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Dubai Financial Services Authority (DFSA): Contents

Dubai Financial Services Authority (DFSA)
Laws
Rulebook Modules
Collective Investment Rules (CIR) [VER24/02-19]
Part 6 Rules Specific to Specialist Classes of Domestic Funds
Sourcebook Modules
Consultation Papers
Policy Statements
DFSA Codes of Practice
Amendments to Legislation
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Financial Markets Tribunal
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  • Part 6 Rules Specific to Specialist Classes of Domestic Funds

    • Guidance

      1. Article 17 of the Law confers on the DFSA the power to prescribe any type of Domestic Fund (i.e. a Public Fund, an Exempt Fund, or a Qualified Investor Fund) as a "specialist class" of a Domestic Fund and in so doing apply any requirements as are suitable for that specialist class of Funds. This Part sets out the requirements that apply to such a Fund by virtue of being a specialist class of Fund.
      2. Most of the requirements that are set out in this part as applying to specialist classes of Domestic Funds are generally in addition to the core requirements that apply to every Domestic Fund (see CIR Part 4). Further, depending on whether it is a Public Fund, an Exempt Fund, or a Qualified Investor Fund, the additional requirements in CIR Part 5 of this module would also apply to a specialist class of Fund.
      3. A Qualified Investor Fund may be constituted as a specialist class of a Domestic Fund without being subject to most of the detailed requirements that would normally apply to such specialist classes of Funds. However, there are some requirements which need to be met as the obligation to do so arises under the general provisions applicable to certain specialist classes of Funds, regardless of whether such Funds are Public Funds, Exempt Funds or Qualified Investor Funds. An example is a Fund constituted as an Islamic Fund. While some of the detailed requirements such as the appointment of a Shari'a Supervisory Board do not apply to the Fund Manager of an Islamic Qualified Investor Fund (see IFR 6.2.1), the other general requirements such as ensuring compliance with Shari'a requirements continue to apply to such Funds and the Fund Manager.
      4. The only specialist class requirements in this chapter that apply to a Qualified Investor Fund are those in Rule 13.6.3 and section 13.7 (Umbrella Funds).
      Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
      [Amended] DFSA RM137/2014 (Made 21st August 2014). [VER17/06-14]

    • CIR 13 Additional Requirements for Specialist Funds

      • CIR 13.1 Application to Qualified Investor Funds

        • CIR 13.1.1

          Only CIR Rules 13.4.1, 13.5.1, 13.6.3 and section 13.7 of this chapter apply to, or in relation to, a Qualified Investor Fund.

          [Added] DFSA RM137/2014 (Made 21st August 2014). [VER17/06-14]
          [Amended] DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

      • CIR 13.1A Fund of Funds

        • CIR 13.1A Guidance

          See CIR Rule 3.1.3 for the definition of a Fund of Funds.

          Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
          [Amended] DFSA RM137/2014 (Made 21st August 2014). [VER17/06-14]

          • CIR 13.1.1A

            (1) A Fund manager of a Fund of Funds may not invest in:
            (a) another Fund of Funds;
            (b) a Feeder Fund;
            (c) any Fund which is dedicated to investment in a number of Funds;
            (d) any Fund which is dedicated to investment in a single Fund or in a single investment trust; and
            (e) any Sub-Fund of an Umbrella Fund or Sub-Fund of any other Fund which is equivalent to a Fund within (a) to (d).
            (2) Not more than 25% in value of the Fund Property is to consist of Units in anyone Fund.
            (3) For the purpose of (1) and (2), each Sub-Fund of an Umbrella Fund and of an equivalent Fund is to be treated as if it were a separate Fund.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] DFSA RM137/2014 (Made 21st August 2014). [VER17/06-14]

      • CIR 13.2 Feeder Funds

        • CIR 13.2 Guidance

          See CIR Rule 3.1.4 for the definition of a Feeder Fund.

          Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

        • CIR 13.2.1

          (1) A Fund Manager of a Feeder Fund must ensure that the Fund Property of a Feeder Fund, except where otherwise provided in the Rules in this chapter, only consists of:
          (a) Units or Debentures of a single Master Fund; or
          (b) in the case of a Feeder Fund which is a Public Fund, Units or Debentures of an eligible Master Fund.
          (2) A Master Fund is eligible for the purposes of (1)(b) only if:
          (a) the borrowing of the Master Fund does not exceed 200% of the net asset value of the Master Fund or the market value of the Units of the Master Fund at the mid-value share price;
          (b) the Units in or Debentures of the Master Fund are regularly Offered for purchase and sale by at least three market makers who are recognised or registered as members of an Exchange or an exchange regulated by a Financial Services Regulator;
          (c) the Feeder Fund owns not more than 20% of the Units (or of any class of Units in or of the Debentures or of any class of Debentures) of the Master Fund; and
          (d) the Master Fund has no limit on its duration.
          Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

        • CIR 13.2.2

          A Fund Manager of a Feeder Fund must also ensure that the Feeder Fund invests in a Master Fund only if:

          (a) the Fund Manager of the Master Fund is regulated by a Financial Services Regulator;
          (b) the Master Fund is itself registered or authorised by a Financial Services Regulator and is itself subject to independent oversight;
          (c) the investment objectives of the Master Fund have been disclosed in detail in the Prospectus of the Feeder Fund;
          (d) it has made available to prospective Unitholders in the Feeder Fund copies of the Prospectus and the last audited annual reports and accounts of the Master Fund; and
          (e) the Fund Manager of the Master Fund has waived any initial charges which it is otherwise entitled to make in relation to the acquisition of Units in its Fund.
          Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

        • CIR 13.2.3

          Where the Feeder Fund invests in a Master Fund managed by the same Fund Manager or by an associated or related company, the Fund Manager of the of the Feeder Fund must ensure that the Master Fund in which the investment is being made does not charge subscription or redemption fees on account of the investment; and commission or rebates received by the Fund Manager of the Feeder Fund, by virtue of the investment into the Master Fund, must be paid into the property of the Feeder Fund.

          Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

      • CIR 13.3 Private Equity Funds

        • CIR 13.3 Guidance

          See CIR Rule 3.1.6 for the definition of a Private Equity Fund.

          Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

        • Investment Committee

          • CIR 13.3.1

            (1) A Fund Manager of a Private Equity Fund is not required to appoint an Eligible Custodian for the Fund pursuant to CIR Rule 8.2.2 where it meets the requirements in (2) and (3).
            (2) A Fund Manager of a Private Equity Fund must call a meeting of Unitholders to vote on the election of at least three experts who are independent of the Fund Manager to sit on an investment committee of the Fund.
            (3) The committee members in (2) must not involve themselves in the day to day management of the Fund but are appointed to review investment opportunities.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

            • CIR 13.3.1 Guidance

              1. The DFSA expects Fund Managers of Private Equity Funds to have proper regard to best practice standards or guidance issued by the DFSA as well as leading international trade bodies in relation to such Funds.
              2. Experts are persons whose profession, expertise or reputation gives authority to a statement or opinion made by that person in relation to the subject matter of the statement or opinion.
              3. Where a Private Equity Fund appoints an investment committee pursuant to CIR Rule 13.3.1(2), the annual report of that Fund must also include a report by that committee (see CIR Rule 9.4.7(1)).
              Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
              [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

          • CIR 13.3.2

            A Fund Manager of a Private Equity Fund must ensure that:

            (a) unless the purpose of the Fund is to invest in a single venture or undertaking, it does not invest more than 25% of the Fund in one such venture or undertaking; and
            (b) it does not invest in companies which are Related Parties in relation to the Fund or the Fund Manager, except where it does so in compliance with the requirements in CIR Rule 8.3.2.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] RM195/2016 (Made 7th December 2016). [VER22/02-17]

          • CIR 13.3.3

            Where the Fund Manager of a Private Equity Fund intends to invest in any venture, the Fund Manager must ensure that it makes adequate arrangements for the undertaking of due diligence in respect of that venture including investigating its corporate governance standards.

            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

          • CIR 13.3.4

            If a Fund Manager of a Private Equity Fund has placed a Person on the board of the Undertaking in which it is investing, it must take reasonable steps to ensure that it manages conflicts and follows good corporate governance.

            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

      • CIR 13.4 Property Funds

        • CIR 13.4 Guidance

          See CIR Rule 3.1.7 for the definition of a Property Fund.

          Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

        • Permitted Form and Listing

          • CIR 13.4.1

            (1) A Fund Manager of a Domestic Fund which is a Property Fund must use only a Closed-ended legal structure for the investment vehicle, unless it is an Exempt Fund or a Qualified Investor Fund.
            (2) In the case of a Property Fund which is or intends to be a Public Fund, the Fund Manager:
            (a) may only use either an Investment Company or Investment Trust as the investment vehicle of the Fund;
            (b) must ensure that it is listed and traded on an Authorised Market Institution or is listed and traded on an exchange in a Recognised Jurisdiction within 3 years from the date on which the Units of the Fund are first Offered to the public or any other shorter period as specified in the Fund's Prospectus; and
            (c) must ensure that the Constitution of the Fund includes provisions that deal with:
            (i) the manner in which the issue and redemption of Units of the Fund will be made to ensure that the Fund is Closed ended; and
            (ii) if applicable, the circumstances in which any Private Placements may be made.
            (3) If the offer document or marketing material of a Property Fund which is an Exempt Fund or QIF states that it intends to be listed and traded on an Authorised Market Institution, or on an exchange in a Recognised Jurisdiction, it must:
            (a) be registered as a Public Company;
            (b) list and trade its Units on the exchange specified in its offer document or marketing material within 3 years of its registration; and
            (c) during the period pending its listing and trading, comply with all the requirements applicable to a Public Fund other than the requirements relating to:
            (i) the independent oversight function; and
            (ii) the issue of a Public Fund Prospectus.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

            • CIR 13.4.1 Guidance

              See Article 18A of the Law for the definitions of Open-ended Fund and Closed-ended Fund.

              Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
              [Amended] DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

        • Self-custody of Real Property for Public Funds

          • CIR 13.4.2

            (1) A Fund Manager of a Public Property Fund is not required to appoint an Eligible Custodian under CIR Rule 8.2.2(2) for Real Property if the Fund Manager:
            (a) acts as custodian of the Real Property;
            (b) has in place adequate systems and controls to ensure the proper segregation and protection of the Real Property; and
            (c) has in place effective arrangements which ensure that the real Property is not available to creditors if the Fund Manager becomes insolvent.
            (2) The systems and controls referred to in (1)(b) must, as a minimum, ensure that:
            (a) legal title to the Real Property is registered in the name of the Fund;
            (b) the Fund Manager identifies, manages and monitors any conflicts of interest that may arise due to it acting as custodian of the Real Property;
            (c) the Fund Manager clearly designates the employees who are responsible for safeguarding the ownership rights of the Fund over any Real Property including but not limited to:
            (i) safekeeping title deeds and other legally relevant documents relating to the Real Property; and
            (ii) ensuring that legal title to the Real Property is registered in the name of the Fund; and
            (d) the employees referred to in (c) are not required to carry out duties and functions which may conflict with their duties and functions referred to in that paragraph.
            [Added] RM158/2015 (Made 9th December 2015). [VER19/02-16]

            • CIR 13.4.2 Guidance

              1. A Fund Manager of a Public Property Fund may itself act as custodian of Real Property if it has in place adequate systems and controls to ensure the segregation and protection of the Real Property. This option only applies for Real Property (defined as land or buildings, whether freehold or leasehold, where the unexpired term of any lease exceeds 20 years). It does not permit the Fund Manager to act as custodian of Property Related Assets such as Shares in a Body Corporate which invests in Real Property or Units in another Property Fund.
              2. In identifying, managing and monitoring conflicts of interest that may arise due to it acting as custodian, the Fund Manager must take into account that it is required under the Law to give priority to Unitholders' interests if there is a conflict between its own interests and the interests of Unitholders.
              3. If a Fund Manager decides to act as custodian of Real Property as permitted under this Rule, it must disclose in the Fund's Prospectus that it acts as custodian, the additional risks that may arise due to it acting as custodian, and how it has addressed those risks (see CIR Rule 14.4.4A).
              [Added] RM158/2015 (Made 9th December 2015). [VER19/02-16]

        • Self-custody of Real Property for Exempt Funds

          • CIR 13.4.2A

            A Fund Manager of an Exempt Property Fund is not required to appoint an Eligible Custodian under CIR Rule 8.2.2(2) for Real Property if the Fund Manager:

            (a) acts as custodian of the Real Property; and
            (b) has in place effective arrangements which ensure that the Real Property is not available to creditors if the Fund Manager becomes insolvent.
            [Added] RM158/2015 (Made 9th December 2015). [VER19/02-16]

            • CIR 13.4.2A Guidance

              Under this Rule, the arrangements must be legally effective to ensure that the Real Property is not available to creditors if the Fund Manager becomes insolvent. This might involve, for example, the use of trust arrangements or registration of title in the name of the Fund. This option only applies to custody of Real Property and not, for example, to Property Related Assets.

              [Added] RM158/2015 (Made 9th December 2015). [VER19/02-16]

        • Alternative Custody Arrangements for Real Property in Certain Jurisdictions

          • CIR 13.4.2B

            (1) If a Fund Manager wishes to rely on CIR Rule 8.2.2(3)(a)(ii), or a Trustee of an Investment Trust wishes to rely on CIR Rule 8.2.3(b), to make alternative arrangements for the purposes of those Rules, it may do so only if the requirements in (2) and (3) are met.
            (2) The Fund Manager or, in the case of an Investment Trust, the Trustee, for the purpose of meeting the legal or regulatory requirements in relation to the ownership of Real Property applicable in the jurisdiction in which the Real Property is situated, may implement alternative arrangements for safekeeping where the arrangements:
            (a) in the case of an Investment Trust, enable the Trustee to continue to control the Fund Property; and
            (b) in all cases:
            (i) do not enable the Fund Manager to have unfettered control of the Fund Property; and
            (ii) are in accordance, where applicable, with the requirements in Rules CIR 13.4.6 to CIR 13.4.11.
            (3) If the Fund Manager or, in the case of an Investment Trust, the Trustee, implements arrangements in accordance with (2), it must satisfy the DFSA that the arrangements have the effect specified in (2) and are legally effective in the DIFC and in the jurisdiction where the Real Property is situated.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

            • CIR 13.4.2B Guidance

              1. CIR Rule 13.4.2B applies in limited situations such as where legal title to Real Property cannot be held in a GCC country due to an applicable law in another jurisdiction. It enables Fund Managers and Trustees to find suitable alternative arrangements to those mandated under Rule CIR 8.2.2(2) and CIR 8.2.3(b) for the safekeeping of Real Property. In such situations appropriate use of declarations of trust, indemnities and resolutions may produce an acceptable alternative. The DFSA has previously permitted such alternative arrangements by way of waiver and modification to earlier provisions preceding the enactment of Rule CIR 8.2.2(2) and CIR 8.2.3(b).
              2. Note that in relation to an Investment Company or Investment Partnership, CIR Rule 8.2.2 requires a Fund Manager to delegate the activity of Providing Custody to an Eligible Custodian. In relation to an Investment Trust, CIR Rule 8.2.3(b) also permits a Trustee to delegate the activity of Providing Custody to an Eligible Custodian.
              Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
              [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

        • Investment Committee

          • CIR 13.4.3

            (1) A Fund Manager of a Property Fund must, subject to (2), call a meeting of Unitholders to vote on the election of at least three experts who are independent of the Fund Manager to sit on an investment committee of the Fund.
            (2) A Fund Manager of a Fund which is constituted as an Investment Trust need not appoint an investment committee.
            (3) The committee members in (1) are appointed to review investment opportunities and must not involve themselves in the day to day management of the Fund.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

        • Investments

          • CIR 13.4.4

            (1) A Fund Manager must, subject to (2), ensure that the assets of a Property Fund, except where otherwise provided in the Rules in this section, consist only of any or all of:
            (a) Real Property;
            (b) Property Related Assets; or
            (c) Units in another Property Fund; and
            (d) cash, government and public Securities, up to a maximum of 40%.
            (2) The requirements in (1) do not apply to a Fund Manager during the initial 6 month period of the Fund's operation and in any case, will be subject to any other time period set out in the Prospectus or as approved by a Special Resolution of the Unitholders.
            (3) A Fund Manager must ensure that:
            (a) Property Related Assets of a Public Property Fund:
            (i) are listed and traded on an Exchange which is provided for in the Prospectus of the Fund; or
            (ii) if not listed and traded as specified in (i), are approved and reviewed regularly by the investment committee of the Fund to ensure that they are sufficiently liquid and can be accurately valued; and
            (b) the Property Fund does not grant any Person an option to acquire any property included in the Fund.
            (4) The Fund Manager or, where appointed, the Trustee, must, subject to (5), ensure that the Fund holds good marketable legal and beneficial title in all its Real Property, whether directly or via Special Purpose Vehicles controlled by the Fund. The Fund may hold such title as joint tenants or tenants-in-common with one or more third parties provided that the Fund must hold the majority interest and control and have the freedom to dispose of its interest.
            (5) Any special arrangement entered into in respect of Fund Property for the purposes of Islamic finance arrangements where the legal title to the property is held by a financial institution will be acceptable for the purposes of (4) provided information relating to such arrangements either disclosed in the Prospectus of the Fund or approved by Special Resolution of Unitholders.
            (6) The Fund Manager and, if appointed, the Trustee, must take all reasonable care to ensure that the Fund Manager arranges adequate property insurance and public liability insurance coverage in relation to the Real Property of a Fund.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

            • CIR 13.4.4 Guidance

              1. CIR Rule 13.4.4(5) enables Fund Managers and Trustees to use certain Islamic structures such as ijara for property financing which require the legal ownership of the real property to be held by the financial institution providing the financing.
              2. CIR Rule 13.4.4.(5) does not require individual transactions to be specified in the Prospectus or approved by Special Resolution of Unitholders. Instead, it would be sufficient for general information relating to such arrangements, such as their legal effect, to be included in the Prospectus, failing which Unitholder approval by Special Resolution will be required. Similarly, Unitholders can by Special Resolution grant general approval for use of such Islamic financing arrangements, obviating the need for each specific transaction to be separately approved.
              Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

        • Borrowing

          • CIR 13.4.5

            (1) The Fund Manager of a Public Property Fund may borrow either directly or through its Special Purpose Vehicle for financing investment or operating purposes, but aggregate borrowings must not at any time exceed 50% of the gross value of the Fund.
            (2) The Fund Manager of a Fund may pledge the Fund's assets to secure borrowings under (1).
            (3) In the event that the borrowing limit under (1) is exceeded, the Fund Manager must inform the Trustee (if appointed), the Unitholders and the DFSA of the magnitude of the breach, the cause of the breach, and the proposed method of rectification. The Fund Manager must use its best endeavours to reduce as soon as reasonably possible the excess borrowings.
            (4) All borrowings by the Fund must be conducted at arm's length.
            (5) Borrowings by any Special Purpose Vehicles held by the Fund must be aggregated for the purpose of calculating borrowings of the Fund for the purposes of this Rule.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] DFSA RM137/2014 (Made 21st August 2014). [VER17/06-14]
            [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

            • CIR 13.4.5 Guidance

              The gross asset value of a Fund should be calculated as the total value of the Fund Property, based on the most recent valuation under CIR Rule 8.4.1(1), but without making the deductions provided for in the other paragraphs of that Rule.

              [Added] RM158/2015 (Made 9th December 2015). [VER19/02-16]

        • Joint Ownership Arrangement

          • CIR 13.4.6

            The Fund Manager must ensure that when a joint ownership arrangement is entered into, the Fund has a majority stake or holding in respect of that arrangement, that is, more than 50% ownership and control in each property at all times.

            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

          • CIR 13.4.7

            (1) In making any joint ownership investment under CIR Rule 13.4.6, the Fund Manager must:
            (a) be able to demonstrate that the arrangement, including the decision to own less than a 100% interest in the property, is in the interests of the Unitholders; and
            (b) must obtain a legal opinion in accordance with (2).
            (2) The legal opinion referred to in (1)(b) must include:
            (a) a description of the significant terms of the joint ownership arrangement;
            (b) a statement whether the Fund will have a good and marketable legal and beneficial interest in the property;
            (c) a description of the equity and profit sharing arrangements of the parties to the agreement;
            (d) a statement that the relevant contract and joint ownership arrangements are legal, valid, binding and enforceable under applicable law;
            (e) a statement that all necessary licences and consents required in the location where the subject property is located have been obtained by the Fund or its Special Purpose Vehicle;
            (f) any restriction on divestment by the Fund of its interest, in whole or in part, in the property; and
            (e) if applicable, the implication of foreign rules and regulations that may prohibit full ownership of the property by the Fund.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

          • CIR 13.4.8

            The Fund Manager must ensure that:

            (a) proper due diligence is conducted in identifying restrictions and constraints that may limit a Fund's direct ownership of a 100% interest in a property; and
            (b) the liability of, or assumed by, the Fund does not exceed the percentage of its interest in the joint ownership arrangement and there is to be no assumption of unlimited liability by the Fund.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

          • CIR 13.4.9

            The Fund Manager must disclose to Unitholders;

            (a) the ownership structure of the property interest and the material terms thereof, including restrictions on divestments and the impact or implication of such restrictions on the divestment value of the interest in the property;
            (b) the identity, background and ownership of the remaining legal and beneficial owners in the property, transactional history of these owners with the Fund in relation to the property;
            (c) financial, remuneration, fee-sharing or other material arrangements that have been or will be entered into between the Fund and the other owners of that property or their associates;
            (d) a summary of the contents of the legal opinion in CIR Rule 13.4.7(1)(b) in relation to the property; and
            (e) where appropriate:
            (i) the nature of restrictions on foreign ownership and the duration of them, and the impact of such restrictions on the operations and financial position of the Fund as a whole;
            (ii) the Valuer's opinion and evaluation of the impact of such prohibitions on the value of the property; and
            (iii) any other information which may reasonably be relevant to a Unitholder.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

        • Use of Special Purpose Vehicles

          • CIR 13.4.10

            (1) The Fund Manager of a Property Fund may hold Real Property for the Fund through a Special Purpose Vehicle, subject to (2) and (3), only if the Fund has majority ownership and control of the Special Purpose Vehicle.
            (2) A Special Purpose Vehicle set up by the Fund Manager of a Fund under (1) may itself hold Real Property through another Special Purpose Vehicle (the second Special Purpose Vehicle) for the sole purpose of directly holding Real Property for the Fund or arranging financing for the Fund but the second Special Purpose Vehicle must not hold Real Property for the Fund through another Special Purpose Vehicle.
            (3) The Fund Manager of the Fund must ensure that:
            (a) neither the Constitution of any Special Purpose Vehicle nor the organisation, transactions or activities of such vehicles under any circumstance contravene any requirements of the Rules in this section;
            (b) the board of directors of each of the Special Purpose Vehicles is appointed by the Fund Manager in agreement with the Trustee or Persons performing oversight functions of the Fund where applicable and, where elected, the investment committee; and
            (c) both the Fund and the Special Purpose Vehicles must appoint the same Auditor and adopt the same accounting principles and policies.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

            • CIR 13.4.10 Guidance

              Additional Special Purpose Vehicles may be permitted by the DFSA by waiver or modification under limited circumstances, such as where the Fund Manager can demonstrate to the satisfaction of the DFSA that the arrangement is necessary for the purpose of meeting the legal or regulatory requirements of another jurisdiction.

              Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
              [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

          • CIR 13.4.11

            If the Fund acquires Real Property through the acquisition of a Special Purpose Vehicle, the following matters must be complied with by the Fund Manager for the purpose of the purchase:

            (a) a report made by the Fund's Auditor must be prepared on:
            (i) the profit and loss of the Special Purpose Vehicle for each of the three years preceding the transaction or any shorter period as is relevant if the Special Purpose Vehicle was in existence for less than three years; and
            (ii) the assets and liabilities of the Special Purpose Vehicle as at the last date, which is no more than 6 months old from the date of the report to which the accounts of the Special Purpose Vehicle were prepared;
            (b) the report required under (a) must:
            (i) indicate how the profits and losses of the Special Purpose Vehicle would, in respect of the Shares to be acquired, have affected the Fund, if the Fund had at all material times held the Shares to be acquired; and
            (ii) where the Special Purpose Vehicle has subsidiaries, deal with the profits or losses and the assets and liabilities of the Special Purpose Vehicle and its subsidiaries, either as a whole, or separately; and
            (c) a valuation report in respect of the Special Purpose Vehicle's interest in Real Property must be prepared in accordance with the requirements set out in Rules CIR 13.4.18 to CIR 13.4.22.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

        • Related Party Transactions

          • Guidance

            1. A Fund Manager of a Public Property Fund is required pursuant to CIR Rule 8.3.2 to obtain the agreement of Unitholders by way of an ordinary resolution before undertaking a Related Party Transaction where the total consideration or value of the transaction is 5% or more of the net asset value of the Fund. See also CIR App2 and CIR App3.
            2. A Fund Manager of a Public Property Fund may enter into a Related Party Transaction for the acquisition or sale of Real Property in the State without obtaining specific approval for the transaction under CIR Rule 8.3.2 if all of the conditions in CIR Rule 13.4.11A(1) are met.
            3. If a Fund Manager enters into a Related Party Transaction under the exclusion in CIR Rule 13.4.11A, it must notify Unitholders of details of the transaction as soon as practicable after entering into the transaction. It also must disclose in the Fund's Prospectus if it has Unitholder approval to enter into such transactions without obtaining a resolution in each case (see CIR Rule 14.4.4B).
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

          • CIR 13.4.11A

            (1) The Fund Manager of a Public Property Fund is not required to comply with CIR Rule 8.3.2(3) and (4)(a) for a Related Party Transaction if:
            (a) the transaction is for the acquisition or sale of Real Property in the State;
            (b) the Fund Manager has general Unitholder approval in accordance with (2) to enter into such transactions;
            (c) the oversight provider of the Fund has confirmed in writing, before the transaction is entered into, that it is on terms that comply with the requirement in CIR Rule 8.3.2(2) and that all other applicable requirements have been complied with; and
            (d) the investment committee of the Fund has confirmed in writing, before the transaction is entered into, that it is on terms that comply with the requirement in CIR Rule 8.3.2(2) and it has no objection to the transaction.
            (2) Unitholder approval under (1)(b) must be by way of an ordinary resolution of the Unitholders of the Fund that:
            (a) was passed at the previous annual general meeting of the Fund;
            (b) is valid only until the date of the next annual general meeting of the Fund (when it may be renewed): and
            (c) authorises the Fund Manager to enter into Related Party Transactions referred to in (1)(a) without obtaining prior Unitholder approval in each case during the period for which the resolution is valid.
            (3) If a Fund Manager of a Public Property Fund enters into a Related Party Transaction under this Rule, it must as soon as practicable after entering into the transaction provide written notification to Unitholders of the Fund setting out relevant details of the transaction including the identity of the Related Party and the nature and extent of his interest.
            [Added] RM158/2015 (Made 9th December 2015). [VER19/02-16]

          • CIR 13.4.12

            (1) The following information in relation to Related Party Transactions must be disclosed to Unitholders and where appointed, the Trustee, by the Fund Manager of a Public Property Fund:
            (a) any beneficial interests of the Related Party, and any changes thereof, in the Fund; and
            (b) any potential conflicts of interests involving the Related Party and the measures implemented to address such conflicts.
            (2) If the Fund Manager operates more than one Fund and a transaction involves two or more of the Funds operated by the Fund Manager, such transactions between the Funds will be Related Party Transactions for each of the Funds involved in the transactions.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

          • CIR 13.4.13

            (1) Where any Related Party has an interest in an Undertaking which competes or is likely to compete, either directly or indirectly, with the Fund's activities, the Fund Manager of a Public Property Fund must disclose to Unitholders and where appointed, the Trustee, the following:
            (a) a description of the Undertaking of the Related Party and its management, to enable Unitholders to assess the nature, scope and size of such business, with an explanation as to how such Undertaking may compete with the Fund;
            (b) where applicable, a statement from the relevant Related Party that it is capable of performing, and shall perform, its duty in relation to the Fund independently of its related business and in the best interests of the Fund and its holders; and
            (c) a statement as to whether the Fund may acquire any of the related business or assets of the Related Party.
            (2) If there is any change in information required under (1) after initial disclosure, the Fund Manager must disclose such changes to the Unitholders and where appointed the Trustee.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

          • CIR 13.4.14

            Where a Related Party has, for the purpose of the establishment of the Fund, agreed to sell Real Property to the Fund, the Fund Manager of a Public Property Fund must disclose the following in the Prospectus:

            (a) a valuation report by an independent valuer of the Real Property that the Related Party has agreed to sell; and
            (b) the price to be paid by the Fund for the Real Property and other material terms of the transaction.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

          • CIR 13.4.15

            (1) The Fund Manager of a Public Property Fund must ensure that if any cash forming part of the Fund's assets is deposited with a Related Party (being an institution licensed to accept deposits), interest must be paid on the deposit at a rate not lower than the prevailing commercial rate for a deposit of that size and term.
            (2) The Fund Manager of a Public Property Fund must ensure that in the event of borrowing from a Related Party (being an institution licensed to lend money), interest charged on the borrowing is at a rate not higher than the prevailing commercial rate for a borrowing of that size and term.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

          • CIR 13.4.16

            (1) This Rule applies to a Related Party Transaction of a Public Property Fund that involves either:
            (a) services provided in the ordinary course of estate management of Real Property of the Fund, including renovation and maintenance work; or
            (b) engaging a property agent to provide services to the Fund, including advisory or agency services in property transactions.
            (2) The Fund Manager, and if appointed, the Trustee, must ensure that if the value of the transaction is 5% or more of the most recent net asset value of the Fund as disclosed in the latest published audited accounts, it is entered into only with the prior approval of the oversight provider of that Fund.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

            • CIR 13.4.16 Guidance

              The requirements in CIR Rule 13.4.16 are in addition to other requirements in these Rules applying to Related Party Transactions. For example, under CIR Rule 8.3.2, the Fund Manager must ensure the transaction is on normal commercial terms, is subject to Unitholder approval if it represents 5% or more of the net asset value of the Fund and is disclosed to Unitholders.

              [Added] RM158/2015 (Made 9th December 2015). [VER19/02-16]

          • CIR 13.4.17 [Deleted]

            [Deleted] RM158/2015 (Made 9th December 2015). [VER19/02-16]

        • Valuation Function

          • CIR 13.4.18

            (1) The Fund Manager of a Property Fund must, subject to the approval of the Trustee, appoint a Person who is able to provide professional valuation services in accordance with the Rules in this section.
            (2) The Fund Manager must ensure that the Person appointed under (1) values each Real Property prior to its acquisition and disposal.
            (3) The Fund Manager must commission the Person referred to in (1) to produce a valuation report of the Property Fund each year in accordance with CIR Rule 13.4.22. The net asset value of the Fund following this valuation must be reported in the annual report of the Fund.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

          • CIR 13.4.19

            For the purpose of CIR Rule 13.4.18, a Fund Manager must appoint a Person:

            (a) who carries on the business of valuing Real Property;
            (b) who is not Related to the Fund Manager; and
            (c) whom the Fund Manager, and if appointed the Trustee, have reasonable grounds to believe would be capable of providing objective valuation of Real Property.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

            • CIR 13.4.19 Guidance

              1. The term "Related" has the meaning given to it in the GLO module.
              2. A Fund Manager, and where appointed the Trustee, in forming the opinion required under CIR Rule 13.4.19(c), should be satisfied that the Person to be engaged for providing valuation of Real Property meets if not all, at least most of the following criteria:
              a. the Person is a, or has key personnel who are, fellow or associate members of a recognised professional body of surveyors or property valuers and who are qualified to perform property valuations;
              b. the Person has or has access within the organisation to the relevant expertise, that is, knowledge of and experience in the valuation of property of the relevant kind in the relevant area where the property is situated;
              c. the Person has robust internal controls and checks and balances to ensure the integrity of valuation reports and that these reports are properly and professionally prepared in accordance with international best practice;
              d. the Person has adequate professional insurance to cover its usual risks;
              e. the Person does not have ownership or other commercial links with any other Persons providing Financial Services to the Fund (such as investment advisers or investment managers appointed to the Fund), which would impair that Person's ability to provide independent and objective valuation services to the Fund; and
              f. the Person or any of his associates has not been instrumental in relation to the finding of the Real Property for the Fund.
              Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

          • CIR 13.4.20

            (1) A Fund Manager must ensure that any valuation by the Person appointed to provide valuation services to the Fund is carried out on the basis of an 'open market value' as defined in the Constitution and the most recent Prospectus of the Fund.
            (2) The valuation report under (1) must confirm that if the Real Property was acquired for the Property Fund it could be disposed of at that valuation within a reasonable period.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

          • CIR 13.4.21

            The Fund Manager must ensure that the property is acquired within a reasonable time from the date of the valuation report and in any event not later than six months from the date of valuation and at a price no more than 5% above the valuation price.

            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

            • CIR 13.4.21 Guidance

              The DFSA would expect the Fund Manager to define 'open market value' to be based on an authoritative text such as the Royal Institute of Chartered Surveyors' Appraisal and Valuation Standards (fifth edition) ("Red Book"); or similar practitioners text used by surveyors; or International Valuation Standards issued from time to time by the International Valuation Standards Committee

              Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

        • Valuation Report

          • CIR 13.4.22

            A Fund Manager must ensure that any valuation report prepared by the Person appointed:

            (a) includes all material details in relation to the basis of valuation and the assumptions used;
            (b) describes and explains the valuation methodologies adopted;
            (c) outlines the overall structure and condition of the relevant market including an analysis of the supply and demand situation, the market trend and investment activities;
            (d) includes a brief description of the property, its location, the nature of the interest the Fund holds in the property, its existing use, any encumbrances concerning or affecting the property, the lease expiry profile if any, the capital value in existing state at the date the valuation was performed, the net monthly income from the property, and any other matters which may affect the property or its value;
            (e) confirms the professional status of the valuer and that the valuation report is prepared on a fair and unbiased basis; and
            (f) explains the rationale for choosing the particular valuation method if more than one method is available.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

          • CIR 13.4.23

            A Fund Manager must ensure that whenever a valuation report is prepared for the Fund, the date of the valuation report must be:

            (a) the date the Fund is valued, if such report is prepared for the purpose of calculating the net asset value of the Fund; or
            (b) a date which is not more than six months before the date on which:
            (i) an offering document is issued;
            (ii) a circular is issued, if the circular relates to a transaction that requires Unitholders' approval; or
            (iii) a sale and purchase agreement or other agreement to transfer legal title is signed, if the transaction does not require Unitholder approval.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] RM165/2016 (Made 10th February 2016). [VER20/02-16]

        • Reappointment of Valuer

          • CIR 13.4.24

            (1) A Fund Manager must ensure that where a Person appointed pursuant to CIR Rule 13.4.19 has conducted valuations of the Real Property for the Fund for five consecutive years, that Person is not permitted to continue to provide valuation services for the Fund unless before the end of that period the position has been put out to tender and the Person has been re-appointed in accordance with that process..
            (2) If the Fund Manager decides to re-appoint the same Person to provide valuation services for the Fund following the tender process referred to in (1), it must, in the next interim or annual report provided to Unitholders, specify the reasons for the re-appointment and the evidence supporting those reasons.
            (3) The Fund Manager, and if appointed the Trustee on instructions of the Fund Manager, may at any time remove the Person appointed to provide the valuation services by notice in writing in any of the following events:
            (a) the Person enters into liquidation, becomes bankrupt or has a receiver appointed over its assets; or
            (b) the Fund Manager, in consultation with the Trustee, determines on reasonable grounds that it is necessary to remove that Person in the interests of the Fund and the Unitholders; or
            (c) an ordinary resolution is passed by the Unitholders to dismiss that Person.
            (4) Upon the retirement or dismissal of the Person appointed to provide the valuation services to the Fund, the Fund Manager must appoint another Person to provide valuation services to the Fund where the Fund Manager and where appointed the Trustee are satisfied that the Person meets the requirements specified in CIR Rule 13.4.19.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

      • CIR 13.5 Real Estate Investment Trusts (REITs)

        • CIR 13.5 Guidance

          1. See CIR Rule 3.1.8 for the definition of a Real Estate Investment Trust (REIT).
          2. REITs are a subset of Property Funds. The Fund Manager of a Public Property Fund, which is, or is to be held out, as a REIT, is required, in addition to the general Rules applying to Public Property Funds (such as Rules on borrowing and Related Party Transactions), to also comply with the Rules in this section.
          3. An Exempt Fund or Qualified Investor Fund may also be constituted as a REIT if it meets the criteria in CIR Rule 13.5.1(2). Such a REIT also has 3 years to list and trade if its offer documents (e.g. the Information Memorandum) or its marketing material state that it intends to list and trade its Units.
          Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
          [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]
          [Amended] DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

        • Real Estate Investment Trusts (REITs)

          • CIR 13.5.1

            (1) A Fund Manager, or any Person making an Offer of a Unit of a Fund or otherwise marketing a Fund, must not include the term "Real Estate Investment Trust" or "REIT" or refer to a Fund or otherwise hold out a Fund as being a Real Estate Investment Trust or a REIT, unless it is a Property Fund which is constituted in accordance with (2).
            (2) A REIT is a Property Fund which:
            (a) is constituted either as an Investment Company or as an Investment Trust;
            (b) is primarily aimed at investments in income-generating Real Property; and
            (c) distributes to the Unitholders at least 80% of its audited annual net income.
            (3) If at any time during the operation of the Fund the requirements in (2) are not met, the Fund Manager, and, if appointed the Trustee, must immediately notify the DFSA and the exchange of the failure to meet the requirements in these Rules and what measures have been or will be taken to remedy the breach.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]
            [Amended] DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

          • CIR 13.5.2

            (1) A Fund Manager of a REIT must ensure that it distributes to the Unitholders as dividends each year an amount not less than 80% of its audited annual net income.
            (2) The Persons providing oversight functions in respect of a Public REIT must determine if any;
            (a) revaluation surplus credited to income, or
            (b) gains on disposal of Real Property,
            shall form part of net income for distribution to Unitholders.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

          • CIR 13.5.3

            Where a Public REIT holds any Real Property via one or more Special Purpose Vehicles, the Fund Manager must ensure that each Special Purpose Vehicle distributes to the Fund all of its income as permitted by the laws and regulations of the jurisdiction where the Special Purpose Vehicle is established.

            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

          • CIR 13.5.4

            (1) A Fund Manager of a Public REIT must ensure, subject to (2), that any investment made in respect of property under development whether on its own or in a joint venture is undertaken only where the REIT intends to hold the developed property upon completion.
            (2) The total contract value of the property under development in (1) must not exceed 30% of the net asset value of the Fund Property of the Public REIT.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

            • CIR 13.5.4 Guidance

              For the purposes of CIR Rule 13.5.4, the DFSA would not consider property development activities to include refurbishment, retrofitting and renovation.

              Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

          • CIR 13.5.5 [Deleted]

            [Deleted] RM158/2015 (Made 9th December 2015). [VER19/02-16]

      • CIR 13.6 Hedge Funds

        • CIR 13.6 Guidance

          See CIR Rule 3.1.9 for the definition of a Hedge Fund.

          Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

        • Risk management

          • CIR 13.6.1

            A Fund Manager of a Hedge Fund must ensure that the risks inherent in the operation of a Hedge Fund are adequately addressed, with due regard to the nature of the strategies and investment process employed by the Fund Manager and the role of Fund Administrators and Custodians and where appointed, prime brokers.

            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

            • CIR 13.6.1 Guidance

              A prime broker is a Person who provides to a Fund a range of services including custody and depository services, trading and execution services, clearing and settlement services and financing to support the Fund's investment activities. Such financing activities generally include stock lending and borrowing. The restrictions in Rules CIR A1.3.1(c) and (f) of Appendix 1 (App 1) prevent a Fund Manager of a Hedge Fund from authorising a prime broker to commingle the assets of the Fund with any other assets held by or available to the prime broker and use those assets as collateral to support the prime broker's cross lending and borrowing activities involving Funds to which it acts as the prime broker. However, the restrictions in CIR A1.3.2(c) and (f) do not apply if a Fund Manager of a Hedge Fund can comply with the requirements relating to the use of prime brokers set out in CIR Rule 13.6.3.

              Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
              [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

          • CIR 13.6.2

            (1) The Fund Manager of a Hedge Fund must ensure functional separation and independence between:
            (a) the functions of Fund valuation and asset pricing; and
            (b) the investment management process.
            (2) Where the Fund manager is unable to demonstrate adequate separation and independence in accordance with (1), the DFSA may require the Fund Manager to appoint an independent, suitably competent and experienced Fund Administrator to perform the functions specified in (1)(a).
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

            • CIR 13.6.2 Guidance

              To provide segregation of the net asset value determination process of the Fund from the investment management process, generally personnel involved in the former should not be involved in the latter. An effective method of achieving such segregation is to delegate the calculation, determination and production of the net asset value to a suitably competent and experienced third party Fund Administrator.

              Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

        • Use of Prime Brokers

          • CIR 13.6.3

            A Fund Manager of a Hedge Fund may only grant to a prime broker authority to combine the assets of the Fund with any other assets held by or available to the prime broker as collateral for any financing activities to be undertaken by the prime broker where, and so long as, all the following conditions are met:

            (a) the Fund is an Exempt Fund or a Qualified Investor Fund;
            (b) the Prospectus of the Fund contains, in addition to the disclosure required under CIR chapter 14, the following mandatory disclosure and warnings:
            (i) the identity and profile of the prime broker, including where it is located and how it is regulated;
            (ii) the services which the prime broker provides to the Fund and the nature and extent to which the prime broker has the power and authority to combine the assets of the Fund with any other assets held by or available to the prime broker as collateral for any financing activities undertaken by the prime broker; and
            (iii) a prominent health warning in the Prospectus to alert prospective Unitholders to the facts that:
            (A) the Fund's appointed prime broker has the power and authority to use as collateral the assets of the Fund in conjunction with any other assets held by or available to the prime broker; and
            (B) where the prime broker uses Fund assets as collateral pursuant to the above power, the Unitholders may lose all the assets of the Fund in the event of the insolvency of the prime broker;
            (c) the Person appointed as the prime broker qualifies as an Eligible Custodian;
            (d) the agreement between the prime broker and the Fund Manager contains mandatory contractual provisions that:
            (i) prohibit the prime broker from using as collateral the assets of the Fund to an extent exceeding 140% of the Fund's indebtedness to the prime broker at any given time; and
            (ii) create an irrevocable right in favour of the Fund that enables any indebtedness of the Fund to the prime broker to be set off against any amounts that are owing by the prime broker to the Fund, including in the event of the insolvency of the prime broker; and
            (e) the Fund Manager has in place adequate valuation procedures to mark positions to market daily in order to meet on an ongoing basis the restriction referred to in (d)(i) relating to the limit to which the prime broker may use as collateral the assets of the Fund.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] DFSA RM137/2014 (Made 21st August 2014). [VER17/06-14]

            • CIR 13.6.3 Guidance

              1. If the prime broker holds the legal title to the Fund assets, the prime broker must, in any event, qualify as an Eligible Custodian. However, even if a prime broker does not hold the legal title to the Fund assets, CIR Rule 13.6.3(c) requires it to meet the Eligible Custodian requirements in certain circumstances. This is where it has the power to use Fund assets as collateral for its financing activities (e.g. by having a charge over the Fund assets) in conjunction with any other assets held by or available to it.
              2. In relation to the matters referred to in Rules CIR 13.6.1 and CIR 13.6.2 and in relation to management of Hedge Fund investments, the DFSA expects Fund Managers of Hedge Funds to have proper regard to best practice standards and guidance set out in CIR App 8, DFSA's Hedge Fund Code of Practice as well as international developments relating to Hedge Funds.
              Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
              [Amended] RM158/2015 (Made 9th December 2015). [VER19/02-16]

      • CIR 13.7 Umbrella Funds

        • CIR 13.7 Guidance

          See CIR Rule 3.1.10 for the definition of an Umbrella Fund.

          Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

        • Form of an Umbrella Fund

          • CIR 13.7.1

            Subject to any restrictions in the Law and the Rules in this module, an Umbrella Fund:

            (a) may be formed as a Protected Cell Company (PCC); and
            (b) must be an Open-ended Fund if formed as a PCC.
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]
            [Amended] DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

            • CIR 13.7.1 Guidance

              1. A Protected Cell Company (PCC) is a form of Investment Company which needs to be registered as a PCC under the Companies Regulations. An Umbrella Fund using the PCC structure has the benefit of legal segregation of Fund Property forming part of each individual cell. Accordingly, Fund Property of one cell of a PCC is not available to pay any obligations arising in relation to another cell of that PCC.
              2. It is not mandatory for an Umbrella Fund to be constituted as a PCC. Instead, such Funds may be formed as a conventional Investment Company or Investment Trust. However, the legal segregation available to each cell of a PCC is not available to Sub-Funds of Umbrella Funds not formed as a PCC.
              Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

        • Investments of an Umbrella Fund

          • CIR 13.7.2

            A Fund Manager of an Umbrella Fund must ensure that none of its Sub-Funds invests in another of its Sub-Funds.

            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

            • CIR 13.7.2 Guidance

              Requirements that apply to other Funds apply to Umbrella Funds equally, although there are some Umbrella Fund specific requirements. For convenience of reference, key provisions specific to Umbrella Funds are identified in the following Table.

              Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

          • CIR 13.7.3

            Additional requirements specific to Umbrella Funds

            Rule Requirements
            CIR Rule 3.1.10 Definition
            CIR Rule 13.7.1 Form of an Umbrella Fund
            CIR Rules 9.4.2 Annual and interim reports
            CIR Rules 9.4.6 Content of the annual report of an Umbrella Fund
            CIR Rules 9.4.9 Fund Manager's Report
            CIR Rules 13.7.2 Investment restrictions applicable to Fund of Funds when investing in a Sub-Fund
            CIR AppA7.1.1(2)(h)&17 Content of a Public Fund Prospectus
            CIR Rules 14.3.5 Content of a Short Form Prospectus
            Rules CIR 16.1.1, CIR 16.1.3(3) (4) & (5) Transfer schemes
            Rules CIR 17.1.1 & CIR 17.1.6 Winding up
            Derived from RM72/2010 (Made 11th July 2010). [VER13/07-10]

      • CIR 13.8 Money Market Funds

        • Investment Conditions and Borrowings

          • CIR 13.8.1

            (1) A Fund Manager of a Money Market Fund must ensure that the Fund's investment strategy is consistent with the investment objectives of such a Fund as set out in CIR Rule 3.1.11.
            (2) Without limiting (1), the Fund Manager of a Money Market Fund must ensure that:
            (a) at least 90% of the net asset value of the Fund Property is invested in Deposits or Debentures that are of high quality, as determined by the Fund Manager in accordance with CIR Rule 13.8.2;
            (b) at least 10% of the net asset value of the Fund Property consists of cash in accounts that permit the cash to be withdrawn immediately on demand;
            (c) Deposits with, or Debentures issued by, a single entity do not exceed 10% of the net asset value of the Fund Property;
            (d) the Fund invests only in Deposits or Debentures:
            (i) with a residual maturity until the legal redemption date of not more than two years; and
            (ii) where the time remaining until the next interest rate reset date is not more than 397 days;
            (e) the Fund Property has a weighted average maturity of not more than 6 months;
            (f) the Fund Property has a weighted average life of not more than 12 months;
            (g) the Fund does not invest in Financial Instruments other than Deposits or Debentures, except for:
            (i) Units in other Money Market Funds that have investment objectives and strategies consistent with those of the Fund; or
            (ii) Derivatives that are used solely to hedge against foreign exchange rate risk; and
            (h) the borrowings of the Fund do not, at any time, exceed 10% of the net asset value of the Fund Property.
            (3) In (2):
            (a) the "net asset value" of Fund Property, means the value of Fund Property at the most recent valuation under CIR Rule 8.4.1;
            (b) the "weighted average maturity" of Fund Property, means the average length of time to maturity of all the Financial Instruments held as Fund Property, weighted to reflect the relative holdings in each Financial Instrument, where the maturity of a floating rate instrument is the time remaining until the next interest rate reset; and
            (c) the "weighted average life" of Fund Property, means the weighted average of the remaining life of each Financial Instrument held as Fund Property, where the remaining life of a Financial Instrument is the time until the due date for repayment of the principal.
            [Added] RM158/2015 (Made 9th December 2015). [VER19/02-16]

            • CIR 13.8.1 Guidance

              IFR 6.12 sets out further Rules and Guidance about how the requirements in this section apply to Islamic Money Market Funds.

              [Added] RM158/2015 (Made 9th December 2015). [VER19/02-16]

        • Due diligence on investment quality

          • CIR 13.8.2

            To determine whether a Deposit or Debenture is of high quality for the purposes of CIR Rule 13.8.1(2)(a), a Fund Manager of a Money Market Fund must carry out due diligence to an adequate standard on the Deposit or Debenture, taking into account the following factors:

            (a) the credit quality of the Issuer, and any guarantor, of the Investment;
            (b) the nature and quality of the asset class represented by the Investment;
            (c) the liquidity of the Investment; and
            (d) any other risks associated with the Investment or the market in which it is traded.
            [Added] RM158/2015 (Made 9th December 2015). [VER19/02-16]

            • CIR 13.8.2 Guidance

              1. A Fund Manager must carry out the due diligence required under CIR Rule 13.8.2 as part of its internal procedures. However, this does not prevent it from using a service provider to carry out the necessary due diligence, provided the outsourcing requirements in these Rules are met.
              2. A Fund Manager will not meet the due diligence requirements in the Rule if it relies solely on credit ratings issued by a credit rating agency. This is because assessment of credit quality is only part of the due diligence required under the Rule.
              3. A Fund Manager should keep appropriate records of the due diligence it has conducted on an Investment to demonstrate that it has complied with the Rule.
              [Added] RM158/2015 (Made 9th December 2015). [VER19/02-16]

      • CIR 13.9 Exchange Traded Funds (ETFs)

        • Restriction on holding out to be an ETF

          • CIR 13.9.1

            A Fund Manager, or any Person making an Offer of a Unit of a Fund or otherwise marketing a Fund, must not describe the Fund in its offer document or marketing material as an "Exchange Traded Fund" (or "ETF") or otherwise hold out the Fund as being an Exchange Traded Fund or ETF, unless the Fund meets the criteria in CIR Rule 3.1.12.

            Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

            • CIR 13.9.1 Guidance

              See also Guidance item 4 under CIR Rule 13.9.6 for the difference between an Exchange Traded Fund or ETF and other exchange traded Open-ended Funds.

              Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

        • Systems and controls

          • CIR 13.9.2

            A Fund Manager of an ETF must take reasonable steps to ensure that any Authorised Participant it appoints has adequate systems and controls to ensure that the Units of the ETF are traded on-market at a price that does not significantly vary from the most recent Net Asset Value (NAV) of the ETF, or the indicative Net Asset Value (iNAV) of the ETF, if available.

            Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

            • CIR 13.9.2 Guidance

              See also Guidance item 3 under CIR Rule 13.9.6 for a description of iNAV and CIR Rule 14.4.8(f) for information relating to iNAV that is required to be included in a Prospectus.

              Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

        • Investment objective and strategy of an ETF

          • CIR 13.9.3

            A Fund Manager of an ETF must ensure that the investment objective and strategy of the Fund is to track the performance of an index or benchmark specified in its Prospectus.

            Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

            • CIR 13.9.3 Guidance

              CIR Rule 13.9.3 requires an ETF to track the performance of an index or benchmark. It therefore does not permit a Fund that is 'actively managed' to be established as an ETF. For more discussion about actively managed Funds—see the Guidance after CIR Rule 13.9.6.

              Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

        • Criteria for underlying indices or other benchmarks

          • CIR 13.9.4

            (1) A Fund Manager of an ETF may use an index or other benchmark for the purposes referred to in CIR Rule 13.9.3 only if it is provided by a Price Information Provider that meets the requirements in App 9.
            (2) In (1), a Price Information Provider is a price reporting agency or an index or benchmark provider which constructs, compiles, assesses or reports, on a regular and systematic basis, prices of Investments, rates, indices, commodities or figures, which are made available to users, including a Fund Manager.
            Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

        • Index or benchmark provided by a Related Party

          • CIR 13.9.5

            The Fund Manager of an ETF must treat an arrangement between the Fund Manager and a Related Party to use an index or benchmark provided by the Related Party as a Related Party Transaction.

            Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

            • CIR 13.9.5 Guidance

              1. An index or other benchmark referenced by an ETF is not the property of the ETF. If the index or benchmark is provided by a Related Party (for example, if it is custom made for the Fund Manager), it can give rise to conflict of interests that may pose the risk of distortion of information in favour of the Fund Manager, to the possible detriment of investors in the ETF. Therefore, CIR Rule 13.9.5 also applies the Related Party Transaction provisions in CIR Rule 8.3.2 to an arrangement under which a Fund Manager of an ETF uses or proposes to use an index or benchmark provided by a Price Information Provider which is a Related Party.
              2. A Fund Manager of an ETF will also need to comply with CIR Rule 13.9.4 in relation to a Related Party Price Information Provider which provides the index or the other benchmark it tracks.
              Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

        • Types of ETFs and their characteristics

          • CIR 13.9.6

            A Fund Manager of an ETF must take reasonable steps to ensure that the Fund's Prospectus and marketing material describe the type of ETF in a way that is clear and not misleading to enable investors and potential investors to understand the type of ETF, and its characteristics.

            Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

            • CIR 13.9.6 Guidance

              • General

                1. The terminology ETFs use are specific to ETFs. Depending on the type of ETF, their features could also be different. FSB, IOSCO and ESMA have issued guidance relating to types of ETFs, ETF terminology and ETF characteristics, to enable retail investors, in particular, to understand ETF terminology, different types of ETFs, and their associated characteristics better. The following Guidance is based on the material issued by those bodies, and is designed to assist Fund Managers of ETFs to meet their overarching obligation in CIR Rule 13.9.6.
                Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

              • ETF terminology

                (Annual) tracking difference

                2. (Annual) tracking difference measures the actual performance of the ETF, compared to the annual return of the tracked index or other benchmark, generally over a 12 month period (but this could be over a shorter specified period).

                Indicative Net Asset Value (iNAV)

                3. iNAV is a measure of the intraday value of the net asset value (NAV) of an index-based ETF, based on the most up-to-date information. iNAV is not the value at which investors buy and sell ETF Units through the Authorised Participant. iNAV is calculated and made available by the operator of the exchange on which an ETF is traded—based on the information made available to the relevant exchange by the ETF manager and the AP relating to the underlying portfolio of ETF assets.

                Exchange traded products (ETPs)

                4. ETF include a wide variety of different investment products that are traded on an exchange, such as exchange-traded commodities (ETCs), exchange-traded notes (ETNs), exchange-traded instruments (ETIs), and exchange-traded vehicles (ETVs). Most of these are debt instruments, and not equity participation rights conferred by a Unit of an ETF.
                Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

              • ETF features

                5. While an ETF is a Collective Investment Fund (Fund), as it has special features, it has been classified as a specialist class of Fund.
                6. An ETF differs from other Funds because unlike other exchange traded Funds, ETF Units have concurrent primary market and secondary market trading, primary market trading occurring in 'creation Units' between the Fund Manager and its Authorised Participant(AP), and secondary market trading between the AP and investors. See also Guidance under CIR Rule 3.1.12.
                7. Investors in an ETF may incur additional costs and fees as they have to buy and sell ETF Units through an Authorised Participant (who directly buys and sells 'creation units' in the ETF from the ETF Fund Manager). These are different to the Units of the ETF which are traded on the relevant exchange, and are generally of a larger denomination than the Units available to investors on the relevant exchange.
                Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]

              • Types of ETFs

                Index tracking ETF (Index-tracker)

                8. An Index-tracking (based) ETF typically seeks to replicate the performance of an underlying index or benchmark. It may do so either as a physical ETF or as a synthetic ETF.

                Physical ETF

                9. The investment strategy of a physical ETF is to hold physical securities and other assets to obtain returns that correspond typically to those of an underlying index or benchmark by replicating (and where appropriate, by sampling) the component securities of the relevant index or benchmark. Replication generally involves investing in the component securities of the underlying index or benchmark in the same approximate proportions as in the underlying index or benchmark.
                10. In certain cases, it may not be possible for an ETF to own every stock of an index (for example, due to, transaction costs, the index being too large, its components being illiquid, or because its market capitalisation weighting would result in the ETF violating regulatory requirements for asset diversification). In such instances, a physical ETF may rely on sampling techniques. For example, by acquiring a subset of the component securities of the underlying index, and possibly some securities that are not included in the corresponding index designed to improve the ETF's index-tracking.

                Synthetic ETF

                11. The investment strategy of a Synthetic ETF is to meet its investment objective by entering into a derivative contract (typically through a total return swap) with a selected counterparty. The swap contracts can take one of two forms:
                a. an unfunded structure; or
                b. a funded (or prepaid swap) structure, as described below.
                12. In both models, the derivative exposure is collateralised or reduced through the use of collateral or a portfolio management process, that may involve the services of a third party as collateral agent (in the funded model) or is covered by the substitute basket as assets of the ETF (in the unfunded model).

                Synthetic ETF (unfunded)

                13. In a synthetic ETF adopting the unfunded structure, the ETF Fund Manager invests the cash proceeds from investors in a so-called substitute or reference basket of securities (typically bought from a bank). The basket's return is swapped via a derivative contract with an eligible counterparty (frequently, the derivatives desk of the same bank), in exchange for the return of the index referenced in the ETF's investment objective.

                Synthetic ETF (funded)

                14. In a synthetic ETF adopting the funded structure, the ETF< Fund Manager enters into a swap in exchange for cash (or for the entire ETF portfolio) without the creation of a substitute basket.

                A leveraged ETF

                15. A leveraged ETF (which is often an index-tracking ETF) can have leverage exposure to an index, or exposure to a leveraged index.

                Actively managed ETF

                16. An ETF is actively managed if the Fund Manager exercises discretion over the composition of the invested portfolio in an attempt to outperform a chosen index or other benchmark. The key difference, compared to an index tracking ETF, is a Fund Manager's ability to adjust the portfolio without being subject to the set rules of the index or other benchmark referenced. An actively managed ETF could be a physical ETF or a synthetic ETF—with a portfolio selected at the discretion of the Fund Manager or derivatives designed at the discretion of the Fund Manager.
                17. The DFSA regime does not permit the creation of actively managed ETFs (see CIR Rule 13.9.3) as there is less transparency relating to the underlying portfolio of assets. This gives rise to potential difficulties in clearly identifying risks associated with exposures to counterparties and any collateral used in such ETFs, compared to ETFs that passively track the performance of a specified index or other benchmark.
                Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]