospectus, Fund Constitution, and any obligations or requirements imposed on the Fund, or any terms, conditions or restrictions of the Operator's Licence which it becomes aware of, or suspects;
      c. taking reasonable steps to ensure that the Operator rectifies any non-compliance with the Rules as soon as reasonably practicable;
      d. reporting to the DFSA if the Operator does not, or is not reasonably likely to, take any remedial actions of any breach reported to the Operator;
      e. assessing at regular intervals whether the Fund's internal systems and controls are adequate, and reporting to the Operator on any improvements needed;
      f. in addition, reporting at least quarterly to the Operator at its Board meetings on the effectiveness and appropriateness of the systems and controls that are in place for the proper discharge of oversight functions;
      g. taking reasonable care to ensure on a continuing basis that the Operator is managing the Fund in accordance with the Rules in respect of single pricing and dealing, income, investment and borrowing and the periodic reporting obligations that apply in respect of the Fund;
      h. taking reasonable steps and exercising due diligence to ensure on a continuing basis that the Operator:
      i. invests Fund Property in accordance with CIR Rules, and
      ii. takes necessary restorative measures to correct any identified non-compliance as soon as reasonably practicable;
      i. holding in the DIFC at least two meetings in each annual accounting period, and in the case of Investment Companies or Investment Partnerships, holding those meetings at the same time as the meetings of the Fund's Governing Body; and
      j. maintaining records relating to the discharge of oversight functions.
      79. The current Funds Regime also imposes fairly extensive obligations on those performing the oversight functions, which apply in respect of every oversight function such individual undertakes. These are set out as high level principles, and cover overarching obligations to act with integrity, apply due care, skill, and diligence, observe standards of conduct in financial markets and open and cooperative dealings with the regulator. The Operator must also assess that every person who is appointed to undertake oversight functions is suitably qualified, fit and proper and meets the specified standards relating to independence from the Operator.
      80. As the Panel identified, the compliance burden imposed on the oversight provider seems to be overly burdensome.
      81. However, one public commentator on the Panel Report disagreed with the Panel's suggestion (not a Panel recommendation) that it may be appropriate to waive the requirement for third-party oversight in the case of large international organisations with layers of compliance throughout the group or with independent directors on the Board. This commentator was of the view that from a compliance perspective, having independent parties involved in the oversight would be useful, particularly as a protection against conflicts of interest that could cloud the decisions of interested parties.
      82. In the light of the above considerations, we consider that a re-structuring of the current oversight arrangements is warranted. Some key issues that have arisen in determining appropriate oversight arrangements for Public Funds, and our proposals to address those issues are set out below.
      a. Flexibility for certain types of Public Funds: In the case of some types of Public Funds, particularly those involving passive management of Fund investments such as index tracking funds that do not require any active investment management as such, the Panel questioned whether the cost of having independent oversight arrangements is warranted. We are sympathetic to their views, provided the Operator's systems and controls adequately address proper monitoring of, and adherence to, the investment and borrowing limits applicable to the Fund, as set out in its Constitution and the most recent Prospectus; and
      b. The Eligible Custodian's role as the oversight service provider: The Panel was of the view that the Eligible Custodian of the Fund should not be permitted to undertake the independent oversight function, particularly due to their conflicting duties involved in the two roles. However, this concern seems to stem more from the nature of direct obligations imposed on the oversight provider relating to the Fund Property, as detailed in paragraphs 83 and 84 below, rather than any inherently conflicting nature of the two roles.
      83. Under the current Funds Regime, independent oversight providers are subject to certain Fund Property specific obligations. In other regimes these are more typically the direct obligations of trustees and depositories of Funds, and not those of oversight providers. Particularly, where actual or potential breaches are identified, the oversight provider is required to ensure that the Operator takes necessary restorative steps to rectify such identified breaches.
      84. Under our current Funds Regime, the Eligible Custodian of a Fund is not itself subject to those requirements in respect of its custody functions. Rather, it is only a delegate of the Operator, with the Operator remaining primarily and directly accountable to the investors for the safe custody of the Fund Property. As a result, where an Eligible Custodian of the Fund is appointed as the independent oversight provider, it attracts significantly more onerous requirements relating to Fund Property than it would otherwise. This appears to be the reason for custodians' reluctance to assume the oversight function.
      85. Given that we are proposing to remove a number of Fund Property specific direct obligations from the responsibilities of the independent oversight providers, Eligible Custodians are likely to find the task of assuming the role of independent oversight provider more acceptable under our proposals.
      86. We also propose to make the permitted oversight arrangements less complex than the current arrangements, focussing on the suitability of the individuals appointed to the function. Accordingly, our proposals permit the oversight function to be undertaken by individuals provided they are independent of the Fund Manager and have the required degree of resources and competencies.

      Proposed changes

      87. In line with the Panel recommendations, we propose to restructure the independent oversight function relating to Public Funds as follows:
      a. To provide for the independent oversight function of a Public Fund to be undertaken by:
      i. an Oversight Committee comprising at least three individuals each of whom meets the suitability criteria specified (i.e. having necessary expertise, resources and independence) to carry out the oversight function – see CIR Rule 10.3.1(a); or
      ii. the Trustee or Eligible Custodian of the Fund – see CIR Rule 10.3.1(b).
      b. The obligations relating to the independent oversight function being recast so as to require the oversight provider to:
      i. monitor whether the Operator is managing the Fund in accordance with the parameters set by the Fund's Constitution and its most recent Prospectus, particularly those relating to investment and borrowings – see Article 40(1)(a) of the CI Law and CIR 10.3.4(a);
      ii. assess whether the Operator's systems and controls, including those relating to risk management and compliance, are properly implemented and operating as intended – see Article 40(1)(b) of the CI Law and CIR 10.3.4(b);
      iii. report to the board of the Operator immediately if there are any breaches or suspected breaches of the parameters referred to in (i) or any inadequacies or failures in relation to the Operator's systems and controls referred to in (ii) – see Article 40(1)(c) of the CI Law and CIR 10.3.4(c); and
      iv. report to the DFSA if any breaches or inadequacies referred to above are not resolved or rectified by the Operator within 30 days of being reported to the board of the Operator – see Article 40(1)(d) of the CI Law and CIR 10.3.4(d);
      c. Removing the prescriptive meeting related requirements of the independent oversight provider, instead giving the discretion to the oversight provider to determine when and how its meetings should take place, taking account of the nature of the activities of the particular Fund – see CIR 10.3.5;
      d. To the extent some of the following resources, powers and privileges are not conferred on the independent oversight provider, incorporate those as relevant:
      i. direct lines of dialogue with, and reporting to, the board of the Operator;
      ii. direct access to, and reporting by, the persons providing Compliance and Risk Management functions;
      iii. direct access to the persons providing custody and valuation functions;
      iv. sufficient resources, including powers to obtain third party expertise where appropriate; and
      v. whistle blower protection relating to their reporting of breaches/suspected breaches to the DFSA,
      see Article 41(3) of the CI Law and CIR 10.3.11; and
      e. Not requiring Public Funds which are passively managed to have independent oversight providers – see CIR Rule 10.1.1(2).
      88. We propose to retain the current suitability criteria and the high level principles applying to individuals undertaking the oversight function, the latter with some refinements to reflect the changes resulting from the proposed approach.

      Issues for consideration

      18. Do you agree with our proposals to allow the oversight function to be undertaken by individuals who meet the prescribed suitability criteria (which includes a requirement for independence from the Fund Manager)? If not, why?
      19. Do you have any concerns relating to our proposal to retain the Eligible Custodian of the Fund as a Person who is permitted to undertake the oversight function, provided the senior individuals who are primarily responsible within the Eligible Custodian for that function meet the prescribed suitability criteria? If so, what are those concerns and how should they be addressed?
      20. Are there any other issues or concerns relating to the oversight function that the DFSA needs to address? If so, what are they and how should they be addressed?

      Issue 7 – Shari'a Compliance

      Analysis of the Panel recommendations

      89. The Panel considered that the Islamic Fund regime in the DIFC, if enhanced in the manner proposed by the Panel, has the potential to become a key attraction for Fund Managers to locate their Islamic business in the DIFC.
      90. The key issues which the Panel identified relating to Islamic Funds are:
      a. the possible overlap of the regulatory requirements relating to the appointment of Shari'a Supervisory Boards (SSB), which are currently required at the Fund Operator level and also at each of the Islamic Funds operated by the Operator;
      b. the need to have a three member SSB, given the limited number of Shari'a scholars available in the DIFC and associated costs and time taken to obtain their services; and
      c. the lack of sufficient flexibility for Fund Managers operating Islamic Funds through Islamic Windows, particularly as their conventional business attracts different accounting and audit standards, thereby increasing their costs.
      91. In order to address the above issues, the Panel recommended that the DFSA adopts the following measures:
      a. consolidate the Shari'a compliance requirements that apply concurrently to the Operator and the Islamic Funds it operates, and in the process clarify any potential for overlap and unnecessary duplication of the relevant regulation;
      b. in consolidating the provisions as set out in (a), consider whether measures such as imposing an express statutory obligation on SSB members to place the interests of the Fund and its investors ahead of the interests of the Operator is necessary;
      c. reduce the requirement for a three member SSB for Operators of Private Funds. Instead have a minimum requirement for such Funds to have a single Shari'a adviser (or Shari'a services provider). Adopt a similar requirement as proposed for Private Funds for the proposed Exempt Funds;
      d. remove the need for a three member SSB for Public Funds where it relies on widely acceptable Shari'a screening processes such as investments in securities included in, or recognised by reference to, an Islamic index, sukuks or treasury instruments issued by a Shari'a compliant financial services provider regulated by a Financial Services Regulator;
      e. remove the requirements for Private Funds to adhere to AAOIFI standards when conducting their audits, and adopt a similar approach to the proposed Exempt Funds;
      f. remove the current prescriptive Shari'a-related requirements applicable to Private Funds such as those set out in current CIR 13.1, and adopt a similar approach to the proposed Exempt Funds; and
      g. provide a greater degree of flexibility for Operators when managing both Islamic and conventional Funds with a view to avoiding the unnecessary and dual layers of costs and regulation that generally occur under the current requirements for operating an Islamic Window from a conventional business platform.
      92. These proposals are substantially in line with our internal thinking relating to regulation of Islamic financial activities in the DIFC, and in particular, the DFSA's objective of promoting the DIFC as a hub of Islamic financial activities. However, there were a number of issues we needed to consider in detail before developing our proposals in this context.

      Should Shari'a scholars appointed to Islamic Funds be subject to an express statutory obligation to place the interests of investors ahead of those of the Operator?

      93. Generally, if a Shari'a scholar is appointed by the Operator and is required to act both for the Fund and the Operator, conflicts of interests may arise in this context. However, unlike any other functionary appointed to the Fund, Shari'a scholars are subject to the paramount Shari'a principles, which dictate high standards of ethical behaviour. Perhaps more importantly, the SSB itself does not bear any direct accountability to investors; this rests with the Operator and it is there that the fiduciary responsibility should be, and is, located. Therefore, we do not consider it necessary to impose such an explicit requirement.

      Should Private Funds be subject to less stringent Shari'a requirements than currently applied?

      94. The Panel recommended that at the Private Fund level (and also at the proposed Exempt Fund level), most of the prescriptive requirements that currently apply under CIR 13.1 (which are now in IFR chapter 6) should be removed. These requirements include systems and controls to ensure Shari'a compliance, an Islamic Financial Business policy and procedures manual, the appointment of a three member SSB, Shari'a review by the SSB resulting in annual and interim reports complying with AAOIFI standards and an internal Shari'a review in accordance with the applicable AAOIFI standards. Instead of these prescriptive requirements, the Panel recommended that the DFSA requirements be confined to:
      a. the Private Fund's disclosure documents to investors (e.g. the Short Form Prospectus) containing provisions describing the Shari'a compliant nature of the Fund, the process for achieving such compliance, including the names of the Shari'a advisers appointed to the Fund; and
      b. those encompassing:
      i. the operations and investments of the Fund being subject to compliance monitoring and reporting by its Shari'a advisers;
      ii. requiring the provision of semi-annual and annual reports to investors and the DFSA explaining the work undertaken by the Shari'a advisers during the relevant period to verify compliance by the Fund with the Shari'a guidelines and restrictions set out in its disclosure documents; and
      iii. requiring confirmation from Shari'a advisers of the extent of the Fund's Shari'a compliance status during the period concerned.
      95. While we agree that a less prescriptive approach to Private Funds and Exempt Funds is warranted, we do not think it is appropriate to remove at the Private Fund level the current requirement to have a three member SSB, which is in line with the international standards. Therefore, we propose to retain the three member SSB requirement for Public and Private Funds.
      96. However, in order to provide greater flexibility and remove some of the overly onerous aspects of the Shari'a compliance requirements, we propose to:
      a. not impose on Exempt Funds an obligation to have an SSB at the Fund level, so that such Funds may use a single Shari'a scholar who is a member of the Firm's SSB for signing off on Shari'a compliance aspects of the Fund operations. Where it does so, the Exempt Fund's disclosure documents must contain information about the Shari'a compliance sign-off process that is applied;
      b. remove the requirements for an Islamic Financial Business policy and procedures manual at the Fund level. The Fund Operator's systems and controls should, however, adequately address how Shari'a compliance is achieved at the Fund level; and
      c. not require Funds to have an SSB at Fund level where they rely on widely accepted Shari'a screening methodologies (such as securities included in an Islamic index).
      97. Further, where the proposed Exempt Fund category is concerned, the DFSA also proposes not to apply most of the prescriptive requirements currently applied to Private Funds which are contained in IFR chapter 6.
      98. Another option is to relieve the Fund Manager from the Shari'a supervisory requirements altogether at the firm level, in reliance on the full application of the SSB and other Shari'a governance requirements at the Fund level. To minimise the need for deviation from the existing conceptual framework of the Shari'a governance requirements, we have not adopted this option.

      Should the removal of the SSB requirement for Funds using acceptable Shari'a screening methods be confined to Public Funds?

      99. The Panel's recommendation to remove the SSB requirement for certain types of Islamic Funds using acceptable Shari'a screening methodologies is confined to Public Funds. However, Exempt and Private Funds using similar acceptable Shari'a screening methodologies should equally be exempt from the otherwise applicable Shari'a advisory requirements (i.e. the minimum Shari'a scholar requirement) as they, too, have the benefit of the relevant screening. Therefore the DFSA proposes to extend the benefit of this proposal in similar circumstances to Private and Exempt Funds. The overarching disclosure obligations applicable to Private and Exempt Funds would require the Operators of such Funds to include in their disclosure documents which Shari'a screening methodology is being used by the Fund, and also the information relating to the SSB that has approved it.
      100. The public comments supported the overall thrust of the Panel proposals to clarify and, where necessary, reduce the current prescriptive requirements relating to Shari'a compliance. However, one commentator did not support the reduction of the three member SSB requirement for Private or proposed Exempt Funds at the firm level, especially where the firm undertakes Islamic financial activities that are not confined to the operation of Islamic Funds. They also did not support the greater degree of flexibility proposed by the Panel with regard to firms operating Islamic funds through an Islamic Window, nor the proposal to remove the requirement to apply AAOIFI standards relating to the audits of Islamic Private/Exempt Funds, as they feared that these proposals, if implemented, would lead to the level and quality of Shari'a review process being compromised.
      101. We have, in designing our proposals, not gone as far as the Panel recommended, particularly in regard to the Panel recommendation to remove the 3 member SSB requirement at the firm level for Private and Exempt Funds, partly due to these concerns raised.

      Proposed changes

      102. We propose, substantially in line with the Panel recommendations, to:
      a. consolidate the Shari'a compliance requirements that apply concurrently to the Operator and the Islamic Funds it operates, so that the Shari'a compliance requirements need not be duplicated at both the Fund level and the Operator level. In doing so, we propose to provide clarification to remove any potential for overlap and unnecessary duplication of the relevant requirements – see IFR Rules 6.1.2(2), 6.1.4 and 6.2.1(2);
      b. reduce the compliance burden on Exempt Funds – see IFR Rules 6.1.3, 6.2.1(1) and Guidance under IFR Rules 6.3.2 and 6.4.1;
      c. permit the use of a single Shari'a scholar for Shari'a compliance purposes of the Fund, instead of the 3 member SSB, for Exempt Funds – see Guidance note 3 under IFR Rule 6.2.1; and
      d. remove completely the need for an SSB and Shari'a scholars for an Islamic Fund where reliance is made on widely accepted Shari'a screening processes such as investments in securities included in, or recognised by reference to, an Islamic index, sukuks, or treasury instruments issued by a Shari'a compliant financial services provider regulated by a Financial Services Regulator – see IFR Rule 6.2.1(3).

      Issues for consideration

      21. Do you agree with our proposed approach relating to Shari'a compliance requirements? If not why? In particular, do you have any views on the option noted in paragraph 98? If so, what are they?
      22. Are there any additional issues or concerns that need to be addressed relating to the Shari'a compliance requirements applying to Islamic Funds and their Fund Managers? If so, what are they and how should they be addressed?

      Issue 9 – Other Issues

      Removing the unintended application of provisions designed for open-ended Funds to closed-ended Funds

      103. The Panel noted that a number of provisions in our Funds Regime, particularly those relating to Fund valuation and pricing requirements associated with redemptions, are inappropriate for closed-ended Funds. For example, Article 21(3) of the CI Law provides that "Every Domestic Fund shall employ single pricing in relation to the price of Units and Unitholders shall be entitled to have their Units redeemed by the Operator of the Fund at a price related to the net asset value of the property to which the Units relate calculated in accordance with the Rules made under this Law." See also the associated requirements in CIR Rules 6.7.1(1) – (5), which provide for redemption of Units based on NAV.
      104. The Panel noted that if a Fund is a closed-ended vehicle, e.g., an Investment Company, there will be no arrangements for redemption of Units, i.e. shares in this case, of the Fund, particularly as share buy-backs are not generally considered as redemptions for the purposes of these provisions and are subject to stringent regulation under the Company Law. Therefore, the Panel recommended that this anomaly be resolved to provide greater certainty for closed-ended Funds which are not subject to an obligation to provide continuous redemptions based on NAV.

      Proposed changes

      105. We propose to remove the unintended application of the redemption provisions to closed-ended Funds. See – Article 27(1)(f) of the CI Law and CIR Rule 8.6.1.

      Other enhancements to the Funds Regime

      106. The Panel also indicated that it would be desirable if we could make our rules, particularly those in the CIR module, more accessible and user friendly.
      107. We have taken the opportunity to restructure the CIR module, both to bring about a closer alignment with the arrangement of the provisions in the CI Law and also to enhance clarity and accessibility of the CIR provisions while incorporating the proposed changes to it set out above. We have also removed some inconsistencies and anomalies in this process. Some of the changes proposed to the CIR module in this context include:
      a. the removal from the GLO module of some of the definitional provisions that apply to Funds, such as the definitions of specialist classes of Funds and fund functionaries such as Eligible Custodians and placing them in the CIR module (see Part 2 of the CIR module);
      b. the inclusion in the definitional provisions of the concept of "Excluded Offers" (see chapter 4 of the CIR module), so that certain types of Transactions and marketing activities which are not treated under the current CIR module as regulated offers are more prominently identified as unregulated offers;
      c. the exclusion of secondary sales of Units which are "personal offers" from being treated as regulated Offers (see CIR Rule 4.1.2). This proposal would alleviate the Prospectus disclosure burden for private individuals selling their own personal holdings in limited circumstances. Individuals using this route would still need to go through the Fund Manager or other Authorised Firm to effect the transaction, at which point the Client classification requirements would apply; and
      d. a more cohesive thematic grouping of related requirements. Examples are the "Accounting, audit and periodic reporting of a Fund" in chapter 9 of the CIR module and bringing together under "Marketing of Domestic Funds and Prospectus Disclosure" in chapter 14 of the CIR module all the provisions associated with the marketing of Units of Domestic Funds, including Prospectus disclosure and liability provisions.
      108. We also propose to make some changes to the requirements that apply to the valuation function of a Property Fund, taking account of practical difficulties arising due to limited resources available in this regard to Fund Managers in the DIFC. While retaining the current requirement for a valuer of a Property Fund to be independent of the Fund Manager, we have given more flexibility to Fund Managers by removing prescription and providing Guidance on factors that should be taken into account by a Fund Manager in assessing the competency and objectivity of valuers (see CIR Rule 13.4.19).
      109. We also propose to make a number of consequential changes to other modules of the DFSA Rulebook to implement the proposals set out in this paper, such as those resulting from the terminology changes referred to under Issue 1.4 (e.g. the change of the term Operator to Fund Manager). In addition, we will be liaising with DIFCA to ensure necessary changes to the Companies Regulations to give effect to the PCC-related changes referred to under Issue 4.

      Issues for consideration

      23. Do you have any concerns or issues relating to the proposed changes to the valuation function relating to Property Funds? If so, what are they and how should they be addressed?
      24. Do you have any concerns or issues relating to the Funds Regime, including any which have not been addressed by, or arising out of, the proposed changes? If so, what are they and how should they be addressed?

      Click here to download the Consultation Paper in PDF Format.

      Appendix 1 — Proposed new Collective Investment Law PDF format
      Appendix 2 — Proposed amendments to the Regulatory Law PDF format
      Appendix 3 — Proposed new CIR module PDF format
      Appendix 4 — Proposed amendments to the Investment Trust Law PDF format
      Appendix 5 — Proposed amendments to the GEN module PDF format
      Appendix 6 — Proposed amendments to the IFR module PDF format
      Appendix 7 — Proposed amendments to the GLO module PDF format
      Appendix 8 — Proposed amendments to the FER module PDF format
      Appendix 9 — Proposed amendments to the DIFC Companies Regulations PDF format
      Appendix 10 — Report by the Market Practitioner Panel PDF format

    • Consultation Paper No. 68 Enhanced Corporate Governance Regime for Reporting Entities

      Why are we issuing this paper?

      1. The DFSA proposes changes to the corporate governance framework applicable to Reporting Entities in the DIFC. This framework needs to recognise that such Reporting Entities may be incorporated outside the DIFC and be subject to the requirements in their home jurisdiction, in addition to the requirements operating here. The proposed changes are part of a wider review of the DFSA Offered Securities Rules ("OSR") currently in progress (which includes corporate governance rules). The framework for corporate governance, however, has been treated as a discrete subject in respect of which some clarificatory amendments are now proposed. In due course a consultation paper setting out additional changes to the OSR will be published. Although reform of the rules relating to the governance of entities is a current topic for debate due to recent events in the global economy, DFSA is not proposing, in the changes in this Consultation Paper, to set out bold new standards for conduct nor to pioneer extensive or prescriptive "black letter" obligations to address deficiencies identified in other markets. Such new standards or obligations, in the event they are enacted, will be reviewed in due course for relevance to the DIFC.
      2. This Consultation Paper details proposed changes to the Markets Law 2004 and the Offered Securities Rules.

      Who should read this paper?

      3. The proposals in this paper would be of interest to:
      (a) current and prospective Reporting Entities;
      (b) advisors to Reporting Entities;
      (c) Authorised Market Institutions operating Official Lists of Securities; and
      (d) auditors of Reporting Entities.

      How is this paper structured?

      4. In this paper, we set out:
      (a) the background to the proposals (paragraphs 10-14);
      (b) overview of the proposed framework (paragraphs 15-20);
      (c) explanation for adopting the "comply or explain" model (paragraphs 21-22);
      (d) legislative proposal (paragraphs 23-28); and
      (e) the specific standards proposed on which comments are sought (paragraphs 29-34).

      How to provide comments?

      6. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      7. The deadline for providing comments on the proposals is 29 May 2010. The longer consultation period of 90 days is to allow the DFSA, given current changes in the financial world, to consider developments in the corporate governance arena, and if appropriate, incorporate those into the DIFC corporate governance regime for Reporting Entities.
      8. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook and to propose amendments to the Markets Law to the President of the DIFC for enactment. You should not act on these proposals until the relevant changes to the DFSA Rulebook and the Markets Law are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:

      Roberta Calarese
      Director, Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE
      +9714 362 1503 or

      e-mail to: rcalarese@dfsa.ae

      Terminology in this paper

      9. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in GLO or in the proposed amendments. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Background

      10. The corporate governance regime under the Markets Law 2004 (the "Law") and the Offered Securities Rules ("OSR") as currently drafted requires compliance with five principles prescribed in the Law and thirteen specific Rules in Appendix 4 of OSR ("App4"). App4 also contains detailed Guidance in support of the requirements. This mandatory compliance approach effectively establishes a 'one size fits all' corporate governance regime for Reporting Entities with alleviation only by way of waivers and modifications. While it could be argued that in a young jurisdiction, such prescription is justified to establish and foster a corporate governance culture, difficulties have arisen and will continue to arise, in implementing the model given the variety of companies that have, and could potentially, become Reporting Entities in the DIFC.
      11. In addition, DFSA considers that it has captured the essence of appropriate corporate governance obligations in its proposed Principles and Standards, since these must also be read in context with the responsibilities and duties of Reporting Entities/directors contained in the OSR (also subject to review).The resulting 'one size fits all' regime might thus be too inflexible for Reporting Entities of various sizes and it also appears to be out of step with peer jurisdictions.
      12. Additionally, there may be confusion about the extent to which currently the corporate governance requirements are mandatory. There are five separate, references in both the Law and OSR (which may cause some lack of clarity in respect of those requirements) to the following effect:

      Provisions requiring or referring to mandatory application
      a. Article 20(1) of the Markets Law requires compliance with the principles in the Law and requirements in OSR Article 20(2) requires explanation of how Reporting Entities apply the principles and Rules in App4;1
      b. mandatory compliance with the Rules in App4 is required pursuant to OSR 8.4.1;
      c. Guidance 3 of A4.1.1 refers to the requirement in (b) for an explanation of how Reporting Entities apply the principles and Rules in App4;
      Provisions allowing for 'Comply or explain'
      d. under OSR item 14 of A2.1.1 in respect of Shares (and under item 14 of A2.3.1 in respect of Listed Funds), Reporting Entities are required to make a disclosure in their annual report of how they have applied the principles (or comply with App4 in respect of Listed Funds) and where they have not, provide an explanation.
      13. While there are varying views on what regulatory obligations fall within the scope of corporate governance2, the regime which DFSA now proposes, as set out in this paper, is based on the way in which authority is exercised and controlled in Reporting Entities and how those in control are held to account3.
      14. In respect of the prescription in App4, our recent analysis of the mandatory requirements found that some of them often would not normally come under the ambit of corporate governance (within the scope as set in the paragraph above) and therefore should be made mandatory elsewhere, if at all, in the OSR4. We also considered that there should be a clear and justifiable distinction between requirements which should be mandatory in order to meet corporate governance objectives and those that set out the recommended approach on how to meet those objectives.

      Overview of the proposed framework

      15. The proposed regime lays out a general mandatory framework to meet corporate governance objectives leaving the mechanism open to Reporting Entities on how to meet these objectives. The proposed regime is to prescribe by way of Rules key corporate governance principles ("Key Principles"). Compliance with these Key Principles would be made mandatory.
      16. In accordance with the proposed tiered structure, the primary obligation to comply with corporate governance Key Principles under existing Article 20 of the Markets Law will be retained in the Markets Law.
      17. The corporate governance principles currently prescribed under Article 21 of the Markets Law will instead be prescribed in the Rules with some relevant enhancements. Prescribing Key Principles by way of Rules instead of in the Markets Law, would give the DFSA greater flexibility in amending such Key Principles to respond to changes in the corporate governance regimes around the world. A clear and justifiable distinction will be maintained between mandatory requirements to meet corporate governance objectives and the recommended approach on how to meet those objectives.
      18. For each Key Principle, the DFSA proposes to set out by way of Guidance a number of minimum best practice standards which a Reporting Entity could apply in order to ensure compliance with the Key Principles. Compliance with these standards would be based on a "comply or explain" model thus enabling a Reporting Entity either to apply the relevant practice standard or explain why it has departed from it and what other steps, if any, it has taken to ensure compliance with the Key Principles. This will minimise the difficulties that may arise in implementing the current corporate governance obligations, given the variety of companies that have or could potentially become Reporting Entities in the DIFC.
      19. In line with the 'comply or explain' model of peer jurisdictions, Reporting Entities will have to make a statement in their annual report5 as to the extent they have adopted the best practice standards and where they have not, explain the reasons why.
      20. The proposed structure can be summarised as follows:

      Location: Markets Law Corporate Governance Chapter in OSR Appendix to the Corporate Governance Chapter in OSR Corporate Governance Chapter in OSR
      Proposal: Overriding obligation to comply with Corporate Governance objectives and requirements as prescribed in OSR. Mandatory Corporate Governance Key Principles Practice standards to achieve Key Principles Requirement for Reporting Entities to make a statement in their annual report disclosing the extent to which they have followed the practices in the Appendix and where they have not, give an explanation why they were not followed.
      Drafting Form: Art.20 as amended Rules drafted as Key Principles. Principle-based practices Rules
      Compliance: Mandatory Mandatory Comply or explain Mandatory

      Why "comply or explain"?

      21. While corporate governance objectives in peer jurisdictions are often implemented by way of industry code rather than legislation, the 'comply or explain' model in respect of the recommended practice standards is an effective way of providing a framework which gives the necessary flexibility. Additionally, in a jurisdiction where corporate governance culture is still developing, making the key corporate governance principles mandatory is desirable having regard to the objective of enhancing the international reputation of the DIFC and the region.
      22. The DFSA notes that some jurisdictions (for example the US) maintain a more prescriptive approach to the issues DFSA regards as corporate governance. Nevertheless, there are three primary reasons why the 'comply or explain' model in respect of practice standards is considered to be more appropriate for this region:
      (a) while it encourages companies to follow accepted best practice, it recognises that in certain circumstances it may be appropriate for them to achieve good governance by other means;
      (b) by allowing a degree of flexibility, the model in practice can set more demanding standards. It can also be more easily adapted to take account of developments in best practice; and
      (c) it leaves decisions about the appropriateness of a company's governance arrangements in the hands of its board and owners which would be particularly useful in cases of foreign incorporated firms which are subject to different company laws and corresponding corporate governance codes.
      Issues for consideration

      Comments are sought on whether the combination of mandatory Key Principles and a "comply or explain" model of best practice standards on how to achieve the Key Principles of corporate governance is appropriate for the region?

      Legislative proposals

      Annex A — The Markets Law

      23. Annex A contains proposed amendments to the Markets Law 2004. The primary obligation to comply with corporate governance principles under Article 20 will be retained while selected corporate governance principles under Article 21 will be prescribed in OSR with relevant amendments.

      Annex B — OSR — Corporate Governance Chapter

      24. Annex B contains new text for the OSR which currently has no equivalent. For the purposes of the Consultation Paper, the new text is styled as a Chapter 1 of the OSR but this is for convenience only as the text will ultimately be located elsewhere in the OSR. In this chapter, the DFSA proposes only six mandatory Key Principles. Three are retained from current Article 21 of the Markets Law, (these are 21(1), 21(3) and 21(4)) with relevant amendments, and the new principles are taken from the UK Combined Code with some minor amendments. These were considered appropriate considering the view that proposed corporate governance regime for Reporting Entities should only relate to the way in which authority is exercised and controlled in Reporting Entities and how those in control are held to account.

      Issues for consideration

      Are the proposed six principles sufficient, or are more mandatory principles necessary to regulate corporate governance applicable to Reporting Entities?

      Annex C — OSR — Appendix to the Corporate Governance Chapter

      25. Annex C contains a blend of existing and new text (underlined) that is styled as Appendix 1 of the OSR for convenience only. This text will ultimately replace App4 and may be located in other parts of the OSR.
      26. Appendix 1 sets out the corporate governance best practice standards. They are based on the UK Combined Code in so far as they are relevant to the mandatory Key Principles. The purpose of the practice standards in the appendix is to guide Reporting Entities on the best way to meet their corporate governance obligations.

      Issues for consideration

      1. The DFSA welcomes feedback on whether basing the proposed practice standards on the UK Combined code is appropriate, bearing in mind that the proposed standards will operate within the 'comply or explain' framework.
      2. Are there any other specific standards which should be included in the appendix?

      OSR — Disclosure of compliance with Appendix 1 to Corporate Governance Chapter 1

      27. In addition to mandatory compliance with the Key Principles, Reporting Entities will be required to make a statement in their annual report disclosing the extent to which they have followed the practice standards in Appendix 1 and where they have not, give an explanation as to why they were not followed or what alternative steps, if any, were taken. 6
      28. The DFSA imposes corporate governance obligations only on certain Reporting Entities (i.e. Reporting Entities that have issued certain equity securities and Listed Funds). Accordingly, the annual report of only these Reporting Entities will require the disclosure of compliance with the practice standards.

      Issues for consideration

      Is the annual report the most appropriate document in which the corporate governance 'comply or explain' statement should be made?

      Specific best practice standards identified for comment

      29. The DFSA seeks comments on the specific best practice standards listed below.
      30. The DFSA proposes as practice standards:
      (a) that the roles of the chairman and chief executive should not be exercised by the same individual; and
      (b) that a chief executive should not go on to be the chairman of the same Reporting Entity (see Guidance 32 and 33 Appendix 1).
      31. These are measures to ensure a clear and appropriate division of responsibilities amongst senior management and the Governing Body. The DFSA is cognisant, however, that these standards may not be achievable by certain companies, which, by virtue of their business nature and size, have access to a limited directors pool.

      Issues for consideration

      1. The DFSA seeks views on whether these standards are appropriate.
      2. Will the proposed standard that a chief executive should not go on to be the chairman of the same Reporting Entity be unduly burdensome and unnecessarily restrictive on companies from jurisdictions where it is not uncommon for the roles to be combined (e.g. US)?
      32. Additionally, a standard has been included relating to the manner in which directors are remunerated. Specifically, it is proposed that the remuneration for non-executive directors should not include share options unless shareholder approval is sought in advance7 and any shares acquired by exercise of the options should be held until at least one year after the non-executive director leaves the Governing Body (see proposed Guidance 32 Appendix 1).
      33. While this proposed standard is in line with the current requirement under OSR App3 (5) where the granting of share components to the Issuers' Directors or Employees' compensation schemes must be approved by majority vote of the shareholders, the DFSA recognises that this may not be in line with the practices in place in other jurisdictions (specifically, in the US).

      Issues for consideration

      1. The DFSA seeks views on whether this standard in respect of director's remuneration is appropriate.
      2. Will this proposed standard be unduly burdensome on companies from jurisdictions where such a requirement is absent (e.g. US)?
      3. Is the requirement to hold Shares acquired by exercise of an option for at least one year after the non-executive director leaves the Governing Body effective in practice? How can the Governing Body monitor such a standard?
      34. We also propose that a number of sub-committees of the Governing Body are to be established to ensure there is appropriate discharge of the Governing Body's fiduciary responsibilities. While the underlying principle for the composition of the Nomination, Remuneration and Audit Committees is to ensure a minimum degree of independence, different standards have been set for each namely:
      (a) The Nomination Committee should comprise a majority of independent non-executive directors and should be chaired by an independent non-executive director (Guidance 16 Appendix 1).
      (b) The Remuneration Committee should comprise at least three independent non-executive directors. The chairman of the Governing Body while eligible to be a member should not chair the committee (Guidance 25 Appendix 1).
      (c) The Audit Committee should have at least two independent non-executive directors of whom at least one should have financial expertise. The chair of the Committee should be an independent non-executive director (Guidance 40 Appendix 1).
      Issues for consideration

      1. Are the proposed standards for ensuring the level of independence for each of the sub-committees of the Governing Body appropriate?
      2. Should the Chairman of the Board be restricted from also chairing the Nomination Committee?
      3. Would the introduction of a standard which prescribes membership only by independent non-executive directors for all of the sub-committees be unduly burdensome on Reporting Entities?

      1 See Annex A

      2 The scope of topics covered in various jurisdictions differs and may be covered under wider headings of 'Risk Management', 'Duties of Directors' and 'Corporate Governance'.

      3 For example, Connected Persons transaction approval requirements could come under the ambit of corporate governance in a wider sense. However this is currently, and will continue to be, captured under ongoing obligations of the Reporting Entity.

      4 Such matters are not set out in this paper but will be the subject of a separate consultation paper in due course.

      5 This requirement will be prescribed by way of a Rule which will be consulted upon at a later stage.

      6 This requirement will be prescribed in a Rule which will be consulted upon at a later stage.

      7 This standard is in line with current OSR Rule A3.1.1 which requires majority consent of shareholders for the granting of Share components to Directors of the Reporting Entity.


      Click here to download the Consultation Paper in PDF Format.

      Annex A PDF format
      Annex B PDF format
      Annex C PDF format

    • Consultation Paper No. 67 Changes to the DFSA Price Stabilisation Rules

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comments on the DFSA's proposals to make changes to certain Rules in the Price Stabilisation Module (PRS). This paper also sets out the proposed changes to the PRS. The proposals are aimed at updating the PRS and are the result of an internal review of our Rules on Price Stabilisation.

      Who should read this paper?

      2. The proposals in this paper would be of interest to:
      a. a Person who is issuing, or proposing to issue, Securities in the DIFC;
      b. a Person seeking to include Securities in an Official List of Securities of an AMI in the DIFC;
      c. a Person who has or proposes to provide the services of a Price Stabilisation Manager to an Issuer in the DIFC; and
      d. advisors to Persons in a., b. and c. above.

      How is this paper structured?

      3. In this paper, we set out:
      a. a summary of our proposals (paragraphs 7 to 8);
      b. some background regarding the current Price Stabilisation regime (paragraphs 9 to 12); and
      c. an outline of the key elements of our proposed changes (paragraphs 13 to 23).
      The proposed changes to the PRS are in Appendix 1. Changes to the Glossary are in Appendix 2.

      How to provide comments?

      4. All comments should be in writing and sent to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      5. The deadline for providing comments on the proposals is 22 April 2010. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed or emailed to:

      Matthew Shanahan
      Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE

      e-mail: mshanahan@dfsa.ae

      Terminology in this paper

      6. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary Module (GLO) or in the proposed amendments. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Summary of proposed changes

      7. The changes to the PRS proposed in this Consultation Paper are designed to update our Rules to reflect developments in best practice and to align the requirements of PRS with the DFSA's risk based approach to regulation.
      8. The proposed changes are intended to provide the DFSA with greater disclosure in relation to Price Stabilisation activity in the DIFC. The DFSA is also making changes to the scope of the PRS, both in terms of what Securities may be subject to Stabilisation and in terms of how they may be stabilised. The opportunity is also taken to propose various miscellaneous amendments.

      Background

      9. The DFSA's vision is to be an internationally respected regulator and a role model for financial services regulation in the Middle East. The DFSA therefore continuously monitors regulatory developments in other advanced jurisdictions to ensure that the DIFC regulatory regime remains at the forefront of international best practice. We also monitor developments in the market, and maintain close contact with market participants. Feedback from market participants has been an essential factor in shaping these proposals.
      10. Price Stabilisation is permitted in major international markets such as UK, EU, USA, Hong Kong and others. The rationale for permitting Price Stabilisation is that such activity promotes the orderly operation of a market, enhances confidence of Issuers and subscribers, and encourages companies to raise funds from the capital markets. For these reasons, Price Stabilisation is also allowed in the DIFC.
      11. A Price Stabilisation regime in the DIFC was first introduced in 2005. It was modelled on the UK FSA's Price Stabilisation requirements. However, the regime was implemented with a narrower scope to reflect the nature of the DIFC capital markets and to suit the circumstances in the DIFC. The regime is one where an Issuer in the DIFC may elect to use Price Stabilisation to keep a proper and orderly market at the commencement of trading of its Securities. From a commercial perspective, it is felt that this regime promotes investor confidence in an IPO. PRS also operates as a defence from conduct which might contravene the Market Misconduct provisions of the Markets Law 2004, pursuant to Article 48(1) of that law. This defence is available to any Person who can demonstrate that their behaviour is in accordance with the PRS.
      12. The Rules in PRS are drafted to prescribe the circumstances in which Price Stabilisation is permitted and the conditions which attach to such activity when carried on in the DIFC.

      Outline of our proposed changes

      13. The following paragraphs set out the key changes that the DFSA is proposing to make to the PRS. Appendices 1 and 2 set out in detail the proposed changes.

      Securities which may be stabilised

      14. As currently drafted, only Shares and Debentures may be stabilised under the PRS. The DFSA proposes to define the Securities which may be stabilised as "Eligible Securities". We propose that "Eligible Securities" should include Shares, Debentures, Certificates over Shares or Debentures, or Warrants over Shares or Debentures. The proposed new definition will make the PRS easier to read and will provide the DFSA with the flexibility to change which Securities may be stabilised without changing the PRS.
      15. Although PRS specifies Shares and Debentures as the securities in respect of which Price Stabilisation activities may be undertaken, there are currently many provisions throughout PRS that only deal with Price Stabilisation activities in respect of Shares. We propose to extend the scope of Price Stabilisation activities to Eligible Securities throughout the PRS.

      Types of offer

      16. At present, PRS only applies to Shares and Debentures publicly Offered by way of a Prospectus Offer. A Prospectus Offer is one made where a Prospectus has been filed with the DFSA and published. A Prospectus Offer has a wider distribution than an Exempt Offer, which, amongst other things, must only be made to no more than 50 Offerees in the DIFC. The proposed amendments to PRS Rules 1.4.1 and 6.1.1, will enable Price Stabilisation activities to be undertaken in respect of any Eligible Securities which are admitted to trading on an AMI, subject to meeting the other requirements in PRS.

      Dual listing

      17. PRS Chapter 6 deals with Price Stabilisation activities for dual listings. Currently, Price Stabilisation activities may only be undertaken in respect of dual listings of the same class of Securities, i.e. either Shares or Debentures and not Certificates over such Shares and Debentures. The proposed amendments to PRS Rule 6.1.1 extend the benefit of Price Stabilisation to Certificates over Shares or Debentures, thereby recognising Certificates as equivalent to the underlying Share or Debenture. This is in line with common market practice where many dual listings consist of the listing of ordinary shares in one jurisdiction and the listing of Certificates over such shares (usually in the form of global depository receipts) in another. The drafting of the Chapter 6 has also been amended to make it more user-friendly.

      Admission a condition of stabilisation

      18. The DFSA proposes that for an Eligible Security to be stabilised, it must be actually admitted to trading. The aim is to avoid stabilisation taking place in the grey market where neither a public market nor the resulting Market Price is available. Consequentially, the Stabilisation Window should also start from the date of admission to trading and end no later than 30 calendar days thereafter.

      Disclosure

      19. With respect to disclosure, we are proposing that the DFSA must be notified of details of all Price Stabilisation transactions within 2 business days following the date of execution of those transactions. This requirement is in addition to the existing pre and post-stabilisation disclosure, and it is in line with the requirements in the Market Abuse Directive 2003/6/EC. Such notification should promote greater discipline in the conduct of Price Stabilisation activity in the DIFC and provide greater transparency for the DFSA.

      Stabilisation Managers

      20. The DFSA proposes that Stabilisation Managers located outside the DIFC who carry on Price Stabilisation in the DIFC will be required to submit to the jurisdiction of the DFSA and the DIFC Courts, and provide an address for service. This proposal is designed to give the DFSA some limited supervisory traction in respect of such Persons and their Price Stabilisation activities.

      Other matters

      21. The DFSA proposes that stabilisation of Shares, Certificates over Shares, and Warrants over Shares must not be executed above the Offer Price. This is in line with international best practice. Other Securities that relate to Shares, such as Warrants over Shares, must also be stabilised in accordance with the proposed pricing limitation.
      22. We propose that any over-allotment of Eligible Securities pursuant to a "greenshoe option" should be subject to certain limits and additional disclosure requirements. It is proposed that requirements similar to those in the Market Abuse Directive 2003/6/EC (the MAD) be introduced in the DIFC.
      23. Miscellaneous amendments proposed are:
      (a) The deletion of the $10,000,000 threshold for Price Stabilisation to align with the MAD;
      (b) The addition of a Rule to permit Price Stabilisation both on and off-order book. Off-order book Price Stabilisation is currently permitted by implication only; and
      (c) The maintenance of a register in respect of Price Stabilisation of all type of Securities. At present, a register is only required in respect of shares.
      Issues for consideration

      Do you have any concerns or comments about our proposed changes to the PRS?

      Do the proposed changes create any unintended consequences?


      Click here to download the Consultation Paper in PDF Format.

      Appendix 1 — Amendments to PRS PDF format
      Appendix 2 — Amendments to GLO PDF format

    • Consultation Paper No. 66 Enhancing Clarity and Accessibility of Islamic Finance Rules

      Why are we issuing this paper?

      1. We propose to restructure the DFSA Rules relating to Islamic finance to better promote the visibility and accessibility of the DFSA's regulatory regime so far as it applies to Islamic financial activities conducted in or from the DIFC.
      2. This Consultation Paper seeks public comments on the proposed changes which entail the introduction of:
      (a) a more comprehensive dedicated Islamic finance module than the current Islamic Finance Business (ISF) module and renaming it as "Islamic Finance Rules (IFR) module — See Appendix 1; and
      (b) a web-based "virtual handbook" — See Appendix 2 for a sample of such a handbook.

      Who should read this paper?

      3. The proposals in this paper would be of interest to Persons:
      (a) carrying on, or considering carrying on, any Financial Service as Shari'a compliant; or
      (b) Offering or proposing to Offer Islamic Securities.

      How to provide comments?

      4. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      5. The deadline for providing comments on the proposals is 4 December 2009. Once we receive your comments, we will consider if any further refinements are required to these proposals. We may then proceed to enact the changes to the DFSA's Rulebook. Because these are still proposals, you should not act on them until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:

      Dhammika Amukotuwa
      Associate Director, Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE

      04 3621509 or e-mailed to: DAmukotuwa@dfsa.ae

      Terminology in this paper

      6. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in GLO or in the proposed amendments. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Background

      7. These proposals are designed to promote better accessibility and visibility to the DFSA requirements relating to Islamic financial activities than under the current arrangements. The proposals do not contain any substantial Rule changes. Under the current arrangement, Islamic specific DFSA requirements are scattered over a number of DFSA Rulebook modules such as ISF, GEN, AMI, COB, CIR, PIB and PIN modules. As a result, Persons engaging in or proposing to engage in Islamic financial activities in or from the DIFC may not be able to easily identify the relevant requirements that apply to their Islamic financial activities.

      Proposals

      8. To promote better visibility and accessibility of the DFSA's current requirements relating to Islamic finance, we propose:
      (a) to create a more comprehensive dedicated Islamic Finance Rules (IFR) module than the current Islamic Financial Business (ISF) module; and
      (b) to give web-based access to Islamic financial requirements via a "virtual handbook" (see paragraph 12).

      Proposed Islamic Finance Rules (IFR) module

      9. We propose to call the new dedicated Islamic finance module "Islamic Finance Rules (IFR) module to reflect that its content covers Rules relating to both Islamic Financial Business and Islamic financial products (see Attachment 1). This module will contain most of the Islamic specific requirements that apply to a specific type of a Financial Service, or an activity relating to a financial product (such as Managing a Profit Sharing Investment Account, Operating an Islamic Fund or Offering Sukuks).
      10. However, to avoid extensive repetition and unnecessary fragmentation, some of the more generic requirements which are common to both Islamic and conventional business, or closely related to both types of business, such as most of the capital requirements that apply to Authorised Firms, are retained in the current modules (i.e. PIN and PIB). We have included cross references to those other modules as appropriate to facilitate easy navigation.
      11. The proposed IFR module is structured so as to bring together:
      (a) the general obligations applicable to Islamic Financial Business (see chapters 2 and 3). Islamic Financial Business covers carrying on a Financial Service as an Islamic Financial Institution or through an Islamic Window. Currently these requirements are located in two modules; those relating to Authorised Firms are found in the ISF module and those relating to Authorised Market Institutions are found in the AMI module, although both sets of requirements are almost identical (with the exception of some variations which are easily catered to in the proposed IFR module — see IFR Rule 3.8.1(1) which applies to an Authorised Firm and IFR Rule 3.8.1(2) which applies to an Authorised Market Institution);
      (b) accounting and auditing standards applicable to Persons carrying on Islamic Financial Business, which are proposed to be removed from the GEN module and be located in IFR chapter 4;
      (c) Rules applicable to Managing Profit Sharing Investment Accounts, which is a unique form of a Financial Service that can only be carried on in accordance with Shari'a, which are proposed to be removed from ISF and GEN modules and located in IFR chapter 5;
      (d) additional disclosure and conduct Rules that apply to a Collective Investment Funds where it is operated as an Islamic Fund or Islamic REIT, which are proposed to be removed from the CIR module and located in IFR chapter 6;
      (e) disclosure and other conduct Rules applicable to the Offer of Islamic Securities, which are proposed to removed from the OSR module and located in IFR chapter 7; and
      (f) disclosure applicable to Takaful Insurers, which are proposed to be removed from the COB module and located in IFR chapter 8.

      Proposed Virtual Handbook

      12. The "virtual handbook" which we propose to provide in conjunction with the dedicated Islamic Finance Rules (IFR) module will create a web-based tailored Islamic finance handbook. This would be available from the DIFCA and DFSA websites and will provide access to the relevant requirements that apply to a particular type of a Financial Service or financial product carried out or Offered as an Islamic Financial Service or Islamic financial product. A person wishing to use the virtual handbook will also be able to download all the Rules relevant to the particular Islamic financial activity from the DFSA or DIFCA website. Attachment 2 contains for illustrative purposes a model virtual handbook.

      Consequential changes

      13. The proposals in this paper do not envisage any substantial changes to the existing requirements relating to Islamic finance activities; instead they represent exiting requirements in a more cohesive and easy to access manner by clustering them together in the proposed IFR module. As a result, some consequential changes to other modules of the DFSA Rulebook from which the relevant requirements are extracted, such as GEN, COB, AMI and CIR, will be necessary if the current proposals are to be implemented following public consultation.
      14. While we have not included the consequential changes that would result from these proposed changes as they are largely of a mechanical nature, one significant change that is noteworthy is the need to withdraw the current ISF module as all the requirements in that module will be subsumed by the proposed ISR module. We also propose to include a definition of Islamic Securities in the GLO module as meaning, except where otherwise provided, "any Security held out or Offered as Islamic or Shari'a compliant".

      Click here to download the Consultation Paper in PDF Format.

      Appendix 1 — Proposed New IFR Module. PDF format
      Appendix 2 — Sample of a Virtual Handbook. PDF format

    • Consultation Paper No. 65 DIFC Representative Office Regime

      Why are we issuing this paper?

      1. The DFSA proposes to introduce a Representative Office regime in the DIFC. The proposal would permit financial institutions to have a presence in the DIFC for the purposes of limited marketing activities in or from the DIFC.

      Who should read this paper?

      2. The proposals in this paper would be of interest to:
      a. Persons interested in establishing a Representative Office in the DIFC; and
      b. Authorised Firms which may wish to consider becoming Representative Offices.

      How is this paper structured?

      3. In this paper, we set out:
      a. the background and overview to the proposals and overview (paragraphs 7 to 10);
      b. a summary of the proposed regime (paragraphs 11 to 35);
      c. our policy on existing firms moving to Representative Office status (paragraph 31),
      d. our policy on Representative Offices moving up a prudential category (paragraphs 32 to 33); and
      e. our policy on supervising Representative Offices and on fees (paragraphs 34 to 35).
      The proposed changes to the Rulebook are in Appendices 1 to 10

      How to provide comments?

      4. All comments should be in writing and sent to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      5. The deadline for providing comments on the proposals is 4 November 2009. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed or emailed to:

      Chris Cameron
      Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE

      e-mail: CCameron@dfsa.ae

      Terminology in this paper

      6. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary Module (GLO) or in the proposed amendments. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Background

      7. We are consulting stakeholders on a proposal to introduce a Representative Office regime in the DIFC. This new regime will permit financial institutions to have a presence in the DIFC for the purposes of limited marketing activities in or from the DIFC. Our policy is to create a regime that reflects the limited scope of activity of Representative Offices, the fact that they will not have any Clients in the DIFC, and the limited regulatory risks they therefore pose.
      8. Representative Office regimes are common in other advanced jurisdictions, especially but not exclusively in the banking sector. The DFSA has received requests from a number of stakeholders to introduce such a regime, and considers that it is now appropriate to do so.

      Overview

      9. The DFSA proposes to define the new Financial Service of Operating a Representative Office. This means that Representative Offices will be Authorised Firms, and will attract the DFSA powers provided in the Regulatory Law 2004 for such firms. However, most of the DFSA's Rulebook will be disapplied. We propose instead a new stand-alone module, REP, which will set out the majority of the Rules and Guidance which will apply to Representative Offices. In addition, a limited number of chapters in the Supervision (SUP) and General (GEN) Modules will apply, the relevant fees will be in the Fees Rule Module (FER), and the Enforcement Module (ENF) will apply as it does to all Authorised Firms.
      10. The Representative Office regime will be available to firms in all financial services sectors, provided that they are regulated in an acceptable home jurisdiction. Their activities will be confined to marketing of financial services and financial products offered from a location outside the DIFC by its head office or a member of its Group. They will, however, be free also to engage in unregulated activities, for example economic research.

      Proposed regime

      11. It is proposed that the Financial Service of Operating a Representative Office will be a stand alone regime. A Representative Office will not be permitted to undertake any other Financial Service and other Authorised Firms will not be able to Operate a Representative Office. Nonetheless, this would not prevent a firm which Advises on Financial Products and Credit and Arranges Credit or Deals in Investments from undertaking activities which would otherwise meet the definition of Operating a Representative Office because the scope of its Licence permits this. However, some Authorised Firms wishing to undertake activities which amount to activities meeting one or more parts of the definition of Operating a Representative Office may need to extend the scope of their Licence to include, for example, arranging or advising, because their existing Licence does not permit this. An example would be a firm whose Licence was limited to Providing Fund Administration.
      12. The details of our proposals can be found in our draft Rules and Guidance. However, in summary the DFSA proposes a new Representative Office regime with the following attributes:

      Status

      13. A Representative Office will be an Authorised Firm authorised under a License to undertake the Financial Service of Operating a Representative Office. A Representative Office will represent itself and other Group companies only. A Representative Office will not be permitted to act as agent for a Person outside the Group.
      14. An Authorised Firm authorised under its Licence to carry on another Financial Service but which also undertakes activities which fall under the definition of Operating a Representative Office will not be required to change the scope of its Licence to add the Financial Service of Operating a Representative Office.

      Definition

      15. We propose to limit the definition of Operating a Representative Office to the activities of marketing and the provision of information relating to financial services and financial products. Effecting introductions to its business in its home jurisdiction or to another Group member in another jurisdiction is also included. We do not intend to regulate firms whose activities are limited solely to conducting economic research, gathering financial, economic or commercial information or those firms which are a representative office of a non-financial institution.
      16. The Financial Service of Operating a Representative Office will include one or more of the following activities:
      (a) the marketing of financial services which are provided in a jurisdiction other than the DIFC, by either the Person conducting the marketing or by a member of that Person's Group;
      (b) the marketing of financial products which are offered in a jurisdiction other than the DIFC, by either the Person conducting the marketing or by a member of that Person's Group; or
      (c) introducing potential customers or investors to either the introducer's business in a jurisdiction other than the DIFC or to a member of that introducer's Group in such a jurisdiction.
      17. In (a) and (b) above, 'marketing' means:
      (a) providing information on one or more financial products or services; or
      (b) engaging in promotions in relation to (a);
      provided that such activities do not constitute Advising on Financial Products or Credit.
      18. Whilst much Representative Office activity will not involve a continuing relationship with the Persons to whom marketing is directed, where such a relationship is necessary, the Representative Office will need to be careful to ensure that the Financial Services Prohibition, under Article 41 of the Regulatory Law 2004, is not breached. The DFSA will, for example, consider activities amounting to order routing or passing in relation to Investments, Deposits, Contracts of Insurance or Profit Sharing Investment Accounts as outside the scope of a Representative Office's authorised activities.
      19. For the purposes of the definition, 'financial product' means an Investment, Credit Facility, Deposit, Profit Sharing Investment Account or Contract of Insurance.
      20. Excluded from the above is any communication which amounts to marketing in respect of a financial service or financial product issued by or on behalf of a government or a non-commercial government entity. Furthermore, a government or non-commercial government entity would not, for the purpose of the definition, be conducting introducing of the type specified. We have not excluded government entities with a commercial purpose because the exclusion for governments is designed to carve out the non-commercial arms of government, not those persons connected with the government which undertake commercial activities or financial institutions which have recently become connected to a government because of the financial crisis.

      Authorisation

      21. It is proposed that in assessing an application for authorisation as a Representative Office the DFSA will consider at least the following factors:
      i) Business model — the DFSA proposes to review the proposed activities to ensure they are within the scope of a Representative Office licence;
      ii) Legal form — the DFSA will only accept applications where the Representative Office comprises a place of business within the DIFC:
      (a) which has no separate legal personality;
      (b) forms a legally dependant part of the applicant whose principal place of business and head office is in a jurisdiction other than the DIFC; and
      (c) through which the applicant will carry on the Financial Service of Operating a Representative Office in or from the DIFC.
      DIFC incorporated firms will not be considered;
      iii) Fitness and propriety — We propose to require consent from the home state regulator for establishing a Representative Office in the DIFC and confirmation of the head office's good standing. We will also need to be satisfied with the quality of the regulation which applies to the head office. Consideration will be given to the location of the head office and the perceived AML risks of this country;
      iv) Solvency — the DFSA will review the applicant's most recent audited accounts to ensure its solvency and capacity to fund the proposed Representative Office;
      v) Controllers — the DFSA will require information on the applicant's controllers as part of the authorisation process and background checks will be conducted to ensure that no adverse information is identified; and
      vi) Premises — the DFSA will need to be satisfied with the Representative Office's proposed premises. The activities of a Representative Office will need to be kept separate from those of any other Authorised Firm and "brass plate" operations will not be acceptable. Representative Offices will, however, be permitted to use serviced offices inside the DIFC.

      Principal Representative

      22. Representative Offices will be required to have an individual acting as "Principal Representative" to oversee the Representative Office and undertake a number of other key functions. It is not proposed that the role of Principal Representative will be a Licensed Function. However, the DFSA will need to be satisfied that the nominated individual is fit and proper.
      23. The DFSA would expect the Principal Representative to be suitably skilled and experienced, ordinarily resident in the UAE, and the individual would not be permitted to have day-to-day responsibilities for either another Authorised Firm or another Regulated Financial Institution outside of the DIFC. This would be to avoid potential conflicts of interests and perimeter issues, for example where a person is wearing two hats, one as an employee of a Representative Office, and the other as an employee of an Authorised Firm. Two or more Representative Offices will not be permitted to share a single Principal Representative.

      Employees

      24. The Representative Office will be responsible for ensuring that its employees remain fit and proper.

      Principles

      25. We propose four high-level principles with which a Representative Office must comply. These relate to integrity, management, adequate resources, conflicts of interest and relations with regulators.

      Regulatory status

      26. A Representative Office will be required to disclose its regulatory status. For example, "Regulated by the DFSA as a Representative Office".

      Notifications

      27. A Representative Office will be required to notify the DFSA of any Rule breaches, and of changes to the Representative Office's name, legal status, address, controllers or Principal Representative. Further, the DFSA will need to be notified of any adverse information which would affect the Representative Office's or the Principal Representative's fitness and propriety.

      AML and UN Sanctions

      28. We propose anti-money laundering requirements for Representative Offices which reflect the fact that they will not have any Clients in the DIFC. The primary focus of the AML rules will be on reporting suspicious transactions. Similarly we propose requirements in regard to observation of relevant UN sanctions.

      Solvency

      29. Under our proposals, a Representative Office will be required to notify the DFSA in circumstances where it may no longer be able to remain solvent. We do not propose that a Representative Office is required to submit a copy of its annual accounts but if we have concerns we will request a copy from the firm or address the matter as part of a supervisory visit.

      Communications

      30. We propose a Rule that will stipulate that any communications issued by the Representative Office should be clear, fair and not misleading.

      Authorised Firms moving to Representative Office status

      31. The DFSA is aware that some Authorised Firms may wish to amend the scope of their existing Licences to Representative Office status on either a permanent or temporary basis. For these firms the normal procedures for Licence amendment will apply. The DFSA will want to be satisfied that any such firm will not be carrying on any Financial Service other than Operating a Representative Office and, in particular, that it will no longer have an on-going client relationship with its existing Clients but will refer all its clients and potential investors/clients to its (or Group members) place of business outside the DIFC.

      Representative Offices moving up in category

      32. Some firms may decide to become Representative Offices in the DIFC as a way of "testing the waters" with a view to establishing a more substantive presence at a later date. A firm wishing to move from Operating a Representative Office to undertake other Financial Services, and thereby move into one of our prudential categories will be required to seek a change to its Licence. This will require the DFSA to consider issues, for example in the firm's systems and controls, that were not considered initially or not considered to the same degree. It may, therefore, take longer than most Licence upgrades.
      33. In some cases, a Representative Office may be required to change its legal form, to become a DIFC-incorporated firm, before it can upgrade.

      Supervising Representative Offices

      34. Because the activities of a Representative Office will be limited, the risks that it poses to the DIFC's objectives will be limited. In general, the principal risks are likely to be in the area of Anti Money Laundering controls, and the risk that the office conducts financial services activities outside those permitted by its Licence, for example by giving tailored advice or by directly arranging transactions. The DFSA therefore expects to undertake regular supervisory visits to Representative Offices, with a particular focus on these matters.

      Fees

      35. In light of the limited nature of the Financial Service of Operating a Representative Office the DFSA proposes to set the fee level for Representative Offices below that for other Authorised Firms. However, in setting an appropriate fee level, the DFSA has taken into consideration the costs of authorising and supervising Representative Offices. It is proposed that an application fee of $2,000 (similar to that for Ancillary Service Providers) and an annual fee of $4,000 would be appropriate for Representative Offices. The Rules in respect of fees are set out in Consultation Paper No. 64.
      Issues for consideration

      Do you have any concerns or comments about our proposed Rules and requirements for firms wishing to establish a Representative Office in the DIFC?

      Do you consider that the proposed Representative Office regime is appropriate for the DIFC?

      Click here to download the Consultation Paper in PDF Format.

      Appendix 1 — Proposed New REP Module. PDF format
      Appendix 2 — Amendments to GEN Module. PDF format
      Appendix 3 — Amendments to COB Module. PDF format
      Appendix 4 — Amendments to CIR Module. PDF format
      Appendix 5 — Amendments to GLO Module. PDF format
      Appendix 6 — Amendments to OSR Module. PDF format
      Appendix 7 — Amendments to SUP Module. PDF format
      Appendix 8 — Amendments to PIB Module. PDF format
      Appendix 9 — Amendments to AML Module. PDF format
      Appendix 10 — Amendments to AUT Module. PDF format

    • Consultation Paper No. 64 Enhancements to the Fees Module

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comment on the DFSA's proposals to make a variety of amendments to the Fees Module (FER) of the DFSA Rulebook.

      Who should read this paper?

      2. The proposals in this Paper would be of particular interest to Authorised Persons.

      How to provide comments

      3. All comments should be provided to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish including on its website any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      4. The deadline for providing comments on this proposal is 4 November 2009. Once we receive your comments, we will consider if any further refinements are required to this proposal. We will then proceed to enact the changes to the DFSA's Rulebook. Because these are still proposals, you should not act on them until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website advising you when this happens.

      Comments to be addressed to:

      Nicholas Alves
      Director, Policy and Legal Services
      Dubai Financial Services Authority
      Level 13, The Gate, P. O. Box 75850
      Dubai, UAE

      or e-mailed to: NAlves@dfsa.ae

      Defined Terms

      5. Defined terms are identified throughout this paper by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary (GLO) module. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Background

      6. The DFSA has gathered together in one paper a number of miscellaneous amendments to the Fees Module (FER) of the Rulebook. Each of the items listed below is a discrete amendment.

      Proposed amendments

      Item 1. Late Payment of Fees

      7. An increasing number of Authorised Firms are not paying their annual fees on time. The DFSA is no longer willing to tolerate such practice. It is, therefore, proposing in FER Rule 1.2.2(2) to introduce a late payment fee of $1,000 or the equivalent of 3% of the annual fee due, whichever is the greater, this amount is to be paid in addition to the fee due.
      8. Currently, FER Rule 1.2.4 provides for an annual fee to be increased by 1% for each month or part of a month it remains outstanding. This provision will remain and is proposed to be merged into FER Rule 1.2.2(2).
      9. The Guidance makes it clear that in the event of overdue payments, the DFSA may take appropriate action under the Regulatory Law 2004. This could include action to withdraw authorisation to carry on Financial Services.

      Item 2. Electronic Payment of Fees

      10. The DFSA proposes to amend FER Rule 1.2.7 to better specify the means by which it will accept payment from applicants, Authorised Persons, Ancillary Service Providers, and other Persons subject to FER. The DFSA is no longer willing to accept monies from third parties in respect of a Person's obligations under FER except to the limited extent specified under the Rule. The limited carve out is in respect of applicants in formation who cannot open a bank account until they are in possession of a commercial licence. In all other situations the transfer of money must be effected by electronic transfer from the relevant Person's bank account directly into the DFSA's bank account.

      Item 3. Protected Cell Companies

      11. The DFSA's insurance regime contains provisions for Captive Insurers, and for Protected Cell Companies (PCCs), which it was expected would also be used for certain types of captive insurance. However, our benchmarking suggests that the setting up and establishment costs for Captive Insurers and PCCs in the DIFC are greater than those in other reputable jurisdictions with significant captive insurance business. Although the DFSA's fees are only one component of these costs, we propose to reduce them to levels comparable to those in the comparator jurisdictions.
      12. In regard to application fees, we propose that:
      a. the application fee for a Captive Insurer be reduced from $15,000 to $5,500; and
      b. the application fee for a PCC be reduced from the current $40,000 which is applied irrespective of the number of cells, to $8,000 for the core and $1,000 for each cell registered at the time of authorisation.
      We also propose that any existing PCC applying to add new cells to the existing PCC should pay an additional fee of $1,000 per each cell to be added.
      13. The annual fee for an Authorised Firm consists of a base component, plus an expenditure-related component. We propose that the base component be reduced in line with application fees, that is:
      a. for a Captive Insurer, from $15,500 to $5,500; and
      b. for a PCC from $40,000 to $8,000 plus $1,000 for each cell.
      The basis of calculation of the expenditure-related component, set out in FER Rule 3.2.2, would remain unchanged.
      14. For the first part-year of authorisation, the annual fee is calculated on a slightly different basis, namely a pro-rata basis taking into account the number of months remaining in the year. The basis of calculation of the annual fee in the first year (in FER Rule 3.1.1), will remain unchanged but the fees charged will be lower because they will be based on the new application fees set out above.

      Item 4. Representative Offices

      15. The DFSA is concurrently proposing to introduce a new Financial Service, namely Operating a Representative Office. An Authorised Firm which carries on that activity will be known as a Representative Office. The DFSA has issued Consultation Paper No. 65 which sets out its proposals in this regard.
      16. A Representative Office will be permitted to undertake the following activities in or from the DIFC:
      a. marketing of financial services which are provided in a jurisdiction other than the DIFC, by either the Person conducting the marketing or by a member of the Person's Group;
      b. marketing of financial products which are offered in a jurisdiction other than the DIFC, by either the Person conducting the marketing or by a member of the Person's Group; or
      c. introducing potential customers or investors to either the introducer's place of business in a jurisdiction other than the DIFC or to a member of that introducer's Group in such a jurisdiction.
      17. In light of the limited nature of the Financial Service of Operating a Representative Office, the DFSA proposes to set the fee level for Representative Offices below that for other Authorised Firms. However, in setting an appropriate fee level, the DFSA has taken into consideration the costs of authorising and supervising Representative Offices. It is proposed that an application fee of $2,000 (similar to that for Ancillary Service Providers) and an annual fee of $4,000 would be appropriate for Representative Offices.

      Item 5. Adding Clarity

      18. It is proposed to make several minor amendments to two FER Rules namely:
      a. to make clear in FER Rule 1.2.2, that the relevant fees are payable in advance; and
      b. to make clear in FER Rule 3.10.1 (Domestic Funds), that the net asset value for calculation of an annual fee is ascertained by reference to the previous year. The amendments also clarify that if no valuation was available as at 10 November in the previous year, the net asset value will be determined as at the date of the most recent valuation.

      Item 6: Miscellaneous

      19. The DFSA provided Guidance to assist applicants during the coming into force of FER. This Guidance was intended only to have effect during the transition from the 2006 fee regime into the 2007 fee regime. Consequentially this Guidance (under FER Rule 1.1.2) is no longer required and is proposed to be deleted.

      Click here to download the Consultation Paper in PDF Format.

      Appendix 1 — Amendments to Fees Module. PDF format

    • Consultation Paper No. 63 Changes to the DIFC Insider Dealing Regime

      Why are we issuing this paper?

      1. The DFSA proposes certain changes to the Markets Law 2004 to bring our insider dealing regime into line with international best practices. The proposals would broaden the scope of "insiders" and add a number of defences to the insider dealing prohibition in the DIFC.

      Who should read this paper?

      2. The proposals in this paper would be of interest to:
      a. any Authorised Person or Recognised Persons who deals in Investments listed on a DIFC market;
      b. any other person who deals, whether directly or through another person, in Investments listed on a DIFC market;
      c. advisors to persons in a. and b. above; and
      d. other persons with an interest in insider dealing or market abuse.

      How is this paper structured?

      3. In this paper, we set out:
      a. a summary of our proposals (paragraphs 7 to 9);
      b. some background to the existing regime (paragraphs 10 to 16);
      c. why we are changing the current regime (paragraph 17 to 19),
      d. an outline of the key elements of our proposed insider dealing prohibition and defences (paragraphs 20 to 42); and
      e. other matters for consideration (paragraphs 43 to 47).
      The proposed changes to the Markets Law are in Appendix 1.

      How to provide comments?

      4. All comments should be in writing and sent to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      5. The deadline for providing comments on the proposals is 4 November 2009. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to recommend the proposed changes to the Markets Law 2004 to the President for enactment by the Ruler. You should not act on these proposals until the relevant changes to the Markets Law 2004 are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed or emailed to:

      Matthew Shanahan
      Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE

      e-mail: mshanahan@dfsa.ae

      Terminology in this paper

      6. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary Module (GLO) or in the proposed amendments. Unless the context otherwise requires (for example the term is defined in the Markets Law 2004), where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Summary of proposed amendments

      7. We are consulting stakeholders on proposed changes to the Markets Law 2004 to broaden the scope of the current insider dealing prohibition (the insider dealing prohibition or the prohibition) and to add three new defences. As currently drafted, Part 8 of the Markets Law, "Prevention of Market Misconduct" is limited in scope with respect to the insider dealing prohibition and does not contain a number of defences and exclusions found in other jurisdictions.
      8. Our proposals are based on the EU's Market Abuse Directive (the MAD) and drafting is broadly in line with the UK's implementation of that directive in its Code of Market Conduct. The key change to the insider dealing prohibition is that a person will become an insider by possessing inside information, rather than by being connected to the issuer to which the inside information relates. This focuses the insider dealing prohibition on the risk that insider dealing poses to the integrity and confidence of the DIFC markets, rather than on the duty owed by officers or agents of a Reporting Entity. Liability for insider dealing would not be restricted to those who are connected or related to an issuer.
      9. The proposals would bring the DFSA into line with the MAD, which is a tried and tested model with some associated jurisprudence. Our proposed changes with regard to defences should bring the DIFC into line with international best practice.

      Background

      10. The law on insider dealing in the DIFC is found in the Part 8, chapters 1 and 2 of the Markets Law 2004. The substantive insider dealing law is set out under Articles 42 to 45. Articles 48, 49 and 50 provide various defences.
      11. Under Article 42 of the Markets Law the prohibition against insider dealing is limited to a Reporting Entity or those who are connected or related to the Reporting Entity. The list of potential "insiders" ("persons in a special relationship" with a Reporting Entity) is narrow when compared to for example the MAD or the Australian Corporations Act. The contravention of insider dealing attaches to the relationship with a Reporting Entity as opposed to the possession of inside information.
      12. The current prohibition is drafted as follows:
      "42. Insider dealing
      1) A Reporting Entity or person in a special relationship with a Reporting Entity shall not, in the DIFC or elsewhere, deal in Investments of or relating to the Reporting Entity if the person possesses material information that:
      (a) is not generally available in the market; and
      (b) has not been disclosed to the market in accordance with this Law or the Rules."
      13. Therefore, the prohibition applies to:
      a. Reporting Entities; and
      b. "persons in a special relationship with a Reporting Entity".
      14. A "person in special relationship" is defined under Article 45 as:
      "(a) a person that is a director, officer, employee, affiliate, Associate or adviser of:
      (i) the relevant Reporting Entity;
      (ii) a person that is proposing to make a Takeover Offer under Part 7 for the shares of the Reporting Entity; or
      (iii) a person that is proposing to be involved in a takeover with the Reporting Entity;
      (b) a person that is engaging in or proposes to engage in any business or professional activity with or on behalf of the Reporting Entity or with or on behalf of a person described in Article 45(2)(a)(ii) or (iii);
      (c) a person that is a director, officer or employee of the entity described in Article 45(2)(b);
      (d) a person that learned of the material information with respect to the Reporting Entity while the person came within Article 45(2)(a), (b) or (c); or
      (e) a person that learned of material information with respect to the Reporting Entity from any other person described in Article 45(2)(a), (b), (c) or (d) and knows or ought reasonably to have known that the other person is in such a relationship."
      15. The effect of the current drafting is that the insider dealing prohibition attaches to persons connected to a Reporting Entity because they have a special relationship with the Reporting Entity. The definition of a "person in special relationship" restricts insiders to those persons meeting the criteria set out in limbs (a) to (e) of Article 45.
      16. The current prohibition also focuses on how a person "learned" of the material information as opposed to the market detriment of a person having material information (no matter how it was acquired).

      Why we are changing the insider dealing regime

      17. Persons caught by limbs (a) to (e) of the definition of "person in special relationship" are insiders. However, as the prohibition is drafted, a person not falling in limbs (a) to (e) of the definition is not a "person in special relationship" and hence is not caught by the insider dealing prohibition. This regulatory gap means that insider dealing can be carried out by anyone who receives material information from person (e) in the definition of "person in special relationship" or from anyone or anywhere else, provided they do not themselves fall into limbs (a) to (e) of the definition.
      18. This raises market abuse issues because a person not in a special relationship with a Reporting Entity may arguably engage in certain activities which are generally considered to be insider dealing without fear of sanction. While Article 43 of the Markets Law 2004 contains a prohibition on disclosure of inside information, this is merely a deterrent to insiders not to disclose to others and means that the DFSA can only act against the person disclosing the material information, not the recipient of the material information who uses the information.
      19. Further to the above, a review of the insider dealing regimes in a number of other jurisdictions has highlighted some gaps in our regime in the area of defences. We are also taking this opportunity to tidy up some of our current drafting.

      Outline of our proposed insider dealing regime

      20. The details of our proposals can be found in Appendix 1. However, in summary the DFSA proposes a new insider dealing prohibition with the following characteristics:

      Nature and scope of the proposed regime

      21. Like the MAD, the proposed insider dealing provisions will be a civil regime, not a criminal one, and will be based on extracts from Chapter 1 of the FSA Code of Market Conduct. The prohibition will continue to apply to Authorised Persons and to those persons who are not regulated by the DFSA. The proposed scope will be wider in that the prohibition will apply to anyone possessing inside information, rather than to persons connected to the issuer.
      22. The current geographical scope of the prohibition is wide, applying as it does to dealing "in the DIFC or elsewhere". The DFSA can take action against any person wherever they are located for a breach of the insider dealing prohibition, subject of course to the limitation in Article 44 which states:
      "Articles 36 to 43 of this Part do not apply to conduct which occurs outside the jurisdiction unless the conduct affects the DIFC markets or users of the DIFC markets."
      23. However, the geographical scope of the prohibition is cut back by limiting the prohibition to behaviour in relation to dealing "in Investments of or relating to the Reporting Entity". The link to a Reporting Entity means that the behaviour would have to be in relation to, for example, an Investment listed or proposed to be listed in the DIFC. The dealing does not have to take place on-market in order to breach the prohibition so OTC transactions would be caught. We do not propose to change the current geographical scope of the prohibition.

      Enforcement and sanctions

      24. We propose to enforce the regime using the civil and administrative powers in Part 9 of the Markets Law 2004 as well as the enforcement powers provided in the Regulatory Law 2004 and associated Rules.
      25. When taking enforcement action against a person for insider dealing, where a profit is made as a result of the insider dealing, we would expect, at a minimum, to seek disgorgement under Article 54(1)(l) of the Markets Law 2004. When acting against a person located outside of the DIFC the DFSA would, where appropriate, seek assistance from the relevant local regulator or other authority. This may include seeking enforcement of a DIFC Court judgment in the relevant local court.

      The prohibition

      26. We propose to bring the DFSA into line with the MAD and impose a blanket ban on insider dealing. Our proposals would prohibit dealing in a Reporting Entity's shares, bonds or related investments by anyone in possession of inside information in relation to the Reporting Entity subject to certain safeharbours and defences. The prohibition in Article 42 would be drafted as follows:
      "A person who is an insider shall not, in the DIFC or elsewhere, directly or indirectly, deal, or attempt to deal, in an Investment of a Reporting Entity, or in a related investment, on the basis of inside information."
      27. This model follows the UK model which prohibits dealing "on the basis of" inside information thus incorporating a mental element to the contravention of insider dealing. The inclusion of a condition that the dealing in question must be based on the inside information places the burden of proof on the DFSA to show on the balance of probabilities that the dealing was undertaken using the relevant inside information. However, the DFSA need only meet the burden of proof to the civil standard. This provides a degree of balance for the parties in civil market abuse cases.
      28. The inclusion of a mental element to the prohibition is found in EU Member States' implementations of the MAD and "on the basis of" is also the test used in the U.S. The UK's Financial Services and Markets Tribunal (FSMT) has held that for dealing to be "based on" inside information the information concerned must have a "material influence" on the decision to engage in the dealing. The FSMT has also held that the information concerned must be one of the reasons for the dealing, but need not be the only reason. We consider this to be the correct test.
      29. Because the insider dealing prohibition would apply to "related investments" as well as Investments, it captures dealing in derivatives, other Investments and even other Reporting Entities' shares. Therefore, a person possessing inside information regarding one Reporting Entity could be caught by the prohibition if he were to deal in shares of another Reporting Entity if there were a causal link between the inside information on the first Reporting Entity and the change in price of another Reporting Entity.
      Issue for consideration

      Do you have any concerns or comments about our proposed insider dealing prohibition in Article 42 of the Markets Law 2004?

      Is the DFSA correct to add a mental element or test of intent to the insider dealing prohibition?

      Do the proposed changes create any unintended consequences?

      Definition of inside information

      30. Inside Information is defined in Article 45(1) of the Markets Law 2004. We propose to define it along the lines of the UK model as being information of a precise nature which:
      (i) is not generally available,
      (ii) relates, directly or indirectly, to one or more Reporting Entities of the Investments concerned or to one or more of the Investments, and
      (iii) would, if generally available, be likely to have a significant effect on the price of the Investments or on the price of related investments.
      31. The definition of "precise" (in relation to information) is proposed to be set out in Article 45(2). Information is precise if it:
      (i) indicates circumstances that exist or may reasonably be expected to come into existence or an event that has occurred or may reasonably be expected to occur; and
      (ii) is specific enough to enable a conclusion to be drawn as to the possible effect of those circumstances or that event on the price of Investments or related investments.
      32. Information would be likely to have a "significant effect on price" if and only if it is information of the kind which a reasonable investor would be likely to use as part of the basis of his investment decisions.
      33. The concept of information not being generally available is akin to it being unpublished or non-public. For example, the DFSA considers that a rumour may not amount to information being generally available but also that it need not have been published through a Regulatory Information Service (RIS) for it to become generally available. The DFSA considers that it will be a matter of assessing the weight of evidence when considered as a whole in deciding if on balance information has become "generally available".

      Insiders

      34. Our proposed changes would introduce the concept of an "insider". An insider is to be defined in Article 45(6) as:
      "A person who has inside information:
      (a) as a result of his membership of the administrative, management or supervisory bodies of a relevant Reporting Entity;
      (b) as a result of his holding in the capital of the relevant Reporting Entity;
      (c) as a result of having access to the information through the exercise of his employment, profession or duties;
      (d) as a result of his criminal activities; or
      (e) which he has obtained by other means and which he knows, or could reasonably be expected to know, is inside information."
      35. The definition differentiates between persons connected to the Reporting Entity, persons obtaining information via their employment or criminal activities, and "other" insiders. Only the "other" insiders would be protected by an objective test of knowledge of whether information is inside information. For insiders who are connected to the Reporting Entity and persons obtaining information via their employment or criminal activities knowledge is irrelevant.

      Pending orders

      36. The proposed amendments to Article 45(4) of the Markets Law 2004 provide that the definition of inside information would include information on pending orders, which is not currently caught. This provision is derived from the MAD and brings what is commonly known as "front-running" into the insider dealing prohibition. Knowledge of pending orders in the market can be very valuable information and dealing on the basis of this information gives a person an advantage over other market users as well as "spoiling" the market.

      Defences

      37. We propose to add three new defences to the insider dealing prohibition which are not currently available to market users in the DIFC but which are common in other jurisdictions. We are also taking the opportunity to tidy up some of the existing defences. We believe that in the interests of legal certainty and efficient markets the regime ought to incorporate sufficient and effective safe harbours to protect market users acting in good faith who might otherwise breach the prohibition because technically they fall within its scope.
      38. We propose to split the general defences in Article 48(2) between those for Article 42 (insider dealing) and Article 43 (disclosure and procuring) because they do not all apply equally to both offences. We are removing 48(2)(c), which deals with disclosure of information in the course of business, because it is already incorporated in the Article 43(1) contravention.
      39. We are also proposing to add to Article 45 a safe harbour for investment research, which in many cases falls into the definition of insider dealing because inter alia the contents of the research can have a significant effect on the price of the Investments.
      40. We propose to re-draft the Article 49 Chinese Wall defence. The existing drafting is somewhat complex. This proposal does not change the general policy regarding information barriers but it does remove this defence for Article 43 contraventions. We have done this because this defence is for "dealing in Investments" so it has no application to Article 43. We are also proposing to delete the Article 50 defence which deals with unsolicited orders to deal on behalf of another person. We propose to replace this with a re-drafted defence for dealing on the basis of unsolicited client orders in Article 48(2)(f). The proposed new defences will deal specifically with market-making (Article 42(2)(e), mergers and acquisitions activity (Article 42(2)(g)) and buy-back programmes (Article 42(2)(h)).
      41. The new defence for market-making is designed to protect persons acting in good faith in the ordinary course of market making. The new defence for mergers and acquisitions activity is designed as a safe harbour for persons acting in good faith in the course of corporate finance activities, where they may on occasion be required to deal in circumstances where they are invariably insiders. We have included a new defence for a Reporting Entity acquiring its own shares as part of a buy-back programme because, while a Reporting Entity could reasonably argue that dealing as part of a buy-back programme was not done "on the basis of" inside information, we consider that a specific safe harbour is preferable in the interests of legal certainty.
      42. Finally, the defences in Article 48(2)(b), (c), and (d) have been amended by including a test that the relevant dealing must be legitimate in order for a person to rely on the defence. As currently drafted these defences are potentially too wide.
      Issues for consideration

      Do you have any concerns or comments about our proposed deletion/redrafting of defences and the new defences on market-making, mergers and acquisitions activity and buy-back programmes?

      Are there any other defences that could be added to protect legitimate users of the markets in the DIFC?

      Other matters

      Commodity derivatives

      43. We propose to update Article 42(2), which excludes commodity options and futures from the insider dealing regime, to reflect the recent changes to the definition of Investments. We propose to replace the present exclusion as drafted with an exclusion for "commodity derivatives".

      Terminology

      44. The new definition of Inside Information adds to the DFSA legislative framework an additional concept which deals with non-public price sensitive information. The other related concepts are:
      a. Material Information in Article 23(2)(b) of the Markets Law and OSR Chapter 8.2 (continuous disclosure); and
      b. related to a. above, Price Sensitive Information (PSI) in OSR A2.1, A2.3 and A2.4 and the guidance in App7.
      45. We consider that the proposed definition of Inside Information encompasses both Material Information and PSI. From a policy and a user's perspective it may not be desirable to have three separate definitions in the Rulebook when one (Inside Information) is broad enough to capture the other two. Three definitions may also cause confusion for market users as it may create a perception that the concepts are somehow different when in fact they are not.
      46. Article 6 of the MAD, which covers issuers' duties to disclose non-public price sensitive information, makes no distinction between inside information for the purposes of market disclosure and inside information for the purposes of the insider dealing prohibition. This is reflected in Member States' implementing measures, where for example, the UK, Germany, Belgium, Italy, Netherlands and France all use the same terminology for their disclosure and insider dealing regimes. We consider that Inside information as a concept is not incompatible with a disclosure regime.
      47. Therefore, in order to reduce the number of unnecessary definitions in the Rulebook, we propose to review the current terminology used in our disclosure regime with a view to replacing Material Information and PSI with Inside Information. We hope to consult on this rationalisation in the first quarter of 2010.
      Issue for consideration

      Do you have any concerns or comments about the use of the concept of Inside Information in a disclosure regime?

      Click here to download the Consultation Paper in PDF Format.

      Appendix 1 — Amendments to Markets Law. PDF format

    • Consultation Paper No. 62 Proposed Changes to the Markets Law in Relation to Powers of the DFSA to Maintain an Official List of Securities

      Why are we issuing this paper?

      1. The DFSA proposes changes to the Markets Law 2004 to confer on the DFSA a power to maintain an Official List of Securities, in circumstances where an AMI is unable or unwilling to do so.
      2. To support those changes, appropriate regulatory requirements including transitional arrangements will be included in the Offered Securities Rules. These consequential Rule changes will be consulted upon at a later date.

      Who should read this paper?

      3. The proposals in this paper would be of interest to:
      a. Authorised Market Institutions;
      b. Persons who have issued, are issuing, or are proposing to issue, Securities; or
      c. Persons seeking to include Securities in an Official List of Securities.

      How is this paper structured?

      4. In this paper, we set out:
      a. the background to the proposals and overview (paragraphs 8 to 10);
      b. summary of the proposed changes to the Markets Law (paragraphs 11 to 16); and
      c. transitional arrangements (paragraph 18).

      How to provide comments?

      5. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      6. The deadline for providing comments on the proposals is 2nd September 2009. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to recommend the proposed changes to the Markets Law 2004 to the President for enactment by the Ruler. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:
      Roberta Calarese
      Director Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE

      or e-mailed to: rcalarese@dfsa.ae

      Terminology in this paper

      7. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in GLO or in the proposed amendments. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Background

      8. When the Markets Law 2004 was enacted in September 2004, it was anticipated that the DFSA would be the Listing Authority in the DIFC. Subsequently in 2005, pursuant to a formal request by Nasdaq Dubai (previously known as DIFX) to maintain its own Official List of Securities, the Markets Law was amended to permit the DFSA to grant an endorsement, with conditions or restrictions, on the Licence of an Authorised Market Institution (AMI) to allow it to maintain an Official List of Securities. The DFSA can refuse to grant, or may suspend or withdraw an endorsement.
      9. What is not provided in the Law is a power for the DFSA to maintain an Official List of Securities in circumstances where:
      a. the AMI does not wish to maintain an Official List of Securities itself;
      b. the DFSA refuses to grant an endorsement to an AMI; or
      c. the DFSA suspends or withdraws an endorsement.
      10. As a result, the DFSA would not be able to step in and exercise the power of maintaining an Official List of Securities on behalf of an Authorised Market Institution in the circumstances described above.

      Legislative proposals

      11. Thus the proposed amendments are to enable the DFSA to maintain an Official List of Securities in such circumstances for an indefinite period of time. The DFSA's power to maintain an Official List of Securities will sit alongside the ability of an AMI to maintain such a list, where it is authorised by the DFSA. The DFSA may exercise this power where the AMI is unable or unwilling to do so, as described in paragraph 9 above and incorporated in proposed Article 17(2).
      12. The DFSA's decisions in relation to the maintenance of the Official List of Securities would be appellable to the Regulatory Appeals Committee.
      13. As the objective of the proposed legislative amendments is to confer on the DFSA the power to maintain an Official List of Securities, only minimal changes to the Markets Law 2004 are proposed at this stage.
      14. It is important to note that when the DFSA maintains an Official list it does so pursuant to statutory rules and powers, whilst an Authorised Market Institution maintains an Official List pursuant to its listing rules which are of a contractual nature.
      15. Further amendments to the DFSA Rulebook's modules such as OSR, AMI and FER will be required to permit the DFSA to maintain an Official List of Securities and these will be published for consultation in due course.
      16. The key changes now proposed in the Markets Law are:
      a. Insertion of a power enabling the DFSA to make rules in relation to the maintenance of an Official List of Securities [Article 8(2)(b)];
      b. Insertion of a power for DFSA to maintain an Official List of Securities [Article 17(1)];
      c. Insertion of obligations placed on the DFSA for the maintenance of the Official List of Securities [Article 21];
      d. Insertion of obligations on the DFSA to maintain Official Lists of Securities in accordance with the Offered Securities Rules [Article 21]; and
      e. Amendments of appeals provisions for the DFSA's decisions in relation to the listings [Article 24].
      17. The amendments in Article 17(5) relating to the substitution of "Securities" with "Investments" have already been consulted upon in Consultation Paper No 57 and are included in the drafting for convenience.

      Transitional arrangements

      18. At a later date, the DFSA expects to introduce transitional provisions by way of Rules that will facilitate the transfer of an Official List of Securities from an AMI to the DFSA or from the DFSA to an AMI with minimal disruption to trading of Securities included in that list.

      Click here to download the Consultation Paper in PDF Format.

      Appendix — Amendments to Markets Law. PDF format

    • Consultation Paper No. 61 Proposed Enhancements to Client Asset Protections

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comments on the DFSA proposal to make changes to certain rules which are designed to protect Client Assets when held or handled by Authorised Firms or their agents. The proposed changes are designed to enhance the current protections and to address recent regulatory developments and risks. The opportunity is also taken to propose various miscellaneous amendments including one to remove an unintended consequence in the current rules on safeguarding and administration.

      Where can the changes be found?

      2. This paper details proposed changes to the following parts of the DFSA Rulebook:
      (a) Conduct of Business (COB) chapters 6.11 to 6.13 and COB App5 and App6 (see Appendix 1 to this paper);
      (b) General Module (GEN) section 8.6 (see Appendix 2); and
      (c) Consequential changes to the Glossary Module (GLO) resulting from the proposed changes (see Appendix 3).

      Who should read this paper?

      3. The proposals in this paper would be of interest to Persons:
      (a) carrying on, or considering carrying on, Financial Services in or from the DIFC;
      (b) Providing or Arranging Custody;
      (c) Managing Assets or Operating a Collective Investment Scheme; and/or
      (d) holding Client Money and/or Client Investments.

      How is this paper structured?

      4. In this paper, we set out:
      (a) the background to the proposals (paragraphs 8-11); and
      (b) the proposed changes to the Client Assets regime (paragraphs 12-29).

      How to provide comments?

      5. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      6. The deadline for providing comments on the proposals is 25 May 2009. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:

      Matthew Shanahan
      Legal Counsel
      Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE

      04 3621511 or e-mailed to: MShanahan@dfsa.ae

      Terminology in this paper

      7. In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in GLO or in the proposed amendments. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Background

      8. Principle 9 of the Principles for Authorised Firms (Customer assets and money) requires an Authorised Firm to arrange proper protection for clients' assets when the firm is responsible for them. The protection of Client Money and Client Investments (together Client Assets) when held or controlled by Authorised Firms has been a core aspect of our COB Rules since 2004.
      9. In summary, the relevant Client Asset provisions impose key requirements on Authorised Firms to segregate and safeguard Client Assets, to perform due diligence when transferring those assets to a third party and to keep adequate records. These key requirements help to constrain an Authorised Firm in the way it handles Client Assets and makes it clear to third parties that the assets are not the Authorised Firm's. If an Authorised Firm becomes insolvent, the Client Assets do not constitute part of the insolvent firm's estate. They are thus protected from claims by creditors of the Authorised Firm. This is particularly important in times of economic downturn when corporate insolvencies tend to increase.
      10. The recent identification by US authorities of certain high-value investment frauds have brought to the DFSA's attention the need to review relevant Rulebook provisions to ascertain whether there is scope to further reduce the risk of detriment to Clients, particularly in the investment management sector.
      11. Whilst fraud can never be entirely eliminated, periodic oversight conducted by an independent third party can materially reduce the likelihood of a fraud going undetected.
      12. In this context, we have reviewed the Rulebook requirements we impose on firms which Manage Assets, Provide Custody or Arrange Custody. These Client Asset requirements are in sections 6.11 to 6.14 and Appendices 5 and 6 of the COB Module and section 8.6 of the GEN Module.
      13. In reviewing the Client Asset regime the DFSA has examined approaches adopted in comparable jurisdictions and, in particular, the EU's Markets in Financial Services Directive (MiFID) provisions on the protection of client assets.

      Proposed enhancements

      14. The key changes proposed are:
      (a) The removal of the Client Money opt-out provision (the Opt-Out) for all Professional Clients other than Market Counterparties;
      (b) The requirement for all firms which hold or control Client Investments to be subject to our Safe Custody Provisions;
      (c) The requirement for all firms which hold or control Client Assets, Provide Custody or Arrange Custody, to be subject to an audit requirement in respect of those Client Assets; and
      (d) A number of miscellaneous amendments including amendments to clarify various Client Asset requirements and to remove an unintended anomaly in the Safe Custody Provisions.

      The Opt-Out

      15. An Authorised Firm which holds or controls Client Money for a Client must comply with the Client Money provisions in COB 6.12.2, including Appendix 5 of the COB Module. Our Client Money provisions contain various requirements in respect of:
      (a) the payment of Client Money into or from Client Accounts;
      (b) Client Account to be held by a Third Party Agent;
      (c) maintenance of a Master List of all Client Accounts;
      (d) Client Disclosure and Client Reporting;
      (e) conducting reconciliations; and
      (f) Client Money Distribution Rules.
      16. However, under COB Rule 6.12.2(2), an Authorised Firm does not currently have to comply with the Client Money provisions in respect of a Professional Client where it has obtained the prior written consent of that Client. Professional Client is defined in COB 2.3.2 to 2.4.1 and includes a Market Counterparty.
      17. We propose to remove the ability for Authorised Firms to allow Professional Clients (other than Market Counterparties) to opt out of the Client Money Provisions. We consider that the benefits of the Client Money Provisions outweigh the compliance costs. Apart from enabling the proper segregation and identification of Client Money in the event of an administration or insolvency, the Client Money Provisions help to reduce the risk of fraud.
      18. Our proposal in regard to the Opt-Out was made after benchmarking against the relevant MiFID provisions and the UK's implementation of this particular directive. Whilst MiFID provides no explicit exemption from the requirement to safeguard client money, it does leave some flexibility regarding the treatment of certain monies received by firms under title transfer arrangements.
      19. We propose, therefore, to simply retain the Opt-Out for Market Counterparties rather than prescribing title transfer arrangements. This is because Market Counterparties are better able to understand the associated risks and to manage their credit risk. However, this would of course only apply to money belonging to the relevant Market Counterparty and not to the money of a Market Counterparty's clients which, in accordance with COB Rule 6.12.2(2), cannot be opted-out.

      Issues for consideration

      Do you have any concerns about the removal of the Opt-Out for Professional Clients (other than Market Counterparties)?

      Extension of Safe Custody Provisions to all firms holding Client Investments

      20. The DFSA currently prescribes high-level requirements for firms which hold or control Client Investments. That is, under COB Rule 6.13.2 an Authorised Firm which holds or controls Client Investments must have systems and controls in place to ensure the proper safeguarding of Client Investments.
      21. Firms which Provide Custody or Arrange Custody are required to comply with the Safe Custody Provisions in COB App6. The Safe Custody Provisions prescribe certain additional requirements on firms in relation to recording and registration of title, Client Accounts, third party custody and client reporting. The requirements are by no means onerous and are simply good practice for firms which safeguard Client Investments
      22. The risks to clients from firms which hold or control Client Investments are broadly similar to those where firms Provide Custody and therefore require the same key protections afforded by the Safe Custody Provisions.
      23. In order to better reflect risk and to level the playing field between firms which hold Client Investments and those Providing Custody we are proposing to extend the application of the Safe Custody Provisions to firms which hold or control Client Investments.

      Extension of Safe Custody Auditor's Report to firms holding Client Investments

      24. The Rules in GEN require an Authorised Firm to appoint an Auditor to undertake periodic audits and to produce regular reports. The Authorised Firm must take reasonable steps to ensure that the relevant audit staff of the Auditor are independent of and not subject to any conflict of interest with respect to the Authorised Firm.
      25. For those Authorised Firms which hold or control Client Money, GEN Rule 8.6.1(d) requires the firm to arrange for a Client Money Auditor's Report to be submitted to the DFSA on an annual basis.
      26. GEN Rule 8.6.1(f) requires an Authorised Firm which Provides Custody to submit a Safe Custody Auditor's Report to the DFSA on an annual basis. Therefore, a Safe Custody Auditor's Report only applies to those firms with permission to Provide Custody. Authorised Firms holding/controlling Client Investments or Arranging Custody which do not also Provide Custody are not required to provide a Safe Custody Auditor's Report to the DFSA on an annual basis.
      27. The risks to Client Assets resulting from Providing Custody or holding/controlling Client Investments are largely equivalent so it follows that both should be subject to the same degree of regulatory scrutiny. Additionally, firms which Arrange Custody have a crucial role to play in ensuring that any Third Party Agent to whom they entrust Safe Custody Assets is and remains suitable. This role requires some independent scrutiny which we believe can be achieved by way of a periodic audit. Therefore, we propose to amend GEN Rule 8.6.1(f) to mandate a Safe Custody Auditor's Report for all firms to which the Safe Custody Provisions apply.

      Issues for consideration

      Do you have any concerns about the requirement for firms which Arrange Custody or hold Client Investments having to provide a Safe Custody Auditor's Report to the DFSA on an annual basis?

      Miscellaneous Amendments

      28. The Safe Custody Provisions have the unintended effect that a firm which is authorised to Provide Custody must use a Third Party Agent to hold the Client Investments (see COB A6.4.2). Furthermore, under the DFSA funds regime, an Eligible Custodian which is authorised to Provide Custody would also be subject to this requirement.
      29. Therefore we propose to amend the definition of a Client Account in COB A6.4.2 such that firms authorised to Provide Custody are able to do so through a Client Account held with themselves. The requirement to use a Third Party Agent would be retained for firms that are not authorized to Provide Custody.
      30. Following a review of COB A5.7.1 (1) (c) (Payment of client money to a third party agent), the DFSA believes that it is necessary to tighten the limited circumstances under which a firm can pass Client Money to a Third Party Agent by clarifying the term "bank" as used in this particular Rule. The DFSA proposes that in the context of safekeeping the term "bank" should be narrowed to ensure that only regulated deposit-taking institutions are used for depositing Client Money. This is to avoid Client Money being held with an unlicenced "investment bank" or a company merely using the word "bank" in its name but without a license for deposit taking.
      31. In addition to the changes proposed above, the DFSA proposes to clarify the treatment to be accorded to a firm's money in circumstances where such money is deposited in an account with Client's Money – See Rule A5.3.3 (2) and also the treatment to be accorded to Client's Collateral – See Rule 6.13.5(a).
      32. Rules A5.10.1 (1) and A6.8.1(1) have been modified to cater for both Retail Clients and Professional Clients. Some minor amendments have also been included for convenience, some of these are also the subject of Consultation Paper No. 60. Finally, we have added Guidance to COB 6.11.1 to set out the framework and purpose of the Client Assets provisions.

      Click here to download the Consultation Paper in PDF Format.

      Appendix 1 — Amendments to COB. PDF format
      Appendix 2 — Amendments to GEN. PDF format
      Appendix 3 — Amendments to GLO. PDF format

    • Consultation Paper No. 59 Proposed Changes to Definitions of Investments

      Why are we issuing this paper?

      1.  The DFSA proposes changes to the current definitions of Investments to ensure that new and hybrid financial products are appropriately categorised for regulatory purposes. The opportunity is also taken to remove some unintended consequences and anomalies found in the current definitions of Investments.
      2.  This Consultation Paper details proposed changes to the definitions of Investments in App2 of the General (GEN) module of the DFSA Rulebook (see Appendix 1 to this paper). Consequential changes to the Glossary (GLO) and Offered Securities Rules (OSR) modules of the Rulebook resulting from the proposed changes are set out in Appendices 2 and 3 respectively. To support those changes, appropriate transitional arrangements will be included in chapter 9 of GEN.

      Who should read this paper?

      3.  The proposals in this paper would be of interest to Persons:
      (a) carrying on, or considering carrying on, Financial Services in or from the DIFC;
      (b) issuing, or proposing to issue, Investments; or
      (c) seeking to include Securities in an Official List of Securities.

      How is this paper structured?

      4.  In this paper, we set out:
      (a) the background to the proposals and overview (paragraphs 8–13);
      (b) removal of anomalies and inconsistencies (paragraphs 14–15);
      (c) proposed changes to expand and rename Designated Investments (paragraphs 16–18);
      (d) a discretionary power to deal with emerging new financial instruments (paragraphs 19–23);
      (e) consequential changes (paragraphs 24 and 25); and
      (f) transitional arrangements (paragraph 26).

      How to provide comments?

      5.  All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      6.  The deadline for providing comments on the proposals is 1 October 2008. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:

      Dhammika Amukotuwa
      Associate Director, Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE

      04 3621509 or e-mailed to: DAmukotuwa@dfsa.ae

      Terminology in this paper

      7.  In this paper, defined terms are identified throughout by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in GLO or in the proposed amendments. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Background

      8.  The proposed amendments to the definitions of Investments are designed to ensure that financial instruments in the DIFC will continue to attract an adequate and appropriate level of regulation, particularly as new or hybrid instruments emerge that do not neatly fit within conventional product boundaries. The emergence of new or hybrid instruments is not a unique phenomenon as it is the natural result of competitive pressure arising from the competing demands of investors for better returns, intermediaries for better margins and for lower cost of capital by the end users of capital.
      9.  Additionally, the proposed amendments are designed to ensure that our Investments definitions are in line with the practice in comparable jurisdictions. Entities in the DIFC may wish to issue or deal in, or admit to an Official List of Securities of an Authorised Market Institution, new or hybrid instruments, particularly those emanating from their home jurisdictions under regulatory requirements that are both appropriate for, and comparable with, the requirements that exist in their home jurisdictions.
      10.  In reviewing the definition of Investments and in particular the manner in which they address new instruments, the DFSA has examined approaches adopted in comparable jurisdictions. These include the United Kingdom, Australia, Malaysia, Hong Kong and Singapore.
      11.  The DFSA envisages that the proposed amendments will facilitate a more effective and efficient capital market in the DIFC, increase the suite of products capable of listing and or trading on an Authorised Market Institution, and enhance the DIFC's reputation as an international capital market.

      Overview

      12.  Investments in the current Rules are divided into two main categories: Securities and Derivatives (see GLO module). App 2 of GEN contains the definitions of discrete types of Securities and Derivatives; i.e. Shares, Debentures, Warrants, Certificates, Options, Units, Futures, Rights and Interests and Designated Investments. Options and Futures fall within the category of Derivatives. Shares, Debentures, Warrants, Certificates, Units, Rights and Interests (other than those in respect of Derivatives) and Designated Investments fall within the category of Securities.
      13.  The key changes now proposed are:
      (a) removal of anomalies and inconsistencies in the definitions;
      (b) expansion of the current category of Designated Investments to capture structured or synthetic products that are referenced to underlying factors other than Share indices, and the renaming of the category to "Structured Products"; and
      (c) introduction of a discretionary power so that, where necessary, the DFSA may declare an instrument to fall within one of existing categories of Investment or, in the case of an instrument that does not neatly fit within an existing category, to be a new type of a Security or Derivative.

      Removal of anomalies and inconsistencies

      14.  We propose to remove anomalies and inconsistencies in the existing definitions. These include:
      (a) Warrants and Options — removal of the current overlap between a Warrant and an Option by confining the scope of a Warrant to be an instrument which confers on the holder a right to acquire an unissued Share, Debenture or Unit (the latter was not previously included). In contrast, an instrument conferring a right to acquire an existing, i.e. issued, Security by way of transfer of that Security will remain within the scope of the definition of an Option. Proposed Guidance under both Warrant and Option is provided (see Rules A2.2.1(c) and A2.3.1(a));
      (b) Futures — a number of clarifications relating to the definition of a Future as follows:
      (i) A key concern that has arisen about the current definition of a Future is whether certain types of contracts are included. Specifically, whether the first limb of the current definition (which covers commodity futures) excludes any over the counter (OTC) negotiated contract from comprising a Future. We propose to remove this uncertainty by expressly including any additional criterion that serves as a test on whether a contract would be reasonably regarded as being made for investment rather than commercial purpose. As subjective (purposebased) tests are hard to establish, we have included the 'reasonability' test as an objective test, rather than relying on the actual intent of the contracting parties. Proposed Guidance deals with non exchange traded contracts made for investment rather than commercial purpose;
      (ii) We propose to clarify that settlement by physical delivery under a commodities contract would not necessarily preclude it from comprising a Future, and will add Guidance which reflects the language used in the Futures definitions under the UK regime; and
      (iii) We propose to add Guidance to deal with certain types of contracts such as contracts for difference, credit default swaps and forward rate agreements. See Rule A2.3.1(b)(ii) (which covers financial futures);
      (c) Debentures — a number of clarifications and refinements to the definition of Debentures as follows:
      (i) the proposed definition expressly acknowledges that a Debenture can be secured or otherwise (Rule A2.2.1(b));
      (ii) removal of the conventional labels from the definition of Debentures and their inclusion instead as Guidance;
      (iii) addition in Guidance of a reference to Islamic Sukuk instruments which may be structured to have the effect of a corporate bond; and
      (iv) clarification in Guidance that a debt instrument does not cease to be a Debenture simply because the interest or other financial return on it is to be calculated by reference to a variable underlying factor. A corresponding clarification on this point is also included under the exclusions from Futures in A2.3.1(b)(ii)(D);
      (d) Rights and Interests — the removal of "Rights and Interests" as a specific category of Investments and the inclusion of a statement in the definitions (see the last sentence of Rule A2.1.1(1)) to ensure that such a right or interest, to the extent it is not already covered by another definition (such as Certificates), is regarded for regulatory purposes as the respective Security or Derivative to which that right or interest relates. An example of such a right or interest is an interest in a syndicated loan. To the extent the syndicated loan is a Debenture, the rights of the holder would be regarded as rights in respect of a Debenture; and
      (e) Certificates — the inclusion of Units as Securities over which a Certificate can be issued. In addition, the language of the definition will be amended to reflect certificate arrangements more accurately (see Rule A2.2.1((d)).
      15.  We also considered whether it would be beneficial to have discrete definitions for commodities futures (Rule A2.3.1(b)(i)) and financial futures, such as contracts for differences (Rule A2.3.1(b)(ii)). We decided to retain the current structure which covers both types of instruments under the generic heading of Futures as any change to this structure would require more extensive changes to existing Financial Services licences.

      Issues for consideration

      Do any of these proposed changes cause any practical difficulties? If so, what are they and how should they be addressed?

      Do you think that the definition of Options should be expanded to cover an Option over an index (i.e. an index Option), interest rate or other similar reference? Would you have any concerns if the Options definition were to capture such instruments? If so, what are those concerns and how should they be addressed?

      Do the proposed definitions of a Warrant and Certificate capture the appropriate types of underlying investments?

      Should there be a separate category of Derivatives to capture more exotic types of derivatives, such as weather derivatives? What other types of exotic products should be included in that category? How should such products be distinguished from other types of standardised or exchange traded Derivatives?

      Proposed changes to expand and rename Designated Investments

      16.  Currently, only one type of structured product, ie: Share index tracking products, is treated as a Security under the heading Designated Investments. We propose to expand this category to capture a range of instrument which essentially have a similar economic effect but different underlying factors. While the range of underlying factors by reference to which the holders' profits or losses can be determined would be expanded beyond a DFSA approved index of Shares to cover property of any description, an index, interest rate, exchange rate or a combination of any of these (ie. a basket), some of the key features of Designated Investments would be retained.
      17.  In particular, the proposals require public availability of information relating to the underlying factors by reference to which investors' profits and losses under the contract are determined. This promotes transparency of the performance of the underlying factor and removes from the definition any contractual arrangements where the parties' entitlements are determined by reference to individually negotiated, and often complex, calculations which are not suitable for treatment as tradable Securities. We also propose to retain the current restrictions which prohibit gearing and contingent liabilities to arise under such contract. These are considered to be inherent features of Derivatives rather than Securities.
      18.  We also noted that varying terminology is used in different jurisdictions to categorise these products. We propose the use of "Structured Product" as the most appropriate and generic term that captures the various products envisaged under this category. This term is consistent with the prevailing practice in some other jurisdictions.

      Issues for consideration

      Is renaming the category as "Structured Products" appropriate? If not, what other term is more appropriate to describe these products?

      Does the proposed definition capture all the products that should be treated as a Structured Product within the broader definition of Security? If not, what are those products and why should they be included?

      Does the proposed definition include any products that should not be included? If so, why?

      Do you have any concerns about the proposed requirement that there should be publicly available information relating to the underlying factor? If so, what are those concerns and how should they be addressed?

      Do you think that the proposed prohibitions against leverage and contingent liabilities arising out of the contract are too restrictive? If you think that one or both of those restrictions should be removed, why are you of that view? If there are any concerns arising from the removal of those restrictions, how should they be addressed?

      Do you think that Structured Products should not be confined to cash settlement only or alternatively permit physical delivery of the underlying? Would you have any concerns if physical delivery is permitted?

      Proposed discretionary power

      19.  As noted at the outset, emergence of new products in financial markets is a continuing trend. Such products may not, in the future, neatly fit within the existing definitions. To encourage product innovation while ensuring appropriate regulation of new products, we propose to include in the Rules an express discretionary power enabling the DFSA to declare new or hybrid products as a particular type of an existing Security or a Derivative, or a new type of Security or Derivative (see Rule A2.4.1(1)).
      20.  The key features of this proposed power are as follows:
      (a) The DFSA may exercise this power on its own initiative or upon application by a person (see Rule 2.4.1(2));
      (b) We propose to specify a range of factors to be taken into account by the DFSA in the exercise of this power. The DFSA may also consider other relevant factors. The specification of matters will assist applicants in preparing their applications (see Rule A2.4.1(3) & (4)); and
      (c) Prior to the exercise of the power, the DFSA will undertake public consultation of at least 30 days except in certain specified circumstances (see Rule A2.4.1(5)(a), (b) or (c) and paragraphs 21 and 22 below).
      21.  The DFSA expects to use this power infrequently, particularly given the proposed clarifications to the existing definitions and the significant expansion of the new Structured Products category to capture a wider range of instruments. Generally, to determine when it is appropriate to exercise this power, the DFSA will monitor emerging new financial instruments and trends in financial markets. For example, this power may be used when new types of financial instruments emerge which, though having the economic effect of an investment, do not fit within any particular category of existing definitions. In such cases, the DFSA may use this power to create a new category of an Investment definition to capture those instruments. Generally, such a declaration would be made following prior public consultation, except where the DFSA determines that any delay resulting from public consultation is prejudicial to the interests of the DIFC or, for reasons of commercial expediency, the dispensation of public consultation is considered warranted.
      22.  The DFSA may also use this power to declare a financial instrument falling within more than one category of existing definitions of Investments to be a particular type of a Security or Derivative as defined in these Rules. However, when making such a declaration, the DFSA is not required to undertake any prior public consultation since the instrument is already within the definition of Investments.
      23.  No specific appeal rights are proposed in respect of declarations made pursuant to this Rule for two reasons. First, where the DFSA undertakes public consultation, any person whose rights, interests or legitimate expectations may be adversely affected would have an opportunity to make representations to the DFSA. Second, where public consultation is not required or is dispensed with by the DFSA pursuant to Rule A2.4.1(5)(a), (b) or (c) appeal rights are considered inappropriate because of the need to ensure certainty for issuers and users of an instrument once it is declared as a particular type of a Security or Derivative and the possible detriment to such issuers and users by the subsequent removal of such a declaration.

      Issues for consideration

      Do you have any concerns about this discretionary power or any aspect of it, including the parameters within which the DFSA can exercise that power? If so, what are they and how should they be addressed?

      Consequential changes to GLO and OSR

      24.  Changes to the GLO module will be required to reflect the proposed changes to the definitions. Also, some of the key aspects of current definitions in the GLO module will be relocated into the GEN provisions. For example, the distinction between Securities and Derivatives currently in the GLO module will relocate to the GEN definitions under these proposals (see Rules A2.1.1(1), A2.1.2 and A2.1.3).
      25. Some consequential changes to the OSR module will be made to accommodate the proposed changes flowing from the revised "Structured Products" category. It is expected that a wider range of products than currently included under Designated Investments will be captured as Structured Products, thereby enabling their inclusion in an Official List of Securities of an Authorised Market Institution and consequently, subjecting them to the OSR module. Accordingly, the obligations currently imposed on Reporting Entities of Designated Investments will apply to Reporting Entities of Structured Products.

      Issues for consideration

      Do you have any concerns about the proposed consequential changes to GLO and OSR modules? If so, what are they and how should they be addressed?

      Transitional arrangements

      26.  The DFSA expects to introduce transitional (and saving) provisions that enable issuers of currently traded Investments on an Authorised Market Institution, and persons who are carrying on any Financial Service relating to any particular type of a Security or Derivative, to be able to continue without any undue interruption to their activities, if the proposed changes were to come into effect. For example, the transitional provisions would allow any Person whose licence authorises him to carry on any Financial Service in respect of Designated Investments to be able to do so in respect of Structured Products.

      Issues for consideration

      Do you have any concerns about this approach to transitional arrangements? If so, what are they and how should they be addressed?

      Click here to download this Consultation Paper in PDF format.

      Appendix 1 — Amendments to GEN. PDF format
      Appendix 2 — Amendments to GLO. PDF format
      Appendix 3 — Amendments to OSR. PDF format

    • Consultation Paper No. 60 Miscellaneous Amendments to Legislation

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comment on the DFSA's proposals to make a variety of amendments to a number of modules of the DFSA Rulebook, and also to the Regulatory Law 2004.

      Who should read this paper?

      2. The proposals in this Paper would be of particular interest to Authorised Persons.

      How to provide comments

      3. All comments should be provided to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish including on its website any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      4. The deadline for providing comments on this proposal is 16 April 2009. Once we receive your comments, we will consider if any further refinements are required to this proposal. We will then proceed to enact the changes to the DFSA's Rulebook, and propose law amendments to the President of the DIFC. Because these are still proposals, you should not act on them until the relevant changes to the DFSA Rulebook or laws are made. We will issue a notice on our website advising you when this happens.

      Comments to be addressed to:

      Nicholas Alves
      Director, Policy and Legal Services
      Dubai Financial Services Authority
      Level 13, The Gate, P. O. Box 75850
      Dubai, UAE

      or e-mailed to: NAlves@dfsa.ae

      Defined Terms

      5. Defined terms are identified throughout this paper by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary (GLO) module. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Background

      6. The DFSA has gathered together in one paper a number of miscellaneous amendments to the modules of the Rulebook and to laws. Each of the items listed below is a discrete amendment. Such amendments are grouped under the relevant module in the Appendices.

      Proposed amendments

      Item 1. Residency requirement in AUT

      7. In line with the DFSA's approach to risk-based regulation and taking into account consultee comments from our independent stakeholder survey, we have reviewed the residency requirements relating to Compliance Officers and Money Laundering Reporting Officers (MLROs).
      8. The existing requirements are specified in the GEN and AUT modules of the Rulebook. There are a number of broad principles (e.g. GEN Rules 4.2.3 and 4.2.4) which in summary, require a Firm to ensure:
      a. its affairs are managed effectively and responsibly by its senior management;
      b. it has adequate systems and controls to comply with the law; and
      c. it can maintain and be able to demonstrate that it has adequate resources to conduct and manage its affairs.
      9. Chapter 5 of GEN contains more specific Rules relating to the compliance function required by a Firm. The Rules require a Firm to resource adequately its compliance function and provide it with unrestricted access to relevant records, and ensure it is independent from other operational functions. A firm must also establish and maintain monitoring and reporting processes and procedures for compliance breaches.
      10. In AUT Rule 10.3.2 the DFSA additionally requires the Compliance Officer and MLRO to be ordinarily resident in the UAE. Given our aim to allow firms some flexibility to implement and maintain adequate compliance arrangements, the continuation of the residency requirement does not appear warranted from a risk based approach to regulation. However, as specified in the proposed guidance, the DFSA considers that some Authorised Firms (particularly start-ups) will need a Compliance Officer/MLRO who is resident in the UAE in order to demonstrate it has adequate compliance arrangements.
      11. The compliance function in a large and complex Authorised Firm is divided along its major business lines and consequently such a firm may appoint several compliance officers each of whom is an expert in their particular field (the relevant business line) and responsible that business line. In such circumstances the DFSA may, in exceptional circumstances, be amenable to granting authorised status to more than one compliance officer.
      12. The proposed amendments are set out in Appendix 1.

      Item 2. Controller requirements in AUT

      13. The DFSA continuously monitors regulatory developments in other advanced jurisdictions to ensure that we remain in the forefront of international best practice. The DFSA also monitors developments in the market, and maintains close contact with market participants.
      14. In September 2007, the European Council adopted the Acquisitions Directive (2007/44/EC). The Directive introduced a single European Controllers regime across wide areas of financial services.
      15. The DFSA's controller provisions require prior notification/approval in prescribed circumstances involving a change in control of an Authorised Firm. In line with the Directive, referred to above, the DFSA proposes to provide carve-outs for short-term holdings, for custodianship, and for holdings arising from underwriting or placement where voting power is not exercised to intervene in the management of the issuer. These regulatory carve-outs avoid unnecessary approvals in cases where the "control" has no practical relevance.
      16. The proposed amendments are set out in Appendix 1.

      Item 3. Correction of typographical and other errors

      17. We have taken the opportunity to make minor amendments to correct cross references and other anomalies. We have also removed Guidance note 6 from GEN 1.2 as Chapter 7 was previously deleted upon enactment of the FER module.
      18. The proposed amendments are set out in Appendices 1 and 2.

      Item 4. Article 24(4) Regulatory Law 2004

      19. The DFSA proposes to ask the Ruler to amend Article 24(4) of the Regulatory Law 2004 to allow the DFSA to dispense with the requirement to consult on Rule changes in circumstances where the amendments are to correct anomalies and typographical errors or where the amendments are consequential in nature, and in all cases do not involve a change in policy.
      20. Articles 24(1)–(3) of the Regulatory Law oblige the DFSA to provide at least 30 days of public consultation on draft Rules. Article 24(4) allows the DFSA to dispense with that requirement where the DFSA Board of Directors concludes that any delay likely to arise under Articles 24(1)–(3) is prejudicial to the interests of the DIFC.
      21. While in past instances the DFSA has appropriately relied upon Articles 24(4) to dispense with consultation, it considers that there are additional circumstances where consultation may be unnecessary or inappropriate. These include where the proposed changes are minor typographical amendments or where consultation would be superfluous — for example where it may be necessary to consequentially amend the Rulebook to reflect an amendment to a DIFC law or Dubai Law No. 9 of 2004 governing the DIFC — provided in all cases that the amendments do not involve a change in policy.
      22. Accordingly, the DFSA proposes the addition of these alternative criteria. The proposed amendments are in Appendix 3.
      23. Note that this proposal does not impact on the DFSA's obligation to consult on proposed changes to law, under Article 7(8)(d) of Dubai Law No. 9 of 2004.

      Item 5. Article 111 Regulatory Law 2004

      24. The DFSA proposes to ask the Ruler to amend Article 111 of the Regulatory Law 2004 to correct a range of typographical errors, primarily relating to cross-referencing where references to Article 112 should be to 111. The proposed amendments are in Appendix 3.

      Item 6. Definition of Guidance in the Regulatory Law 2004

      25. Part 2(f) of Schedule 1 of the Regulatory Law states that "Guidance" includes "guidance made and issued by the Chief Executive under the Law". Consultation Paper 57 recently proposed amendments to Article 36 of the Regulatory Law 2004 to clarify the powers of the Chief Executive to issue Guidance. However, this did not address the related issue of what qualifies as Guidance in this context. While this issue may not be of interest to Authorised Persons in the DIFC, it is thought prudent to clarify this as the DFSA is subject to an obligation under Article 36(d) to notify the Board of the issue of Guidance. The proposal clarifies that "Guidance" refers only to notations in the Rulebook.
      26. This proposal will affect similar provisions elsewhere in the laws administered by the DFSA, eg Part 2(f) of Schedule 1 of the Markets Law 2004.

      Click here to download this Consultation Paper in PDF format.

      Appendix 1 — Amendments to AUT. PDF format
      Appendix 2 — Amendments to GEN. PDF format
      Appendix 3 — Regulatory Law Amendment Law PDF format

    • Consultation Paper No. 58 Implementation of Pillars 2 & 3 of Basel II

      Why are we issuing this paper?

      1.  This Consultation Paper seeks public comments on the DFSA's proposals to implement Pillars 2 and 3 of Basel II. The proposals involve changes to the following modules of the DFSA Rulebook:

      GEN (see Appendix 1)

      GLO (see Appendix 2)

      SUP (see Appendix 3)

      PIB (see Appendix 4)

      PIN (see Appendix 5)

      Who should read this paper?

      2.  The proposals in this paper would be of particular interest to Authorised Firms within Categories 1, 2, 3 or 5, and Insurers (other than PCCs, Captive Insurers and Authorised ISPVs). The proposals may also be of interest to Registered Auditors and Ancillary Service Providers operating in the realm of accounting and audit.

      How is this paper structured?

      3.  In this paper, we set out:
      (a) the background and overview of the proposals (paragraphs 7—30); and
      (b) proposed Rule amendments (paragraphs 31—39).

      How to provide comments?

      4.  All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      5.  The deadline for providing comments on the proposals is by close of business on 1 November 2008. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:

      Prasanna Seshachellam

      Associate Director, Supervision
      DFSA
      PO Box 75850
      Dubai, UAE

      or e-mailed to: pseshachellam@dfsa.ae

      Definitions

      6.  Defined terms are identified throughout this paper by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary (GLO) module. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning. Some proposed changes to GLO are in Appendix 2.

      Background

      7.  While most acknowledge that Basel II is an improvement over Basel I in terms of risk management standards and overall granularity of risk profiles, many financial professionals are debating whether Basel II could have prevented or lessened the impact of the recent crisis. These questions and arguments appear to be targeted at the capital calculation component of Basel II, rather than the supervisory review or market discipline components. Given this background, we believe implementation of Pillar 1 of Basel II is best reserved for a future date; however, we are minded to move ahead with implementation of Pillars 2 and 3. The following text outlines the background of the capital adequacy accords and provides the logic behind our recommendations. We encourage and welcome your considered feedback on this initiative.
      8.  In 1988, the Basel Committee on Banking Supervision (BCBS) published a framework for determining the capital adequacy for banks, commonly referred to as Basel I. Basel I was designed to strengthen the soundness and stability of the international financial system and to achieve a consistent framework for capital adequacy measurement globally. Basel I has been successful in achieving its objectives and has been adopted as a standard for prudential regulation in almost all countries of the world. A decade after Basel I, BCBS started work on an enhanced version of the framework with the primary objective of making the framework more risk-sensitive.
      9.  The BCBS published the revised framework of capital adequacy, commonly referred to as Basel II, in November 2005. The fundamental objectives of Basel II are to:
      •    strengthen the stability and soundness of financial services firms; and
      •    promote the adoption of stronger risk management practices.
      The framework aims at significantly higher levels of risk sensitivity in calculating capital requirements and greater consistency in capital adequacy regulation across jurisdictions. Basel II involves greater use of internal risk assessments by firms and the consequent use of such risk assessments as inputs in their own assessment of risk and capital adequacy.
      10.  Basel II includes three main components, commonly referred to as three pillars:
      •    Pillar 1 — Minimum Capital Requirements;
      •    Pillar 2 — Supervisory Review Process; and
      •    Pillar 3 — Market Discipline.
      Pillar 1 specifies the approaches allowable for arriving at minimum capital requirements. Pillar 2 deals with the supervisory review process which is intended to encourage better risk management practices and to ensure that firms hold adequate capital to address all risks, including any risks not covered in their Pillar 1 calculations. Pillar 3 aims to encourage market discipline, as a complement to the other two pillars, by specifying a set of disclosure requirements which will allow market participants to assess the soundness and risk levels of an institution.
      11.  The DFSA considers that it is essential to implement Basel II, though in a manner appropriate and proportionate to DIFC Authorised Firms, to be in line with the latest international prudential supervision standards and to ensure compliance with the revised Basel Core Principles. This is also consistent with the DFSA's philosophy of ensuring that DIFC is at the forefront of international standards and best practices. Our benchmarking indicates that most of the DFSA's peer regulators have either implemented or are in the process of implementing Basel II in their jurisdictions.
      12.  The DFSA proposes to proceed with implementing Pillars 2 and 3 now, and to implement the Pillar 1 provisions later. Given the current situation in the financial sector around the globe, we believe the elements of Pillar 1 are best adopted at a later date. This strategy remains consistent with the guidance offered by BCBS for implementation of Basel II, wherein BCBS has suggested that supervisors of certain markets may retain their current capital adequacy regime (Pillar 1) and concentrate on building a robust supervisory review framework (Pillar 2) and on enhancing market discipline (Pillar 3). The proposed implementation will therefore not include any aspect of Pillar 1 and consequently there will be no changes to the Rules for measuring Capital Requirements and Capital Resources specified in the PIB module of the DFSA Rulebook.
      13.  The DFSA's decision to delay implementing Pillar 1 is based on the relatively early stage of development of the DIFC financial market, and of firms within it, and that the PIB and PIN Rules currently provide an appropriate risk-sensitive capital adequacy regime.
      14.  Effective implementation of Basel II also requires that implementation suit the requirements of the jurisdiction and be accomplished in a proportionate and flexible manner, suitable for all regulated firms in a market. The DFSA believes that the proposed implementation approach suits the market in the DIFC and the nature and complexity of Authorised Firms operating within it.

      Overview of the proposals

      15.  The proposed implementation and consequent Rule changes apply only to Domestic Firms which are in Categories 1, 2, 3 and 5, or are Insurers. In relation to Insurers, it is proposed that they will not apply to Protected Cell Companies (PCCs), ISPVs or Captive Insurers. The scope of application of the proposed Rules varies across the types of firm with less complex firms being subject to simpler requirements.
      16.  Domestic Firms in Categories 1 and 5, and Domestic Insurers (not PCCs, ISPVs or Captives), will be covered by the full scope of the Basel II implementation because of the relatively higher levels of risk posed by these Authorised Firms to the DFSA's objectives, given the nature and complexity of their businesses. Implementation of the proposals is expected to help the firms in enhancing their risk management processes and to ensure that these Domestic Firms maintain adequate capital to address all risks faced by them.
      17.  Domestic Firms in Categories 2 and 3 will be covered by a reduced scope of implementation, which will require them to make a regular assessment of their risks, but not to perform their own assessments of capital adequacy, or to make enhanced disclosures to the market.
      18.  Although Basel II is primarily aimed at banks and deposit takers, the DFSA believes that this scope of implementation will encourage all relevant Domestic Firms to enhance their risk management standards. In addition, the implementation of Basel II will ensure that the DFSA's regulatory framework continues to reflect best regulatory practices. In this context we note that within Europe the Capital Requirements Directive applies a Basel II based approach to investment firms corresponding largely to our own Categories 2 and 3.
      19.  Pillars 2 and 3 are aimed at strengthening the management of all types of risks and enhancing market discipline. Many financial services firms face risks which are not covered by current prudential rules and cannot be readily addressed by availability of capital. The proposed Pillar 2 processes will require such firms to assess their risks and document their risk management processes. While certain questions are being raised with regard to the effectiveness of Pillar 1, given the large losses in the financial sector over the past year, relatively few questions have arisen with regard to the scope and application of Pillars 2 and 3. The overall approach to implementation, described below is broadly consistent with the approach taken by the Committee of European Banking Supervisors (CEBS), and is in line with guidance produced by the BCBS.

      Issues for consideration

      Is it appropriate to implement Basel II Pillars 2 and 3 in the financial services industry of the DIFC, and at this time? If not, why not?

      Is the scope of application appropriate?

      Are there additional types of firm that should be included, or excluded?

      Pillar 2

      20.  All Domestic Firms to whom the proposals apply (i.e. firms in Category 1, 2, 3 or 5 and firms which are Insurers other than PCCs, Captive Insurers or Authorised ISPVs) will be required to establish, maintain and operate adequate processes for completing robust internal risk assessments on an annual basis. An Internal Risk Assessment Process (IRAP) is an internal process of a Domestic Firm which should enable its senior management and Governing Body to adequately identify, assess, aggregate and monitor all the risks faced by the firm. The results of these assessments are required to be documented and submitted to the DFSA. The proposed Rules also require Authorised Firms to ensure a robust level of corporate governance over their IRAP so that the results are meaningful and contribute towards the objective of improving the internal risk management of the firm.
      21.  Additionally, Domestic Firms in Category 1 or 5, and those Insurers to whom the proposals apply, will be required to establish, maintain and operate adequate processes for completing robust internal capital adequacy assessment on an annual basis, using the results of their IRAP assessments. An Internal Capital Adequacy Assessment Process (ICAAP) is an internal process of a firm which enables the firm to identify risk elements which can be addressed with capital and aggregate them to determine the level of capital it needs to address all such risks and ensure that it holds adequate capital commensurate with the firm's risk profile. The results of these assessments are required to be documented and submitted to the DFSA. The proposed Rules would also require Domestic Firms in the relevant Categories to ensure a robust level of corporate governance and adequate oversight by senior management over their ICAAP processes so that the objective of ensuring adequate capital to address all risks is effectively achieved.
      22.  Both IRAP and ICAAP where applicable should form an integral part of the management and decision-making processes of the firm. They need to be comprehensive, forward-looking and covered by adequate oversight and governance.
      23.  The DFSA will review the results of the IRAP and, where applicable, the ICAAP as part of its Supervisory Review and Evaluation Process (SREP). The results of the SREP will enable the DFSA to determine the required level of supervisory oversight and identify the appropriate mix of supervisory tools.
      24.  The SREP review of a firm's ICAAP assessment may lead to the conclusion that the firm needs to maintain higher capital requirements than those determined using the applicable prudential rules. In such cases, the DFSA will specify an Individual Capital Requirement (ICR) for that firm, which will be in excess of the Capital Requirement (or, for an Insurer, Minimum Capital Requirement) calculated using applicable prudential rules. The DFSA will determine the ICR after considering the results of the SREP taking into account all the risks identified as part of the ICAAP and subsequent discussions with the firm, if need be. The DFSA will also consider other appropriate remedial measures which can help in achieving the desired supervisory objectives before resorting to issuing an ICR.
      25.  The DFSA may also specify an ICR for a firm in Category 2 or 3, which does not have to submit an ICAAP. This will again be done following the SREP, and after a similar process of consideration and discussion with the firm.
      26.  At present, GEN Rule 5.3.4 requires all Authorised Firms to establish and maintain risk management systems and controls to enable them to identify, assess, mitigate, control and monitor their risks. In requiring IRAP assessments the proposed Rules seek to give a structured framework to meet this current rule requirement. However, the DFSA will expect a firm to meet the IRAP requirements in a flexible manner proportionate to the scale and complexity of its activities.

      Pillar 3

      27.  The primary objective of Pillar 3 is to complement the minimum capital requirements and the supervisory review process, by bringing market discipline to bear on firms. The BCBS has prescribed a set of minimum disclosure requirements which will enable market participants to take their own view of the risks and long-term soundness of an institution.
      28.  The prescribed set of disclosure requirements will require a firm to provide key information on the financial group structure, if applicable, capital, risk exposures, risk assessment processes. The risks to which firms are exposed and the techniques that those firms use to identify, assess, monitor and control those risks are important factors market participants consider in their assessment of a firm.
      29.  As regards Insurers, the International Association of Insurance Supervisors has recommended enhanced disclosures, and an enhanced disclosure regime is also being proposed by the European Commission as part of the Solvency II proposals.
      30.  The proposed Rules apply the disclosure requirements to Domestic Firms in Categories 1 and 5 and Insurers (except those excluded in paragraph 14). In the case of Financial Groups, the disclosure requirements are placed on the Parent entity of the Financial Group.

      Issues for consideration

      Do the Pillar 3 proposals apply to the appropriate sectors and categories of Authorised Firm? If not, what additional types of firm should be included or excluded?

      Should the DFSA include Liquidity Risk as a separate risk element, even though guidance and discussion of this critical risk element by BCBS remains mostly in consultative and draft form?

      Are the proposed disclosures appropriate? If not, what changes should be made?

      Detailed description of the drafting (Pillar 2)

      31.  Proposed Rules in new chapter 6 in SUP, section 2.11 of PIB and section 4.5 of PIN incorporate key aspects of Pillar 2. The DFSA will consider a waiver request in relation to the requirements described below, if the Authorised Firm is a member of a Group and is consequently subject to similar or more stringent regulatory requirements at the Group level.

      IRAP

      32.  Proposed section 6.3 of SUP requires a Domestic Firm which is in Category 1, 2, 3 or 5 or which is an Insurer (other than a PCC, Captive Insurer or Authorised ISPV) to establish and maintain an IRAP. The IRAP must identify, assess, aggregate and monitor the risks faced by the firm. Proposed App2 provides guidance on the types of risks that should be considered when a firm undertakes its IRAP.

      ICAAP

      33.  Proposed section 6.4 of SUP stipulates the requirement for a Domestic Firm in Category 1 or 5 or which is an Insurer (other than a PCC, Captive Insurer or Authorised ISPV) to carry out an ICAAP on the basis of the results of its IRAP. Proposed App3 provides Guidance on the ICAAP process.

      SREP

      34.  Proposed section 6.5 of SUP incorporates a process for the DFSA to review and evaluate an Authorised Firm's IRAP and ICAAP assessments. The SREP will include review and assessment of all the material risks borne by the firm as well as its internal controls and governance to manage those risks. Proposed App4 provides Guidance on the supervisory process of reviewing and assessing the IRAP and ICAAP.

      ICR

      35.  Proposed sections 2.11 of PIB and 4.5 of PIN incorporate provisions to enable the DFSA to impose an ICR or a Financial Group ICR on an Authorised Firm on the basis of the results of the SREP. Currently, the DFSA has the means to impose capital requirements which are higher than those determined using PIB Rules for a specific Authorised Firm, by imposing a condition on that firm's licence. The proposed approach includes incorporating explicit rules which would enable the DFSA to impose higher capital requirements. It is expected that such powers would be used only in cases where other risk mitigants and/or supervisory tools are inadequate to address the risks identified in the IRAP or ICAAP or SREP.
      36.  Consequential changes relating to the ICR have also been made to relevant sections in the PIB and PIN module as marked in Appendix 4 and 5.

      Issues for consideration

      Are the proposed amendments clear and unambiguous?

      Are the proposed SREP and its relationship with the IRAP and ICAAP clearly understandable? Would further Guidance be helpful?

      Detailed description of the drafting (Pillar 3)

      37.  Proposed Rules in sections 9 of PIB and 11 of PIN incorporate disclosure requirements for a Domestic Firm which is in Category 1 or 5, or which is an Insurer (other than a PCC, Captive Insurer or Authorised ISPV), as applicable.
      38.  In the case of a Domestic Firm within Category 1 or 5, the proposed section 9 of PIB and App8 together generally set out the disclosure policy and the type of qualitative and quantitative disclosures that a firm is required to make. The disclosures generally relate to group information, business of the firm, the types of risks faced by the firm and capital adequacy. These disclosures are modelled on those recommended by CEBS.
      39.  Similarly, in the case of an Insurer, the proposed section 11 of PIN and App 11 set out the disclosure policy and the type of qualitative and quantitative disclosures that an Insurer is required to make. The disclosures also generally relate to group information, business of the firm, the types of risks faced by the firm and capital adequacy. The disclosures for Insurers are modelled on those in the EU Solvency II proposals.

      Issues for consideration

      Are the proposed amendments clear and unambiguous?

      Do Authorised Firms see any practical difficulties with the proposed Guidance and Rules?

      Click here to download this Consultation Paper in PDF format.

      Appendix 1 — Amendments to GEN. PDF format
      Appendix 2 — Amendments to GLO. PDF format
      Appendix 3 — Amendments to SUP. PDF format
      Appendix 4 — Amendments to PIB. PDF format
      Appendix 5 — Amendments to PIN. PDF format

    • Consultation Paper No. 57 Miscellaneous Amendments to the Rulebook

      Why are we issuing this paper?

      1.  This Consultation Paper seeks public comment on the DFSA's proposals to make a wide variety of amendments to a number of modules of the DFSA Rulebook.

      Who should read this paper?

      2.  The proposals in this Paper would be of interest to all Authorised Persons, Ancillary Service Providers and Recognised Persons.

      How to provide comments

      3.  All comments should be provided to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish including on its website any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      4.  The deadline for providing comments on this proposal is 1 October 2008. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook. Because these are still proposals, you should not act on them until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website advising you when this happens.

      Comments to be addressed to:

      Nicholas Alves
      Legal Counsel
      Policy and Legal Services
      Dubai Financial Services Authority
      Level 13, The Gate, P. O. Box 75850
      Dubai, UAE

      or e-mailed to: NAlves@dfsa.ae

      Defined Terms

      5.  Defined terms are identified throughout this paper by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary (GLO) module. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Background

      6.  The DFSA has gathered together in one paper a number of miscellaneous amendments to the modules of the Rulebook. Each of the items listed below is a discrete amendment. Such amendments are grouped under the relevant module in the Appendices. The proposed amendments result from the DFSA's desire to simplify and clarify certain Rules but are also in response to the DFSA's experience of operating the Rules in practice, comments from market participants and also to ensure consistency with other jurisdictions where appropriate to do so.

      Proposed amendments

      Item 1. COB 6.7.1 — Recording of voice and electronic communications


      The Rules relating to the recording of voice communications are proposed to be amended for clarity and to cover all electronic communications. These proposed Rules link with COB Rule 7.4.4 in regard to record keeping of orders and transactions. The period of time for keeping a record of electronic communication, including voice recordings, will be increased from 3 months to 6 months (in alignment with the period about to be introduced in 2009 under the UK regime).

      Preventing, detecting and deterring market misconduct is one of the DFSA's key priorities. Good quality recordings of voice conversations and of electronic communications (taping) help firms and the DFSA to detect and deter inappropriate behaviour.

      The term electronic communication has a wide application. It includes fax, email, Bloomberg mail, video conferencing, SMS, business to business devices, chat and instant messaging. But it is not limited to these as it captures any electronic communications involving receiving client orders and the agreeing and arranging of transactions.

      The DFSA has provided an exemption in respect of recording general conversations and communications about market conditions.

      These proposed amendments to the Rules are in Appendix 1.

      Item 2. COB 7.2.2 — Direct insurance

      The COB Rules currently prohibit an Insurer from Effecting or Carrying Out a Contract of Insurance in relation to a risk situated within the UAE (including the DIFC) unless it is a contract of reinsurance. This is more restrictive than the Financial Free Zones Law of 2004 which along with the UAE Ministerial Council Cabinet Resolution No.28 of 2007 permits an Authorised Firm to insure a DIFC risk directly. The DFSA proposes to change the rule accordingly.

      The proposed Rule amendments to implement that approach are set out in Appendix 1.

      Item 3. REC 7.2.2(a) — Authorisation and recognition

      A significant number of Authorised Firms have sought and received relief from the effect of REC Rules 3.2.2 and 7.2.2 which prevent recognition being granted to an applicant which is also an Authorised Firm or Authorised Market Institution. The restriction was not intended to prevent Authorised Firms which have a principal place of business outside the DIFC and operate in the DIFC through a branch, from being recognised for the conduct of certain activities, i.e. trading on an AMI from their principal place of business. Therefore, the DFSA proposes changes to the relevant Rules to permit such recognition.

      The proposed relevant Rules are in Appendix 2.

      Item 4. CIR — Exclusion of certain companies and partnerships from constituting a fund

      Whilst no issues arise from treating all open-ended Bodies Corporate (investment companies with variable capital) as collective investment funds, issues arise in regard to such treatment of closed-ended Bodies Corporate. Ordinary commercial companies can arguably fall within the definition in Article 15 of the Collective Investment Law 2006 and thereby be considered a fund unless exempted pursuant to Article 16 by the DFSA. There is an applicable exemption under the Rules at CIR Rule 2.3.5. Some uncertainties have arisen in regard to this Rule. To address this we have now included an amended exclusion and repositioned it under CIR Rule 2.3.2. An equivalent exclusion is proposed in relation to Partnerships.

      The proposed exemption is set out in Appendix 3.

      Issue for consideration

      Do the draft Rules effectively exclude those closed-ended Bodies Corporate and Partnerships that are clearly not intended to be treated as collective investment arrangements and thereby regulated by the DFSA?

      Are there any other characteristics which should also be included?

      Item 5. CIR 2.3.9 — Certain Sukuk excluded from being a fund

      Sukuk are often referred to as Islamic bonds. There are many ways in which sukuk can be structured. They commonly use a Special Purpose Vehicle whose contractual relationships with the originator may take a variety of forms. Some of these structures, though economically equivalent to debentures, have some legal similarities to collective investment funds. The DFSA therefore proposes introducing a new CIR Rule 2.3.9 to put beyond doubt that sukuk that are in essence economically equivalent to debentures should not be treated as funds for regulatory purposes.

      The proposed Rules are in Appendix 3.

      Issue for consideration

      Does the draft Rule effectively exclude some sukuk which should not be at risk of being treated as collective investment funds? Are there further types of sukuk which should also be excluded, and how might an appropriate exclusion be drafted?

      Item 6. CIR 2.3.10 and OSR 2.4.1 — Employee share scheme exclusion

      A significant number of Authorised Firms offer the benefits of an employee share scheme to their employees and have sought and been granted relief from the marketing provisions relating to Funds in CIR and also the offer of securities provisions in OSR. Amendment is proposed to avoid the scheme being a Fund and thereby attracting the application of the CIR marketing Rules. Secondly, if the scheme is not a Fund, then the OSR prospectus offer Rules apply. Both sets of provisions are onerous in the circumstances of such employee reward arrangements.

      The DFSA therefore proposes introducing appropriate exemptions in regard to such offering of Securities and Units. The proposed exemption in relation to CIR excludes certain employee share schemes from amounting to a Collective Investment Fund, whilst the proposed OSR provisions treat an offer of a Security in such a scheme as an Exempt Offer.

      The proposed Rules are in Appendix 3 and Appendix 6.

      Item 7. FER 3.9 and 3.10 — Fund net asset valuation date

      In the Fees module (FER), the annual fee due for a Fund is calculated using the net asset value of the Fund. These amendments to FER 3.9 and FER 3.10 seek to remove any uncertainty by prescribing a date on which the net asset value is to be determined for the purpose of the fee calculation. If the Fund has not conducted a valuation on that date, then the most recent valuation will suffice for these purposes.

      The proposed Rules are set out in Appendix 4.

      Item 8. GLO definition — Islamic financial business

      This proposed amendment aligns the definition of "Islamic Financial Business" in the Glossary (GLO) with the Law Regulating Islamic Financial Business 2004.

      The proposed amendment is in Appendix 5.

      Item 9. GLO definition — Foreign and domestic property funds

      The DFSA proposes amendments to the definition of "Property Fund" and to insert a new definition for "Foreign Property Fund" to align more closely the definitions with the Domestic Property Funds under CIR Rule 13.5.4 and with Foreign Property Funds under CIR Rule 3.7.1.

      The proposed amendment to the definition is in Appendix 3 and 5.

      Item 10. OSR — Financial statements and annual reports

      New Guidance has been inserted under OSR Rule A2.1.1(13). The purpose of the new Guidance is to clarify the difference between an annual report and a financial statement. Further, the new Guidance also clarifies that Reporting Entities may make different levels of disclosure for different types of instruments or investment products.

      Appendix 6 contains the proposed amendments.

      Item 11. AMI 7.2.3 and Art 17(1) Markets Law

      Currently Article 17 of the Markets Law 2004 deals solely with Securities that an Authorised Market Institution ("AMI") may permit to trade on its facilities. This is inconsistent with the AMI module which also deals with the trading of Investments other than Securities, provided there is a proper market in respect of such Investments. The proposed amendments aim to align the Law with the Rules, thereby widening the scope of the Law to cover the trading of Investments other than Securities using the facilities of an AMI and to carry out consequential amendments for the purposes of Article 17(1)(b).

      One minor amendment to the AMI module is also proposed, so that the reference to "Listing Rules" in AMI Rule 7.2.3 (2) (f) is changed to "listing rules" where applicable, as the proper market test only becomes relevant where Investments admitted to trading are either listed in other jurisdictions or otherwise than through inclusion in an Official List of Securities.

      See Appendix 7 for the proposed changes to AMI Rules and Appendix 8 for the proposed changes to the Markets Law.

      Item 12.  Waivers and Markets Law

      The DFSA proposes to ask the Ruler to amend Article 36(e) of the Regulatory Law 2004 to clarify that the Chief Executive exercises the power of the DFSA under Article 58 of the Markets Law.

      Article 58(1) confers power on the DFSA to waive or modify the application of the Markets Law. This is the only instance in the laws administered by the DFSA of a power to waive or modify the application of law. However, the Regulatory Law and other laws administered by the DFSA do not clearly specify who within DFSA exercises this power. In this regard, under the Regulatory Law:

      •    the DFSA has a number of components, including the DFSA Board of Directors, and the Chief Executive and his staff (Article 9);
      •    neither the Board nor Chief Executive are given power to grant waivers or modifications in relation to law (see Articles 20 and 36);
      •    the Chief Executive has power to grant waivers and modifications to the Rules (Article 36(e)).

      Article 36(a) of the Regulatory Law confers the DFSA's executive power on the Chief Executive. The DFSA considers that a power to waive or modify the application of Markets Law in relation to a person is inherently executive in character, and should therefore be exercised by the Chief Executive.

      The proposed changes to the Law are in Appendix 8.

      Item 13. The making of guidance

      The DFSA proposes to ask the Ruler to amend Articles 36(c) and (d) of the Regulatory Law 2004 to clarify that the Chief Executive "makes and issues" Guidance, excepting Guidance comprising a standard or code of practice.

      "Guidance" is defined in Schedule 1 clause 2(f) of the Regulatory Law to comprise:

      •    guidance made and issued by the Chief Executive under the Law; and
      •    any standard or code of practice issued by the DFSA Board of Directors and which has not been incorporated into the Rules.

      In relation to the power of the Board to incorporate a standard or code of practice into Rules, see Article 23(3) of the Regulatory Law.

      The distinction between Guidance issued by the Chief Executive, and standards or codes of practice that are not incorporated into Rules, is recognised in Article 116 of the Regulatory Law.

      The proposed amendments to Articles 36(c) and (d) are designed to address the following anomalies:

      •    the reference to preparation of "standards or codes of practice" in Article 36(c)(ii) overlaps with the reference to "Guidance" in Article 36(c)(iii) to the extent that the latter includes a standard or code that is not incorporated into Rules;
      •    Article 36(c) confers power on the Chief Executive to "prepare" Guidance but does not confer power to issue. Schedule 1 clause 2(f) of the Regulatory Law anticipates that Guidance is "made and issued" by the Chief Executive;
      •    Article 36(d) empowers the Chief Executive to "advise [the Board] of such Guidance". As "Guidance" includes a standard or code of practice issued by the Board but not incorporated into Rules, it is anomalous that the Chief Executive must advise the Board of this type of Guidance.

      The proposed changes to the Law are in Appendix 8.


      Click here to download this Consultation Paper in PDF format.

      Appendix 1 — Amendments to COB. PDF format
      Appendix 2 — Amendments to REC. PDF format
      Appendix 3 — Amendments to CIR. PDF format
      Appendix 4 — Amendments to FER. PDF format
      Appendix 5 — Amendments to GLO. PDF format
      Appendix 6 — Amendments to OSR. PDF format
      Appendix 7 — Amendments to AMI. PDF format
      Appendix 8 — DIFC Laws Amendment Law 2008. PDF format

    • Consultation Paper No. 56 Regulation of Single Family Offices

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comments on the DFSA's proposals to facilitate an initiative of the DIFC Authority (DIFCA) to establish a Single Family Office (SFO) regime in the DIFC by removing some unnecessary regulatory burden on such offices. This paper is issued in conjunction with a separate Consultation Paper No.3 issued by DIFCA which outlines its proposals for a framework for SFOs. That paper may be accessed at www.difc.ae under "Laws & Regulations" and then under "Proposed Laws and Regulations".
      2. The scope of this paper is limited to proposals granting appropriate exclusions from the DFSA financial services regulatory regime and involves some changes to the following modules of the DFSA Rulebook:

      GEN General module (see Appendix 1)

      GLO Glossary module (see Appendix 2)

      Who should read this paper?

      3. The proposals in this paper would be of particular interest to entities wishing to establish SFOs, Private Trust Companies and Family Fiduciary Structures, and to their financial and legal advisers.

      How is this paper structured?

      4. In this paper, we set out:
      (a) the background and overview of the proposals (paragraphs 8 to 12); and
      (b) a detailed description of the drafting (paragraphs 13 to 20).

      How to provide comments?

      5. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      6. The deadline for providing comments on the proposals is by close of business on 20 July 2008. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:

      Errol Hoopmann
      Policy and Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE

      or e-mailed to: ehoopmann@dfsa.ae

      Definitions

      7. Defined terms are identified throughout this paper by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary (GLO) module or in DIFCA's proposed SFO Regulations. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Background

      8. The concept of an SFO is globally recognised, and refers to a dedicated facility or platform to manage and co-ordinate the personal and business affairs of a single family and its members. It may conduct a range of activities including administration services, real estate management, investment advice, fiduciary services, asset management, and the provision of legal, accounting and compliance services. Some of these activities may constitute Financial Services falling within the scope of DFSA regulation in the DIFC.
      9. As explained in DIFCA's Consultation Paper, the thrust of the SFO initiative is to encourage "super wealth bracket families" to adopt the DIFC as a centre of choice to establish a suitable SFO. It envisages the introduction of new DIFC Regulations for the DIFC SFO platform based on an initial policy statement issued by DIFCA foreshadowing these changes dated 2 August 2007. The background and summary of the proposal, including the draft SFO Regulations, is contained in DIFCA's Consultation Paper No.3.
      10. To facilitate the introduction of the SFO Regulations, it is considered appropriate to amend the DFSA's GEN and GLO modules to remove from the scope of DFSA regulation certain activities relating to the operation of an SFO. In framing the exclusions, the DFSA has weighed the desirability of a flexible and confidential environment for SFOs against requiring an SFO to be regulated in the same way as other providers of Financial Services, and has particularly taken into account these factors:
      (a) the nature of risks posed by the activities undertaken by an SFO and within a Single Family environment;
      (b) the community of interest of family members;
      (c) the fact that a large range of services that would be conducted within a Single Family may in any event not satisfy the "by way of business" test which forms a threshold for the DFSA's regulatory regime to apply to such activities;
      (d) the provisions of the SFO Regulations that limit the provision of services to the Single Family and restrict services from being provided to the public; and
      (e) the benefit and effectiveness of the proposed SFO regulatory regime to be administered by the DIFC Registrar of Companies under the SFO Regulations, including in relation to anti-money laundering procedures and controls.

      Overview of the proposals

      11. It is proposed to exclude certain activities of an SFO, a Private Trust Company and a Family Fiduciary Structure from the "by way of business" test under GEN 2.2.1(b). These entities provide services to a Single Family which constitutes Family Members, Family Entities and Family Businesses, each of which, as a recipient of services, does not need the benefit of the "by way of business" exclusion. A Single Family may also include a Family Fiduciary Structure which is a little different, as it is envisaged to be either or both a recipient of services from an SFO and Private Trust Company, and a provider of trust services to a Single Family. Accordingly, a Family Fiduciary Structure will fall within the "by way of business" exclusion where it Provides Trust Services and only to that extent.
      12. Where an activity does not meet the "by way of business" test by virtue of the proposed exclusion, the activity will not constitute a Financial Service and would as a result lie outside the scope of the Financial Services prohibition under Article 41 of the Regulatory Law. It would therefore not attract the requirement for licensing and supervision by the DFSA.

      Detailed description of the drafting

      (a) GEN 2.3.6(1) exclusions for an SFO
      13. It is proposed to exclude an SFO from the "by way of business" test in relation to a range of activities carried on exclusively for the purposes of carrying out its duties as an SFO. This suite of exclusions comprises:
      Dealing in Investments as Principal,
      Dealing in Investments as Agent,
      Arranging Credit or Deals in Investments,
      Managing Assets,
      Advising on Financial Products or Credit,
      Operating a Collective Investment Fund,
      Providing Custody,
      Arranging Custody,
      Insurance Intermediation,
      Providing Trust Services,
      Providing Fund Administration, and
      Acting as the Trustee of a Fund.
      14. Note that under proposed SFO regulations 2.1 and 2.4.1, an SFO may only provide services to a Single Family as defined. This, and the parameters of what constitutes a Single Family, are addressed in DIFCA's Consultation Paper No.3.

      Issues for consideration

      Do these exclusions properly represent the usual activities of an SFO?

      Is the scope of the exclusions appropriate, taking into account regulatory risk? If not, what should be the scope of exclusions and why?
      (b) GEN 2.3.6(2) exclusions for a Private Trust Company
      15. A Private Trust Company is currently exempted from the requirement to hold a Licence in respect of Providing Trust Services under GEN 2.23.2.
      16. A "Private Trust Company" is currently defined in the GLO module as a body corporate established for the sole purpose of providing trust services in circumstances where it provides those services to a specific trust or trusts involving Related Persons, and which does not provide services to the public. It is proposed to repeal and substitute the existing definition in GLO, to align with the regime under the SFO Regulations. The existing definition was interim, to meet the purpose of a regime as now contemplated under the SFO Regulations.
      17. It is also proposed to exclude a Private Trust Company from the "by way of business" test in relation to Providing Trust Services where such services are provided to a Single Family. In order to avail itself of the exclusion, the Private Trust Company is restricted to carrying on the relevant activity exclusively for the purposes of, and only so far as it is, providing services to a Single Family. Accordingly, it cannot solicit trust business from, or provide trust services to, the public. As a consequence of this change, it is proposed to remove the existing exemption under GEN 2.23.2.

      Issues for consideration

      Are the limitations imposed on the availability of the exclusion for Private Trust Companies appropriate? If not, why not?

      Is the proposed definition of Private Trust Company accurate, clear and appropriate? If not, how should it be defined?

      If any Private Trust Company in the DIFC is operating within the scope of the existing definition, will it suffer any detriment by the adoption of the proposed definition? If so, what detriment and how should such detriment be alleviated?
      (c) GEN 2.3.6(2) exclusions for a Family Fiduciary Structure
      18. A Family Fiduciary Structure is a trust or foundation that may be expected to receive services from an SFO and Private Trust Company. In addition, or alternatively, it is envisaged that a Family Fiduciary Structure may itself Provide Trust Services to a Single Family. In that regard, a Family Fiduciary Structure differs from a Private Trust Company as it may not be a body corporate.
      19. Accordingly, and similar to a Private Trust Company, it is proposed to exclude a Family Fiduciary Structure from the "by way of business" test where it engages in Providing Trust Services. In order to avail itself of the exclusion, the Family Fiduciary Structure is restricted to carrying on the relevant activity exclusively for the purposes of, and only so far as it is, providing services to a Single Family. Accordingly, it cannot solicit trust business from, or provide trust services to, the public.

      Issues for consideration

      Are the limitations imposed on the availability of the exclusion for Family Fiduciary Structures appropriate? If not, why not?

      Is the DFSA's view of the role of a Family Fiduciary Structure accurate? If not, why not?
      (d) GLO definitions
      20. Aside from the definition of "Private Trust Company" above, the other proposed definitions draw their meaning from similar terms used in the SFO Regulations.

      Issues for consideration

      Are the respective definitions under the SFO Regulations accurate, clear and appropriate, in the context of the regulatory exemptions proposed? If not, why not?

      Click here to download this Consultation Paper in PDF format.

      Appendix 1 — Amendments to GEN. PDF format
      Appendix 2 — Amendments to GLO. PDF format

    • Consultation Paper No. 55 Proposal to Enhance Rules Relating to Anti Money Laundering and Observance of Relevant United Nations Resolutions and Sanctions

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comment on the DFSA's proposals to:
      (a) require Authorised Market Institutions, Authorised Firms and Ancillary Service Providers to:
      (i) conduct ongoing due diligence in respect of their business relationship with a Member or customer or business partner in respect of transactions undertaken; and
      (ii) make appropriate use of any applicable findings, guidance, directives, resolutions and sanctions issued by the United Nations Security Council and, in respect of anti money laundering issues, other relevant authorities or bodies, as the case may be; and
      (b) provide Authorised Firms with the flexibility to undertake customer identification after effecting a Transaction in certain situations described below.

      Who should read this paper?

      2. The proposals in this Paper would be of interest to Authorised Market Institutions, Authorised Firms and Ancillary Service Providers with regard to the applicable anti money laundering related regulatory obligations and additional requirements for systems and controls to give due regard to the United Nations Security Council resolutions and sanctions.

      How to provide comments

      3. All comments should be provided to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish including on its website any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      4. The deadline for providing comments on this proposal is 10 July 2008. Once we receive your comments, we will consider if any further refinements are required to this proposal. We will then proceed to enact the changes to the DFSA's Rulebook. Because these are still proposals, you should not act on them until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website advising you when this happens.

      Comments to be addressed to:

      Radish Kaur
      Manager, Policy and Legal Services
      Dubai Financial Services Authority
      Level 13, The Gate, P. O. Box 75850
      Dubai, UAE

      or e-mailed to: rkaur@dfsa.ae

      Defined Terms

      5. Defined terms are identified throughout this paper by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary (GLO) module. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning.

      Background

      6. The DFSA's aim in relation to the proposed amendments is to:
      (a) ensure that certain provisions in the Rulebook relating to anti money laundering and counter terrorist financing are more closely aligned with the Financial Action Task Force (FATF) recommendations. Accordingly, we are proposing to insert a Rule on ongoing due diligence;
      (b) ensure that due regard is paid by Authorised Firms, Authorised Market Institutions and Ancillary Service Providers to relevant resolutions and sanctions issued by the United Nations Security Council;
      (c) harmonise relevant requirements that should apply across the board, in a consistent manner, to Authorised Market Institutions, Authorised Firms and Ancillary Service Providers; and
      (d) provide flexibility to Authorised Firms to conduct customer identification after effecting a Transaction, where applicable. The current AML Rules require Authorised Firms to undertake customer identification before effecting a Transaction. The proposed flexibility is consistent with the FATF recommendation No. 5.

      Proposed amendments

      7. Requirements relating to ongoing due diligence
      •   The proposed AML Rule 3.4.4(1)(b), AMI Rule 11.7.3(1)(b) and ASP Rule 6.5.4(1)(b) require Authorised Market Institutions, Authorised Firms or Ancillary Service Providers, to conduct ongoing due diligence on business relationships with and transactions undertaken by, a Member, a customer or a business partner, as applicable.
      8. Requirements relating to United Nations Security Council sanctions
      •   The proposed GEN Rule 5.3.30 requires Authorised Persons to make appropriate use of any United Nations Security Council resolutions and sanctions which are relevant to their business dealings. In addition, Authorised Persons are required to report to the DFSA any business dealings or potential business dealings with affected Persons.
      •   In relation to Ancillary Service Providers, a similar obligation as mentioned above is imposed in new section 3.6 of the ASP module. Accordingly, Ancillary Service Providers will also be required to make appropriate use of relevant United Nations Security Council resolutions and sanctions and report to the DFSA any business dealings or potential business dealings with affected Persons.
      9. Harmonisation of certain anti money laundering obligations for consistency
      •   As already required in the case of Authorised Firms, it is proposed that an obligation is placed on Authorised Market Institutions and Ancillary Service Providers to take into account anti money laundering related findings issued by relevant authorities or bodies, such as the UAE Central Bank, FATF, DFSA or other government departments in the UAE. As such, it is proposed that the existing Guidance under AMI section 11.9 and ASP section 6.8 be made into a Rule.
      •   Under AML Rule 3.4.13, proposed new provisions have been inserted to require Authorised Firms to verify their business partner's identity if they lacks sufficient information, as currently required in the case of dealing with a customer.
      10. Requirements relating to flexibility in conducting customer identification
      •   The proposed new provisions in AML Rule 3.4.3 provide that an Authorised Firm may carry out customer verification after effecting a Transaction but only where it involves a low risk Transaction and, if the:
      (a) delay in undertaking the Transaction would be prejudicial to the interest of such customer; and
      (b) Transaction is in respect of Investment Business or Insurance Business.
      11. Consequential and other minor amendments
      •   Authorised Market Institutions, Authorised Firms and Ancillary Service Providers will find that consequential changes, as a result of the amendments mentioned in paragraphs 7, 8, 9 and 10, are proposed to relevant requirements relating to record keeping, reporting, training and awareness and responsibilities of the AMLO or MLRO, as the case may be.
      •   In addition, certain changes are proposed to streamline language and to correct minor typographical errors.

      Proposed consolidation of the anti money laundering Rules

      12. Following this limited scope exercise, we are considering streamlining the Rules on anti money laundering and accordingly consolidating them in one single module. We expect the streamlining to be completed by end of 2008. We do not expect the streamlining to result in material changes to the substance of the Rules.

      Click here to download this Consultation Paper in PDF format.

      Appendix 1 — Amendments to AMI. PDF format
      Appendix 2 — Amendments to AML. PDF format
      Appendix 3 — Amendments to ASP. PDF format
      Appendix 4 — Amendments to GEN. PDF format

    • Consultation Paper No. 54 Implementation of DFSA's Key Policy Review

      Why are we issuing this paper?

      1. This Consultation Paper provides a further update on certain aspects of the DFSA's Key Policy Review proposals (Consultation Paper No. 52). These aspects relate to:
      (a) a proposed Rule which would require an Authorised Firm to apply to the DFSA for an endorsement to its Licence to enable it to conduct Financial Services with Retail Clients;
      (b) the dispute resolution and Complaints handling processes which an Authorised Firm is required to implement if it conducts Financial Services with Retail Clients; and
      (c) the transitional arrangements which the DFSA would provide to facilitate the implementation of the Rule changes proposed in Consultation Paper No. 52.
      2. The current proposals involve changes to the following modules of the DFSA Rulebook:

      GEN General — Chapter 3 (Appendix 1)
      AUT Authorisation — Part 5 (Appendix 2)
      COB Conduct of Business (Appendix 3)
      GEN General — Chapter 9 (Appendix 4)

      Who should read this paper?

      3. The proposals in this paper would be of interest to Persons carrying on, or considering carrying on, Financial Services in or from the DIFC, to their professional advisers, and to those who deal with such Persons.

      How to provide comments?

      4. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      5. The deadline for providing comments on the proposals is 15 March 2008. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:
      Lawrence Paramasivam
      Legal Counsel, Policy & Legal Services
      DFSA
      PO Box 75850
      Dubai, UAE

      or e-mailed to: lparamasivam@dfsa.ae

      Background

      6. Consultation Paper No. 52, issued on 4 December 2007, contained a proposal by the DFSA to develop its regulatory regime in three key areas: client classification and access; the regime for collective investment funds; and convergence with international regulatory developments. Consultation Paper No. 52 also indicated that the DFSA would consult on other issues relating to this proposal.
      7. This Consultation Paper contains an update in relation to:
      (a) a proposed Rule requiring an Authorised Firm before it carries on Financial Services with Retail Clients to apply to the DFSA for an endorsement on its Licence (see paragraphs 8 to 10);
      (b) the dispute resolution and Complaints handling processes of an Authorised Firm that carries on Financial Services with Retail Clients (see paragraphs 11 to 16); and
      (c) the transitional arrangements which should be in place for all Authorised Firms upon the implementation of the changes proposed in Consultation Paper No. 52. (see paragraphs 17 to 18).

      Licence Endorsement for an Authorised Firm

      8. As outlined in paragraphs 27 to 33 of Consultation Paper No. 52, we propose to make changes to our regime which will permit an Authorised Firm to carry on Financial Services with Retail Clients. To facilitate this proposal, the DFSA proposes to insert Rules within our GEN and AUT Modules requiring an Authorised Firm to apply to the DFSA for an endorsement on its Licence before it carries on Financial Services with Retail Clients. Authorised Firms including those entities that have received an in principle letter from the DFSA to carry on Financial Services, will be able to apply for an endorsement on their Licence. The DFSA will also update its application forms to enable applicants for a Licence to apply for such an endorsement.
      9. To assist Authorised Firms and applicants, the DFSA proposes to provide further guidance outlining the requirements that a person must meet before the DFSA grants such an endorsement. Amongst other things, the DFSA would need to consider the following before granting an endorsement:
      (a) the adequacy of the internal dispute resolution and Complaints handling procedures;
      (b) the enhanced market material disclosures for Retail Clients including any information relating to past performances under proposed COB Rules 3.2.4 to 3.2.6; and
      (c) the systems, controls and procedures for carrying on Financial Services with Retail Clients.
      The issue raised in paragraph (a) is likely to be the most significant one for the DFSA to consider.
      10. It is also intended that the Public Register for Authorised Firms on the DFSA's website will be updated to reflect such endorsements.

      Dispute resolution and complaints handling processes

      11. An Authorised Firm that carries on Financial Services with Retail Clients will be required to have an internal dispute resolution and complaints handling process (see paragraphs 85 to 87 of Consultation Paper No. 52). The proposed Chapter 9 of the GEN Module sets out the requirements for an Authorised Firm to have written policies and procedures for the investigation and resolution of complaints made against it by Retail Clients and the manner of redress.
      12. The DFSA has explored the possibility of creating an external dispute resolution scheme ("EDR scheme") for Retail Clients. An EDR scheme provides Retail Clients with an additional mechanism to resolve a Complaint. However, a Retail Client must first lodge a Complaint with an Authorised Firm's internal dispute resolution process, and receive an unsatisfactory outcome. An example of an EDR scheme is the Financial Ombudsman Service within the United Kingdom.
      13. The DFSA has commenced work to develop a suitable model for an EDR scheme. However, it is not envisaged that the DFSA will require Authorised Firms to provide to their Retail Clients access to a suitable EDR scheme at the time of implementation of the policy proposals in Consultation Paper No. 52. The DFSA considers that from a cost benefit perspective, the immediate establishment of an EDR scheme is not warranted given the likely initial low volume of Complaints that may be received by an EDR scheme within its first few years of operation. However, the DFSA will monitor the effectiveness of an Authorised Firm's internal dispute resolution and Complaints handling procedures and may, in the light of experience, decide to establish an EDR scheme for Authorised Firms and their Retail Clients. This is unlikely to happen within the next twelve months.
      14. As there will not be an EDR scheme available when the proposed changes come into operation, the DFSA intends to place a higher emphasis on ensuring that an Authorised Firm has adequate polices and procedures governing the investigation and resolution of Complaints made against it by Retail Clients.
      15. Given this emphasis, the DFSA considers that an Authorised Firm should ensure that a Retail Client is aware of its Complaints handling procedures. In Consultation Paper No. 52, we proposed under COB Rule A2.1.2(1)(h) to require an Authorised Firm to provide details of its internal Complaints handling procedures within the Client Agreement entered into with a Retail Client. The DFSA would consider that such details include a summary of the minimum requirements on internal Complaints handling procedures proposed in section 9.2 of the GEN Module.
      16. We propose to include within COB Rule A2.1.2(1)(h) a requirement that a Client agreement for a Retail Client include a statement that the Complaints handling procedures are available to a Retail Client upon request in accordance with proposed GEN Rule 9.2.11.

      Transitional arrangements for all Authorised Firms

      17. We have previously indicated that where an Authorised Firm does not intend to deal with Retail Clients, they should be able to continue to deal with their existing Clients with little change. Accordingly, there are a number of areas in which the DFSA intends to provide Authorised Firms with transitional relief, if the changes proposed in Consultation Paper No. 52 are implemented. The DFSA will provide transitional relief through either Rule amendments and/or by waiver and modification of DFSA Rules. These areas of transitional relief include the following:
      (a) Persons that are classified by an Authorised Firm as either a:
      i. Client within the current COB Rule 3.2.2; or
      ii. Commercial Customer within the current Part 4 of the COB Module relating to Insurance Business,
      will be classified as a Professional Client under the new regime in relation to the same Financial Services provided to that Person. Therefore, an Authorised Firm will not be required to undertake a new assessment of such Persons as required under proposed COB Rule 2.3.1;
      (b) Persons that are classified as a Qualified Investor within the current OSR Rule 3.3.2 will be classified as a Professional Client under the new regime;
      (c) Existing Market Counterparties will be treated the same without an Authorised Firm having to obtain their express consent as required under proposed COB Rule 2.3.4;
      (d) Client Agreements which are currently in place for Clients will remain valid, in that an Authorised Firm would not need to sign a new Client Agreement with a Professional Client as required under proposed COB Rule 3.3.2. However, if an Authorised Firm has obtained an endorsement on its Licence to conduct Financial Services with Retail Clients and it then receives a request from a Professional Client to be treated as a Retail Client under the proposed COB Rule 2.3.3(4), the DFSA would expect that an Authorised Firm would enter into a new Client Agreement with the Person as a Retail Client; and
      (e) Existing marketing material and disclosure documents for Clients will continue to be valid under the new regime for a specified period of time before having to comply with the requirements in the proposed regime.
      18. The DFSA would also like to receive comments as to whether any other transitional relief should be given to Authorised Firms from any of the intended changes in Consultation Paper No. 52.

      Click here to download this Consultation Paper in PDF format.

      Appendix 1 — Amendments to GEN 3. PDF format
      Appendix 2 — Amendments to AUT. PDF format
      Appendix 3 — Amendments to COB. PDF format
      Appendix 4 — Amendments to GEN 9. PDF format

    • Consultation Paper No. 53 Prudential Rules for Islamic Finance

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comments on the DFSA's proposals to enhance the PIB regime with regards to the way Islamic Contracts should be treated for prudential purposes. The proposals involve changes to the following modules of the DFSA Rulebook:
      PIB Prudential — Investment, Insurance Intermediation and Banking Business (Appendix 1)
      ISF Islamic Financial Business (Appendix 2)
      GLO Glossary (Appendix 3)

      Who should read this paper?

      2. The proposals in this paper would be of particular interest to Authorised Firms Managing a Profit Sharing Investment Account but will also be of interest to Authorised Firms in Category 1, 2, 3 or 5 when investing in or holding Islamic Contracts when calculating Credit Risk or Market Risk in respect of such contracts.

      How is this paper structured?

      3. In this paper, we set out:
      (a) the background and overview of the proposals (paragraphs 7 to 11); and
      (b) a detailed description of the drafting (paragraphs 12 to 21).

      How to provide comments?

      4. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      5. The deadline for providing comments on the proposals is by close of business on 9 March 2008. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:
      Peter Casey
      Director, Policy
      DFSA
      PO Box 75850
      Dubai, UAE

      or e-mailed to: pcasey@dfsa.ae

      Definitions

      6. Defined terms are identified throughout this paper by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary (GLO) module. Unless the context otherwise requires, where capitalisation of the initial letter is not used, the expression has its natural meaning. Some proposed changes to GLO are in Appendix 3.

      Background

      7. Consultation Paper 52, issued on 4 December 2007, contains proposals to ensure the DFSA's regime is in line with the standards which prevail in advanced jurisdictions. Although the proposals in this paper are not specifically linked to any proposal in Consultation Paper 52, they form part of the overall key policy review currently being undertaken by the DFSA and were contemplated in that paper.
      8. In order to ensure the DFSA's regime is in line with international standards, including the standards produced by the Islamic Financial Services Board (IFSB), the DFSA has examined its prudential regime for Islamic finance. We have also observed an increase in conventional firms investing in or holding Islamic instruments, and we consider that guidance may be required on the treatment of such instruments for capital purposes.

      Overview of the proposals

      9. The main aim of the proposals is to enhance the PIB regime by providing more detail on the way Islamic Contracts should be treated for prudential purposes.
      10. At present, the treatment of Islamic Contracts for prudential purposes is set out in PIB chapter 3. The proposed enhancements include:
      •   amending Table 2 of PIB chapter 3 to be in line with the "Capital Adequacy Standard for Institutions (other than insurance institutions) Offering Only Islamic Financial Services" (CAS 1) issued by the IFSB, and to deal with a wider range of Islamic Contracts;
      •   prescribing the treatment of Islamic Contracts financed other than by a PSIA, including those held by conventional institutions; and
      •   providing Rules on treatment of Market Risk for Islamic Contracts held in a Trading Book, whether financed by a PSIA or otherwise.
      11. The substantive provisions are based on CAS 1, the only changes of substance being those that are necessary to implement them in the context of the PIB regime.

      Detailed description of the drafting

      12. PIB chapter 3 has been substantially enhanced with new Guidance on the treatment of Islamic Contracts, as well as new Rules relating to Market Risk.
      (a) Guidance on the treatment of Islamic Contracts
      13. Table 2 under PIB Rule 3.5.3 is proposed to be relocated as Guidance under PIB Rule 3.5.2. The table has been enhanced to include the provisions in CAS 1 dealing with the minimum capital requirements for Islamic Contracts, specifically relating to relevant risk weightings or applicable capital charges.
      14. This table and the other Guidance under PIB Rule 3.5.2 are intended to assist Authorised Firms in calculating their PSIACOMcredit (see Rule 3.4.2).
      15. It is also relevant to an Authorised Firm which invests in or holds Islamic Contracts, when calculating Credit Risk for such contracts. We have inserted Guidance to that effect under PIB Rule 4.1.1 and consequential amendments have also been made to PIB Rule 4.10.1.
      (b) Market Risk
      16. Proposed new PIB section 3.6 is based on provisions in CAS 1. This section has been inserted to assist Authorised Firms in calculating their PSIACOMmarket (see Rule 3.4.2), and is also relevant to an Authorised Firm when calculating its Market Risk Capital Requirement in respect of Islamic Contracts it invests in or holds. We have inserted Guidance to that effect under PIB Rule 5.1.1
      (c) Economic substance
      17. The proposed new Guidance under PIB section 3.2 emphasises that an Authorised Firm undertaking Islamic Financial Business or otherwise investing in or holding Islamic Contracts, should give due importance to the economic substance of the transaction, in addition to the legal form of the Islamic Contracts.
      (d) Management of PSIAs
      18. We have taken the opportunity to move PIB Rule 3.7.1 to the ISF module as Rule 4.3.1. This Rule prohibits an Authorised Firm from utilising funds of PSIA holders to finance its corporate activities. This Rule has been moved because it relates to systems and controls (as opposed to capital requirements) and is therefore more appropriately placed under chapter 4 of the ISF module which sets out rules relating to systems and controls.
      (e) Displaced Commercial Risk
      19. Consultation Paper 52 contains proposals which if implemented will enable Authorised Firms to offer Financial Services to a wider range of Clients. That paper, amongst other things, deals with enhanced disclosure requirements for PSIAs.
      20. As this paper focuses on prudential requirements for Authorised Firms Managing a PSIA, the DFSA invites comments on whether the current ratio of 35% for Displaced Commercial Risk (please refer to PIB Rule 3.4.2) remains appropriate, in light of the proposed broader access set out in Consultation Paper 52.
      21. The Displaced Commercial Risk ratio essentially measures the likelihood that an Islamic bank will feel obliged to support returns to its PSIA holders for commercial reasons, even though in principle those holders bear the full investment risk, with no guarantee of principal. Full support would imply a ratio of 100%; no support at all would imply a ratio of 0%.

      Issues for consideration

      Are the proposed amendments clear and unambiguous?

      Do Authorised Firms see any practical difficulties with the new Guidance and Rules for the treatment of Islamic Contracts for prudential purposes? If so, what are they and how should they be addressed?

      Does the 35% Displaced Commercial Risk ratio remain appropriate? If the changes proposed by CP 52 are implemented should the ratio be revised?

      Click here to download this Consultation Paper in PDF format.

      Appendix 1 — Amendments to PIB. PDF format
      Appendix 2 — Amendments to ISF. PDF format
      Appendix 3 — Amendments to GLO. PDF format

    • Consultation Paper No. 52 Key Policy Review

      The DFSA will be hosting briefing sessions at its offices to discuss the changes proposed in Consultation Paper 52. These sessions are aimed mainly at Authorised Firms, and are scheduled for Monday 7th January and Thursday 17th January. If you wish to attend, please contact Gerosa D'Lima on GDLima@dfsa.ae.

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comments on the DFSA's proposals to develop its regulatory regime in three key areas: client classification and access; the regime for collective investment funds (CIFs); and convergence with international regulatory developments. The proposals are far-reaching, and involve changes to the following modules of the DFSA Rulebook:
      •   CIR Collective Investment Rules (Appendix 1)
      •   COB Conduct of Business (Appendix 2)
      •   GEN General (Appendix 3)
      •   PIB Prudential — Investment, Insurance Intermediation and Banking (Appendix 4)
      •   PIN Prudential — Insurance Business (Appendix 5)
      •   ISF Islamic Financial Business (Appendix 6)
      •   OSR Offered Securities Rules (Appendix 7)
      •   GLO Glossary (Appendix 8)
      The paper also foreshadows further changes, which will be the subject of later consultation.

      Who should read this paper?

      2. The proposals in this paper would be of interest to Persons conducting, or considering conducting, Financial Services in or from the DIFC, to their professional advisers, and to those who deal with such firms.

      How is this paper structured?

      3. In this paper, we set out:
      (a) the background and overview of the proposals (paragraphs 8 to 26); and
      (b) a detailed description of the drafting (paragraphs 27 to 92)

      How to provide comments?

      4. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      5. Because these proposals are far-reaching, we shall be organising briefing sessions for firms and their advisers. If you are interested in attending one of these, please watch our website for details.
      6. The deadline for providing comments on the proposals is 7 February 2008. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.
      7. As mentioned above, we expect to consult on some further changes later. These may affect the detail of some of the current proposals, but are unlikely to change their general substance.

      Comments to be addressed to:
      Peter Casey
      Director, Policy
      DFSA
      PO Box 75850
      Dubai, UAE

      or e-mailed to: pcasey@dfsa.ae

      Definitions

      8. In this paper, generally, capitalised terms are defined in the GLO module of the DFSA Rulebook. Some proposed changes to GLO are in Appendix 8.

      Background

      9. The DFSA's vision is to be an internationally respected regulator and a role model for financial services regulation in the Middle East. We therefore continuously monitor regulatory developments in other advanced jurisdictions to ensure that we remain in the forefront of international best practice. We also monitor developments in the market, and maintain close contact with market participants.
      10. One major international development of recent years has been the adoption in Europe of the Markets in Financial Instruments Directive (MiFID). Much of the business done in the DIFC is in areas which, in Europe, are covered by MiFID. It is therefore appropriate to examine our own regime in the light of MiFID, with the aim of making it easier for firms who are subject to MiFID to enter the DIFC without major changes to their compliance regimes. One particular aspect we have considered is the basic structure for classifying clients. We have also looked at other European legislation, such as the Insurance Mediation Directive (IMD).
      11. Another international trend is towards principles-based regulation, focusing on outcomes rather than the way in which these are to be achieved. The DFSA is committed to such an approach, in which a high standard of supervision allows less detailed requirements hard-coded into rules. In considering how we might more closely align with MiFID in particular, we have focused on the high level principles rather than attempting to replicate some of its detailed prescription.
      12. A related development is reliance on clear disclosure, combined where appropriate with suitability requirements, rather than prescribed restrictions on products in particular. This has always been part of the DFSA's approach, but it has been reinforced in these proposals.
      13. A further trend is increasing convergence between financial services. Indeed, this has been one of the drivers for the creation of integrated regulators like the DFSA. In formulating our proposals, we have wherever possible taken a cross-sectoral approach, though recognising that this will not always be appropriate.
      14. Another highly relevant factor in these proposals is the increasing maturity of the DIFC, and of the DFSA itself. At the outset, the DFSA adopted a set of restrictions on the customers with which firms could deal, sometimes described in the language of being a "wholesale" centre. This also reflected the practice of many advanced jurisdictions in applying a lighter regulatory regime to transactions with wealthier or more sophisticated customers. By restricting the types of customers with whom Authorised Firms could deal, the DFSA was able to adopt a lighter regime overall. This was appropriate to a regulator which was still building its capability. That stage is now substantially past, as recognised in the recent evaluations by the International Monetary Fund and World Bank, published on the IMF's website1.
      15. Indeed, in many areas, the existing DFSA regime is already at or close to the strength of those in retail markets elsewhere, partly reflecting the fact that products created in the DIFC may be sold to customers in other markets. Authorised Firms in the DIFC therefore bear many of the costs of retail-strength regulation, without the ability to address the full range of potential customers. Our contacts with current and potential Authorised Firms indicate that, while some firms are content to concentrate on institutional and high net worth business, others would welcome access to a wider customer base. We consider that in some areas there is scope to allow this, with relatively limited enhancements to our regulatory regime and within the constraints of Federal law.

      Overview of the proposals

      16. In the light of the factors set out above, the policy proposals in this paper fall into three broad, and sometimes overlapping, areas:
      •   a review of the regime for client classification, and broader access to financial services through firms in the DIFC;
      •   a review of our collective investment regime, in the light of experience and comment from the market; and
      •   convergence with international regulatory developments, including those mentioned above.
      17. In line with the general approach taken in MiFID, the proposals set out in the attachments introduce a new classification of customers into Retail Clients and Professional Clients. Market Counterparties are defined as a subset of Professional Clients. For an individual to be classed as a Professional Client, he would need to have $500,000 in net assets (excluding his principal residence) and satisfy a sophistication test. There is a limited exemption for Employees of Authorised Firms. Details are in paragraph 26 onwards. Firms who wish to deal only with Professional Clients will be able to do so within substantially the present regulatory regime. In most areas, Authorised Firms will also have the option of dealing with Retail Clients, with enhanced regulatory protections. This classification will also apply to insurance business, in place of the existing division between individuals and Commercial Customers.
      18. Two exceptions are credit and accepting deposits. A fully retail credit regime would involve a large extension to the current rulebook, and there has been no indication from the market that such an extension would be justified. We do, however, propose to allow credit for commercial purposes to be extended to Retail Clients who are Undertakings (not individuals). As regards accepting deposits, the additional market available from an extended Client definition is severely limited by the restrictions in the Federal law. This market would not justify the creation of a full banking regime.
      19. We have examined our regime against the standards which prevail in advanced jurisdictions, including in particular MiFID and other European Directives, and propose a number of enhancements. In general these will apply only where Authorised Firms deal with Retail Clients. In line with our commitment to principles-based regulation, we have implemented these where possible through high-level requirements focusing on outcomes rather than processes. There are a small number of areas where we have taken the opportunity to reduce some of the more prescriptive provisions which currently apply.
      20. Apart from those set out above, the main areas of change are, in summary:
      •   flexibility for firms to do business with only one type of Client or all types of Clients;
      •   clarification of the position of Clients who hold assets through personal investment vehicles such as trusts;
      •   requirements for Authorised Firms to have internal complaints handling procedures for Retail Clients;
      •   allowing enhanced access to Public Funds, while restricting Private Funds to Professional Clients;
      •   allowing Foreign Funds to be marketed to Retail Clients where they may be so marketed in their home jurisdictions (subject to the other restrictions on the funds that may be marketed);
      •   a small enhancement to the existing training and competence provisions;
      •   an enhanced regime for financial promotions and marketing, especially in relation to statements about past performance;
      •   some further disclosures to Clients about the financial services and products offered, including enhanced disclosures in respect of the Profit Sharing Investment Accounts offered by Islamic financial institutions;
      •   provision of information to prospective Clients about financial services offered before signing the Client Agreement;
      •   further disclosures for Retail Clients on inducements; and
      •   an enhanced insurance conduct of business regime.
      21. We have taken the opportunity of these changes to simplify the structure of the COB Module.
      22. The DFSA is also examining the possibility of an external dispute resolution scheme for Retail Clients, and may be bringing forward proposals for this at a later date.
      23. We are also taking the opportunity of the revisions to the CIR Rules to bring forward a number of other changes resulting from our experience of the first year's operation of the CIF regime, and from informal consultation with a number of industry participants. The most important of these are:
      •   removing the current restrictions that Domestic Funds must have asset pricing and Fund valuation, issue and redemption of Fund Units and record keeping and maintenance of the Unitholder register conducted in the DIFC;
      •   simplifying the Rules relating to delegation and outsourcing, including removing the requirement for prior DFSA approval of certain delegation arrangements in favour of a "due diligence" requirement;
      •   providing greater flexibility with regard to Eligible Custodians, including reducing the base capital requirement from $10 million to $4 million;
      •   providing greater flexibility for the marketing of Foreign Funds, by relaxing some aspects of the current eligibility criteria for custodians and investment managers;
      •   limiting the lifetime of the initial Prospectus, and introducing the concept of a Supplementary Prospectus;
      •   removal of Trustees from the categories of Persons responsible for disclosure in a Prospectus;
      •   clarifying the independence requirement for Shari'a Supervisory Boards; and
      •   removing some restrictions on single property funds in favour of enhanced disclosure.
      24. We have substantially restructured the CIR Rules to make them easier to navigate, and we have standardised some of our terminology.
      25. In the context of developing international practice including the standards papers produced by the Islamic Financial Services Board, the DFSA has been examining its prudential regime for Islamic finance. This also reflects another aspect of convergence, in that conventional firms may invest in Islamic instruments, and may require guidance on their treatment for capital purposes. A separate Consultation Paper on this will be issued in due course.
      26. Details of the proposals are set out in the paragraphs that follow.

      Client classification

      27. As explained earlier, the DFSA is proposing to introduce a new classification of Clients. The proposals are contained in COB chapter 2 and constitute extensive amendments to section 3.2 of the current COB module.
      28. Under proposed COB Rule 2.3.1, an Authorised Firm will need to determine prior to carrying on a Financial Service with a Person whether such Person is a Professional Client unless it treats a Person as a Retail Client.
      29. Proposed COB Rule 2.3.2 provides that to be classified as a Professional Client, a Person must have $500,000 in net assets and satisfy a sophistication test. For individuals, the principal residence is excluded from the net asset test. There is an exemption from this test for certain Employees of Authorised Firms. Under the current regime, for an individual to be treated as a Client (which effectively equates with the proposed Professional Client classification) he must have at least $1 million in liquid assets and sufficient financial experience and understanding to participate in financial markets. For an Undertaking, the current minimum requirement is called up share capital or net assets of at least $5 million.
      30. Certain types of entities such as Authorised Firms, public authorities, government agencies and supranational organisations do not have to pass the sophistication test as they are deemed to possess the necessary sophistication to do business in financial markets. The same type of Person, once classified as a Professional Client, can also be treated as a Market Counterparty if it expressly consents to such treatment. See proposed COB Rules 2.3.2(2) and 2.3.5.
      31. A Professional Client will have the option to be treated as a Retail Client if he so wishes. If an Authorised Firm only deals with Professional Clients, then it must inform the Person of such fact and any relevant consequences thereof. See proposed COB Rule 2.3.3.
      32. We have clarified the treatment of Persons who hold part or all of their assets through personal investment vehicles. Firstly, the reference to "held directly or indirectly" in proposed COB Rule 2.4.1(b) allows an individual to include assets held in a personal investment vehicle in calculating net assets for the purpose of classification as a Professional Client. Secondly, proposed COB Rule 2.3.4 provides that a personal investment vehicle of an existing Professional Client will not need to meet the net asset test to qualify as a Professional Client.
      33. We note that in MiFID the financial resources test for an individual is based on the size of his "financial portfolio". Our draft proposals provide for a test based on net assets. This has the advantages of being more readily applicable to both individuals and businesses, and as being more appropriate to non-investment services such as insurance or credit. However, there are arguments for a test based on financial portfolio as this is closer to MiFID and also serves as a closer proxy for the individual's ability to bear financial risk. We are keen to receive comments on this point.

      Issues for consideration

      Do these changes allow firms to do business more effectively than under the current requirements?

      Would you prefer, instead of a "net asset" test, a test based on the client's investment portfolio (to be defined as including cash deposits and financial instruments)?

      Is the $500,000 net asset threshold appropriate as the dividing line between a retail client and a professional client? Would your view of the appropriate level change if the test were based on investment portfolio?

      Do you see any anomalies or ambiguities in the application of these provisions?

      Should a Professional Client be required to give express consent to be treated as a Market Counterparty? If not, why not?

      Would firms welcome some relief from having to provide disclosure documents more than once when dealing with individuals and their personal investment vehicles, or is this not an issue in practice?

      Does the reference to "directly or indirectly" in proposed 2.4.1(b) achieve the intended purpose, or would additional Guidance be useful? If so, what should it say?

      Changes to Financial Services of Accepting Deposits and Providing Credit

      (a) Decoupling of Providing Credit
      34. Currently, COB section 3.3 and the definition of "Banking Business" provide that an Authorised Firm which carries on Accepting Deposits or Providing Credit or both of those activities is to be considered as carrying on Banking Business and accordingly subject to restrictions against accepting deposits from the State's markets, and against accepting deposits, providing credit, or undertaking currency and foreign exchange transactions in the UAE dirham. These restrictions are designed to safeguard against contraventions of Federal Law No. 8 of 2004.
      35. The DFSA recognises that in the normal course of business, credit may be extended by financial institutions which are not banks. Accordingly, it is proposed to delete the definition of Banking Business and to amend the definition of a Bank to capture only the Financial Service of Accepting Deposits. This would have the effect of permitting Authorised Firms, which are not Banks, to Provide Credit subject to the restrictions proposed in COB chapter 4.
      (b) Different treatment of Accepting Deposits and Providing Credit
      36. Proposed COB section 4.2 retains the existing prohibitions on an Authorised Firm that Accepts Deposits from doing so from State's markets or in the UAE dirham. In addition, a restriction is imposed against accepting deposits from a Retail Client.
      37. Proposed COB section 4.3 retains the existing prohibition on an Authorised Firm that Provides Credit from doing so in the UAE dirham. The section also provides that a firm may only Provide Credit to a Retail Client if that Client is an Undertaking (that is, not an individual) and for a business purpose.

      Issues for consideration

      Do the proposed requirements pose any practical difficulties? If so, what are they and how should they be addressed?

      Other changes to the conduct of business (COB) regime

      (a) Application of the Client classification
      38. Earlier we explained the new Client classification provisions in COB chapter 2. The remaining chapters of COB are revised to reflect the differing obligations of an Authorised Firm as they apply to a Retail Client, Professional Client and Market Counterparty.
      39. In relation to Insurance Business and the Financial Services of Insurance Intermediation and Insurance Management, it is proposed to delete the current classification of "Commercial Customer" and to replace this with the new Client classification regime. In terms of the regime applied, the existing "Commercial Customer" will broadly equate with the proposed Professional Client.

      Issues for consideration

      Do any practical problems arise from the new Client classifications? If so, what are they and how should they be addressed?
      (b) Communication of information and marketing material
      40. Currently, Rules in COB 6.1 and 18.6 (for Investment related activities) and 11.1–11.3 and 16.1–16.3 (for insurance) govern the manner of disclosure in marketing materials. It is proposed to consolidate these Rules into COB 3.2 (Investment related) and 7.3–7.7 (insurance).
      41. The provisions have been enhanced to reflect the differing needs of Retail Clients and Professional Clients, and to augment the existing obligation that communications must be clear, fair and not misleading. For instance, in relation to Investment Business, if the marketing material is intended only for Professional Clients, an Authorised Firm must make disclosures to that effect and indicate that the material is not to be relied upon by any other type of Client. Material containing representations based on past performance and targeted to Retail Clients must contain warnings that past performance is not necessarily a reliable indicator of future results. In insurance, the Rules require additional disclosures to Retail Clients, including as to the nature of advice provided by an Insurance Intermediary (proposed Rule 7.5.2) and as to interest, profits and charges payable by a Retail Client for premium payments made through a credit facility (proposed Rule 7.6.2).

      Issues for consideration

      Do the proposed requirements pose any practical difficulties? If so, what are they and how should they be addressed?
      (c) Key information and Client Agreements
      42. Currently, COB 8.1 requires the execution of a Client Agreement before conducting Investment Business for a Client. This will relocate to COB 3.3 under the new proposals. The provision of key information in respect of Providing Trust Services is currently required by COB 18.6, and this requirement will be embraced within the new COB 3.3.
      43. The current requirements relating to Client Agreements have been enhanced to ensure that prospective Retail and Professional Clients are given key information relating to the financial service on offer in good time to enable them to make a well informed decision about the service. This is consistent with the MiFID approach. We also provided flexibility for a Client to obtain Financial Services from a firm without first having to sign a Client Agreement where it is either impracticable to do so (for example when obtaining time critical transaction execution services) or where the Client agrees to dispense with the requirement in regard to a personal investment vehicle (see Rule 3.3.2). We have also drawn a distinction between the level of disclosure required to be included in a Client Agreement, with less detailed information required for agreements with Professional Clients. See COB App2, A2.1.2(1) and (2).

      Issues for consideration

      Do the proposed requirements pose any practical difficulties? If so, what are they and how should they be addressed?
      (d) Assessments of suitability
      44. Currently, Rules in COB 6.2 and Guidance under COB 11.6 govern the obligation of an Authorised Firm to assess suitability of a financial product or service for a particular Client or Commercial Customer. It is proposed to revise and relocate these provisions as Rules in sections 3.4 and 7.8 of COB. The revised requirements will apply in relation to Retail Clients and Professional Clients but not Market Counterparties. Consistent with the current requirements, a Professional Client may agree to dispense with the suitability assessment either completely or partially provided the firm gives the Client a prior written warning, and the Client acknowledges receipt of the warning (see Rule 3.4.2(2)).
      45. In line with the MiFID approach, we have recast the suitability assessment as requiring a firm to have 'a reasonable basis' for considering a Transaction or recommendation to be suitable for the particular Client for whom the Transaction is executed on a discretionary basis or the recommendation is made (see Rule 3.4.2(1)).

      Issues for consideration

      Do the proposed requirements pose any practical difficulties? If so, what are they and how should they be addressed?
      (e) Conflicts of interests and inducements
      46. We have retained the current prohibition relating to giving and receiving inducements likely to conflict with a firm's duties to the Clients with only some minor drafting amendments. These provisions will apply to both Retail and Professional Clients. In addition, we propose to impose a requirement that when making a recommendation to or undertaking a Transaction for a Retail Client, a firm must make prior disclosure to the Client of any commissions and other direct or indirect benefit which the firm or any of its Employees or Associates may or will receive from any third party in connection with the recommendation or Transaction. In line with the MiFID approach, we have provided flexibility so that a firm may provide such disclosure in summary form with detailed disclosure only upon request of the Client.

      Issues for consideration

      Do firms see any practical difficulties in making disclosure of inducements to Retail Clients? If so, what are they and how should they be addressed?
      (f) Right to cancellation ("cooling off")
      47. In Europe, there are provisions, deriving principally from the Distance Marketing Directive, which provide certain rights of cancellation in relation to insurance contracts. The DFSA does not currently propose to provide such rights, but it would be possible to do so by further amending the proposed COB section 7.11 to confer new rights of cancellation on Retail Clients. If we followed the European pattern the rights might be exercisable within 30 days of contract in relation to a Long-Term Insurance Contract, and within 14 days in respect of a General Insurance Contract.

      Issues for consideration

      Would such an initiative be appropriate? If not, why not?

      The structural framework of the conduct of business (COB) regime

      48. The framework of COB is considerably revised. As mentioned earlier, the Client classification provisions are located in chapter 2 with the refinements necessary to allow firms to deal with Retail Clients. Conduct rules that apply to firms when dealing with high net worth and sophisticated individuals and institutional clients (i.e. Professional Clients under the proposals) remain substantially unchanged, with further flexibility introduced in some areas.
      49. The remainder of COB is configured into two parts, segregated largely along the lines of investment-related and insurance-related Financial Services. Chapter 3 contains a set of common Rules for Investment Business, and Financial Services of Accepting Deposits, Providing Credit and Providing Trust Services. Additional chapters address specific aspects of these Financial Services. These will be followed in chapter 7 with a set of common Rules relating to the insurance-related Financial Services.
      50. The DFSA considers these changes to the framework of COB will provide long term benefits in promoting the better understanding of regulation in the Centre, and that any short term transitional costs will be outweighed by that benefit. The MiFID-related changes make this an opportune time to implement this more general structural initiative.
      51. Annexure A to this paper contains a COB Transition Map to assist in understanding the transition of existing COB Rules to the proposed version.

      Issues for consideration

      Will the above changes in framework of COB, and the new definitions, assist in your navigation and understanding of the Rulebook? If not, where do you see need for improvement, or retention of existing provisions?

      Changes to specific provisions within the collective investments (CIR) regime

      (a) Enhanced access for Clients
      52. Under the proposals, a Public Fund is not restricted as to the types of Client that may be Unitholders. Therefore a Retail Client may invest in a Public Fund. In this regard, proposed CIR section 3.2 removes the effect of current COB Rule 6.8.2. Amendments to the prescribed contents of a Public Fund Prospectus (see CIR App6) reflect the need for appropriate levels of disclosure for Retail Clients.
      53. It is proposed that only a Professional Client may invest in a Private Fund. See proposed CIR Rules 3.3.1 and 18.3.1, which effectively substitute existing COB Rules 6.8.4 to 6.8.6. It is also proposed to amend the mandatory statement in CIR Rule 19.3.1 to warn that the Prospectus is not intended for distribution to Retail Clients.
      54. As a consequence of the above changes, the concept of "Qualified Investor" would have no ongoing relevance to CIR.

      Issues for consideration

      Is this division of Funds into two classes, with Public Funds accessible to all investors, and Private Funds restricted to Professional Clients, appropriate?

      Will these proposals operate effectively in practice?

      Should we include additional protection for Retail Clients, and if so, what? Should we include additional protection for high net worth individuals who are Professional Clients?
      (b) Prospectuses
      55. It is proposed to introduce the concept of Supplementary Prospectus partly based on the regime in OSR section 5.6. This new regime amends the existing provisions in CIR sections 15.2 and 19.2 and allows a Supplementary Prospectus to be issued as either a supplementary or replacement document.
      56. It is also proposed to introduce an expiry date of a Prospectus being no later than 12 months after the date of the Prospectus. Our review of a range of comparable jurisdictions indicates that Prospectus expiry dates are accepted practice for both open and closed ended vehicles, and the timeframe is based on benchmarking of the expiry dates in those jurisdictions.
      57. It is proposed to remove a Trustee from the category of Persons responsible for disclosure in, and approval of, a Prospectus, except to the extent that the Trustee agrees to provide any disclosure in the Prospectus. The DFSA is of the view that these changes will better align the respective responsibilities of the Operator and Trustee, and are consistent with international benchmarking. See proposed CIR Rules 11.2.1 and 11.3.2, and proposed deletion of current CIR Rules 15.2.1(4) and 19.2.1(4).

      Issues for consideration

      Do you see benefit in the introduction of an expiry date for a Fund Prospectus? If so, is 12 months an appropriate period?

      Is the removal of Trustee responsibility for a Prospectus appropriate? If not, why not?
      (c) Removal of restrictions for certain functions to be located in the DIFC
      58. It is proposed to remove the current requirement under CIR Rule 6.2.2(1) that asset pricing and fund valuation, issue and redemption of units, and record keeping and the maintenance of the Unitholder Register for a Domestic Fund must be conducted in the DIFC. The proposal will allow greater flexibility for fund administration to be undertaken from centres of excellence both inside and outside the DIFC.
      59. This increased flexibility is subject to a range of safeguards. The centres outside the DIFC are limited to "Zone 1" jurisdictions (as defined in the Basel Accord) and those that are Recognised Jurisdictions pursuant to Article 20 of the Collective Investments Law. Under proposed Rules 7.3.2(2) and 7.3.3(2), a Service Provider located in such a jurisdiction must be authorised to carry out those relevant functions by a Financial Services Regulator. It is proposed that this should not only apply to delegation of certain activities of fund administration, but also to an Operator's delegation of Managing Assets under proposed CIR 7.3.2(2)(c) with the addition of Guidance to convey that the DFSA may grant waivers from that restriction where appropriate. Also, the terms of the Delegation Agreement with the Service Provider must contain the provisions prescribed in CIR A1.2, including obligations to maintain and provide access to information for those who carry out functions in relation to the Fund and to the DFSA.

      Issues for consideration

      Is it appropriate to remove the restrictions under current CIR 6.2.2(1) and allow provision of fund administration by entities outside the DIFC? Will this cause any disadvantages to the DIFC and its market participants?

      Is it appropriate to apply the same Zone 1 and Recognised Jurisdiction restrictions in relation to a delegation of Managing Assets? If not, why not?

      Is the requirement for such a Service Provider to be authorised in its home jurisdiction to carry on the relevant functions appropriate? Are there any practical difficulties in this regard? What are the alternative means through which an adequate level of regulation in the home jurisdiction of the Service Provider can be delivered?
      (d) Changes relating to delegation and outsourcing
      60. We propose to clarify and streamline the processes to be followed by Operators and Trustees when delegating their activities and outsourcing their functions. These changes are designed to provide greater flexibility and efficiencies for Operators and Trustees to do business.
      61. It is proposed to remove the requirement currently within CIR Rules 7.3.1, 7.3.3 and 7.4.1 for prior approval of the DFSA for delegation of Financial Service activities. Proposed Rule 7.4.1 will impose an obligation on the Operator or Trustee to carry out appropriate due diligence on the Service Provider. It is also proposed to enhance Prospectus disclosure of such arrangements.
      62. The proposals streamline and simplify the requirements relating to outsourcing and delegation agreements under CIR. In particular, see the revisions to App1. We have not, however, conducted a fundamental review of all the outsourcing or delegation provisions throughout the Rulebook, including the more general provisions applied to all Authorised Persons in GEN.
      63. In relation to the structure of the CIR Rules, we propose to relocate the outsourcing and delegation provisions from various locations in CIR, in particular from existing CIR 6.3.1(2)–(4), to a single location in chapter 7. In addition, the proposals remove some unintended consequences and anomalies, and Guidance in section 7.2 has been revised to better express the intended effect of chapter 7. These proposals would result in extensive changes to existing CIR sections 6.3 and 7.3–7.5 and App1.

      Issues for consideration

      These proposals are designed to simplify these provisions and to remove unnecessary restrictions and anomalies. Are these objectives met? If not, are there any areas for improvement?
      (e) Fund property and custodians
      64. CIR section 6.3 is extensively revised to clarify the duties of an Operator or Trustee in relation to Fund Property.
      65. Current CIR Rule 6.3.1(2) requires an Operator to register the legal title of Fund Property with an Eligible Custodian under a Safekeeping Agreement, and Rule 6.3.1(1) provides that the Operator remains responsible for the safety of that property. In the case of an Investment Trust, under CIR Rule 6.3.1(5), the Trustee holds the Fund Property and is responsible for its safety, but is permitted by Rule 7.3.3(1) and (3) to delegate the activity of Providing Custody.
      66. It is proposed to recast the Operator's obligations under Rule 6.3.1(2) as a required delegation of the activity of Providing Custody under proposed CIR Rule 7.3.1, to provide structural consistency with the Trustee's ability to delegate that activity. To clarify that the Operator and Trustee are initially vested with these activities in order to so delegate, it is proposed to amend the Financial Services of Operating a Collective Investment Fund and Acting as the Trustee of a Fund in GEN Rules 2.12 and 2.25 to incorporate within the scope of these activities the activity of Providing Custody in relation to a Fund, among others. This also has the effect of streamlining the authorisation process for Operators and Trustees, by allowing conferral of a single authorisation to cover all the necessary attributes for the conduct of each Financial Service.
      67. Proposed Rule 6.3.2 permits flexibility in safekeeping arrangements for a Property Fund. This reflects previous relief granted by the DFSA by way of waiver and modification to existing Rule 6.3.2.
      68. It is also proposed to amend the definition of "Eligible Custodian" and relocate it from existing Rule 6.3.2 into GLO. Paragraph (5) of that definition reflects relief previously granted by the DFSA.
      69. It is proposed to reduce the base capital requirement for a custodian of Fund Property from $10 million to $4 million. See PIB 2.4.1. Similarly, the minimum capital requirement for a foreign custodian within the definition of "Eligible Custodian" in GLO is proposed to reduce from $10 million to $4 million. This proposal arises from public consultation with industry, relief requests made by market participants, and our comparison of this capital requirement with similar requirements in comparable jurisdictions. It will provide greater access to Service Providers.

      Issues for consideration

      These proposals are designed to simplify these provisions and to remove unnecessary restrictions and anomalies. Are these objectives met? If not, are there any areas for improvement?

      Current CIR Rule 6.3.1 and proposed 7.3.1 require an Operator to appoint an Eligible Custodian to hold Fund Property. Should an Operator be required to delegate custody? Does this create any issues for responsibility to Unitholders and regulators? Is there a preferable approach?
      (f) Single property funds
      70. It is proposed to delete current Rule 13.5.5. This Rule stipulates the conditions under which a Public Property Fund may invest in a single property, and requires both tenant and trade sector diversification. This could prove onerous, given the wide definition of what constitutes a single property. The DFSA now believes that the more appropriate course may be to enhance disclosure of the risks associated with single property investments of a Public Fund, including a REIT. Accordingly it is proposed to introduce a new CIR Rule 15.7.3 requiring enhanced disclosure. It is not intended to require a similar level of disclosure under CIR section 19.7 in relation to a Private Property Fund.

      Issues for consideration

      Is it appropriate to adopt the principle of disclosure-based approach to single property funds? If not, why not?

      Should the disclosure requirements extend to Private Funds? If so, why?
      (g) Independence of Shari'a Supervisory Board members
      71. Current CIR Rule 13.1.7 requires an Operator to ensure the independence of a Shari'a Supervisory Board and to ensure that it is not subject to conflicts of interest with respect to the Fund, Operator, or Trustee (where relevant). The broad language of this Rule has caused difficulty due to the limited number of Persons with relevant expertise to act as Shari'a Supervisory Board members. Recognising this, but also the need for appropriate safeguards, it is proposed to replace Rule 13.1.7 with a conflicts of interest disclosure and management regime, consistent with similar conflict of interest treatment elsewhere in the Rulebook.
      72. Similar amendments are proposed to ISF Rule 5.1.4.

      Issues for consideration

      Does the proposed amendment provide the degree of flexibility and adequate safeguards to ensure independence of Shari'a board members? If not, how should these aims be achieved?

      The structural framework of the collective investments (CIR) regime

      73. It is proposed to make a range of amendments to the structural framework of CIR to allow easier navigation. In particular, it is proposed to relocate conduct standards relating to distribution of Units, including of Foreign Funds, from sections 6.8 to 6.10 of COB to chapter 3 and App7 of CIR.
      74. Additionally, provisions in chapter 19 of COB relating to Fund Administration will relocate to chapter 4 of CIR (which apply directly to an Authorised Firm carrying on the activity of Fund Administration in or from the DIFC, including for a Foreign Fund) and App7 of CIR (which prescribes mandatory provisions for an agreement between an Operator or Trustee and a Service Provider delegated to carry on Fund Administration, whether the provider is located in or outside the DIFC).
      75. As a consequence of these changes, while current CIR is structured to apply only to Domestic Funds (see current Rule 1.1.3), proposed Rule 1.1.4 widens the scope to include Foreign Funds.
      76. It is also proposed to amend terminology to assist comprehension and to better explain concepts. For example, more consistent use of "Unitholder" and consolidation of the terms "Eligible Person" and "Permitted Third Party" into "Service Provider" will better convey the intended concepts. It is proposed to make a range of new definitions in GLO and to amend some other definitions.
      77. It is also proposed to relocate some prescriptive detail from the core of the Rules to appendices. For instance, the prescribed contents of a Fund's Constitution would relocate from section 5.4 to App4, and the prescribed contents of a Public Fund Prospectus would move from section 15.4 to App6.
      78. It is proposed to relocate the contents of current chapter 2 (overview) into chapter 1 (introduction), and current chapter 4 (arrangements not constituting a fund) into proposed chapter 2 (arrangements amounting to collective investment). This involves no substantive changes to text, except that proposed Rules 2.3.2(c) and 2.3.7 are redrafted to better express their intended purpose. This permits provisions from COB to be relocated into chapter 3, and provisions relating to fund administration into chapter 4, as discussed earlier.
      79. Other changes are proposed to enhance navigation and relevance. For instance, it is proposed to remove Chapter 21 ("Appeals") which merely contains Guidance which restates the effect of the Collective Investment Law. It is also proposed to remove copies of Articles of the Law where these are considered unnecessary — for example from existing CIR section 5.5.
      80. The DFSA considers these changes to the framework of CIR will provide long term benefits in promoting the better understanding of regulation in the Centre, and that any short term transitional costs will be outweighed by that benefit.
      81. Annexure B to this paper contains a CIR Transition Map to assist in understanding the transition of existing Rules from CIR and COB into the redrafted CIR Rules.

      Issues for consideration

      Will the above changes in framework of CIR, and the new definitions, assist in your navigation and understanding of the Rulebook? If not, where do you see need for improvement, or retention of existing provisions?

      Offered Securities Rules

      82. We also propose certain amendments to the OSR module to align these provisions with the treatment of Offers of Units of Domestic Funds. Under the proposals, an Exempt Offer may be made to a Professional Client and a Prospectus Offer may be made to any investor including a Retail Client. As a consequence, the concept of "Qualified Investor" is replaced with the Professional Client definition in the Rulebook.

      Issues for consideration

      Is this alignment appropriate? If not, why not?

      Training and competency

      83. It is proposed to enhance the current obligations in GEN section 5.3 to reflect the skills, knowledge and experience required by Employees to provide Financial Services across the spectrum of the new Client classifications.
      84. To that end, it is proposed to amend GEN Rule 5.3.19(1)(b) to reflect the desired outcome of competence and capability. It is also proposed to amend the Guidance to that Rule in order to provide further assistance to an Authorised Firm in considering whether its Employees are fit and proper, and competent and capable in performing the functions which are assigned to them.

      Issues for consideration

      Are there any qualifications or training requirements you consider appropriate or necessary for an Employee interfacing with a Retail Client to have?

      Dispute resolution

      85. It is proposed to introduce a new GEN chapter 9 addressing processes for internal dispute resolution and complaints handling. In essence, these new provisions will require an Authorised Firm to have written policies and procedures for the investigation and resolution of complaints made against it by Retail Clients and the manner of redress. The Rules stipulate the manner and timeframe in which such complaints will be handled and resolved. Minor amendments have also been made to the existing definition of Customer Complaint (now defined as a Complaint in GLO).
      86. In relation to complaints received from a Professional Client, proposed GEN section 9.3 requires an Authorised Person to have adequate policies and procedures to record such complaints. This proposed section is based on the current requirements in relation to Customer Complaints contained in GEN Rule 5.3.24.
      87. As noted at the outset, the DFSA is also examining the possibility of an external dispute resolution scheme for Retail Clients, and may bring forward proposals for this at a later date. Other such avenues for redress may be expanded upon in the ultimate drafting of proposed GEN Rule 9.2.6.

      Issues for consideration

      Do you have any comments on the new definition of Complaint? Do you think the procedures and timeframes are appropriate and will work in practice?

      Profit Sharing Investment Accounts (PSIAs)

      88. The Islamic Financial Business module (ISF) imposes disclosure requirements on Authorised Firms that undertake Islamic Financial Business.
      89. Some structural changes have been made to this module by merging chapter 6 into chapter 2.
      90. Enhancements have been made to the disclosure requirements relating to PSIAs in view of the intended wider access to these accounts. These enhancements can be found in Rules 2.2.2 (current Rule 6.12) and 2.2.3 (current Rule 6.13). Minor changes have been made to Rules 2.1.3 (current Rule 6.1.4) and 2.2.1 (current Rule 6.1.1); these are purely for added clarity and do not change the effect or application of the current requirements.
      91. Guidance is inserted under Rule 2.2.1 to ensure that Authorised Firms remain aware that a PSIA does not constitute a Deposit and that great care should be taken to ensure that a PSIA is not represented as a Deposit. This is to ensure that the firm is not at risk of being characterised as engaging in the activity of Accepting Deposits.

      Issues for consideration

      Are the new disclosure requirements appropriate in view of the wider access to Islamic finance through the Centre?

      Keeping of records

      92. Provisions of the Rulebook generally require the keeping of records for a period of at least 6 years. Article 25 of MiFID Directive 2004/39/EC proposes member states to require firms to keep records for at least 5 years. The DFSA proposes to retain the 6 year requirement, due in large part to the 6 year period of limitation of actions under Article 38 of the DIFC Courts Law.

      Issues for consideration

      Comments are sought on the merits of either course, of retaining the current 6 year requirement or moving to a 5 year requirement.

      1 http://www.imf.org/external/pubs/cat/longres.cfm?sk=21433.0 and http://www.imf.org/external/pubs/cat/longres.cfm?sk=21456.0.


      Annexure A

      COB TRANSITION MAP

      From current COB to proposed CIR
      Current RulesProposed COB / CIR
      Application of the COB module Introduction 
      1.1 Application 1.1
      General 
      1.2 General -
      PART 1 — Restrictions on Business 
      Insurance Business 
      2.1 Application 7.1.1
      2.2 Restrictions 7.2.1–7.2.5
      Investment Business and Banking Business 
      3.1 Application 2.1
      3.2.1 (1),(2) Restrictions -
      3.2.1(3) 2.3.1(3)
      3.2.2 Client 2.3.1–2.3.5
      3.2.3 Liquid Assets - (cf: 2.4)
      3.2.4 Analysis 2.5
      3.2.5 Verification Systems and Controls -
      3.2.6 Record Keeping 2.6
      3.3 Additional Restrictions for banking business 4.1–4.3
      Insurance Intermediation Business 
      4.1 Application 7.1.1
      4.2 Restrictions 7.2.1–7.2.5
      PART 2 — Conduct of Investment Business 
      Introduction 
      5.1 Application -
      Responsible Conduct 
      6.1 Communication of information and marketing material 3.2.1–3.2.5
      6.2 Suitability 3.4.1–3.4.3
      6.3 Conflicts and material interest 3.5.1
      6.4 Personal account transactions 6.2.1–6.2.5
      6.5 Investment research and offers of securities 6.3.1–6.3.8
      6.6 Inducements 3.5.3
      6.7 Soft dollar agreements 3.5.4–3.5.7
      6.8 Marketing and selling Units of a Domestic Fund CIR 3.1–3.3, 3.8 & 18.4
      6.9 Marketing and selling Units of a Foreign Fund CIR 3.4–3.7
      6.10 Record Keeping CIR 3.9
      Dealing 
      7.1 Best execution 6.4.1–6.4.4
      7.2 Non-market price transactions 6.5
      7.3 Aggregation and allocation 6.6
      7.4 Record keeping — transactions and orders 6.7
      7.5 Other dealing rules 6.8
      Documentation 
      8.1 Client agreement 3.3.1–3.3.3
      8.2 Confirmation notes 6.9
      8.3 Periodic statements 6.10
      Client Assets 
      9.1 Application 6.11.1
      9.2 General requirements 6.11.2
      9.3 Client money 6.12
      9.4 Client investments 6.13
      9.5 Record keeping 6.14
      PART 3 — Conduct of Insurance Intermediation and Insurance Management Business 
      Introduction 
      10.1 Application 7.1.1
      Responsible Conduct 
      11.1 Communication of information and marketing material 7.3.1
      11.2 Authorised Firm's duty of disclosure 7.5.2
      11.3 Customers duty of disclosure 7.4
      11.4 Costs and remuneration 7.6
      11.5 Information about the proposed insurance 7.7
      11.6 Suitability 7.8
      11.7 Conflicts of interest 7.9
      Placement of Insurance 
      12.1 Applications 7.10.1
      12.2 Instructions 7.10.2
      12.3 Quotations 7.10.3
      12.4 Confirmation of cover 7.10.4
      Providing an ongoing service 
      13.1 Application -
      13.2 Amendments to and renewal of insurance 7.11.1–7.11.3
      13.3 Claims 7.11.4
      Insurance Monies 
      14.1 Application 7.12.1
      14.2 General 7.12.2–7.12.4
      14.3 Insurance money segregation 7.12.5–7.12.15
      PART 4 – Conduct of Insurance Business 
      Introduction 
      15.1 Application 7.3
      Responsible Conduct 
      16.1 Communication of information 7.3.1
      16.2 Customers duty of disclosure 7.4
      16.3 Information about the proposed insurance 7.7
      16.4 Confirmation of cover 7.10.4
      16.5 Amendments to and renewal of insurance 7.11.1–7.11.3
      16.6 Claims 7.11.5
      PART 5 — ATS Operator 
      ATS Operators 
      17.1 Application 6.15.1–6.15.2
      17.2 Client Disclosures 6.15.3
      17.3 Systems and controls 6.15.4
      17.4 Information 6.15.5–6.15.6
      17.5 Monitoring and Disclosure 6.15.7–6.15.8
      17.6 Record Keeping 6.15.9
      PART 6 — Conduct of Trust Service Providers 
      Trust Service Providers 
      18.1 Application 5.1
      18.2 General 5.2
      18.3 Conflicts of interest 3.5.1
      18.4 Reviews 5.3
      18.5 Communications 3.2.1–3.2.3
      18.6 Marketing material 3.2.4
      18.7 Professional indemnity insurance cover 5.4
      18.8 Dual control 5.5
      18.9 Internal reporting 5.6
      18.10 Recording of Selection Criteria 5.7
      18.11 Qualification and experience of Trust Service Provider staff 5.8
      18.12 Books and records 5.9
      18.13 Due diligence 5.10
      18.14 Suitability 3.4.2
      18.15 Attribution of Knowledge and Inducements 3.5.2–3.5.3
      18.16 Documentation 3.3.2–3.3.3
      18.17 Fitness and Propriety of Persons acting as trustees 5.11
      PART 7 — Fund Administration 
      Fund Administrators 
      19.1 Application CIR 4.1
      19.2 Compliance with the AML Rules CIR 4.2
      19.3 Compliance with the CIR Rules -
      19.4 Client Money and Assets CIR 4.3, A1.4
      19.5 Service Level Agreements CIR A1.2.1
      19.6 Record Keeping CIR 4.5
      PART 8 — Conduct of Banking Business 
      Conflict of Interests 
      20.1 Application -
      20.2 Managing Conflict of Interests 3.5.1
      App1 — Records of Orders and Transactions 
      A1.1 Minimum contents of transaction records A1.1
      App2 — Client Agreement 
      A2.1 Application -
      A2.2 Content of client agreement A2.1
      App3 — Confirmation of Transactions 
      A3.1 Content of confirmation notes A3.1
      App4 — Periodic Statements 
      A4.1 Content of periodic statements: investment management A4.1
      App5 — Client Money Provisions 
      A5.1–A5.14 Requirements A5.1–A5.14
      App6 — Safe Custody Provisions 
      A6.1–A6.10 Requirements A6.1–A6.10
      App7 — Additional Prospectus Disclosures for Foreign Funds 
      A7.1 Shari'a approval process statement CIR A7.2

      Annexure B
      CIR TRANSITION MAP

      From current CIR to proposed CIR
      Current Rules Proposed CIR
      Application of the CIR module 
      1.1–1.2 Application, Interpretation 1.1–1.2
      Overview 
      2.1–2.2 General, Overview of module 1.3
      Arrangements amounting to collective investment 
      3.1 Definition of Collective Investment Fund 2.2
      Arrangements not constituting a fund 
      4.1 Application 2.1
      4.2 Prescribed arrangements 2.3
      Constitution 
      5.1–5.3 Application, Instrument constituting the fund, Name of the fund 5.1–5.3
      5.4 Table of contents App4
      5.5 Alterations to the constitution 5.4
      Operation of the fund 
      6.1–6.2 Application, General management duties 6.1–6.2
      6.3.1 Duties in relation to fund property 6.3.1, 7.3.1
      6.3.2 GLO
      - 6.3.2
      6.4–6.12 Conflict of interest, Valuation of fund, Determination of single price, Issue and redemption of Public Fund Units, Unitholder register, Meetings of governing body and unitholders, Approvals and notifications, Maintenance of records, Capital 6.4–6.12
      Delegation and Outsourcing 
      7.1–7.2 Application, General 7.1–7.2
      7.3–7.4 Delegation of activities by operator and the trustee, Approval of proposed delegation 7.3–7.4, A1.2
      7.5–7.7 Outsourcing of functions, Systems and controls, Review 7.5–7.7
      Accounting Standards 
      8.1–8.3 Application, Accounting standards for funds, Accounting records 8.1–8.3
      Periodic Reports 
      9.1–9.9 Application, Annual and interim reports, Interim report, Contents of the annual report, Operator's report, Comparative table, Oversight report, Report of the auditor, Annual report table 9.1–9.9
      Charges and expenses 
      10.1–10.6 Application, Charges, levies and payments, Remuneration and reimbursement expenses, Promotional payments, performance fees, and set up costs, Allocation of payments to capital or income, Payments of liabilities on transfer of assets 10.1–10.6
      Responsibility for Prospectus 
      11.1–11.4 Application, Prescribed persons, Exceptions from liability, Experts 11.1–11.4
      Auditors 
      12.1–12.4 Application, Appointment and termination of auditors, Co-operation with auditors, Function of the auditor 12.1–12.4
      Specialist Funds 
      13.1–13.2 Islamic funds, Fund of funds 13.1–13.2
      13.3.1–13.3.3 Feeder funds 13.3.1–13.3.3
      13.3.4 13.3.2
      13.3.5 13.3.4
      13.4 Private equity funds 13.4
      13.5.1–13.5.4 Property funds 13.5.1–13.5.4
      13.5.5 15.7.3
      13.5.6 –13.5.30 13.5.6 –13.5.30
      13.6 Hedge funds 13.6
      Registration of Public Funds 
      14.1–14.2 Application, the application for registration 14.1–14.2
      14.3.1–14.3.2 Requirements for registration 14.3.1–14.3.2
      14.3.3 7.4.4
      14.4–14.7 Rejection of an application, Withdrawal of registration, Reinstatement 14.4–14.7
      Public Fund Prospectus 
      15.1 Application 15.1
      15.2.1 Drawing up and availability of prospectus 15.2.1
      15.2.2 15.2.3–15.2.5
      15.2.3 15.2.2
      15.3 Drawing up a prospectus — mandatory statement 15.3
      15.4 Contents of a prospectus App6
      15.5–15.9 Drawing up a prospectus for Islamic funds,
      Drawing up a prospectus for a feeder fund,
      Drawing up a prospectus for a property fund,
      Drawing up a prospectus for a private equity fund,
      Drawing up a prospectus for a hedge fund
      15.5–15.9
      Investment and Borrowing Powers 
      16.1–16.7 16.1–16.7
      Oversight Arrangements 
      17.1–17.2 Application, General 17.1–17.2
      17.3.1–17.3.2 Permitted arrangements 17.3.1–17.3.2
      17.3.3 17.3.2(3), 17.3.5
      17.3.4 17.3.4–17.3.5
      17.4–17.7 General oversight duties, Proceedings, Principles and disclosure of interests, Management systems and controls 17.4–17.7
      17.8 Eligible custodians -
      17.9–17.11 Criteria for appointment of individuals, Persons appointed to oversee, Record keeping 17.9–17.11
      Private Funds 
      18.1–18.3 Application, Notification, Criteria to be classified as a private fund 18.1–18.3
      18.4 Umbrella funds 18.5
      18.5 Winding up -
      Private Fund Prospectus 
      19.1 Application 19.1
      19.2.1 Drawing up and availability of a short form prospectus 19.2.1
      19.2.2 19.2.3–19.2.5
      19.2.3 19.2.2
      19.3–19.9 Drawing up a prospectus — mandatory statement, Contents of a short form prospectus, Drawing up a prospectus for Islamic funds, Drawing up a prospectus for a feeder fund, Drawing up a prospectus for a property fund, Drawing up a prospectus for a private equity fund, Drawing up a prospectus for a hedge fund 19.3–19.9
      Suspension and Termination 
      20.1–20.5 Application, Suspension of dealings, Winding up a fund, Funds that are not commercially viable, Transfer schemes 20.1–20.5
      Fees 
      21 (Note that this chapter will be repealed from 1 December 2007) -
      Appeals 
      22 (Guidance only) -
      App 1 — Service Level Agreements 
      A1.1 Application A1.1
      A1.2.1 Mandatory provisions A1.2.1
      A1.2.2 A1.3.1
      A1.2.3 A1.3.2
      A1.2.4 A1.2.1(3)
      App2 — Approvals and Notifications 
      A2.1–A2.3 Fundamental Change requiring prior approval by unitholder meeting, Significant change requiring pre-event notification to the unitholders, Pre-event or post-event notifiable changes to unitholders A2.1–A2.3
      App3 — Guidance on Asset Valuation and Pricing 
      App3 (Guidance only) App3
      App4 — Fees 
      App4 (Note that this appendix will be repealed from 1 December 2007. Also see CIR 5.4 above.) -
      App5 — Guidance on Fitness and Propriety 
      App5 (Guidance only) App5
      App6 — Additional Prospectus Disclosure for Islamic Funds 
      A6.1 Shari'a approval process statement A7.1
      From current COB to proposed CIR
      Conduct of Investment Business — Responsible Conduct 
      - CIR 3.1
      COB 6.8.1–6.8.3 Marketing and selling units of a domestic fund CIR 3.2
      COB 6.8.4 CIR 3.3.1
      COB 6.8.5–6.8.6 CIR 18.4
      COB 6.8.7 CIR 3.8
      COB 6.9 Marketing and selling units of a foreign fund CIR 3.4–3.7
      COB 6.10 Record keeping CIR 3.9
      Fund Administrators 
      COB 19.1–19.2 Application, Compliance with the AML Rules CIR 4.1–4.2
      COB 19.3 Compliance with the CIR Rules -
      COB 19.4 Client money and assets CIR 4.3, A1.4
      COB 19.5 Service level agreements CIR A1.2.1
      COB 19.6 Record keeping CIR 4.5
      App7 — Additional Prospectus Disclosures for Foreign Funds 
      COB A7.1 Shari'a approval process statement CIR A7.2

      Click here to download this Consultation Paper in PDF format.

      Appendix 1 — Draft Collective Investment Rules. PDF format
      Appendix 2 — Draft Conduct of Business Module. PDF format
      Appendix 3 — Proposed Amendments to GEN. PDF format
      Appendix 4 — Proposed Amendments to PIB. PDF format
      Appendix 5 — Proposed Amendments to PIN. PDF format
      Appendix 6 — Proposed Amendments to ISF. PDF format
      Appendix 7 — Proposed Amendments to OSR. PDF format
      Appendix 8 — Proposed Amendments to GLO. PDF format

    • Consultation Paper No. 51 Proposals Relating to Offers of Securities from the DIFC

      Click here to download this Consultation Paper in PDF format.

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comments on the DFSA's proposals to amend OSR Rule 2.7, in respect to Offers from the DIFC. In summary the proposed amendments will:
      a. require Offerors to advise the DFSA (within a prescribed time period) of details of Offers that are made, rather than those intended to be made; and
      b. require Offerors to insert a disclaimer on the Offer document which states that the document has not been reviewed or approved by the DFSA.
      Guidance has also been added to clarify the types of Offers the DFSA needs to be advised of and the nature of information such advice should include.

      Who should read this paper?

      2. The proposals in this paper would be of primary interest to Persons who make or intend to make an Offer of Securities from the DIFC, and their advisers.
      3. The Offered Securities Rules do not apply to a Person in relation to an Offer of a Unit or any right of interest in a Unit. Such offers are not covered by this paper and are dealt with under the Collective Investment Law and Collective Investment Rules.

      How is this paper structured?

      4. In this paper, we set out:
      (a) defined terms in paragraph 7;
      (b) the purpose of OSR Rule 2.7 in paragraphs 8 to 10;
      (c) current limitations of OSR Rule 2.7 in paragraphs 11 to 13; and
      (d) proposed amendments to OSR Rule 2.7 in paragraphs 14 to 19 and Annex A.

      How to provide comments?

      5. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      6. The deadline for providing comments on these proposals is 8th August 2007. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to make the necessary changes to the OSR Module of the DFSA Rulebook. However, because the changes recommended in this paper are still proposals, you should not act on them until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:
      Roberta Julfar
      Legal Counsel
      DFSA
      PO Box 75850
      Dubai, UAE

      or e-mailed to: rjulfar@dfsa.ae

      Definitions

      7. The terms used in this paper have the same meaning as in the Rulebook Glossary, unless otherwise stated. For convenience of reference, in this paper:
      (a) "Exempt Offer" means an Offer prescribed under Article 14 (2) of the Markets Law 2004 and further prescribed under OSR Rule 2.4;
      (b) "Offer" means an offer of Securities falling within Article 13 of the Markets Law 2004;
      (c) "Offeror" means a Person who makes an Offer of Securities;
      (d) "OSR" means the Offered Securities Rules Module of the DFSA Rulebook;
      (e) "Person" means any natural person, Body Corporate or body unincorporated, including a legal person, company, Partnership, unincorporated association, government or state;
      (f) "Personal Exempt Offer" means an Exempt Offer of a kind specified in OSR Rule 2.4.1 (2);
      (g) "Prospectus Offer" means an Offer of Securities made in circumstances where a Prospectus has been filed with the DFSA and published; and
      (h) "Security" means:
      i. Shares, Debentures, Warrants, Certificates, Units or any right to or interest in any such Investment but not a right to or interest in a Derivative; and
      ii. Designated Investments.

      Purpose of OSR Rule 2.7

      8. The main objective of OSR Rule 2.7 is to ensure the continuance of the high integrity and reputation of the DIFC. The Rule does this by providing the DFSA with regulatory recourse against Persons who make Offers of Securities from the DIFC, in circumstances where the Person making the Offer does not comply with the legislation in the jurisdiction where the Offer is received.
      9. Currently OSR Rule 2.7 reads as follows:

      2.7 Offers from the DIFC

      2.7.1 A Person intending to make an Offer of Securities from the DIFC must:
      (a) advise the DFSA in writing of the nature of the Offer and the jurisdiction in which the Offer is to be made; and
      (b) comply with any initial and ongoing obligations that are applicable in that jurisdiction in relation to the Offer of Securities.
      10. In the absence of OSR Rule 2.7, the DFSA would be unaware of Persons making Offers of Securities from the DIFC. Such a constraint may inhibit the ability of the DFSA to effectively carry out its regulatory responsibilities and subsequently impact upon the integrity and reputation of the DIFC.

      Current limitations of OSR Rule 2.7

      11. Existing OSR Rule 2.7.1 (a) facilitates the collection of information relating to intended Offers of Securities from the DIFC. There is no requirement for the DFSA to be notified of Offers of Securities from the DIFC that are in fact made.
      12. The requirement under existing OSR Rule 2.7.1 (b) for an Offeror to comply with the regulatory obligations in the jurisdiction in which the Offer is made, can only be satisfied when there is an Offer rather than merely an intention to make an Offer. In the absence of confirmation by the Offeror to the DFSA that the Offer has taken place, the DFSA is unable to determine whether the obligation under existing OSR Rule 2.7.1 (b) has arisen.
      13. In practice, it is only once an Offer is made that the obligation under existing OSR Rule 2.7.1 (b) becomes relevant.

      Proposed amendments to OSR Rule 2.7

      14. The proposed amendments to OSR Rule 2.7 are set out in Annex A. In summary the proposed amendments:
      (a) require Offerors to advise the DFSA (within a prescribed time period) of details of Offers that are made (rather than those intended to be made); and
      (b) require Offerors to insert a disclaimer on the Offer document which states that the document has not been reviewed or approved by the DFSA.
      Guidance has also been added to clarify the types of Offers the DFSA needs to be advised of and the nature of information such advice should include.
      15. The proposed amendment to OSR Rule 2.7.1 ensures that actual Offers, rather than intended Offers, made from the DIFC are notified to the DFSA. This will assist in reducing the regulatory requirements on Offerors.
      16. In addition, a time limit of 5 business days following the making of an Offer for an Offeror to notify the DFSA has been inserted. The aim of the inclusion of such a period is to make the time period definitive.
      17. The proposed new OSR Rule 2.7.1 (1) (c) requires Offerors to provide in or by attachment to the Offer document a prominent disclaimer, stating that the Offer document has not been reviewed or approved by the DFSA. This is consistent with the approach taken by the DFSA for marketing and selling Units of a Foreign Fund (another activity not regulated by the DFSA) under COB Rule 6.9.
      18. The proposed new OSR Rule 2.7.1 (2) will clarify that any Offers from the DIFC, that fall within the definition of Personal Exempt Offers will not be subject to the notification requirement in OSR Rule 2.7.1 (1) (a). Personal Exempt Offers are a special and very limited category of Exempt Offer. Such Offers are made to no more than 50 Offerees in the DIFC in any 12 month period, and the total consideration payable for the Offer of Securities offered does not exceed US$1 million (refer to OSR Rule 2.4.1 (2)).
      19. The proposed Guidance clarifies:
      (a) that the application of OSR Rule 2.7.1 (1) (a) includes Exempt and Prospectus Offers of Securities from the DIFC;
      (b) that a Person located in the DIFC (such as an Issuer incorporated in the DIFC) will be subject to the notification obligation under OSR Rule 2.7.1 (1) (a) even if the Offer of Securities is to be made through its agent located outside the DIFC; and
      (c) the type of information that should be included in the notification to the DFSA under OSR Rule 2.7.1 (1) (a).

      Click here to download this Consultation Paper in PDF format.

      Annex A — Proposed Amendments to the Offered Securities Rules. PDF format

    • Consultation Paper No. 50 Proposed Hedge Fund Code of Practice

      Click here to download this Consultation Paper in PDF format.

      Why are we issuing this paper?

      1. When the Collective Investment Law 2006 and the Collective Investment Rules (i.e. the CIF regime) came into effect in April 2006, the DFSA indicated that it expects Operators of Hedge Funds to have proper regard to guidance and best practice standards issued by the DFSA and leading industry bodies. The DFSA also announced that it will develop a Code of Practice for Hedge Funds in consultation with the industry after the CIF regime has been in operation for a year. This Consultation Paper seeks public comment on the proposed Code of Practice (the Code) for operating Hedge Funds in the DIFC.
      2. Hedge Funds often have significant assets under management. They have been particularly attractive to institutional investors seeking to enhance their returns through sophisticated and innovative investment strategies. Where properly managed, Hedge Funds can contribute to the efficiency and liquidity of global capital markets. Conversely, where not properly managed, Hedge Funds can have a significant adverse impact not only on investors but also on market integrity and market confidence. These factors and the collapses of some large Hedge Funds recently have highlighted the need for increased regulatory attention on Hedge Fund operations. In line with the DFSA’s risk based approach to regulation, we have adopted a principles based approach by setting out best practice standards, instead of prescriptive rules, to promote certainty without removing flexibility.

      Who should read this paper?

      3. These proposals will be of primary interest to Authorised Firms operating or proposing to operate Public or Private Hedge Funds in the DIFC and also to their third party service providers such as persons undertaking investment management, asset valuation, prime broking and other services for Hedge Funds. We also think that these proposals will be of significant interest to the wider hedge fund community, especially coming in the wake of the recent initiatives such as the projects undertaken by the European hedge funds industry and the US President’s Working Group on Financial Markets for developing best practice standards for hedge funds.

      How is this paper structured?

      4. The Code sets out best practice standards under 9 Principles. Where we have used capitalised terms, they are defined terms set out in the GLO Module of the DFSA Rulebook. We have included some of those relevant definitions in Table A of the draft Code. We have also included in paragraph 10 a brief overview of the CIF regime to promote a better understanding of the regulatory framework on which the proposals are built.

      How to provide comments?

      5. We have identified a number of specific issues relating to the proposed Principles on which we seek your comments. You may also comment on any other related issues or aspects.
      6. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      7. The deadline for providing comments on these proposals is 4 October 2007. During the consultation period, we propose to undertake discussion with Authorised Firms and focus groups. If you intend to participate in these discussions, you should contact the person specified below as soon as possible.
      8. Once we obtain your comments, we will consider if any further changes or refinements are required to this Code. At the time of adopting the Code, we will remove the Guidance relating to Hedge Funds under CIR Rule 13.6.4, as the Code covers in more detail the matters which are addressed in that Guidance.
      9. As the Code contains only proposals at this stage, they should not be acted upon as settled policy. We will notify you by information on the DFSA website when the Code is finalised and adopted.

      Comments and interest to participate in consultation should be directed to:

      Mrs Dhammika Amukotuwa
      Legal Counsel — Policy and Legal Services
      DFSA
      Telephone: 971 (0)4 362 1509
      PO Box 75850
      Dubai, UAE

      or e-mailed to: damukotuwa@dfsa.ae

      An overview of the CIF regime

      10. Some of the key features of the CIF regime (CIF Law and CIR Module) which apply to Hedge Funds, being Collective Investment Funds ("CIF"), include the obligations that the Operator of the Fund must:
      (a) be legally accountable to investors of the Fund for the operation and proper management of the Fund. In doing so, the Operator must avoid conflicts of interests and act in the best interests of the investors. These underlying obligations apply to the Operator even if it uses third party service providers such as fund administrators, investment managers and custodians;
      (b) be an Authorised Firm whose licence authorises it to Operate a CIF. It may also need additional authorisations for Financial Services it may conduct in operating the Fund, such as Fund Administration;
      (c) appoint an Eligible Custodian or a Trustee to hold the Fund property;
      (d) appoint a registered auditor to audit the Fund;
      (e) not offer or market the Units of the Fund to Persons other than Qualified Investors (i.e. high net worth individuals or wholesale investors who meet the definition of Client in COB 3.3.2) and ensure, in the case of Private Funds, no more than 100 Investors participate in the Fund and they do so by private placement;
      (f) register the Fund with the DFSA, if it is a Public Fund and, give the DFSA 14 days prior notice before the issue of Units of the Fund, if it is a Private Fund;
      (g) comply with the relevant Prospectus and disclosure requirements, depending on whether it is a Public Fund or Private Fund; and
      (h) if it is a Public Fund, have independent oversight arrangements that meet the specified standards.

      Why have we adopted a principles based approach for best practice standards?

      11. Within the legal framework provided by the CIF regime as outlined above, we have adopted a principles based approach to developing best practice standards for Hedge Funds, instead of a more detailed and prescriptive approach. This approach is designed to promote certainty without removing the flexibility for industry participants to find alternative means to achieve similar results. However, where an Operator adopts the best practice standards in the Code, it will provide strong evidence to support compliance with the relevant requirements in the CIF regime to which the standards relate.

      Issue for consideration

      Does the industry prefer a more prescriptive approach, at least in some areas of Hedge Fund operations covered by the Code? If so, why?

      What is the rationale for choosing these particular Principles?

      12. The nine Principles under which we propose best practice standards are designed to address a number of risks that are more specific to the operation of Hedge Funds, than to other types of Collective Investment Funds. We have identified the rationale for addressing the relevant risks under each Principle. In general, these principles flow from the overarching obligation of Operators of Hedge Funds to have adequate systems and controls to address risks inherent in the operation of a Hedge Fund. In doing so, Operators are required to have due regard to the nature of strategies and investment processes employed by the Fund and the roles played by various service providers involved in the operation of the Fund, such as fund administrators and prime brokers (see CIR Rule 13.6.4).

      Issue for consideration

      Are there any other significant areas of risks relating to Hedge Funds which should be addressed in the Code? If so, what are they and how should they be addressed?

      MANAGING OPERATIONAL RISK

      Resources and skills

      13. Principle 1 and the associated best practice standards (see paragraphs 3–6) are designed to address the risk of lack or loss of relevant expertise at the Operator and third party service provider level that can seriously impair the Operator’s ability to effectively implement investment strategies of a Hedge Fund. Following broad measures that can generally be adopted to mitigate this risk, we have provided detailed guidance relating to prime brokers.

      Issue for consideration

      Are there any other key aspects or issues relating to resources and skills that are relevant to Hedge Fund operations which should be dealt with by best practice standards? If so, what are they and how should they be addressed?

      Do you agree that prime broker issues should be addressed as a skills and resources issue? If not, how should they be addressed?

      Investment strategy and process

      14. Principle 2 and the associated best practice standards focus on measures that can be adopted by Operators of Hedge Funds to ensure that the investment processes adopted by them are robust and flexible and are best suited to the investment objectives and risk profile of the investment strategies of the Fund. See paragraphs 8 and 9.
      15. Principle 3 and associated best practice standards are designed to address trading related risks such as price overrides and failed trades. Hedge Funds are particularly vulnerable to these risks due to high volume trading and the use of multiple third party service providers often located in remote locations, which make it harder to assess the effect of such overrides and failed trades on the Fund’s overall exposures. See paragraphs 10–12.

      Issue for consideration

      Are there any other issues arising in relation to investment and trading processes of Hedge Fund operations which should be addressed by best practice standards? If so, what are they, and how should they be addressed?

      Back-office procedures

      16. Principle 4 and associated best practice standards deal with risks arising from backlogs in trade confirmations. These assume a special significance in Hedge Fund operations which involve high volume trades as backlogs can make it harder to ascertain and manage exposures to market and credit risks, by both the Funds and the counterparties involved. See paragraphs 13–15.

      Issue for consideration

      Are there any other back office functions related issues other than backlogs in trade confirmations which need to be addressed in the Code? If so, what are they, and what best practice standards are appropriate to address them?

      PORTFOLIO RISK MANAGEMENT

      17. Principle 5 and associated best practice standards deal with portfolio risks. Portfolio risks to which Hedge Funds are exposed (such as market, liquidity and counterparty risks) are quite distinct from the operational risks addressed under the previous principles. Because of the extensive use of leverage and derivatives in the investment strategies employed by Hedge Funds, the impact of these risks can be rapidly magnified well beyond the impact such risks can generally have on conventional Funds, and hence the need for best practice standards to mitigate the effect of such risks on Hedge Funds. See paragraphs 16–23.

      Issue for consideration

      Are there other portfolio risks that are not addressed by the proposed best practice standards proposed? If so, what are they and what best practice standards are appropriate to address them?

      FUND VALUATIONS

      18. Principle 6 and associated best practice standards aim to mitigate risks to Fund valuation processes. This is quite a high risk area for Hedge Fund operations as they often invest in hard to value complex financial instruments, which rely on mark to model, rather than mark to market valuations. Absence of adequate processes and mechanisms to ensure proper valuation of the Fund assets can result in price distortions that seriously mar investor confidence and affect market stability. Due to these concerns, the International Organisation of Securities Regulators (IOSCO) has in March 2007 published for public consultation a set of draft principles for valuation of Hedge Fund portfolios. Although the consultation period on these proposals has just ended and hence the final principles are not yet settled, given the DFSA’s commitment to meet international best practice standards, we have taken into account those proposals when developing our proposals (see paragraphs 24 and 25).

      Issue for consideration

      Are there other measures that can be adopted by Operators of Hedge Funds to ensure more accurate valuations? If so, what are they?

      Are there other measures that can be adopted by an Operator of a Hedge Fund to ensure integrity and reliability of valuation inputs which are provided or influenced by the investment manager? If so, what are they?

      CONFLICTS OF INTERESTS SUCH AS SIDE LETTER ARRANGEMENTS

      19. Principle 7 and associated best practice standards deal with conflicts of interests such as those that may arise from side letter arrangements. This remain a contentious issue as it seems to be a prevalent practice among Operators of Hedge Funds to enter into side letter arrangements to provide undisclosed benefits and concessions to only some investors. We are of the view that this practice would generally amount to a breach of some of the Operator’s fundamental statutory and fiduciary obligations, particularly those relating to treating investors of the same class equally and investors of different classes (as between classes) fairly. However, we recognise that in very limited circumstances, an Operator may be able have side letter arrangements without breaching these obligations. These circumstances encompass side letter arrangements under which additional periodic reports are made available to all investors alike, with adequate disclosure of the terms and conditions including any applicable fees. See paragraphs 26 and 27.

      Issue for consideration

      Should the DFSA adopt a more stringent approach to the issue of side letters? If so, why?

      Are there other types of conflicts of interests that should be addressed through best practice standards? If so, what are they, and how should they be addressed?
      20. Principle 8 and associated best practice standards deal with issues relating to possible abuses of market sensitive information. While not unique to Hedge Fund operations, the potential for abuse of such information is higher in Hedge Funds due to high volume trading, close relationships with counterparties and performance based remuneration involved. See paragraph 28.

      Issue for consideration

      Should the issues relating to market abuses be left to be dealt with through the applicable legal requirements, rather than any additional best practice standards as proposed? Why do you think so?

      FUND OF HEDGE FUNDS INVESTMENTS

      21. Principle 9 and the associated best practice standards focus on risks that arise from the use of a Fund of Funds structure by Operators of Hedge Funds. Implicit in an investor’s agreement to invest in a Fund of Hedge Funds is the reliance that the Operator will have sufficient skills and resources to ensure on-going suitability of the underlying Hedge Funds to justify additional fees resulting from such structures (see paragraphs 29–31).

      Issue for consideration

      Are there other risks relating to the use of a Fund of Hedge funds structure which are not addressed through the proposed best practice standards? If so, what are they, and how should they be addressed?

      Click here to download this Consultation Paper in PDF format.

      Annex A — Hedge Fund Code of Practice. PDF format
      Annex B — Definitions of some terms used in the Hedge Fund Code. PDF format

    • Consultation Paper No. 49 Proposals Relating to Fees

      Click here to download this Consultation Paper in PDF format.

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comments on the DFSA's proposals to amend its fees regime. A number of detailed changes are proposed, to take effect from 1 December 2007 onwards. In addition to the substantive changes, the fees provisions which currently reside in several Modules of the DFSA Rulebook are to be brought together in a new single module namely the Fees Rules Module (FER).

      Who should read this paper?

      2. The proposals in this paper will be of primary interest to Authorised Firms, Authorised Market Institutions, Ancillary Service Providers, Recognised Members, Recognised Bodies, Registered Auditors and those seeking, or considering seeking, such status. The proposal will also be of interest to a Bidder in respect of a takeover and a Person filing a Prospectus with the DFSA. They will also be of interest to Reporting Entities, though no changes are currently proposed in the fees payable by those entities.

      How is this paper structured?

      3. In this paper, we set out:
      (a) definitions — paragraph 7
      (b) background to the DFSA's fees regime — paragraphs 8–10;
      (c) proposals relating to Authorised Firms, and applicants for authorisation — paragraphs 11–18;
      (d) proposals relating to Authorised Market Institutions, and applicants for authorisation — paragraph 19
      (e) proposals relating to registered Auditors, and applicants for registration — paragraph 20;
      (f) proposals relating to Ancillary Service Providers, and applicants for registration — paragraph 21;
      (g) proposals relating to Recognised Bodies, and applicants for Recognition — paragraph 22;
      (h) proposals relating to Recognised Members, and applicants for Recognition — paragraph 23;
      (i) proposals relating to other fees — paragraph 24;
      (j) proposals relating to currency and payment — paragraph 25;
      (k) proposals relating to commencement — paragraph 26 and 27.
      Annex A sets out a comparison of the current against the proposed fees, and the proposed Rule amendments are in Annex B with consequential Rule amendments in Annex C.

      How to provide comments?

      4. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      5. The deadline for providing comments on these proposals is 2 August 2007. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.
      6. It is proposed that the final changes will be enacted at the DFSA Board's meeting on 3 September 2007. It is therefore important that responses are received by the deadline mentioned above.

      Comments to be addressed to:

      Peter Casey

      Director, Policy
      DFSA
      PO Box 75850
      Dubai, UAE

      or e-mailed to: pcasey@dfsa.ae

      Definitions

      7. In this paper, generally, capitalised terms are defined in the GLO Module of the DFSA Rulebook. For convenience, the following terms have the meaning set out below:
      (a) Ancillary Service Provider — A Person who is registered by the DFSA in relation to the carrying on of one or more Ancillary Services.
      (b) Annual Audited Expenditure — The expenditure calculated in accordance with PIB Rule 2.5.2.
      (c) Auditor — A partnership or company that is registered by the DFSA to provide audit services to Authorised Firms and Authorised Market Institutions that are Domestic Firms or to Domestic Funds. References to "Auditor" include "applicant" where relevant.
      (d) Authorised Firm — A Person, other than an Authorised Market Institution, who holds a Licence.
      (e) Authorised Individuals — An individual who has been authorised by the DFSA to carry out one or more Licensed Functions.
      (f) Authorised Market Institution — A Person who is Licensed by the DFSA in relation to the carrying on either or both of the Financial Services prescribed in GEN Rule 2.17.1 and GEN Rule 2.18.1.
      (g) Authorised Person — An Authorised Firm or an Authorised Market Institution.
      (h) Bidder — includes, but is not limited to, companies wherever incorporated and individuals wherever resident who or which make a Bid under TKO.
      (i) Recognised Body — A Person who holds a Recognition Notice, issued to it pursuant to Article 61 of the Regulatory Law 2004, recognising it as a Recognised Body.
      (j) Recognised Member — A Person who holds a Recognition Notice, issued to that Person pursuant to Article 61 of the Regulatory Law 2004, recognising it as a Recognised Member.
      (k) Takeover — has the meaning given in the Markets Law 2004.

      Background to the DFSA's fees regime

      8. The fee policy of the DFSA aims to embody the following principles:
      •   partial cost recovery;
      •   the cost of regulation to the market should be proportionate, transparent and flexible;
      •   fees should not be a disincentive to locate in the DIFC, as opposed to broadly comparable centres;
      •   fees should not provide any perverse behavioural incentives; and
      •   fees should be efficient to be administered.
      9. There are currently different fee structures for different DFSA activities. For entities with which we have a continuing regulatory relationship, we generally levy an authorisation fee (or equivalent) and an annual supervision fee (or equivalent), with limited transaction fees for particularly large regulatory transactions (e.g. a major change in the scope of a licence). For entities with which we do not have such a relationship (e.g. Reporting Entities) there is greater reliance on transaction charges, for example for considering takeovers. We see no reason at present to propose a fundamental change to this approach.
      10. The current and proposed fees are set out in Annex A, and explained in the paragraphs that follow.

      Authorised Firms

      11. Authorised Firms currently pay an annual supervision fee which contains three components. The first (the base component) is based on the Financial Services for which the firm is licensed, the second on the number of Authorised Individuals in the firm, and the third on turnover. The total fee is capped at $150,000. The application fee is made up of the first two of these components only.
      12. In 2006, the DFSA abolished the Licensed Representatives element of its Authorised Individuals regime. This means that the number of Authorised Individuals does not vary between firms as much as before and no longer functions as an effective proxy for conduct of business supervision. We therefore propose to simplify the regime by removing it.
      13. The current turnover metric has posed problems in practice, especially for firms where income deriving from DIFC-originated business is booked outside the DIFC. We propose to replace this by expenditure, defined in the same way as in calculating our expenditure based capital requirement. For DFSA incorporated firms this will be the whole-firm expenditure. For firms incorporated elsewhere, it will be the expenditure in the DIFC. This information is already collected, and audited, as part of the annual return.
      14. At present, firms that have been authorised but have not yet submitted an annual return pay a turnover component based on figures in the most recent business plan submitted to the DFSA. This has also posed problems in practice, and we therefore propose to remove this provision. This means that firms which have not yet submitted an annual return will pay no turnover component.
      15. To offset the loss of income from this proposal and the abolition of the Authorised Individual component, we propose to increase the general level of base components. We have also introduced a new charging band for some firms in asset management, reflecting the levels of supervision they involve. We have, however, reduced the base component for insurance companies.
      16. The maximum annual fee is currently capped at $150,000. There are no firms that currently benefit from this cap, and we are proposing that it be removed.
      17. Application fees for Authorised Firms currently consist of the base component plus the Authorised Individuals component. In future it is proposed that they should consist solely of the base component.
      18. Where an Authorised Firm seeks to add new Financial Services to its Licence, a charge will be made on the same basis as now, when the new Financial Services will take the firm into a higher charging band.

      Authorised Market Institutions

      19. No change is proposed to the present regime, which involves flat rate fees based on the Financial Services involved. The DFSA may, however, consider at a later stage the possibility of introducing transaction based fees in respect of DIFC exchanges.

      Registered Auditors

      20. The new registered Auditors regime involves a programme of assessments of registered Auditors carried out by an external party on DFSA's behalf and at DFSA's expense. As a result, we propose to increase the annual fee for a registered Auditor to $6,000. On the other hand, we consider that the initial registration fee can be reduced to $4,000. We also make new proposals for the first annual fee to be reduced where registration is granted in the last quarter of the year.

      Ancillary Service Providers

      21. No change is proposed except that Ancillary Service Providers who are also registered Auditors will have to pay only the registered Auditors annual fee.

      Recognised Bodies

      22. Recognised Bodies are non-DIFC exchanges who offer their services electronically to firms within the Centre. At present we charge an initial fee of $10,000 and no annual fee. This is out of line with practice elsewhere and may create a perverse incentive for firms to provide their services from outside the Centre. It is proposed to raise the initial fee to $25,000 and charge an annual fee of $10,000. It is also proposed to reduce the first annual fee when Recognition is granted in the last quarter of a year.

      Recognised Members

      23. Recognised Members are firms who trade on DIFC exchanges from outside the Centre. At present, they pay no fees. It is proposed that they should be charged fees equivalent to those for Ancillary Service Providers, that is, an application fee of $2,000 and an annual fee of $1,000.

      Other fees

      24. No change is proposed to other DFSA fees, specifically those relating to Collective Investment Funds, the filing of Prospectus documents and Takeovers.

      Currency and Payment method

      25. The DFSA is proposing to clarify by way of a Rule that all fees are payable only in United States Dollars and by bank transfer.

      Commencement Date

      26. The FER module is due to come into force on 1 December 2007. The effect of the coming into force of the Rules on that date is:
      (a) All applications filed on or after 1 December will be subject to the new fee structure in respect of application fees and, thereafter, in respect of initial and subsequent annual fees.
      (b) All applications filed prior to 1 December will be subject to the current application fees set out in the relevant modules. However, the initial annual fee to be charged will depend on whether Registration, Authorisation or Recognition is granted prior to 1 December in which case the current fees remain applicable or if the Registration, Authorisation or Recognition is granted on or after 1 December then the new fee structure applies in respect of initial annual fees and subsequent annual fees.
      27. In paragraph 26, "applications" include applications to extend the scope of a Licence, to wind up a Fund, upon filing a prospectus and in respect of bid documents.

      Click here to download this Consultation Paper in PDF format.

      Annex A — Table of DFSA Fees Current and Proposed PDF format
      Annex B — Proposed new module FER PDF format
      Annex C — Proposed Consequential Amendments to CIR, REC, ASP, OSR, GEN, AMI and TKO Modules PDF format

    • Consultation Paper No. 48 Proposals to Facilitate Certain Types of Advising and Arranging

      Click here to download this Consultation Paper in PDF format.

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comment on the DFSA's proposal to provide a greater degree of flexibility for Authorised Firms providing generic advice or making mere referrals as part of conducting Investment Business by removing:
      (a) the detailed analysis and verification requirements for establishing whether a Person meets the Client test in COB Rule 3.2.2;
      (b) the suitability requirements under COB Rule 6.2.1; and
      (c) the client agreement requirements under COB Rule 8.1.1.
      2. These proposals reflect the DFSA's risk based approach to regulation.

      Who should read this paper?

      3. The proposals in this Paper would be of primary interest to Authorised Firms conducting the Financial Services of Advising on Financial Products or Credit or Arranging Credit or Deals in Investments. It will also assist those Persons proposing to conduct such Financial Services.

      How to provide comments

      4. All comments should be provided to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish including on its website any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      5. The deadline for providing comments on this proposal is 5 August 2007. Once we receive your comments, we will consider if any further refinements are required to this proposal. We will then proceed to enact the changes to the DFSA's Rulebook. Because these are still proposals, you should not act on them until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:
      Lawrence Paramasivam
      Legal Counsel
      DFSA
      PO Box 75850
      Dubai, UAE

      or e-mailed to: lparamasivam@dfsa.ae

      Defined Terms

      6. Where we have used capitalised terms, they are generally defined terms in the Glossary Module of the DFSA Rulebook. For convenience of reference, in this Paper:
      (a) "ASP" means the Ancillary Service Providers Module of the DFSA Rulebook;
      (b) "COB" means the Conduct of Business Module of the DFSA Rulebook;
      (c) "Financial Services Regulator" means a regulator of financial services activities established in a jurisdiction other than the DIFC.
      (d) "Firm" means an Authorised Firm;
      (e) "GEN" means the General Module of the DFSA Rulebook; and
      (f) "Person" includes an natural person, body corporate or body unincorporated, including a legal person, company, partnership, unincorporated association, government or state.

      Background

      7. The activity of generic advice falls within the definition of the Financial Service of Advising on Financial Products or Credit in GEN Rule 2.11.1. It is defined to mean any communication that contains information about a Financial Product or Credit Facility which can reasonably be regarded as intended to influence a Person to make a decision relating to that product or facility, but without containing any advice on the merits of the particular Person entering into a contract relating to that product or facility. A similar concept applies in relation to Insurance Intermediation (GEN Rule 2.19.1), but does not raise the issues dealt with in this paper.
      8. The activity of a mere referral falls within the scope of the Financial Service of Arranging Credit or Deals in Investments in GEN 2.9.1.
      9. The Financial Services of Advising on Financial Products or Credit and Arranging Credit or Deals in Investments in turn fall within the definition of Investment Business. A Firm conducting Investment Business can only do so with a Person who is a Client as defined in COB Rule 3.2.2.
      10. To establish whether a Person meets the Client test, a Firm is required to undertake an analysis and verification process, which is designed to ensure that Firms do not provide Financial Services to Retail Customers, in keeping with the wholesale nature of the DIFC. (See Rules COB 3.2.4 and COB 3.2.5.)
      11. With limited exceptions, under COB Rule 6.2.1, a Firm may only advise a Client on Financial Products or Credit where that advice is suitable for that Client having regard to that Client's investment objectives and risk tolerance and any other requirements or relevant facts about the Client of which the Firm ought reasonably to be aware.
      12. A Firm must also provide a client agreement before conducting Investment Business with a Client (or if impracticable, within a reasonable time after), subject to some limited exceptions. (See COB Rule 8.1.1.)

      Scope of, and the rationale for, the proposals

      13. Firms are encountering difficulty in complying with the Rules mentioned above when giving generic advice. This is because generic advice is often given at a preliminary stage of a professional relationship with a potential customer, for example in a seminar or by giving out a brochure. As a result, an analysis of a Person's assets, financial experience and understanding to participate in financial markets is neither practicable nor cost efficient. Similarly, Firms may give out information brochures on products that contain contact details of product providers to potential customers in seminar and similar contexts. Given that those potential customers are then able to contact the relevant product providers, such activities would constitute arranging as defined in GEN Rule 2.9.1.
      14. The DFSA considers that the requirements for a Firm before giving generic advice to a Person to conduct a detailed analysis and have a verification process, meet suitability requirements and issue a client agreement, are not justified from a cost benefit or risk perspective, because generic advice by its very nature:
      (a) does not contain any advice on the merits of the Person entering into a transaction relating to a particular Financial Product or Credit Facility to warrant a detailed analysis; and
      (b) may often be given at an early stage of the establishment of a formal professional relationship with a potential customer.
      15. Similarly, the DFSA considers that certain types of referral activities do not warrant a detailed analysis and verification process and the issue of a client agreement. The circumstances are that no advice of the kind referred to in GEN Rule 2.11.1(1)(a) or (b) is given to the Person and the referral is to an entity which is subject to adequate regulation (i.e. another Authorised Firm or an entity regulated by another Financial Services Regulator). In these circumstances, there are no suitability based recommendations about Financial Products or Credit to warrant the more detailed analysis otherwise required and also, the Client has the benefit of regulation provided by the DFSA or another Financial Services Regulator when obtaining the products or services from the entity to whom the referral is made.
      16. Therefore, the DFSA proposes that a Firm giving generic advice or providing a mere referral to a Person only need satisfy itself, on reasonable grounds, that the Person appears to be a high net worth individual (i.e. a person who appears to have $1 million or more in liquid assets) or an Undertaking (i.e. a Body Corporate, a Partnership, or an association carrying on a trade or business). However, a Firm providing advice as to the merits of a Person entering into a transaction to buy or sell a particular Financial Product or Credit Facility will be subject to the full analysis, verification, suitability and client agreement requirements under the COB Rules. Similarly, a Firm that proceeds to provide any other Financial Service, such as dealing, will also be subject to the same COB requirements.
      17. The DFSA proposes to make changes to its COB and GLO Rulebooks (set out in Annex A) that will allow Firms giving generic advice, the benefit of not having to:
      (a) undertake a detailed analysis and verification process required under Rules COB 3.2.2 to COB 3.2.6;
      (b) the suitability requirements under COB Rule 6.2.1; and
      (c) provide a client agreement as required under COB Rule 8.1.1.
      18. Furthermore, the DFSA proposes to allow a Firm providing a mere referral from the benefit of not having to comply with Rules COB 3.2.2 to COB 3.2.6 and COB 8.1.1.

      Click here to download this Consultation Paper in PDF format.

      Annex A — Proposed Consequential Amendments to the COB and GLO Modules. PDF format

    • Consultation Paper No. 47 Proposals Relating to Insurance Securitisation

      Click here to download this Consultation Paper in PDF format.

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comments on the DFSA's proposals to introduce a framework for insurance securitisation. The proposals deal with the establishment of Insurance Special Purpose Vehicles (ISPVs) within the DIFC, and also the treatment of securitisations by DIFC authorised insurers. They involve amendments to the Prudential — Insurance Business (PIN), General (GEN), Conduct of Business (COB), and Glossary (GLO) Modules of the DFSA Rulebook, and the introduction of a new form (AUT-ISPV) in the AFN Sourcebook.

      Who should read this paper?

      2. The proposals in this paper would be of primary interest to Persons considering arranging or undertaking insurance securitisation transactions in or from the DIFC.

      How is this paper structured?

      3. In this paper, we set out:
      (a) definitions — paragraph 6;
      (b) proposals relating to Authorised Insurance Special Purpose Vehicles — paragraphs 7–17; and
      (c) proposals relating to the treatment of insurance securitisations by Insurers — paragraph 18.

      How to provide comments?

      4. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      5. The deadline for providing comments on these proposals is 20 June 2007. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:
      Roberta Julfar
      Legislative Counsel
      DFSA
      PO Box 75850
      Dubai, UAE

      or e-mailed to: rjulfar@dfsa.ae

      Definitions

      6. In this paper, generally, capitalised terms are defined in the GLO Module of the DFSA Rulebook. For convenience, the following terms have the meaning set out below:
      (a) "Insurance Special Purpose Vehicle" means an insurer which:
      (i) assumes risks by way of reinsurance; and
      (ii) fully funds its exposures to such risks through the proceeds of a debt issuance or some other financing mechanism where the repayment rights of the providers of such debt or other financing mechanism are subordinated to the insurer's reinsurance obligations;
      (b) "ISPV" means an Insurance Special Purpose Vehicle; and
      (c) "Authorised ISPV" means an ISPV who holds a Licence.

      Proposals relating to ISPVs

      7. An insurance securitisation is a transaction intended to transfer insurance risk to the capital markets. Although various structures are possible, almost all involve the use of a Special Purpose Vehicle (SPV). In a typical insurance securitisation, the SPV is a normal company, or in some jurisdictions a cell of a protected cell company or similar structure. It assumes risk from an insurer through a reinsurance contract, with an associated premium. It transfers this risk to the capital markets, normally through the issue of bonds whose coupon, and sometimes principal, are at risk depending on the claims made against the reinsurance contract.
      8. Regulators commonly require that the SPV in an insurance transaction be fully-funded. This means that its possible liabilities under the reinsurance contract should be capped, and it should always have assets which exceed those liabilities. This requirement is included within our definition of an Insurance Special Purpose Vehicle (ISPV).
      9. Because of the reinsurance contract, an ISPV would be regarded as conducting insurance business in most jurisdictions, and would thus fall to be regulated under the normal insurance regime. There is, however, a general consensus among regulators that this would be disproportionate to the risks. The European Reinsurance Directive makes specific provision for countries to introduce a much simplified regime for ISPVs.
      10. Amongst other jurisdictions some, for example the UK, have decided to adopt explicit provisions for ISPVs in their rules. Others, for example Jersey, deal with proposals on a case by case basis using powers to waive or modify their regimes. We have taken the former approach, since we believe the industry will welcome the legal certainty it offers, especially in our position as a new jurisdiction, but we welcome comment on this point.
      11. Our proposals are set out in Annexes A–E. Readers are reminded that only underlined amendments are relevant for the purposes of this proposal. Text which is not underlined is unchanged and currently in force. No comments are required in relation to text which is not underlined, as it is provided solely to show the legislative amendments in context.
      12. Annex A covers our proposals to amend PIN. In essence, the capital adequacy and reporting regimes of PIN are replaced for an Authorised ISPV, by provisions which require, in substance, that:
      •   the ISPV's assets exceed its liabilities at all times;
      •   these assets be held by or on behalf of the ISPV or the ceding insurer;
      •   its liabilities are capped to no more than its assets;
      •   the rights of those who finance the ISPV are fully subordinated to its reinsurance obligations;
      •   its activities are confined to the ISPV activities for which it was established; and
      •   it maintains a proper risk management system.
      These provisions apply to a Cell of a Protected Cell Company as though it were an Insurer.
      13. Annex B contains amendments to the GEN Module which cut back somewhat the systems and controls requirements of GEN Chapter 5, and also provide for an ISPV to be subject to a similar fees regime to that for a captive insurer. (Note that GEN Chapter 8 is not amended, and an ISPV will therefore still need to submit audited annual accounts.)
      14. Annex C amends the COB Module to disapply entirely COB Part 4, which contains the conduct of business provisions for insurance business.
      15. Annex D sets out new definitions to be included in GLO.
      16. In considering which parts of the DFSA Rulebook should continue to apply, we have recognised that it would be normal for an ISPV to outsource all or most of its management functions. We have assumed that this would be to a professional firm, which if located in the DIFC, would be required to be licensed as an Insurance Manager, and that for such a firm it would not be onerous to comply with other provisions of the Rulebook, so far as they are relevant to the limited activities of an ISPV. However, we welcome comment on the overall weight and shape of the regime, as well as its details.
      17. Annex E contains the proposed new authorisation form AUT-ISPV. Although we are not required to consult on new forms, we are doing so in this case to give an indication of the approach we propose to take to the authorisation of ISPVs. We envisage that ISPVs would have to submit only AUT-ISPV, plus forms in respect of each individual for whom Authorised Individual status is sought. The form provides for independent legal certification of the arrangements surrounding the ISPV. Apart from this, our main considerations at authorisation will be the effective capping of its liabilities, the adequacy of its assets to meet those liabilities, and the fitness and propriety of those associated with it. On this basis we expect to operate a very streamlined authorisation process.

      Proposals relating to the capital treatment of insurance securitisations

      18. It is possible that an Insurer operating in the DIFC will wish to transfer risk through an insurance securitisation. Annex A also contains our proposals to deal with such transactions within our capital adequacy regime. In essence, we have followed the approach proposed by the UK FSA, that we shall deal with any securitisations on a case by case basis, using our waiver/modification powers. This will enable us to consider in each case the effectiveness of the risk transfer and the legal arrangements surrounding the SPV, wherever it is located.

      Click here to download this Consultation Paper in PDF format.

      Annex A — Proposed amendments to PIN PDF format
      Annex B — Proposed amendments to GEN PDF format
      Annex C — Proposed amendments to COB PDF format
      Annex D — Proposed amendments to GLO PDF format
      Annex E — Proposed new Form AUT-ISPV PDF format

    • Consultation Paper No. 46 Proposals to Implement an Electronic Prudential Reporting System

      Download this Consultation Paper in PDF format.

      Purpose of the paper

      1. This paper seeks public comment on the DFSA's proposals to implement an electronic prudential reporting system, along with some minor revisions to the current reporting requirements. The intention behind implementing an electronic prudential reporting system and the revised reporting requirements is to enhance the effectiveness of the DFSA's risk-based supervisory approach, to improve efficiency for Authorised Firms and the DFSA, and improve the availability of aggregate data on the activity levels of Firms in the DIFC.

      Who should read this paper?

      2. The proposals in this paper would be of interest to Authorised Firms which have obligations to submit prudential returns pursuant to the provisions of the Prudential — Investment, Insurance Intermediation and Banking Business Module ("PIB") or the Prudential — Insurance Business Module ("PIN") of the DFSA Rulebook.

      How is this paper structured?

      3. In this paper, we set out:
      (a) defined terms in paragraphs 6 to 7;
      (b) background in paragraphs 8 to 11;
      (c) current requirements for submission of prudential returns in paragraphs 12 to 14;
      (d) proposed EPRS and revised reporting requirements in paragraphs 15 to 31 and Annexes A to C;
      (e) consequential changes to the DFSA Rulebook, in paragraphs 32 to 36 and Annexes D to H;
      (f) costs and benefits associated with implementation of the EPRS in paragraphs 37 to 43;
      (g) handling of information collected in the EPRS in paragraphs 44 to 45;
      (h) technological considerations and solutions in paragraphs 46 to 49; and
      (i) implementation in paragraphs 50 to 52.

      How to provide comments?

      4. All comments should be provided to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      5. The deadline for providing comments on these proposals is 24th June 2007. Once we receive your comments, we will consider if any further changes are required to these proposals. We will then proceed to make the necessary changes to the DFSA's Rulebook covering all amendments resulting from this paper. However as the changes recommended in this paper are still proposals, you should not act on them until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:
      Mr Prasanna Seshachellam
      Senior Manager, Supervision
      DFSA
      PO Box 75850
      Dubai, UAE

      or e-mailed to: PSeshachellam@dfsa.ae

      Defined terms

      6. Generally, capitalised terms used are defined terms in the Glossary (GLO) Module of the DFSA Rulebook. For example:
      (a) "Annual Regulatory Returns" means an annual regulatory return of the type specified in PIN Rule A10.3.1;
      (b) "Authorised Firm" means a Person, other than an Authorised Market Institution, who holds a Licence;
      (d) "PIN" means the Prudential — Insurance Business Module of the Rulebook;
      (e) "PRU" means the Prudential Returns Module of the Rulebook;
      (f) "Quarterly Regulatory Return" means a quarterly return of the type specified in PIN Rule A10.3.2; and
      (g) "Return" includes both Quarterly Regulatory Returns and Annual Regulatory Returns.
      7. The following terms are regularly used in this paper and have the following meanings:
      (a) "DIFCA" means the Dubai International Financial Centre Authority;
      (b) "EPRS" means the proposed DFSA electronic prudential reporting system;
      (c) "Firm" means an Authorised Firm; and
      (d) "return" and/or "prudential return" includes both a return specified in PIB and a Return specified in PIN.

      Background

      8. Regulated banks and other financial institutions across the world are required to provide accounting and prudential information to their regulators on a periodic basis. This requirement is usually met by way of a set of prudential returns and accounting reports that regulated firms are mandated to submit to their regulator at specified intervals.
      9. Such reporting arrangements are seen as an essential regulatory tool to enable regulators to assess, monitor and control the risk profile of regulated firms individually and collectively on a systemic basis. The submission of prudential returns also enables regulators to effectively carry out off-site supervisory tasks, which are an integral part of any effective risk-based supervisory approach.
      10. International best practice standards on prudential regulation, such as the Core Principles for Effective Banking Supervision developed by the Basel Committee on Banking Supervision, stipulate that regulators must establish and implement a system of prudential returns to ensure effective off-site supervision and to achieve a good understanding of the firm-specific as well as systemic risk levels.
      11. Consistent with such standards, Firms operating in the DIFC are currently required to prepare and submit prudential returns in accordance with the rules and guidance prescribed in PIB, PIN and in PRU. These rules prescribe the applicable returns to be submitted by Firms in different prudential categories, applicable frequency of reporting, reporting deadlines and required level of authentication on the returns.

      Current requirements for submission of prudential returns

      12. The prudential returns forms, along with detailed guidelines for completion, are contained in PRU. Currently, Firms are required to submit the applicable prudential returns in paper with a formal signed declaration by appropriate officers of the Firm.
      13. The PIB forms contained in PRU, focus on the primary financial accounting statements, information on risk exposures and calculation of capital adequacy position of Firms. These returns also require specific reports on liquidity risk position, large exposures to monitor concentration risk and non-performing loans and provisions for credit losses. The current PIB returns do not require the submission of adequate information to assess and monitor risk levels in some aspects such as, geographic concentration of credit and counterparty risk, currency and transfer risks.
      14. Overall, the PIN forms contained in PRU require the submission of adequate information to assess and monitor risk levels. However, further submissions in relation to net earned premiums and claims incurred are required to enable a more comprehensive risk assessment.

      Proposed electronic prudential reporting system and revised reporting requirements

      15. The DFSA proposes to establish and implement a more comprehensive system for regulatory reporting by Firms. This system will provide an electronic medium for submission of reports along with a revised set of reporting requirements.
      16. The DFSA believes that making use of appropriate technology will assist Firms in the provision of reporting data and allow the DFSA to manage, process and analyse that data more efficiently.
      17. After the implementation of the new system, Firms will still be required to submit the forms currently specified in PIB, PIN and PRU (albeit electronically) with relatively minor change. However, there will be some additional reporting requirements in respect of the activity levels of the Firm.

      Revisions to Existing Forms

      18. Annex A includes a copy of all current PIB forms with any revised reporting requirements highlighted on the forms. The changes primarily affect PIB Forms 1, 2 and 9.
      19. The revised reporting requirements in relation to these forms will facilitate reporting in accordance with the International Financial Reporting Standards and will also reduce the number of data items required to be reported as part of the calculation of risk weights for credit risk exposures in the non-trading book. This reduction in data items will be made possible partly because of the efficiencies and flexibility derived from the use of an electronic reporting system.
      20. Annex B includes a copy of all current PIN forms with any revised reporting requirements highlighted on the forms. The changes are minor and primarily affect PIN forms 1, 4 and 5. The additional information required in PIN form 1 will allow the DFSA to assess Firm liquidity. Additional tables will be inserted in PIN forms 4 and 5 to capture information regarding net earned premiums and net incurred claims. The submission by Firms of this information will allow the DFSA to understand the loss experience that an Insurer may sustain by Class of Business.
      21. There will be no change to the category of Firms required to submit the existing forms. The requirement to submit these forms will continue to be as currently set out in PIB, PIN and PRU.
      22. The amendments to the forms set out in Annexes A and B are provided for illustrative purposes only. The format of the forms and the proposed amendments may change prior to the implementation of the EPRS.
      23. The PIN forms included in Annex B indicate the changes being proposed as part of the implementation of the EPRS. Further changes to PIN forms were proposed as part of Consultation Paper 44 ("Proposals Relating to Direct Long-Term Insurance, Credit Insurance and Group Supervision"), consultation on which closed on 3 May 2007. To gain a full picture of the proposed future reporting requirements for Insurers, the forms in Annex B should be read in conjunction with Consultation Paper 44 ("Proposals Relating to Direct Long-Term Insurance, Credit Insurance and Group Supervision"). The two sets of proposals are, however, independent of each other. If, after consultation, both sets of changes are approved, they will be integrated without conflict.

      New Forms

      24. Annex C contains a copy of the proposed new forms required to be submitted by Firms. All new forms are PIB forms. The forms a Firm is required to submit will be determined based on the financial service(s) for which a Firm is authorised.
      25. The new forms will capture information regarding the activity levels of Firms covering matters such as, product volumes, trading volumes, amount of investments being arranged on behalf of clients, number of client accounts or portfolios being managed, amount of assets under management in portfolio management schemes and number of funds being sold in or from the DIFC.
      26. The new forms will also capture data on credit activity such as details of credit disbursals and credit outstanding for any reporting period, including composition of credit activity in terms of type of borrower, by product category, by geographic and sector distribution of borrower, by maturity and by currency of denomination.
      27. Most of the information captured on the new forms is essential for effective off-site prudential risk assessment. Much of the new information submitted to the DFSA by Firms will enable the DFSA to assess and monitor risk and activity levels on a Firm-specific basis as well as on a system-wide basis.
      28. In addition to enabling the DFSA to assess and monitor risk and activity levels of Firms, the new information will also assist in the following ways:
      (a) information on geographic distribution and currency of credit will assist in assessing the impact of activities in the DIFC on the macroeconomic position of the UAE and the GCC; and
      (b) information on credit by product category will allow analysis of the size and growth of the market in the DIFC for various product segments; and
      (c) information on geographic distribution of credit and currency-wide distribution of credit will assist in the assessment of systemic risk in the DIFC.
      29. The forms contained in Annex C are provided for illustrative purposes only. The format of the forms and the content may change prior to the implementation of the EPRS.

      Signed declaration

      30. PIB Rule 1.6 requires officers of Firms to sign returns. Similarly PIN Rule 6 requires returns to include a Statement of Directors. The requirement for appropriate sign-off of returns in writing by officers and or directors of Firms will continue after the implementation of the EPRS.
      31. Although sign-off in writing will still be required, it is not the DFSA's intention to compel Firms to submit these sign-offs at the time of electronic submission of returns. Rather, the DFSA is proposing to implement a process whereby Firms will be required to complete the appropriate sign-offs at the time of the submission of returns and maintain a copy of such sign-off on file for the DFSA to view on demand or at the next on-site supervisory meeting.

      Consequential changes to the GEN, PIB and PIN Modules of the DFSA Rulebook

      32. Consequential changes to GEN, PIB and PIN are set out in Annexes D to H.
      33. These consequential changes arise mainly on account of the new mandatory obligation on Firms to submit returns required pursuant to PIB and PIN using EPRS.
      34. The DFSA Board recently resolved to de-couple PRU from the Rulebook and make it a Sourcebook and a repository of all prudential forms and instructional guidelines. The only provisions in PRU that needed to be maintained as Rules were those provisions relating to PIN forms contained in old PRU Chapter 3. These provisions (old PRU Rules 3.1 to 3.4 and 3.15) have been moved to PIN Appendix 10. The information relating to completion of forms in old PRU Chapter 3 (old PRU Rules 3.5 to 3.14 and 3.16) have been reformatted and maintained in PRU as new PIN form 11: Instruction Guidelines.
      35. It is envisaged that forms and information contained in PRU will mirror the forms and information in EPRS.
      36. Consultation Papers 42 ("Proposed Enhancements to the DFSA Rulebook to Meet International Best Practice Standards"), 44 ("Proposals Relating to Direct Long-Term Insurance, Credit Insurance and Group Supervision") and 45 ("Proposals to Refine the Definitions of Related Parties") set out a series of amendments to PRU, PIB and PIN that are currently being considered.

      Costs and benefits of the proposed EPRS

      37. The desire to design and implement the proposed EPRS as a simple framework without excessive complications has been the foremost principle guiding the DFSA's efforts in developing the EPRS.
      38. The DFSA's approach seeks to balance the need for a robust technological solution that is fit for purpose with the desire to minimise operational costs and burden for the DFSA and Firms. The DFSA is mindful of not over-engineering the solution and ensuring that the costs and implications remain proportionate to the benefits.
      39. The primary benefits of implementing the EPRS for Firms and the DFSA include:
      •  removing the need for paper-based preparation, submission and manual processing, validation and analysis of data;
      •  providing greater certainty for Firms reporting via on-screen validation checks and automated receipt of submitted returns; and
      •  supporting the DFSA's objectives of producing and publishing accurate, consistent and timely aggregated data on the activities carried out within the DIFC.
      40. The costs of implementing the EPRS include the:
      •  direct implementation costs associated with the EPRS design, build and roll out;
      •  ongoing costs associated with the operation of the EPRS; and
      •  development and implementation of additional internal systems for collection of required data by Firms.
      41. The direct implementation costs will result in an increase to the overall operational costs of the DFSA in 2007. It is the DFSA's intention to absorb this cost rather than pass this cost on to Firms directly.
      42. The ongoing costs of maintaining the EPRS will form part of the DFSA's operational costs. By way of example, the cost of licensing the EPRS, estimated to be US$1,500 to US$2,000 per Firm, will be met by the DFSA. A proportion of these costs will be recovered from Firms by way of the DFSA's normal fee provision.
      43. The proposed EPRS will result in varying levels of incremental reporting obligations for Firms dependent on the financial service(s) for which a Firm is authorised. The incremental regulatory reporting requirements for Firms arising out of the proposed EPRS are illustrated in the table below. The financial services not included in the table do not require the preparation or submission of any new forms.
      Financial Services Activity Number of new forms
      Accepting Deposits 3
      Providing Credit 3
      Dealing in Investments as Principal 1
      Arranging Credit or Deals in Investments and Advising on Financial Products or Credit (mainly in relation to Wealth Management business) 1
      Managing Assets 1
      Operating a Collective Investment Fund 1
      Dealing in investments as agent (mainly in relation to Brokerage business) 1
      Providing Custody 1
      Providing Trust Services 1
      Providing Fund Administration 1
      Acting as the Trustee of a Fund 1
      Other forms Applicable to all Firms — Related party transactions 1

      Handling of information collected as part of EPRS

      44. The proposed EPRS includes a database to collect and store the data being reported by Firms and a software application to analyse the data collected for the purposes of assessing and monitoring prudential risk levels, both on a Firm-specific and systemic basis.
      45. The application for analysis of data collected will also be designed to provide analytical reports to the DFSA that may be used (subject to the DFSA's obligations for protection, use and disclosure of information set out in Regulatory Law No 1 of 2004) in preparing and providing information on an aggregate basis to external stakeholders such as, the UAE Central Bank, DIFCA, relevant Government Ministries within Dubai and the UAE, and general public dissemination via appropriate means. It is the DFSA's intention that the provision of such information will only be on an aggregate level.

      Technological considerations and solution

      46. The DFSA has considered both off-the-shelf and custom made financial reporting and analysis solutions. Based on its review, it has concluded that adequate off-the-shelf solutions are available and, that the development of a custom made solution would present an unacceptable level of risk, in terms of quality, cost and timeliness.
      47. Whilst undertaking its review the following matters were of primary importance to the DFSA:
      •  the complexity of the underlying technology;
      •  the resulting need for hardware and software for both the DFSA and the Firms;
      •  submission options (online via web, offline via downloadable forms or vendor software package or uploading of information via XML files or vendor software package);
      •  security; and
      •  the direct and indirect costs for Firms and the DFSA associated with implementing and maintaining the system.
      48. The DFSA has identified a number of potential vendors of off-the-shelf solutions and is currently in the process of finalising its selection. Irrespective of the vendor selected, the system implemented will contain at a minimum the following functionality:
      •  online submission via web forms (the DFSA considers this submission method the most cost effective as it will not require Firms to invest in hardware or software);
      •  no specific hardware needs to be installed by Firms;
      •  the ability to complete forms in multiple sittings;
      •  automated confirmation upon receipt of forms by the DFSA;
      •  where appropriate, on line validation checks and reconciliation between data items contained in the forms;
      •  the ability to print a version of the forms submitted to the DFSA.
      49. Security of the system will be ensured via two levels. Firstly, access to the relevant web page will be via SSL connection thereby ensuring any data transferred will be encrypted, and secondly entry to the EPRS only available upon username and password authentication.

      Implementation of the electronic prudential reporting system

      50. Use of the EPRS will be mandatory for all Firms.
      51. The DFSA is aiming to have the EPRS implemented and available for Firms to use by the end of the fourth quarter of 2007. If the EPRS is implemented by the end of the fourth quarter 2007, Firms will be required to submit forms electronically in 2008 commencing with the reporting period ending December 31 2007.
      52. New proposed PIB Rule 1.6 (contained in Annex E) and new proposed PIN Rule 6.5.1 (contained in Annex G) contain the provisions relating to submission of returns. Pursuant to these Rules the DFSA will issue a notice announcing when the EPRS is in operation, after which time Authorised Firms will be required to submit returns using the EPRS in accordance with any instructions set out in the notice and any instructions provided in the EPRS and the Rules.

      Download this Consultation Paper in PDF format.

      Annex A — Current PIB forms PDF format
      Annex B — Current PIN forms PDF format
      Annex C — Proposed additional forms PDF format
      Annex D — Proposed amendments to GEN Chapter 8 of the DFSA Rulebook PDF format
      Annex E — Proposed amendments to PIB Chapter 1 of the DFSA Rulebook PDF format
      Annex F — Proposed amendments to PIB App7 of the DFSA Rulebook PDF format
      Annex G — Proposed amendments to PIN Chapter 6 of the DFSA Rulebook PDF format
      Annex H — Proposed amendments to PIN App10 of the DFSA Rulebook PDF format

    • Consultation Paper No. 45 Proposals to Refine the Definition of "Related Parties"

      Download this Consultation Paper in PDF format.

      Purpose of the paper

      1. This paper seeks public comment on some further refinements to our initial proposals relating to exposures to related parties that were set out in Annex E of Consultation Paper No. 42.
      2. We issued Consultation Paper No. 42 in December 2006 seeking public comment on a range of proposals to enhance the DFSA Rulebook to promote compliance with international best practice standards. Annex E of that paper contained proposals to amend the Investment, Insurance Intermediation and Banking Business (PIB) Module of the DFSA Rulebook to meet Core Principle 11 of the principles issued by the Basel Committee on Banking Supervision in October 2006. Core Principle 11 sets standards that Firms conducting Banking Business must meet to address risks arising from credit and other exposures to related parties.
      3. The refinements we are proposing in this paper (see Annex) relate only to one aspect of our initial proposals, the scope of the definition of "Related Persons".
      4. Public consultation on the proposals in Consultation Paper No. 42 ended on 19 February 2007. We did not receive any comments relating to any of those proposals. However, we consider that the proposal in this paper to expand the definition of "Related Persons" is sufficiently important that we should defer the finalising of the package of proposals that were dealt with under Consultation Paper No. 42 until the end of public consultation on this paper.

      Who should read this paper?

      5. The proposals in this paper would be of primary interest to Authorised Firms conducting or proposing to conduct Banking Business (i.e. a Prudential Category 1 Firm) or Investment Business as a Prudential Category 2 or 3 Firm or as an Islamic Financial Institution which is a Prudential Category 5 Firm. These proposals will also be of interest to Persons who intend to transact with such Authorised Firms.

      How is this paper structured?

      6. In this paper, we set out:
      (a) defined terms in paragraph 9;
      (b) scope of Basel Core Principle 11 in paragraphs 10 and 11;
      (c) scope of our initial proposal in paragraphs 12–14; and
      (d) scope of and reasons for the new proposals in paragraphs 15–23.

      How to provide comments

      7. All comments should be provided to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      8. The deadline for providing comments on these proposals is 19 April 2007. Once we receive your comments, we will consider if any further changes are required to these proposals. We will then proceed to make the necessary changes to the DFSA Rulebook covering all the amendments resulting from Consultation Paper No. 42 and this paper. However, because the changes recommended in this paper and Consultation Paper No. 42 are still proposals, you should not act on them until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:

      Mrs Dhammika Amukotuwa
      Legal Counsel
      DFSA
      PO Box 75850
      Dubai, UAE

      or e-mailed to: damukotuwa@dfsa.ae

      Defined Terms

      9. Generally, capitalised terms used are defined terms in the GLOSSARY (GLO) Module of the DFSA Rulebook. For example:
      (a) "Controller" of an Authorised Firm means a Person who:
      i. either alone or with any Associate holds 10% or more of an Authorised Firm’s shares or its Parent; or
      ii. is entitled to exercise, or control the exercise of, 10% or more of the voting rights in respect of the Authorised Firm or its Parent; or
      iii. is able to exercise significant influence over the management of the Authorised Firm or its Parent;
      (b) "Close Relative" is defined to include a spouse, child, parent or sibling as well as a step child, parent or sibling;
      (c) "Group" means an Authorised Firm’s Parent or Subsidiary, as well as a direct or indirect Subsidiary of such a Parent or Subsidiary; and
      (d) "Parent" means a Holding Company.

      Scope of Basel Core Principle 11

      10. Basel Core Principle 11 requires supervisors to address risks of abuses and conflicts of interests that arise from banks’ exposures to related parties. To address such risks, supervisors should require that Firms should only enter into transactions with related parties on an arm’s length basis. Even where arm’s length transactions are to be undertaken with related parties, such transactions are to be subject to stringent controls. For example, persons likely to benefit from such transactions should not be part of the process of granting and managing the exposure. A limited exception is suggested in the case of employee compensation schemes, where credit can be extended on terms which are more favourable than those generally available.
      11. Basel Core Principle 11 requires supervisors to define "related parties", and gives an indicative and non-exhaustive list of persons who might generally be considered as falling within such a definition. They are:
      (a) a bank’s subsidiaries and affiliates,
      (b) any party the bank exerts control over or that exerts control over the bank; and
      (c) the bank’s major shareholders, directors, senior management and key staff, their direct and related interests, and their close family members, and corresponding persons in affiliated companies.

      Our Initial proposal

      12. To comply with Basel Core Principle 11, our initial proposal included requirements that would:
      (a) prohibit an Authorised Firm from extending exposures to Related Persons on terms more favourable than those available to non- Related Persons except in the limited circumstances set out in (b);
      (b) provide an exception to the above prohibition in relation to the provision of credit to Employees. The exception would apply where the Authorised Firm has policies and procedures approved by its Governing Body relating to the provision of such credit and those policies include requirements to deal with conflicts of interests, particularly to preclude Persons who will directly or indirectly benefit from such transactions being part of the process of approving or managing the exposure; and
      (c) in any case, even where exposures are made to Related Persons on terms no more favourable than those available to non-Related Persons, preclude Persons directly or indirectly benefiting from such exposures being part of the approval or write off process of such exposures.
      13. These proposals would apply to Authorised Firms in Prudential Categories 1, 2, 3 and 5.
      14. Our initial proposals defined a Person to be a "Related Person" of an Authorised Firm if that Person is, or was in the past 2 years:
      (a) a member of a Group or partnership (other than a Limited Liability Partnership) in which the Authorised Firm is or was also a member;
      (b) a Controller of the Authorised Firm or a Close Relative of such a Controller; or
      (c) a Director, Partner or an Employee of the Authorised Firm; or
      (d) a Close Relative of a Director, Partner or an Employee of the Authorised Firm or that of a corresponding person in an entity referred to in (a) or (b).

      Scope and purpose of the current proposal

      15. We propose to alter the initial proposals set out in paragraph 12 above in three regards, i.e.:
      (a) to expand the definition of Related Persons to capture entities in which Related Persons have a significant interest;
      (b) to exclude certain Persons from the definition of Related Persons; and
      (c) to strengthen the initial proposals relating to Employee credit. Inclusion of significant interests.
      16. We propose to expand the definition of the term "Related Person" to capture any entity in which a "significant interest" is held by a Director, Partner or senior manager (or a Close Relative of such an individual) of:
      (a) the Authorised Firm;
      (b) a member of the Group in which the Authorised Firm is also a member; or
      (c) a Controller of the Authorised Firm.
      17. We will regard an individual referred to in paragraph 16 as having a "significant interest" in another entity if that individual:
      (a) holds 20% or more of the shares of that entity, or its Parent, if that entity is a company; or
      (b) is entitled to exercise 20% or more of the voting rights in respect of that entity.
      18. We propose to expand the definition of a Related Person in this manner because:
      (a) we have identified a risk that the purpose of the controls relating to related party transactions may be circumvented through exposures (such as loans) to entities in which a Director, Partner or senior manager of the Firm or their Close Relatives (or corresponding persons in affiliated firms) have a significant interest. The Basel guidance appears to recognise this as a risk; and
      (b) this wider definition is broadly consistent with the approach adopted by a number of comparable jurisdictions such as Hong Kong and Singapore.

      Exclusions for certain persons

      19. We have also identified two subsets of Persons included within the terms "Partners" and "Employees" under our initial proposals that do not warrant being treated as Related Persons. This is because not all Partners and Employees occupy positions of influence within an Authorised Firm or its related entities that would enable them to expose an Authorised Firm to abuses of related party transactions.
      20. On this basis, we have excluded limited partners of a limited partnership (whether formed under the Limited Partnership Law of 2004 or any similar law of a country or territory outside the DIFC) from our proposed definition of Related Persons, as limited partners play a role similar to that of shareholders of a company rather than Directors or senior managers.
      21. Similarly, we also propose to treat as Related Persons only those Employees who are senior managers of the Authorised Firm, rather than all its Employees, as the opportunity for any abuse of related party transactions is more likely to arise in the case of senior managers.

      Refinements to strengthening the initial proposals

      22. We have also made some further refinements to the initial proposals to ensure that the objectives of the initial proposals are fully achieved. The most important refinement is to the requirements in the initial proposal relating to the exception for an Employee credit policy that allows more favorable credit terms than those offered commercially. We propose to make it clear that Directors, Partners and senior managers may benefit from an Employee credit facility where the facility is one that is widely available to Employees of the Authorised Firm.
      23. In conclusion, we note that the controls adopted to deal with conflicts of interests and abuses arising from related party transactions vary quite significantly from jurisdiction to jurisdiction. However, we consider that our revised proposals address the risks identified in the Basel principles in a way consistent with international practice and without being overly restrictive.

      Download this Consultation Paper in PDF format.

      Download Annex — Proposed amendments to Prudential — Investment, Insurance Intermediation and Banking Business Module (PIB) of the DFSA Rulebook in PDF format.

    • Consultation Paper No. 44 Proposals Relating to Direct Long–Term Insurance, Credit Insurance and Group Supervision

      Download this Consultation Paper in PDF format.

      Why are we issuing this paper?

      1. This Consultation Paper seeks public comments on the DFSA’s proposals to amend the Prudential — Insurance Business (PIN) Module and the Prudential — Investment, Insurance Intermediation and Banking Business (PIB) Module of the DFSA Rulebook. These proposals encompass:
      (a) a prudential framework for DIFC incorporated Insurers proposing to conduct Direct Long-Term Insurance Business from a branch located outside the DIFC (Annex A);
      (b) a change in the underpinning minimum capital for non-captive Insurers (also Annex A);
      (c) a capital adequacy regime for Insurers who wish to write credit insurance, distinguishing between conventional credit insurance and credit enhancement insurance (such as insuring bonds against default); (Annex B);
      (d) requirements relating to group supervision (Annex C); and
      (e) associated Prudential PIN and PIB forms (Annex D).

      Who should read this paper?

      2. The proposals in this paper would be of primary interest to Authorised Firms conducting, or Persons proposing to conduct, Insurance Business especially if:
      (a) that business is to include Direct Long-Term Insurance Business to be conducted from a branch outside the DIFC;
      (b) that business is credit insurance; or
      (c) they are, or will be, a member of a Financial Group.

      How is this paper structured?

      3. In this paper, we set out:
      (a) definitions — paragraph 6;
      (b) proposals relating to Direct Long-Term Insurance — paragraphs 7–19;
      (c) the proposal relating to minimum capital — paragraph 20;
      (d) proposals relating to credit insurance — paragraphs 21–23;
      (e) proposals relating to group supervision — paragraphs 24–29; and
      (f) Associated Prudential PIN and PIB Forms — paragraph 30.

      How to provide comments?

      4. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

      What happens next?

      5. The deadline for providing comments on these proposals is 3 May 2007. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA’s Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.

      Comments to be addressed to:
      Peter Casey
      Director, Policy
      DFSA
      PO Box 75850
      Dubai, UAE

      or e-mailed to: pcasey@dfsa.ae

      Definitions

      6. In this paper, generally, capitalised terms are defined in the GLO Module of the DFSA Rulebook. For convenience, the following terms have the meaning set out below:
      (a) "Financial Group" means in relation to an Authorised Firm, any Parent of it incorporated in the DIFC, any Financial Institution Subsidiaries of the Authorised Firm or any of its Parents and any Financial Institution in which the Authorised Firm or any Parent or Subsidiary holds 20% or more of the voting rights or capital. This definition also includes an entity which the DFSA may direct an Authorised Firm to include within its Group.
      (b) "Fund" means a Long-Term Insurance Fund established for the purposes of the requirements in the PIN Module; and
      (c) "Group" means a group of entities which includes an entity (the "first entity") and:
      (i) any Parent of the first entity; and
      (ii) any subsidiaries (direct or indirect) of the Parent or Parents in (a) or the first entity.

      Proposals relating to Direct Long–Term Insurance

      7. In 2006, the DFSA made a policy decision to permit a DIFC incorporated Insurer to write Direct Long-Term Insurance Business, provided that such activities are conducted from a branch located outside the DIFC. Following that decision, we have now developed a regime to address prudential risks to a DIFC incorporated Insurer arising from Direct Long-Term Insurance business conducted from a branch. Annex A sets out the proposed prudential framework.
      8. The key aspects of the proposed prudential framework encompass:
      (a) modifications to the capital regime (see paragraphs 9–12) and associated reporting requirements (see paragraph 30);
      (b) provisions to address risks arising from the inclusion of special features such as guarantees and options in Direct Long-Term Insurance contracts (see paragraphs 13 and 14);
      (c) provisions to enable segregation of Direct Long-Term Insurance business conducted from a branch from the other parts of the Insurer’s business (see paragraphs 15 and 16);
      (d) augmentation of actuarial reporting requirements (see paragraphs 17 and 18); and
      (e) supervision of the branch operations (see paragraph 19).

      Modifications to the capital regime

      9. The principal change to the regime is the inclusion of a Direct Long-Term Insurance Business component within the risk-based capital regime. This is set out in proposed PIN Rule A4.12.8, and broadly mirrors the current European regime. The capital component is the sum of:
      (a) for most classes of Long-Term Insurance, a percentage of provisions;
      (b) where the insurer bears death risk, a percentage of capital at risk, subject to a maximum reduction for reinsurance of 50%;
      (c) for certain linked long-term business, a proportion of administrative expenses;
      (d) for permanent health insurance, a percentage of premiums or claims;
      (e) the assets of a tontine.
      10. This is supported by specific valuation requirements relating to the measurement of liabilities of Insurers. These include provisions that prohibit Insurers from treating any contract of insurance as an asset or making any allowance for lapse, surrender, making paid-up or revival of a contract of insurance where that would result in a decrease of liability in respect of that contract. In addition, we also include proposals that require Insurers to take into account reasonable expectations of policy holders relating to bonuses and any other forms of participation, even if they are not vested entitlements. We also include Rules and Guidance relating to the determination of discount rates when assessing yields on assets. See modifications to PIN Rule 5.6.7 and Guidance.
      11. We also propose to require an Insurer writing Direct Long-Term Insurance to ensure that:
      (a) premiums for Direct Long-Term Insurance contracts are sufficient for the formation of technical provisions relating to Future Benefits under those contracts; and
      (b) Funds to which Direct Long-Term Insurance contracts are attributed hold Invested Assets of appropriate safety, yield and marketability that is adequate to provide the future Policy Benefits under those contracts.
      12. We have included detailed Guidance on how an Insurer may be able to demonstrate its compliance with these requirements and with the existing Rule that an Insurer must always have capital resources adequate for the conduct of its business. See proposed PIN Rule 4.2.3 and Guidance to PIN Rule 4.2.2 and PIN Rule 4.2.3.

      Inclusion of special features

      13. Another aspect of our proposals deals with Direct Long-Term Insurance contracts that include features such as guarantees and options. Such features are likely to expose the Insurer to investment, expense or other risks that are not readily definable at the inception of the contract. To address those risks, we propose that such features can only be included in Direct Long-Term Insurance contracts where the DFSA has given prior written permission for such inclusion. An Insurer seeking such permission must give the DFSA information such as how it intends to price such contracts, value them for the purposes of capital adequacy calculations and also quantify, monitor and manage the risks to its capital adequacy that may arise from such features.
      14. Under our proposals, the DFSA may allow or refuse to allow the inclusion of such features in a Direct Long-Term Insurance contract, or permit the inclusion of such terms subject to specified terms and conditions. The DFSA will give reasons for its decision and an Insurer may appeal such a decision to the DFSA’s Regulatory Appeals Committee. See proposed PIN Rule 3.6.1 and PIN Rule 3.6.2.

      Segregation of Direct Long-Term Insurance Business

      15. We are proposing that the DFSA be given a discretionary power to require Insurers conducting Long-Term Insurance Business to create separate Funds for any part of its Business. This would enable the DFSA to require, where appropriate, an Insurer proposing to write Direct Long-Term Insurance from a branch located outside the DIFC to establish a separate Fund to which that part of the business is to be attributed. The DFSA will determine on a case by case basis whether the establishment of a separate Fund is warranted in light of factors such as the relative size and complexity of the branch activities and the associated costs of establishing and maintaining a separate Fund for that Business.
      16. We also propose to reduce the underpinning minimum for the Minimum Fund Capital Requirement in respect of a Long-Term Insurance Fund from $10 million to $5 million. This aims to ensure that this figure does not act as a barrier to business, particularly if the DFSA were to require an Insurer to establish multiple Funds. See PIN Rule A8.2.3.

      Augmentation of the actuarial reporting requirements

      17. We also propose to enhance the actuarial reporting requirements taking into account that Long-Term Insurance Business will no longer be confined to reinsurance. Where Direct Long-Term Insurance Business is conducted, the Actuarial report must, under these proposals, set out the information segregated not only by Class of Business but also by each jurisdiction in which such business is conducted (see PIN Rule 7.3.7).
      18. Actuaries will be required to report on:
      (a) any discretionary charges and benefits, options and guarantees, and reversionary bonus entitlements, where such features are included in a contract;
      (b) deviations of actual experience compared to the assumptions made in the previous valuation;
      (c) the method and assumptions used by the Actuary in the valuation process, including, where relevant, a commentary on significant differences between the assumptions used and recent actual experience of the Insurer;
      (d) any expense reserves, mismatching reserves and any other special reserves included by the Actuary in the value of the Long-Term Insurance Liabilities, or recommended by the Actuary to be maintained although not included in the valuation;
      (e) a description of the Invested Assets used to determine the riskadjusted yield on which the discount rate used in the valuation was based; and
      (f) any significant changes to the matters reported on during the period since the previous valuation, including any significant differences between the assumptions used and the actual experience of the Insurer where relevant and an estimate of the effect of these changes on the Long-Term Insurance Liabilities as at the Reference Date. See additions to PIN Rule 7.3.6 and Guidance.

      Supervision of branch operations

      19. Under these proposals, an Insurer undertaking Direct Long-Term Insurance Business is specifically required to supervise adequately the conduct of its Direct Long-Term Insurance Business in each jurisdiction in which that Insurance Business is conducted. While our proposals do not contain any conduct requirements, since such regulation is a matter for the host state regulator of the branch, an Insurer must ensure that its systems and controls are adequate to fully comply with all regulatory requirements that apply to it. This is because any failure to do so may have an adverse impact on the overall operations of the Insurer’s business including that in the DIFC. We have also included Guidance as to how an Insurer may satisfy this requirement. (See proposed PIN Rule 3.6.2 and Guidance).

      Proposal relating to minimum capital

      20. Separately, we are proposing to reduce the underpinning minimum capital for those Insurers who are not Captive Insurers from its current $100 million to $10 million. This is designed to ensure that this minimum, which is currently higher than in most comparable jurisdictions, does not act as an unnecessary barrier to business in the DIFC. See PIN Rule A4.2.3. The risk-based variable capital calculation will continue to apply as set out in PIN Rule A4.2.2, subject to the changes proposed elsewhere in this paper.

      Proposals relating to Credit Insurance

      21. The proposals relating to credit insurance provide for a capital adequacy regime for insurers who wish to write credit insurance. To do this effectively, we have drawn a distinction between credit enhancement insurance (for example covering bonds against default), and more conventional credit insurance business. The former is mainly written by specialist mono-line insurers, none of which is established in the DIFC. The current proposals do not provide for such specialist mono-line insurers, for whom special provisions would be necessary. If a specialist mono-line Insurer wishes to operate in the DIFC, the DFSA will consider what requirements should apply to it. In the meantime, under these proposals, Authorised Firms will be allowed to undertake small amounts of credit enhancement business as part of their more general credit insurance business.
      22. In light of the above considerations, our proposals:
      (a) draw a distinction between conventional credit insurance and credit enhancement insurance. We have done this by splitting the current definition of "Credit and suretyship" into "Class 7(a) — Credit" and "Class 7(b) — Suretyship" — See proposed GEN Rule A4.1.3;
      (b) specify the Underwriting Risk Component and Reserving Risk Component for both classes of credit insurance. See proposed PIN Rule A4.10.1 and PIN Rule A4.11.1;
      (c) limit the amount of Class 7(b) insurance that can be written by an Insurer for any reporting period to 5% of the total Gross Written Premium of the Insurer in respect of all classes of non-life business written by the Insurer during that period (see proposed PIN Rule 2.5.2(a));
      (d) confine the Persons who can be covered by Class 7(b) insurance to a Body Corporate or a Financial Institution that has at the time of effecting that contract at least a BBB rating given by a recognised Rating Agency (see proposed PIN Rule 2.5.2(b) and (c));
      (e) restrict the duration of Class 7(b) insurance to a period of 20 years (see proposed PIN Rule 2.5.2(d)); and
      (f) require an Insurer proposing to undertake Class 7(b) Insurance Business to notify the DFSA in writing before doing so (see proposed PIN Rule 2.5.5).
      23. In addition to the above, we are proposing a number of minor consequential amendments to the PIN Module to recognise the creation of Class 7(b) insurance.

      Proposals relating to Group Supervision

      24. We are putting forward proposals to extend our provisions relating to supervision of entities conducting Insurance Business and to bring them into line with the Core Principles of the International Association of Insurance Supervisors.
      25. These proposals apply to an Insurer which is a member of a Financial Group, unless it is excluded from these requirements because:
      (a) it is already subject to Financial Group prudential supervision by the DFSA due to another member of its Financial Group being an Authorised Firm;
      (b) the DFSA has confirmed in writing that it is satisfied that the Insurer’s Financial Group is subject to consolidated prudential supervision by an appropriate regulator; or
      (c) the percentage of total assets of the Financial Institutions within the Group, including the Authorised Firm, are less than 40% of the total Financial Group assets, except where the DFSA has expressly directed otherwise (see proposed PIN Rule 8.3.1).
      26. Our proposals set out how an Insurer which is subject to group supervision must calculate its Financial Group Capital Requirement (see proposed PIN Rule 8.3.4) and its Financial Group Capital Resources (see proposed PIN Rule 8.3.5). These provisions provide flexibility in the preparation of accounts by taking into account different regimes that may apply to different entities within the Financial Group. They also contain various safeguards to ensure that a true and accurate picture of the capital adequacy of the Financial Group as a whole is presented. For example, these provisions require an Insurer not to include Capital Resources or Adjusted Capital Resources of Subsidiaries where such Resources exceed the regulatory capital required by the Subsidiary but are not freely transferable within the Financial Group (see proposed PIN Rule 8.3.6).
      27. An Insurer which is subject to group supervision will have to prepare a six monthly Financial Group Capital Adequacy Report (see proposed PIN Rule 6.6.1). This report must include specified information relating to the members of the Financial Group, Financial Group Capital Requirement and Financial Group Capital Resources Requirement as set out in the Rules. The Financial Group Capital Adequacy Report, along with a statement by the Insurer’s auditor stating whether any significant matter has come to the attention of the auditor that suggests that the Report has not been properly compiled, must be provided to the DFSA within 4 months of the end of the annual reporting period and within 2 months of the end of the interim reporting period.
      28. We already require an