Fund and its Types in DIFC

The Dubai Financial Services Authority (DFSA) is an independent regulator of the financial and ancillary services which are conducted in, or from, the Dubai International Financial Center (DIFC). The activities of the DFSA include regulating the firms responsible for managing or distributing Collective Investment Funds (Funds). In this article, we will explore the regulatory regime for Funds in the DIFC and look at the types of funds along with some important details.

A lot of the information in this blog is referred from a DFSA published document.

Regulatory Regime for Funds in the DIFC

In 2006, the DFSA introduced its Funds Regime to meet the international standards for regulation and provide protection to investors. Therefore, the DFSA ensured that it provided a business-friendly and facilitative framework which was compliant with the principles of the International Organization of Securities Commission (IOSCO).

Also Read: What Makes a Good Real Estate Investor?

How are Funds Regulated?

To establish and manage a fund in the DIFC, you must be:

• • A DFSA-licensed Fund Manager or

• An External Fund Manager

DFSA-licensed Fund Manager

In order to obtain a DFSA license, you must demonstrate that:

• • You have all the systems and controls in place to be able to manage the type of Fund that you want to establish AND

• All the key members (Board members, senior management, etc.) within the firm meet the required suitability and integrity criteria

On receiving the license, the DFSA supervises the activities about the Funds managed by you on a regular basis.

Also Read: Real Estate vs Mutual Funds

External Fund Manager

Under the applicable requirements, a Fund Manager from an acceptable jurisdiction can establish and manage a Domestic Fund without a DFSA license provided:

• • It is a body corporate

• • It manages the Domestic Fund from a place of business which is located in a jurisdiction:
    • • Included in the DFSA’s Recognized Jurisdiction List OR
    • Assessed by the DFSA as providing an adequate level of regulation

• • It allows itself to be subjected to the DIFC Laws and Courts

• It appoints a DFSA-licensed Fund Trustee or Administrator who acts as the local agent of the External Fund Manager for regulatory processes pertaining to the DFSA.

Types of Funds

Specialist Funds – Islamic Funds

In case of an Islamic Fund, the Fund Manager must have a license which authorizes it to conduct Islamic Financial Business or an Islamic Window before the Fund is set up. Further, the Fund Manager must:

• • Appoint a Sharia Supervisory board or SSB to the Fund. It can use the firm’s existing SSB for the Shari’a-specific governance of the Islamic Fund

• • Establish and maintain systems and controls which are Sharia compliant. Also, establish Islamic business policies and procedures manual for the Fund.

• Get the Constitution and Prospectus of the Fund approved by the SSB (of the Fund or the Firm).

Hedge Funds

The Fund Manager of a Hedge Fund must ensure that he/ she manages the risks which are associated with the fund. This is possible through:

• • Making sure that the duties of the investment function and the Fund valuation process are adequately segregated.

• • Following the best practice guidelines and standards which the DFSA issues (particularly the DFSA Hedge Fund Code of Practice).

• Ensure that the requirements about the appointment of primary brokers are observed. This includes the authority of the primary brokers to combine the assets of the Fund with any other assets (permitted only in Exempt Funds and NOT in Public Funds).

Also Read: Mutual Funds and their Types

Private Equity Funds

Private Equity Funds are Exempt Funds. The Fund Manager of a Private Equity Fund must:

• • Appoint an Investment Committee to the Fund and NOT entrust the Fund Property to any eligible custodian

• Ensure that in the Prospectus it discloses the way the Fund’s assets are held

Property Funds

Property Funds invest predominantly in real estate or real estate-related assets and are close-ended Funds. Further, Property Fund which is a Public Fund must:

• • Invest only in physical property or property-related assets.

• • Be an investment company or an investment trust.

• • Be listed within 6 months of its establishment either on an Authorized Market Institution or an Exchange in a Recognized Institution.

• • Ensure that the Fund property is valued annually.

• • Also, ensure that the Fund property is valued before acquiring or disposing of an asset. This must be on the basis of an independent valuation.

• Finally, limit its borrowing to 80% of its total net asset value.

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Property Funds – Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts or REITs are a part of Property Funds which are designed to help investors generate income. REITs are close-ended funds and must:

• • Ensure that they use an Investment Trust or an Investment Company as the fund vehicle

• • Be a Public Fund which is listed and traded on an Authorized Market Institution

• • Ensure that it distributes around 80 percent of its audited annual net income among the unit holders

• • Limit its borrowing to 70 percent of its net asset value

• Not investing more than 30 percent of the total assets on properties under development