United Arab Emirates Financial Rules & Regulations PDF

Chapter Two Licensed Bodies Introduction 39 1. General Provisions 39 2. Licensing Financial Activities 44 3. Further Licence Applic...

Chapter Two Licensed Bodies Introduction 39 1. General Provisions 39 2. Licensing Financial Activities 44 3. Further Licence Applicant Requirements 47 This syllabus area will provide approximately 14 of the 100 examination questions 38  Licensed Bodies Introduction This chapter draws on the Securities and Commodities Authority (the SCA or the Authority) Decision No. 13 2 of 2021 titled ‘Regulations Manual of the Financial Activities and Status Regularisation Mechanisms’. This decision lays down various obligations and expectations for firms applying to be licensed bodies – to gain a licence from the Authority to perform one or more of the financial activities that were detailed at the conclusion of Chapter 1. 1. General Provisions 1.1 Legal Status, Place of Business and Close Ties Learning Objective 2.1.1 Know the obligations of licensed bodies in relation to: disclosure of legal status (Article 8); state of emergency (Article 9); place of business (Article 10); close ties (Article 11) The disclosure of a licensed body’s legal status, including the fact that it is licensed by the Authority, is important. It enables those that might suffer from perceived or actual misbehaviour at the hands of a licensed firm to raise their concerns with the regulator. The decision’s requirements include that each licensed body discloses its legal status by adhering to the following: 1. Disclosing to third parties that it is licensed by the Authority and is subject to the Authority’s control and supervision, alongside the licence category and the financial activity it conducts. 2. Including a letterhead in all its documents and work papers to the effect that it is a body licensed by the Authority, along with its licence number and addresses. This must be included whether it is delivered by hand, fax or email, or published or delivered by any other electronic means (such as on the firm’s website). This requirement applies to any communications with the Authority or clients, including client agreements and other documents. 39 3. Refraining from setting any condition that exempts or limits the responsibilities arising from practising its financial activity. Any condition, including an exemption or limitation from responsibility, will be null and void unless there is a force majeure or a state of emergency. 4. Refraining from using, utilising, or copying the Authority’s logo for any reason. If there is a desire to use the Authority’s logo for a specific reason, written permission is required. Article 9 of the decision provides some common-sense provisions to cover emergencies such as fire, electricity interruption, or loss of connections. The decision specifies that, in the case of an emergency that is out of the licensed firm’s control and cannot be avoided after taking reasonable steps and procedures, the firm is not required to adhere to the normal disclosure of legal status. However, the licensed body must notify the Authority immediately after knowing about any case of emergency and indicate its expected effects and the procedures that have been taken or suggested to be taken to deal with this case, and the way to manage or treat this as soon as possible in order to mitigate the probable losses for the body and its clients. The SCA’s decision also puts requirements on a licensed firm’s place of business. The head office of the licensed body must be within the geographic boundaries of the State, unless the firm has obtained the approval of the Authority (and any other concerned authorities) to practise its financial activity within another geographic boundary. The head office of the licensed body means the place in which it conducts supervision, regulation, management, control, and takes decisions on its operations (including its employees) to practice its financial activity inside the State. The head office is also required to be the address of the licensed body inside the State to communicate with the Authority or third parties. The licensed body may also establish one or more branches to practise the financial activity, after obtaining the Authority’s approval. In circumstances where a transaction relates to the financial activity that is conducted by the branch, communication may take place between the branch and the Authority. The head office and any branch of the licensed body must be actual, physical offices, and the Authority has the right to inspect either in order to check the licensed body’s readiness to practise the financial activity. The Authority also uses the decision to make sure that any close ties between the licensed firm and others do not make effective supervision difficult or impossible. It requires a licensed body to notify the Authority of any close ties and make sure that these ties will not impede the Authority’s supervision and control, and that the person intended to be tied with has fulfilled the standards of efficiency and appropriateness required of the Authority. The licensed body must also be ready to provide the Authority with the required documents and information related to these ties upon request. The Authority may, under the efficiency and appropriateness procedures, the licence requirements, and the capital market institutions’ requirements demand to end or amend close ties if it sees that they are not consistent with the required conditions or may impede the Authority’s supervision and control. The Authority may take what it deems as appropriate actions and apply sanctions for any failures to comply, which can include the cancellation of the licence. 40  Licensed Bodies 2 1.2 Inspections and Investigations Learning Objective 2.1.2 Know the obligations of licensed bodies in relation to: control and investigation (Article 12); contact with the authority (Article 13); providing information to the Authority and the capital market institutions (Article 14) The Authority may control and inspect the licensed body to confirm the extent to which it has complied with applicable laws and regulations. It may investigate any violations detected during inspections or included in the complaints or the reports received by the Authority. Licensed bodies are also required to reply to enquiries from the Authority, within the time determined by the Authority, and licensed bodies must enable their employees to attend investigations or meetings required by the Authority. Furthermore, the Authority may request any information, documents, or records from the licensed body or its employees, for control and inspection purposes from the electronic and non-electronic records, the computer data and systems, and other technical systems, or electronic means as long as they relate to financial paper transactions or to practising the licensed financial activity. The licensed body must then provide the Authority with what it demands, in a timely manner, along with enabling it to access, review and obtain a copy at the licensed body’s head office at its own expense. The Authority may oblige the licensed body to make and utilise an electronic link with the Authority or any of the capital market institutions. 41 In addition to investigating violations of the applicable legislations with the licensed firm, the Authority may investigate with members of the board of directors and/or the partners and/or its senior management and/or the employees of the licensed body and/or any of the investors or third parties. This may include requests for information or documents related to the investigation. Contact between the licensed body and the Authority may be in Arabic or English, but documents must be submitted in Arabic. However, the Authority may accept documents in English at its discretion, but in cases of contradiction, the Arabic language will supersede. Contact with the Authority must be through the permitted contact persons with both the necessary capacity and competence. Any application, complaint, or grievance submitted by incompetent or unauthorised persons will not be accepted. Moreover, it is the licensed body that remains responsible for any contact with the Authority using the licensed body’s papers, documents, emails, or any other means of contact of the licensed body by persons who have no competence, capacity, or authorisation from that licensed body. Article 14 covers the Authority’s expectations in respect of information provided to it and to the capital market institutions. ‘Information’ means any notices, notifications, disclosures, reports, correspondence sent to the Authority, as well as replies or answers to its requests or enquiries. The licensed body must do the following: 1. Make sure that all information and documents required to practise the financial activity or required by the Authority or any of the capital market institutions are submitted in a timely manner, along with ensuring that all of them are true, accurate, complete and well-founded. 2. Provide the Authority or any of the capital market institutions with the mentioned information and documents through the electronic systems specified for the same. In case of failing to submit using this method, they must be submitted according to the following: a. In written form. b. Detailing the name of the person who submits the documents or information, their job description and capacity to submit the same, as well as their contact number. c. The documents or information must be forwarded to the concerned department at the Authority, any of the capital market institutions, or to the office of the CEO of any of these authorities in case of failing to know the concerned department. d.. The documents or information can be delivered by registered mail, by hand, or by email. 3. Notify the concerned entity at the Authority or any of the capital market institutions immediately after the licensed body discovers that any of the submitted documents or information are incorrect, misleading, incomplete, inaccurate, not updated, or have been changed. If this is the case, the relevant information and documents should be identified, showing the reasons behind the issues. 4. Maintain sufficient evidence to prove the delivery and submission of the information and documents upon request. 42  Licensed Bodies 1.3 Sanctions Available to the Authority Learning Objective 2 2.1.3 Know the sanctions available to the Authority in the event of a violation of its provisions (Article 17) Without prejudice to the fines mentioned in the companies’ law or any related laws, the Authority may, in case of violating its provisions, place any of the administrational sanctions declared below: 1. Serve a notice. 2. Impose a financial fine of not more than AED 100,000. 3. Suspend the licensed body from practising the financial activity for a period of not more than one year. 4. Suspend any financial activity practised without a licence, and prevent any normal person from carrying out any tasks or works related thereto without obtaining an approval. The Authority may seek the assistance of the concerned authorities to execute its decision or close the violated head office. The Authority may cancel the licence of the licensed body or cancel the approval to practise the financial activity in any of the following cases: 1. Failing to meet one of the licence conditions or the conditions of practising the financial activity. 2. Severe violation of any of the duties or obligations. 3. Submitting data or documents that are incorrect, misleading, or forged to the Authority. 4. Failing to pay the annual fee prescribed to renew the financial activity, or failure to pay any of the fines prescribed by the Authority. 5. Where a final judicial judgment has been issued declaring bankruptcy, or where there are significant risks that will lead to bankruptcy. 6. If the licensed body is a party in a lawsuit which would adversely affect its ability to practise the financial activity. 7. If the licensed body is dissolved or liquidated. 8. If the licensed body, for a period of six months from the date of obtaining the category licence, did not practice a single financial activity as a minimum stated within the licence. The reasons behind the decision to cancel the licence or the financial activity will determine the way of disposing of the guarantee deposited at the Authority, or any of the capital market institutions, or keeping the same until settling all the obligations of the licensed body against its clients or any of the capital market institutions or the Authority The cancellation decision will be published at the expense of the licensed body in two daily newspapers issued in the State, one of which is in Arabic. The Authority may oblige the previously licensed body to transfer the records and the data of the contracted bodies, the clients, their accounts, and their securities to another licensed body or to any of the capital market institutions. 43 The Authority may, if the licensed body’s authorised employees commit any violation, impose any of the following administrational sanctions: 1. Serve a notice. 2. Suspension from practising their profession for a period of not more than two months. 3. Cancel the approval. 4. Impose a financial fine of not more than AED 100,000. The board of the Authority may publish the names of the violators of the law provisions or the decisions issued, and publish the fines and sanctions, in any way it determines is appropriate. The Authority also has the right to refer the violator to public prosecution. 2. Licensing Financial Activities This section details the provisions related to licensing categories and practising financial activities, along with regulatory approval of professional jobs in order to be able to practise any of those financial activities legally and appropriately. It also outlines some of the obligations related to the licensed body and the members of its board of directors, partners, senior management or employees. 2.1 Licensed Financial Activities and Categories Learning Objective 2.2.1 Know the types of licensed financial activities (Chapter 2, Article 1); licence categories (Chapter 2, Article 2) As already encountered in Chapter 1 of this workbook, the Authority can license the following financial activities: 1. Trading broker. 2. Trading and clearing broker. 3. Trading broker in the international markets. 4. Trading broker of OTC derivatives and currencies in the spot market. 5. Securities dealer. 6. Financial consultations. 7. Financial adviser (issuance manager). 8. Listing adviser. 9. Promotion. 10. Definition. 11. General clearing. 12. Securities portfolios management. 13. Investment funds foundation and management (the management company). 14. Management of investment funds’ investments. 15. Administrative services of investment funds. 16. Safe custody. 44  Licensed Bodies 17. Registrar of private joint stock companies. 18. Issuer of covered warrants. 19. Deposit bank. 20. Deposit bank’s agent. 2 21. Credit rating. Furthermore, the financial activities licence is divided into five categories: First category – Dealing in securities. Second category – Dealing in investment. Third category – Keeping, clearing and registration. Fourth category – Credit rating agencies. Fifth category – Arrangement and advice. 2.2 Initial Approval Conditions Learning Objective 2.2.2 Know the requirements for meeting initial approval conditions: financial eligibility (Chapter 2, section 3, Article 2); experience and efficiency (Chapter 2, section 3, Article 2); honesty and integrity (Chapter 2, section 3, Article 2); compliance (Chapter 2, section 3, Article 2); professional record (dismissal, sanction or licence cancellation) (Chapter 2, section 3, Article 2); feasibility study & work plan (Chapter 2, section 3, Article 2); resources (Chapter 2, section 3, Article 2); appropriateness of the company, its board and senior management (Chapter 2, section 3, Article 2) An applicant for a licence from the Authority must meet several conditions to gain initial approval including the following: 1. Financial eligibility – Not having refrained from paying commercial debts even if this is not accompanied by a bankruptcy declaration, rehabilitation in the event of a bankruptcy declaration, complying with the payment of banking loans for commercial purposes and the financial obligations resulting from a judicial decision or judgment, not having repeatedly had returned cheques because of commercial works and clarifying the extent of financial capability to meet incidental and future obligations. 2. Experience and efficiency – Availability of the required experience, establishment of previous experience and clarifying the extent of the experience in the same field, along with clarifying the ability to practise the financial activity and managing risks effectively. 3. Honesty and integrity – Provision of valid and complete information and documents. Moreover, the relevant records shall not include any matters that may cause prejudice or damage to the safety or reputation of the Authority or the State. There shall not be any judicial lawsuit, reports or investigations into prosecution concerning honesty and integrity, either inside or outside the State. Furthermore, there must not be a judgment or decision issued by courts or prosecutions over any breach of honesty, fraud or deception. 4. Compliance – Clarifying the extent of compliance with legislations whether the legislations related to practising the financial activity or the relevant applicable legislations. Furthermore, the professional record issued by the Authority or any other controlling or regulating authority inside or outside the State shall not include any administrative sanctions. 45  The name of the entity must not be listed in the sanctions lists issued by the UN and the other foreign organisations, particularly those who are concerned with encountering money laundering, terrorism financing and illegal organisations. Moreover, the licensed body, its partners or the members of its board of directors shall not have committed any crime or serious violation inside or outside the State within the five years before the filing request, not have committed any moderate violation inside or outside the State within two years before filing the request, and not be subject to any administrative or criminal investigations inside or outside the State while the request is being filed or studied. 5. Professional record – There shall not be dismissal or sanction of licence cancellation by other supervisory authorities or governmental institutions whether local or foreign. This shall be ensured by obtaining a copy of the professional record or by direct communication with those authorities. 6. Feasibility study and work plan – Submission of a realistic and logical study and work plan for practising the financial activity. This shall be evaluated by analysis of the logic of the bases, assumptions and plans that are relied upon in comparison with the same sector. 7. Availability of sufficient resources – The financial allocation according to the feasibility study and the work plan related to the potential or future obligations shall be sufficient and the required means shall be available for management of the risks related to financial activity practice. 8. Appropriateness of the company, the members of the board of directors and the senior management – Meeting the Authority’s efficiency and appropriateness standards. 46  Licensed Bodies 3. Further Licence Applicant Requirements Learning Objective 2 2.3.1 Know requirements for licence applicants in relation to: governance (Chapter 4, Article 2, point 6); administration (Chapter 4, Article 2, point 7); employees (Chapter 4, Article 2, point 8); behaviour (Chapter 4, Article 2, point 9); bonuses (Chapter 4, Article 2, point 10); technical systems (Chapter 4, Article 2, point 12) Further licensing conditions and requirements include the following: 3.1 Governance, Administration, Employees, and Technical Systems 3.1.1 Governance Regulation Licence applicants must provide governance guides that shall include the following: a. The number of the members of the board of directors or the board of managers and the senior management, provided that they shall be formed of sufficient number of members who shall have knowledge, skill, and various experiences to perform their tasks effectively. b. Clear duties and responsibilities of the members of the board of directors including application of governance and according to the nature and volume of works. c. The commercial targets of the licence applicant that are previously specified and the strategies for achieving such targets along with effective supervision or management thereof. d. The framework according to the best standards, and as suitable to the nature and volume of the financial activity, and as sufficient to enhance sound and wise management, and to protect the interests of clients and stakeholders. The licence applicant must also obtain an acknowledgment from the members of the board of directors, or the board of managers and the senior management upon appointment, that they have knowledge and full awareness of the limits of their duties and responsibilities. 3.1.2 Administration Regulation Licence applicants must provide a regulatory structure and a management work regulatory guide including the following: 1. The administrative hierarchy among the members of the senior management board and the main and approved jobs, including clear specification of the persons responsible for works. 2. The mechanism of separating between tasks and approved jobs in order to avoid conflicts of interest. 3. Specifying and clarifying the senior management’s responsibility for managing the licence applicant’s daily works according to the commercial targets and strategies approved by the board of directors, along with observing the employees’ works and supervising them effectively. 47 4. Specifying the senior officer who represents the senior management and who bears responsibility for mistakes resulting from practising the following: a. Distribution of tasks and responsibilities among employees. b. Supervising works and tasks and the extent of complying with them. c. Observing the work of the employees and workers of the licensed body and supervising them appropriately. 3.1.3 Employees Regulation Licence applicants must provide a guide for the required rules and regulations for ensuring that all its employees meet the efficiency and appropriateness standards expected of the Authority. These rules and regulations should apply to those employed and those assisting for a limited term to perform specific tasks, and natural persons to whom tasks have been outsourced. The rules and regulations must include the following: 1. A mechanism of revising and updating the rules and regulations related to the employees. 2. A mechanism of keeping the employees’ data in a record that will be continuously updated and certified on the website that includes the tasks and responsibilities of every one of them and the date of practising the tasks. 3. Keeping the employees’ data for a period of ten years from the date of the last update. There must also be behaviour regulation, including a professional code of ethics, that prohibits committing, participating in, or contributing to any behaviour that may represent any of the following: a. A financial crime under the applicable legislations. b. Wrong practices and violations of the applicable legislations. c. Practices or rumours that affect the reputation of the Authority or any of the capital market institutions. Licence applicants must also provide evidence clarifying any bonus mechanism according to the work goals, the strategies, the specified risk factors, the nature of jobs and roles and the results thereof and the long-term interests according to the nature of the financial activity. 3.1.4 Technical Systems The licence applicant must have the technical systems and technical and electronic programs required to practise the financial activity, along with clarifying the mechanism of updating them continuously, including an information safety and protection system for encountering and managing cyber risks, along with provision of a guide including the following: 1. The mechanism of encountering cyber risks and the method of dealing with them and managing them. 2. The procedures to immediately notify the Authority and the entities concerned with cyber security in the State after any hack or breach of cyber security. 48  Licensed Bodies 3.2 Risk Management, Compliance and Internal Audit Learning Objective 2 2.3.2 Know requirements for licence applicants in relation to: risk management (Chapter 4, Article 2, point 13); compliance (Chapter 4, Article 2, point 14); internal audit (Chapter 4, Article 2, point 15) 3.2.1 Risk Management Each licence applicant must submit a risk management guide that includes the following: a. Development and implementation of policies and procedures for managing risks encountered by the firm or its clients so that the risks officer becomes able to provide advice to the board of directors and senior management concerning those risks. b. Clarifying, evaluating, managing, observing and controlling risks along with counting and defining potential risks that may be encountered, and the method of dealing with them. Specifically, controlling and reporting on them should be sufficient to enable the continuing practice of the firm’s financial activity. The licence applicant must acknowledge that it has the knowledge and awareness of the risks and likely resultant effects. 3.2.2 Compliance Licence applicants must provide a compliance regulation guide that includes the policies and procedures that clarify programs, mechanisms, procedures, and periodicity of ensuring compliance with all relevant applicable legislations, namely the following: a. The procedures and mechanisms required to enable the compliance officer to have access to sufficient resources in order to perform the tasks and works independently, including the provision of a sufficient number of qualified employees under supervision. b. The procedures and mechanisms that ensure that the compliance officer shall have access to all records and to the board of directors and the senior management without any restrictions. c. The procedures of immediate reporting on compliance violations and the proposed mechanisms for rectifying them. 3.2.3 Internal Audit Each licence applicant must provide a guide regulating the internal audit processes in order to observe the extent of appropriateness and efficiency of the rules, procedures and bylaws. It must include the following: 1. The procedures and mechanisms required to enable the internal auditor to act independently, and not face interference nor merge the job with any other. 49 2. The procedures followed to ensure that the internal auditor shall, at all times, have access to the relevant records and information and to produce photocopies thereon, moreover, if required, to resort to the board of directors, the senior officer or the relevant committee formed by its board of directors for this purpose. 3. The mechanism of informing the financial auditor immediately of any matter that may affect the financial position of the licensed body. 4. Documentation of the structure, responsibilities and procedures of the internal auditor position. 3.3 Information Confidentiality and Reporting Breaches Learning Objective 2.3.3 Know requirements for licence applicants in relation to: information confidentiality (Chapter 4, Article 2, point 17); reporting violations and legal breaches (Chapter 4, Article 2, point 19) 3.3.1 Information Confidentiality Applicants for a financial activities licence must provide a guide clarifying the mechanism it uses to protect the confidentiality of information and to ensure it is not inappropriately leaked or disclosed. Such disclosure should only be made in the following circumstances: 1. If disclosure is required under applicable legislation in the State. 2. If the client agrees to disclose. 3. If disclosure is reasonably necessary to perform a particular financial service for the client. 4. If the information is no longer confidential. 5. If the disclosure is made upon request of judicial or supervisory entities in the State, such as the Authority or the capital market institutions. 3.3.2 Reporting Breaches Licence applicants must also provide a guide clarifying their policies in relation to ‘whistleblowing’ – encouraging employees to inform senior management and the Authority about any essential violations they come across while performing their job tasks. The whistleblowing policies should include a mechanism for protecting the reporting employee (the ‘whistleblower’) from any unfair prejudice by keeping their identity confidential whilst the reported violation is investigated. Furthermore, the Authority should be informed of any violation of the relevant legislations as well as other reports on any violation or breach of the rules, regulations, technical rules or the used technique. 50  Licensed Bodies 3.4 Complaints Handling Learning Objective 2 2.3.4 Know requirements for licence applicants in relation to complaints (Chapter 4, Article 2, point 20) The licence applicants must clarify the policies and procedures for dealing with, and investigating any complaints filed by clients. Such complaints must be dealt with justly, orderly and immediately. The policies and procedures must include the following: 1. Recording any complaint immediately after receiving it along with providing the complainant with the contact details and name of the employee in charge, the procedures of complaints handling services, the durations and the mechanism of keeping all its details, documents and correspondences, along with the procedures taken concerning it according to the legal periods. 2. Notifying the complainant periodically of the procedures taken to handle the complaint. 3. Notifying the complainant by letter on the date of the decision made in the complaint. 4. Other settlement mechanisms for handling any complaint that the complainant who filed it was not satisfied with the settlement, and the mechanism of providing suitable contact details upon request. 5. Providing a copy of the complaints handling procedures for free to any client upon request. 6. Ensuring that the employee that is the subject of the complaint does not participate in managing and providing the financial services concerning which the complaint was filed. 7. Ensuring that the employee to whom the complaint was referred has sufficient powers to settle the complaint or is able to communicate with the decision maker. 8. Referring the complaint to another body where necessary: a. Notifying the complainant that the complaint will be referred to another body in a dated letter. b. In the event that the complainant agrees, the complaint shall be immediately referred along with notifying the complainant in writing of the complaint referral date, the person responsible for the complaint in the body to which the complaint was referred and the contact and communication details. c. Continue handling any part of the complaint that was not referred. d. In the event that the complainant refuses referral or does not respond within a period of not more than ten business days, the complaint shall be considered within the limits of the available documents and information or returned to the complainant, along with provision of evidence proving the same in order to file the complaint to the relevant or competent body. 51 3.5 Outsourcing and Cloud Computing Learning Objective 2.3.5 Know requirements for licence applicants in relation to: general outsourcing (Chapter 4, Article 2, point 21, First); cloud computing (Chapter 4, Article 2, point 21, Second); outsourcing to an out-of-state party (Chapter 4, Article 2, point 29, Third) There are further expectations placed on licence applicants in respect of outsourcing. Licence applicants must provide an outsourcing guide that includes the mechanism for outsourcing tasks to a specialised legal personality (the outsourced party) inside or outside the State as the case may be, taking care to not assign any approved job or tasks unless expressly allowed. The guide must include the following: Firstly, certain general outsourcing provisions: 1. Procedures to ensure due diligence in choosing the appropriate outsourced party. 2. Procedures for effective supervision of outsourced jobs and tasks and to ensure that the outsourced party will maintain the outsourcing conditions, along with effective handling of any failure by it, default or breach of relevant applicable legislations. 3. Procedures followed for outsourcing jobs or tasks, along with ensuring that there are plans of emergency and management of outsourcing risks according to the Emergency Crisis and Disasters Management Authority. 4. Procedures for ensuring that the outsourcing arrangements will not adversely affect meeting the obligations towards the clients and the Authority and will not impede supervision and control. 5. Ensuring that the outsourced party maintains confidentiality of data and information. 6. There must not be outsourcing of all the main tasks of the license applicant entity to other parties resulting in the entity remaining without any essential tasks. 7. Documents establishing compliance with the following: a. Entering into a written outsourcing contract with the outsourced party and providing the Authority with a copy immediately after entering into the contract, and with any subsequent amendment or change. The contract must include a provision that grants the Authority the right to enter the headquarters of the outsourced party, if required, concerning the financial activity, to review the relevant documents and date and to take any of them. b. Providing the Authority with the required information and documents upon request and immediately. c. Full cooperation and coordination with the Authority whether by the outsourced party or the licensed body. d. Bearing full responsibility for any failure in performing the tasks or responsibilities or any breach of the obligations or violation of the relevant applicable legislations. e. Ensuring that the outsourced party has no outsourcing agreement terminated with any other licensed body for reasons related to a breach of its obligations or violation by it of the applicable legislations in the year before the outsourcing. f. Ensuring that the outsourced party obtained the Authority’s approval according to its conditions in the event that it desires to provide its services for more than one licensed body. 52  Licensed Bodies Secondly, certain additional provisions on outsourcing using cloud computing: For licence applicants using cloud computing for providing or giving computer services and resources via the internet (such as servers, databases, programs, networks, storage spaces, applications, etc), the 2 following are required: 1. Confirmation of the licence applicant’s clear understanding of the risks arising from cloud computing. 2. Ensuring that the servers for the cloud computing of the outsourced party and all other servers and computer resources are inside the State. 3. Ensuring that the outsourced party will not review the information and data and will keep such information confidential. 4. Ensuring that the outsourced party will provide an audit report from an external auditor on data and information security annually, sending a copy to the Authority and a copy to the capital market institutions (if the licence applicant is a member of any of them). 5. Ensuring that the outsourced party is able to keep and not lose or miss the data and information (‘zero data loss’) and protect them from any violation for ten years, along with keeping back-up copies of the data and information during that period. 6. Ensuring that the outsourced party is able to meet any additional requirements specified by the capital market institutions if the licensed body is a member of any of them. 7. Providing an exit strategy plan to handle cases of contract termination with the outsourced party in order to ensure maintenance of all data and information and valid transfer without missing data or infringing laws and regulations. 53 Thirdly, some additional provisions when outsourcing to a party outside the State: Licence applicants must comply with the following if outsourcing to a party outside the State (cross border): 1. Not outsourcing any approved jobs, tasks or services to any abroad entity unless expressly allowed, provided that the economic or legislative conditions of the State in which the outsourcing entity works does not prevent the outsourced party from performing its obligations towards the licensed body. 2. Informing the Authority and the capital market institutions – in the event that the licensed body is a member – if the supervisory authority, to which the outsourced party is subject, requests to review the data of the licensed body. 3.6 Record Keeping Requirements Learning Objective 2.3.6 Know record keeping requirements for licence applicants (Chapter 4, Article 2, point 22) Licence applicants must have procedures for keeping all electronic and non-electronic records related to the licensed body, the required technical guides and regulations, the practice of works, the clients’ transactions and data, the account opening agreements made with them, and everything related to practising the works and practising the financial activity. The mechanisms and procedures must enable the licensed body to recover any of those records or data from the archive within a period not exceeding three business days. The procedures must include the following: 1. The powers to review the records (according to the competence, responsibilities and legal duties of the role). 2. Clarification of the mechanism of keeping the records in a safe place for a period of not less than ten years, keeping back-up copies thereof for the same period, and protecting them from being exposed to any damage. 54  Licensed Bodies End of Chapter Questions Think of an answer for each question and refer to the appropriate section for confirmation. 1. Why is disclosure of legal status, including the licence, required for licensed bodies? 2 Answer reference: Section 1.1 2. What provisions exist in the event of a licensed firm facing an emergency, such as an electricity interruption? Answer reference: Section 1.1 3. Where does a licensed firm’s head office have to be? Answer reference: Section 1.1 4. What is required before a licensed firm sets up a branch? Answer reference: Section 1.1 5. What is the perceived danger of a licensed body having ‘close ties’? Answer reference: Section 1.1 6. What is expected of a licensed body that receives enquiries from the Authority? Answer reference: Section 1.2 7. What language must be used for submitting documents to the Authority? Answer reference: Section 1.2 8. What is the maximum fine that the Authority can impose as an administrational sanction? Answer reference: Section 1.3 9. How long can a firm be suspended under the administrative sanctions? Answer reference: Section 1.3 10. How many different types of financial activities can the Authority license? Answer reference: Section 2.1 11. What are the five categories of licence that are granted by the Authority? Answer reference: Section 2.1 12. Initial approval conditions include ‘honesty and integrity’ which includes considerations of what? Answer reference: Section 2.2 13. How do previous serious violations impact initial approval? Answer reference: Section 2.2 14. What areas are considered to be ‘further licence applicant requirements’? Answer reference: Section 3 55 15. Are bonus schemes allowed at licensed bodies? Answer reference: Section 3.1.3 16. What is expected of a licensed applicant in relation to risk management? Answer reference: Section 3.2.1 17. What is expected of a licensed applicant in relation to internal audit? Answer reference: Section 3.2.3 18. What is expected of a licensed applicant in relation to ‘whistleblowing’? Answer reference: Section 3.3.2 19. Are there any restrictions on a licensed body outsourcing to others? Answer reference: Section 3.5 20. How long do records need to be kept? Answer reference: Section 3.6 56 Chapter Three Investment Funds 1. Local Funds 59 2. Provisions Specific to Certain Public Investment Funds 64 3. Cash Investment Funds 68 4. Exchange-Traded Funds (ETFs) 69 5. Real Estate Funds 72 6. Evaluation of In-Kind Shares of Investment Funds 74 This syllabus area will provide approximately 15 of the 100 examination questions 58  Investment Funds 1. Local Funds 1.1 Establishing a Local Fund Learning Objective 3 3.1.1 Know who can establish local funds (Article 4, Resolution No. 01/Chairman of 2023 concerning the Regulation of Investment Funds) The Securities and Commodities Authority issued a Resolution (No. 01/Chairman) in early 2023 titled ‘Concerning the Regulation of Investment Funds’. Article (4) of the resolution details the persons involved in establishing a local fund. A local fund can be established by one of the following persons: 1. An entity licensed by the Authority to carry on the activity of management of Investment Fund investments. 2. An entity licensed by the Authority to conduct the activity of family investment management in relation to a family fund, provided that the units of the fund shall be 100% owned by one or more members of the family, whether such member is a natural person and/or corporate person which is wholly owned by them, and provided that the unit holder is the beneficial owner. It is the Authority that specifies the definition of family in relation to this type of fund. 3. Two or more natural and/or corporate persons in relation to a self-managed fund provided that the following conditions are met: a. The natural person must meet the conditions and standards of qualification and fitness related to approved employees’ fit and proper requirements as laid down in the Authority’s Financial Activities Rulebook, excluding passing of the professional licensing tests and continuous professional development. b. The corporate person must be established in the UAE and conduct a financial, banking or insurance activity. The corporate person 59  may also conduct other activities provided that their main activity is that conducted by the investment fund through its investment policy. The corporate person must also fulfil the following conditions: - Capital of not less than 20 million Dirhams. - To have been carrying on their main activity and realised net profits during the two financial years preceding the application to establish the fund. - To meet the initial approval conditions and the assessment requirements as stated in the Authority’s Financial Activities Rulebook c. The founders must subscribe at least 5 million dirhams into the fund. d. The founders must not dispose of the investment units owned by them for a period of at least 6 months from the date of foundation. e. The founders must pay a self-management fee for a self-managed fund as specified by the Authority, and the fund will be liable to settle all fees once it is licensed and established. A self-managed fund, through its founders, its board of directors, the executive body, and the investment committee – each within their respective responsibilities – must comply with the duties of the entity licensed to carry out the activity of management of the investment funds investments as stated in the Authority’s Financial Activities Rulebook. 1.2 Approval and Documents Learning Objective 3.1.2 Know the requirement for initial approval from the Authority, the need to publish both an offering document and KIID and the process of final approval (Articles 6, 7 & 12, Resolution No. 01/Chairman of 2023 concerning the Regulation of Investment Funds) 1.2.1 Initial Approval Establishing a local fund requires the approval of the Authority. An application must be submitted to gain initial approval, which the Authority will either grant, or reject within ten working days for a public fund and within five working days for a private fund, from the date of receipt of the application. The Authority may issue its approval on conditions or restrictions it considers necessary and may subsequently reject an application despite fulfilment of its conditions. The grounds for rejection are where the Authority judges approval is not in the best interests of the public, where it considers that the investment is not suitable for the investment environment in the UAE, or where it considers that the application does not represent the interest/s of the investors. The Authority must notify the applicant of its rejection and state the grounds of rejection. The Authority’s initial approval does not license the local fund to conduct its activity. Any act or procedure relating to carrying on the local fund’s activity based only on the initial approval are considered null and void. An initially approved fund is prohibited from making any announcements or initial procedures for establishing or licensing the local fund, subscribing in its units, promoting thereof, distributing any promotional materials or announcing any information until the Authority’s final approval has been obtained. 60  Investment Funds Furthermore, the founders of a self-managed fund must ensure that the fund meets the conditions of licensing the activity of managing the investments of investment funds in Section 2 of the Authority’s Financial Activities Rulebook during the initial approval period and before commencement of the offering procedures. A local fund is permitted to have a corporate identity throughout the period of its establishment and licensing to the extent necessary for it to fulfil its licensing conditions and enable it to carry out 3 necessary procedures such as acquisition of premises or lease, opening bank accounts, appointing approved employees and any other acts as may be allowed by law to be carried out by companies under incorporation. 1.2.2 Offering Documents The fund manager and the founders of a self-managed fund must prepare the local fund’s offering document (alternatively referred to as the prospectus) and the offering document information summary (alternatively referred to as the Key Investor Information Document or KIID) in Arabic or English. Both documents must not contain any promises, guarantees or incorrect or misleading information. The prospectus must include full disclosures of any shares in kind provided and the units to be issued against them, specifically: a. Full information on every share in-kind, its owners and value, and the number of units to be issued against every share. b. Summary of the evaluation report of the shares in-kind. c. Explanation of the extent to which the shares in-kind can be disposed of after establishing the fund pursuant to investment resolutions taken. d. Explanation of the extent to which the values of the shares in-kind will vary after establishing the fund according to the market circumstances and evaluation reports. 61 Attached to the prospectus there must be a copy of the subscription form that includes information on the local fund’s name, investment strategy, capital and the conditions of subscription, along with the subscriber’s name, address in the State, profession or activity, nationality, number of the investment units desired and an undertaking to accept the fund offering document’s provisions and the summary thereof. The fund manager and the founders of a self-managed fund must sign the offering document and its summary (KIID) and be responsible for validity of the data and information contained therein. Thereafter, the website of the fund manager and the self-managed fund must make available to the unit holders on a constant basis, and update on a regular basis, the prospectus and the KIID alongside the historical performance of the local fund. These must be made available to the unit holders without consideration. Note that family funds are excluded from the need for publication on the website. 1.2.3 Final Approval The fund manager and the founders of the self-managed fund must submit the following items to the Authority within no more than 30 days of the date of closing subscriptions. Failure to do so will deem the establishment procedures non-existent and require the return of the amounts subscribed. a. Certificate from the auditor of the local fund stating that subscription to capital has been completed. b. Submitting evidence proving that the natural and corporate persons who subscribed in a family fund are all family members and are 100% beneficial owners. The Authority will issue a certificate for establishing and licensing of the local fund to commence conducting its activities within 5 days from the date of submission of the auditor’s certificate and ownership evidence in relation to the family fund and on payment by the fund manager of the prescribed licensing fee. The term of the license of the local fund shall be one year commencing from the date of issuance of the first license. Thereafter, the fund manager and the executive body of the self-managed fund must submit an application for renewal of the license annually not less than one month prior to its expiry date, upon payment of the annual license renewal fee prescribed by the Authority from the fund. All the legalities performed by the fund manager or the founders of the self-managed fund in the incorporation and licensing process must be transferred to the local fund. The fund shall then bear all of the associated expenses except the expenses of offering and promoting the public fund units and the expenses of preparation of the offering document and other associated documents as required by the Authority. These expenses must be borne by the fund manager or the founders of the self-managed fund from their own resources. The local fund will have full corporate identity and independent financial accounts as of the date of issuance of the certificate of establishing which authorises it to carry out all the legal acts a company can carry out such as acquisition, lease, opening bank accounts, appointment of approved employees and others. The local fund must begin to exercise its investment policy within a period not exceeding 12 months from the date of being licensed. 62  Investment Funds 1.3 Reporting Requirements Learning Objective 3.1.3 Know the reporting requirements for local investment funds (Articles 14 & 15, Resolution No. 01/Chairman of 2023 concerning the Regulation of Investment Funds) 3 Every local fund must specify a financial year in the offering document and the first financial year of the local fund must not exceed 18 months in length, nor be shorter than 6 months from the licensing date of the fund. The subsequent financial years will be consecutive periods running for 12 months after the end of the precedent financial year. The administrator of a local fund must maintain the fund’s accounts and prepare the financial reports. The reports must be prepared in accordance with International Financial Reporting Standards (IFRS) and if required, they must also include the opinion of the Sharia’s Supervision Committee. The reports should consist of: 1. Semi-annual financial reports audited by an external independent auditor within a period of no longer than 45 days from the end of the semi- annual period. 2. Annual financial reports audited by an external independent auditor within a period of no longer than three months from the end of the local fund’s financial year. In addition to the financial reports, the fund manager and the self-managed fund’s board of directors must, in coordination with the investment fund’s administrator, prepare the following: 1. Semi-annual report on the public fund’s performance no later than 45 days from end of the semi- annual period. This should reflect the material changes in the public fund including the changes in the fund’s asset values and the changes made to the fund’s investment policy during the report’s period (if any). 2. Annual report on the local fund’s performance no later than three months from the date of end of the local fund’s financial year. This report must include the material changes, the fund’s related party transactions on the fund units, any investment restriction violations and the corrective procedures and their effects, and the level of performance of the fund service providers. The fund manager and the self-managed fund’s board of directors must publish all of the required reports in Arabic and English languages. It may also prepare additional copies in other languages and provide them to the unit holders on the website of the fund manager or the website of the self-managed fund or by any mean as agreed in the offering document, the subscription form, free of charges. Note that the reports related to any family fund will be limited to the unit holders as agreed upon under the offering document. In all cases, the Authority must be provided with copies of the reports, and the market must be provided with copies if the units are listed. 63 1.4 Private Funds Learning Objective 3.1.4 Know the additional restrictions for private funds in relation to advertising and promotion and transfer of units (Articles 31 & 32, Resolution No. 01/Chairman of 2023 concerning the Regulation of Investment Funds) 1.4.1 Promoting Private Funds All advertisements and promotional materials for private funds distributed to the unit holders must be copied to the Authority and must clarify the private fund’s specific nature and include the required disclaimer laid down by the Authority. Private funds must refrain from using public advertisement media of all types, including audio, video and read media. 1.4.2 Restrictions on Transfer of Title to the Private Fund Units Transferring title of a private fund’s units are limited to the following: Transfer to existing unit holders. Transfer to professional investors or counterparty, provided that the minimum nominal value of the transferred units is not less than 180 thousand Dirhams or the equivalent amount in other currencies. Transfer to any family member or corporate person 100% owned by a family member in a family fund. Furthermore, investment units of a family fund must not be sold or pledged to any third party who is not a family member or to a corporate person 100% owned by any such party. 2. Provisions Specific to Certain Public Investment Funds Learning Objective 3.2.1 Know regulations relating to: private equity funds (Decision No. (2/R.T) of 2017); venture capital funds (Decision No. (3/R.T) of 2017); general and limited partnership funds (Decision No. (32/R.M) of 2017) A series of decisions have been made by the Authority in relation to certain types of public investment funds and placed particular requirements on those funds. Those within the syllabus are detailed in this subsection. 64  Investment Funds 2.1 Private Equity Funds A private equity fund consists of a founder referred to as the general partner (or just the GP). The GP holds shares in the fund and typically manages the fund, although this could be outsourced to another licensed investment manager. In addition to the GP, there will also be other limited partners (LPs) who hold shares in the funds but have no role in the management. 3 When a private equity fund is incorporated, the incorporation agreement must, as a minimum, include the following: 1. The fund’s size and period for accumulation of contributions. 2. The fund’s intended investments. 3. A statement as to whether the investment management will be outsourced. 4. The remuneration of the general partner, or of the investment manager if outsourced, and any additional incentives. 5. The borrowing limits of the fund for investment purposes. 6. The fund’s term, dividend distribution dates, and withdrawal procedures. 7. The mechanism to liquidate the fund’s assets upon the lapse of its term. Private equity funds are required to invest most of their assets in shares. These shares will typically be in limited liability companies, partnerships, limited partnerships, or private shareholding companies. However, private equity funds are also permitted to buy securities of public shareholding companies that have started the process of converting to private shareholding companies or are about to commence a liquidation process. The general partner of the private equity fund takes on a series of obligations, including: Calculating the net asset value and the price of its units at the end of every three months. The assets should be valued in accordance with the international standards and at fair value. Performing a more detailed valuation of the fund’s assets at least once a year based on the audited annual financial reports of the companies where the fund places its investments. Determining the borrowing percentage is in compliance with the fund’s investment policy. Assuming full responsibility for the management, projects, investment decisions, and assets of the fund reflecting the fund’s objectives and investment policies and ensuring full co-operation among the related parties. 2.2 Venture Capital Funds A venture capital fund is a private investment fund that invests in high-risk assets such as new projects, modern technologies, distressed projects, or companies with new or creative ideas, in technology or otherwise, within the business sector. In addition to the investment funds regulations, the following conditions must be satisfied by a venture capital fund: The fund must invest at least 70% of its assets in one or more of the following investments: Units of other venture capital funds, provided that the investments of such funds are not more than 10% of their assets in other venture capital funds. 65  Equity instruments issued by companies not listed in the regulated primary market or other instruments issued by such companies or their affiliates, which will result in an equity stake. Lending money to unlisted companies, provided that such lending is not more than 30% of the fund’s assets, and provided that the fund is an investor in the company which issues such instruments. Lending money to the new or distressed projects, provided that such lending is not more than 30% of the fund’s assets, or the fund may become a partner in such projects. The venture capital fund’s investments which would be permitted for a public investment fund must not exceed 30% of its assets. There are additional requirements based on the total value of the assets held by the venture capital fund: For venture capital funds with managed assets that are valued at AED 180 million or more, the fund must: prepare an annual report in accordance with the International Financial Reporting Standards (IFRS) appoint a Risk Management Officer, and not exceed its net asset value in its total exposure to risks. For venture capital funds with managed assets that are valued at less than AED 180 million, the fund must: prepare a summary of the annual report in accordance with IFRS, and not exceed its net asset value in its total exposure to risks. 2.3 General and Limited Partnership Funds A general and limited partnership fund (GP/LP) is an investment fund with a fixed capital, formed in the UAE by one or more general partners, and one or more limited partners, and governed by a partnership agreement agreed between them. The general partner must be a firm licensed by the Authority to manage investment funds. The limited partners can be natural or corporate persons capable of the management, follow-up, and protection of their own investments, which includes the following: The federal government and local governments, government institutions and agencies, or companies fully owned by any of them. General pension funds, corporate pension funds, insurance companies, sovereign funds, endowments, and family companies. International agencies and organisations. Persons licensed to exercise a commercial business in the UAE, provided that the purposes of the business include investment. Natural persons with financial solvency and that declare that their annual income is not less than AED 3 million, or that their net equity rights, except for their main residence, is equal to AED 7 million. The natural persons must also declare that they have sufficient knowledge and experience, whether on their own or by using a financial adviser. A person who is represented by an investment manager licensed by the Authority or by a similar supervisory entity. 66  Investment Funds 3 The general partner is fully liable for the fund’s obligations. If there are multiple general partners, they are jointly liable. The limited partners are only liable to the extent of their respective share in the capital of the fund. The Authority has the right to perform control and inspection, as well as enforce penalties on the general partner for any failures to meet the regulatory obligations. The licensing application of the fund is submitted to the Authority by the general partner, or their representative, excluding any limited partner, on the designated form, enclosing the supporting documents and data, including the following as a minimum: a. The trade name, date of incorporation, and headquarters of each general partner. b. The full or trade name, nationality, date of birth or incorporation, residence address or headquarters of each limited partner. c. The name of the fund with the addition of the phrase ‘GP/LP Fund’ at the end of its name. d. The place and address of the fund and contact information. e. A true copy of the partnership agreement signed between the general partner and limited partner(s), duly notarised. f. A declaration signed by the general partner confirming the payment of the required capital. g. Any other data or information required by the Authority. As with other types of funds, the Authority will issue a decision approving the licensing application, or rejecting it due to the application being incomplete, incorrect, or to otherwise in the public interest, within a period of no longer than 30 business days from the date of submitting the complete application. If accepted, the Authority will issue a licence certificate including the fund’s name, registration number and date, annotated with the phrase ‘GP/LP Fund’. The fund will have an independent legal personality. 67 The fund’s licence term will be one year expiring on 31 December every year. The term of the first licence commences from the date of issue until the end of December of the same year. The licence will be renewed upon the request of the general partner or their representative, submitted to the Authority at least one month prior to the expiration of the licence as long as the requisite fee is paid and the fund continues to meet the regulatory conditions. The general partner must also notify the Authority within seven days of any change to the following: a. Main locations of practising the business. b. The name of any general partner or any limited partner. c. Any general partner who becomes a limited partner or any limited partner who becomes a general partner, along with the obligations of each partner after the change. The general partner is also required to keep the documents, instruments, records, and accounting books related to the fund’s operations for a period of not less than ten years, and maintain back-up copies of the same for the same period, and protect the same from damage, especially in relation to the following: a. The name, address, and details of each partner in the fund. b. The date of entry and exit of each partner in the fund. c. The date and amount of each limited partner’s share, and the date and amount of any payment that represents a return or a portion of their share. 3. Cash Investment Funds Learning Objective 3.3.1 Know regulations regarding cash investment funds (Decision No. (52/R.T) of 2016) Cash investment funds are similar to what are called money market funds in other jurisdictions. They are defined in the Authority Decision No. 52 of 2016 as ‘public investment funds whose investment policy requires investments to be placed in instruments with maturity dates extending 397 days or two years, as the case may be, including treasury notes, commercial papers, deposit certificates, bank acceptances and medium-term bonds’. The more detailed requirements that the cash investment fund must meet are as follows: Investing a minimum proportion of 90% of its assets in cash instruments with high liquidity. The maximum weighted average of the fund’s investment maturity may not be more than 120 days. If a market price is not available, the fund’s assets must be evaluated according to the fair value principle. The credit rating of the debt instruments where the fund places investments may not be less than BBB+ or equivalent by one of the recognised rating agencies. The fund must not borrow or engage in operations entailing liabilities, with the exception of borrowing to cover redemption requests subject to a maximum limit of 10% of its net asset value. The fund’s investments in debt instruments of one issuer may not exceed 10% of the fund’s net assets. 68  Investment Funds 4. Exchange-Traded Funds (ETFs) Learning Objective 3.4.1 Know regulations relating to exchange-traded funds (Decision No. (49/R.T) of 2016) 3 The Authority’s Administrative Decision No. 49 of 2016 concerns exchange-traded funds (ETFs). An ETF is an open-ended investment fund that invests its assets in the components of an index determined by its investment policy. The name of the ETF must not cause any confusion or misguidance and the ETF’s units must be listed in one or more markets in the UAE. It may only offer its units in the State after first obtaining the approval of the Authority, meeting the listing controls and rules set by the market and approved by the Authority. Some or all of the ETF’s units may be listed on a foreign market subject to the Authority’s approval. 4.1 The Index The index used by an ETF can be made up of any investment components with specific investment proportions whether prepared in advance or newly introduced. The ETF will be an index fund with a portfolio constructed to match or track the components of the index, such as the Standard & Poor’s 500 Index (S&P 500). Common arguments in favour of index tracking funds are that they typically provide broad market exposure, low operating expenses and low portfolio turnover. The index tracked by the ETF must have a known and clearly defined target and must reasonably reflect the market or the sector it represents. The index must also reflect the movements of prices and the changes in its components or its relative weights, and its components must have adequate liquidity. The ETF can choose to fully represent the index it tracks in terms of all components and its relative weights, or the ETF may represent the index through a selected sample that reflects it using a specific correlation coefficient. 4.2 The Prospectus of the ETF The ETF prospectus and the prospectus data summary must include the following: details of the index tracked by the ETF mechanism of investment in and divestment from the ETF mechanism for issuance and redemption of the ETF’s units the market(s) where the ETF’s units will be listed the name of the authorised agent the spread between offer and bid prices, which will be provided by the authorised agent in the market and will depend on the net value of the assets of the unit which must be continuously available the maximum deviation from the index tracked by the ETF. 69 4.3 Participants Participants to an ETF include the management company/investment manager, an administrative services company, an authorised agent (referred to above), and a safe custodian. The obligations and expectations placed on each is detailed below: 4.3.1 The Management Company/Investment Manager The management company or investment manager issues new units of the ETF and cancels units submitted by the authorised agent for redemption in accordance with the rules and regulatory procedures stated in the Prospectus as approved by the Authority. The management company or investment manager also must follow up on the performance of the ETF to ensure: a. The implementation of the ETF’s investment policy and ensure that the authorised agent performs all tasks required. b. Achievement of the correlation between the value of ETF’s units and the value of the index tracked by the ETF when it is established so that the correlation coefficient is not less than the value set in the investment policy and announced in the prospectus. c. Availability of the required liquidity on the ETF’s units in the secondary market and availability of permanent bids and offers on such units by the authorised agent of the ETF. d. The prices of orders issued through the authorised agent of the ETF are correlated with the net value of the unit’s assets, which is announced on a daily basis or with the indicative value of the net value of the unit’s assets, which is announced during trading, provided it may not be greater than the agreed margin as announced in the prospectus. The management company or investment manager must also coordinate the various parties to the ETF to accomplish the ETF’s operations, review and audit functions, as well as exchange information and reports related to the ETF. 4.3.2 Administrative Services Company The administrative services company for the ETF is required to review the daily evaluation of the net value of the unit’s assets at the end of the day and the indicative value of the unit during the day as per the principles, timings and rules contained in the Prospectus and subject to the rules set by the concerned market in this regard. Furthermore, the administrative services company must: 1. announce the net value of the unit’s assets on a daily basis and provide the Authority and the concerned market with any statements as required 2. regularly announce the indicative value of the net value of the ETF’s assets set during the daily trading to the market, related parties and the authorised agent 3. publish the components of the ETF’s index on a regular basis as stated in the prospectus 4. perform any other tasks as stated in the contract signed with the ETF. 70  Investment Funds 3 4.3.3 Authorised Agent of the ETF The authorised agent is the corporate person approved by the market to directly trade the ETF’s units, which are listed in the market with the purpose of providing the required liquidity for the ETF’s units. The obligations of the authorised agent include: 1. Obtaining the ETF’s units in consideration of the assets representing the index components that are transferred to the ETF, or returning the ETF’s units in consideration of the assets representing the index components that are transferred from the ETF. 2. Provide sell or buy orders for the ETF’s units to make them executable through trading in the concerned market in a manner that ensures maintaining the required liquidity based on the announced net value of the assets of the unit or based on the indicative value of the net value of the assets of the unit during daily trading, whichever is latest. 3. Not to exceed the agreed spread between the selling and buying prices as specified in the prospectus. 4. Update sell and buy orders according to the timings and mechanism agreed with the concerned market. 4.3.4 Safe Custodian The safe custodian must ensure that the orders and documents relating to the exchange of the ETF’s units with the index components that are carried out between the ETF investment manager or the management company and the authorised agent are executed through the administrative services company and adhere to the established and approved regulations and mechanisms. The safe custodian must also ensure that the transfer of ownership of the ETF’s units from or to the safe custodian is completed before carrying out any redemption, cancellation or issuance of the ETF’s units. 71 5. Real Estate Funds Learning Objective 3.5.1 Know regulations relating to real estate funds (Decision No. (6/RT) of 2019) A real estate investment fund is a public or private investment fund established to invest at least 75% of its assets in real estate assets for construction, development or refitting in preparation for sale, management, leasing or disposal. A real estate investment fund may establish or own one or more real estate services, provided that its investment in the ownership of such company and its subsidiaries shall not be more than 20% of the fund’s total assets. The real estate assets of the fund must be proven under an ownership right or usufructuary right based on official contracts or by possession in any company having any of these rights. These rights must not be charged with any restrictions or obligations, and the remaining period of the usufructuary right shall not be less than seven years. At least 75% of the real estate assets held must produce the revenues, and the revenue generated from real estate must not be less than 90% of the total revenues of the fund. Furthermore, the percentage of investment in usufructuary rights – for which the remaining period is less than 30 years – must not exceed 25% of the net assets of the fund upon listing its units in the market or upon transferring the usufructuary right to it. 5.1 Valuation and Borrowing Evaluation of the fund’s real estate assets must be at least every six months based on the nature of such assets, based on the evaluation reports prepared by the Real Estate Appraiser of the Fund. However, the management company or board of directors of the fund may, for acceptable reasons after notifying the SCA, postpone the date of assets evaluation. The real estate investment fund may borrow amounts of no more than 50% of its total assets value, provided that the lender is authorised by the competent authority in the UAE to do so. Any relationship between the lender and the real estate investment fund or any of the related parties to the fund must be disclosed, and conflicts of interest appropriately managed. 5.2 Distributions of Dividends from a Public Real Estate Investment Fund A public real estate investment fund must distribute at least 80% of the achieved net profits every year to the holders of its units, with the possibility of making more than one distribution during the year. 72  Investment Funds 5.3 Obligations of the Real Estate Fund’s Management Company or Board of Directors The management company of the real estate investment fund and its board of directors must: Value any real estate assets before buying or selling them, using the services of a contracted real estate appraiser. 3 Enable the real estate appraiser to perform its tasks including the provision of access to the documents and information required to complete the evaluation. Not rely on any report dating back more than three months when dealing in a real estate asset of the fund. Assume full responsibility for the fund’s management, projects, investment decisions and assets, and insure the assets against any risks. Include all of the fund’s investments and their market value, nature, type and location of real estate assets and investments in the biannual financial reports, along with the credit rating of any bond investments. Include the details of all of the fund’s assets and any material legal disposals of such assets made during the period in the annual report. Sign a contract with a legal adviser to prepare and review all contracts, obligations, legal dealings of the fund and its real estate assets, to ensure the legality of its actions and that there are no restrictions on its ownership. Sign a contract with a real estate appraiser who has the required experience in the real estate field in order to evaluate the real estate assets of the fund. Sign contracts with the other parties associated with its activity to implement the business plan of the fund, such as the real estate developer, real estate management company, real estate distributer and promoter, and real estate service company. 5.4 Obligations of the Real Estate Appraiser The real estate appraiser of the fund must evaluate the real estate assets including the following items in the evaluation report: a. The evaluation approach, method and assumptions based on which the evaluation was made. b. Analysis of the variables related to the real estate market such as offer and demand, property particulars and description. c. The risks related to the property under evaluation. d. Disclosure of any violations or risks related to the assets under evaluation and the proposed or implemented remedial mechanisms. The evaluation reports must be made available to the fund’s management company or board of directors, investment manager, administrative services company, and auditor. The reports must also be provided to the SCA as requested. The real estate appraiser must also maintain independence from the fund and any related party to the fund. 73 6. Evaluation of In-Kind Shares for Investment Funds 6.1 General Requirements Learning Objective 3.6.1 Know in-kind share requirements (Article 1); evaluation requirements (Article 2); evaluator requirements (Article 3) Certain provisions are laid down in the Authority’s Decision No. 63 of 2019 for instances where fund units are exchanged for assets other than cash. This is described as an ‘in-kind’ transfer and the assets exchanged must meet certain requirements. If the assets are shares provided by the investor to subscribe for the units of an investment fund, then these shares must be consistent with the fund prospectus and its investment policy. The shares must also be able to be liquidated, not be subject to any legal dispute and not be charged with any rights or guarantees in favour of third parties. The in-kind shares must also be valued by two evaluators at fair value, taking into account the lower value for each evaluated asset. If the in-kind shares are in companies that are not listed on the main market, if there haven’t been any announced market prices at the time of evaluation, if three months have elapsed after the last announced price, or if trading is limited and inactive, both of the evaluation parties must be financial advisers licensed by the Authority. More generally, an evaluator of in-kind shares must have obtained a licence or approval from the competent authority in the state for evaluation and have experience of no less than five years in evaluation field and no less than three years in the field of evaluation of an asset provided as an in-kind share. The evaluator must also be completely independent and have no joint interests with the fund founders or any relevant parties. An auditor or financial adviser to a fund cannot evaluate the in-kind shares provided to the same fund. 6.2 The Evaluator’s Obligations Learning Objective 3.6.2 Know the obligations of the evaluator (Article 4) The obligations placed on an in-kind shares evaluator include: Preparation of an in-kind shares evaluation report according to the international standards. Validly and accurately evaluating using sufficient and complete data and information. Clarifying whether the in-kind shares provided for the funds are able to be liquidated or not. Analysing all risks related to the evaluated asset and conducting the analysis to ensure the inclusion of their impact on the future expectations and assumptions on which the evaluation report is based. 74  Investment Funds Managing the conflict of interests between their tasks and any other financial activities practised by them, and disclosing them. Working with due diligence according to the provisions of the law, and in accordance with the principles of honesty, justice, and equality in collecting information and data from official authorities. Moreover, taking all procedures and making examinations or required auditing to make sure of the accuracy and completeness of data and information of the evaluation report and to make sure that they cover all aspects to reach the fair value of the estimated asset. 3 6.3 Report Contents Learning Objective 3.6.3 Know the required content of the in-kind shares evaluation report (Article 5) An in-kind shares evaluator, when completing a report, must disclose any securities related to the evaluation report owned prior to the preparation of the report and refrain from trading in securities associated with the evaluation subject (including financial derivatives) within a period between 15 days before issuing the evaluation report and five days after issuing the report. The evaluation report should be based on valid, clear, not misleading, and updated data of a period not exceeding three months before the evaluation date. Furthermore, the evaluator must not object to the evaluation report being published in full and/or summary form in the fund prospectus and on the website of the management company or the investment manager and the market where the funds units are listed (if any). 75 The evaluation report and a complete summary must be provided to the Authority before disclosure to third parties, no later than three months after evaluation report’s date. Submission of a copy of the report to the management company or the investment manager must be after receipt by the Authority. The summary of the evaluation report must include the most important evaluation data including the following: The fair value of the evaluated asset. Confirmation that there are no obligations, debts, mortgages, rights, or other guarantees charged on the asset in favour of third parties, with the ability to rely on a special report issued by the fund’s legal counsel in this regard. The different evaluation methods used by the evaluator to specify the fair value of the evaluated asset according to the professionally followed and recognised principles in accordance with the nature of the asset. The Authority reserves the right to discuss the evaluation reports with the in-kind shares’ evaluator or any of the relevant parties and choose to appoint another in-kind shares’ evaluator at the expense of the management company or the investment fund if it deems this necessary. 6.4 Other Obligations Learning Objective 3.6.4 Know obligations of the management company (Article 6); self-fund founders (Article 6); investment manager (Article 6) For in-kind share transactions, the management company, self-fund founders or the investment manager (as appropriate) also take on certain obligations that include: Ensuring the feasibility of accepting the provided in-kind shares and the extent of their appropriateness to the nature and investment policy of the fund. Making sure that the value of the units allocated to the investor do not exceed, upon the allocation, the value of the in-kind share provided. Maintaining the evaluation report and all information, documents, and records related to the evaluation process for a period of no less than ten years. Disclosing in the fund prospectus the provided in-kind shares and the units that will be issued against them, especially as follows: sufficient information about each one of the in-kind shares, their owners and their value, and the number of the units that will be issued against each share summary of the in-kind shares evaluation report, as well as attaching the evaluation report and its complete summary to the prospectus the possibility of disposing of the in-kind shares after founding the fund the possibility of fluctuation in the values of the in-kind shares after founding of the fund. 76  Investment Funds 6.5 Other Requirements Learning Objective 3.6.5 Know requirements relating to the expenses of in-kind shares evaluation and transfer of their ownership or usufructuary (Article 7) 3 If in-kind shares are provided when the fund is founded, the management company or the self-fund founders must initially bear the expenses of the in-kind shares’ evaluation and the transfer expenses of the ownership or usufructuary. These expenses can then be recovered once the fund is set up as ‘foundation expenses’ or as the fund’s auditor deems appropriate. If the subscription fails then, unless it is agreed with the in-kind shares providers to bear all or any of these expenses, these expenses will fall to the management company or the self-fund founders. 77 End of Chapter Questions Think of an answer for each question and refer to the appropriate section for confirmation. 1. Who can establish a local fund? Answer reference: Section 1.1 2. Who approves a local fund? Answer reference: Section 1.2 3. What is expected of a prospectus for a local fund? Answer reference: Section 1.2.2 4. What is a KIID? Answer reference: Section 1.2.2 5. How does final approval differ from initial approval of a local fund? Answer reference: Section 1.2.1 & 1.2.3 6. What are the restrictions for the length of the first financial year of a local fund? Answer reference: Section 1.3 7. How often are financial reports required for local funds? Answer reference: Section 1.3 8. What restrictions apply to private fund advertisements and promotions? Answer reference: Section 1.4.1 9. What restrictions apply to private equity funds? Answer reference: Section 2.1 10. What restrictions apply to venture capital funds? Answer reference: Section 2.2 11. What restrictions apply to general and limited partnership funds? Answer reference: Section 2.3 12. What restrictions apply to cash investment funds? Answer reference: Section 3 13. What is an exchange-traded fund? Answer reference: Section 4 14. What restrictions apply to exchange traded funds (ETFs)? Answer reference: Section 4 15. What must an administrative services company for an ETF announce to the Authority? Answer reference: Section 4.3.2 78