Establishment of an open-ended investment fund in the UAE

12.08.2024

In the contemporary economic landscape of the UAE, open-ended investment funds (OEIFs) have emerged as a pivotal instrument for capital mobilisation and investor participation in diverse financial markets. As the UAE economy continues to develop and diversify at an unprecedented pace, OEIFs have become increasingly crucial in attracting both domestic and international investment, thereby fostering sustainable economic growth. Recognising the UAE's aspirations to establish itself as a preeminent global financial centre, it is imperative for market participants, both novice and experienced, to comprehend the intricacies of establishing and managing OEIFs within the nation's legal and regulatory framework. This guide provides a brief analysis of the formation and operation of OEIFs in the UAE.

Key attributes of OEIFs

Liquidity: investors possess the ability to purchase or dispose of fund shares on any given business day at the net asset value (NAV) determined at the close of the trading session.
Flexibility: OEIF managers can swiftly adapt to evolving market conditions, implementing investment strategies in accordance with the prevailing circumstances.
Diversification: OEIFs typically allocate capital across a diverse array of assets, effectively mitigating risk for investors.
Professional management: the fund's assets are overseen by a team of seasoned investment professionals who are responsible for making informed decisions regarding the acquisition and divestment of assets.

Distinguishing open-ended and closed-ended IFs

The distinctions between OEIFs and CEFs are rooted in several fundamental characteristics that reflect their respective structures, trading mechanisms, and accessibility to investors. For the sake of clarity, these differences are presented in a tabular format:

Characteristic	OEIFs	CEIFs
Trading mechanism	Shares are purchased and sold directly through the management company at the NAV.	Shares are traded on a stock exchange akin to equities, with prices determined by market forces of supply and demand.
Liquidity	High; investors can buy or sell shares at any time.	Contingent upon market activity; disposing of shares may prove challenging in the absence of willing buyers.
Pricing	Shares are priced at the NAV, with potential purchase/sale fees.	Share prices may deviate from the NAV, trading discounted or premium.
Impact on asset management	Necessitates the maintenance of liquidity to accommodate share redemption requests.	Greater latitude in investment decision-making due to the absence of ongoing redemption obligations.

This comparative analysis underscores the primary distinctions between the two types of investment funds, empowering investors to make well-informed decisions based on their individual preferences regarding fund accessibility, pricing dynamics, and asset management practices.

The Emirates investment landscape

In recent years, the UAE has emerged as a preeminent global financial centre, presenting a myriad of opportunities for both regional and international investors. This ascension to prominence can be attributed to several key factors that have collectively enhanced the nation's investment allure.

Political and economic stability

The UAE boasts a robust and reliable investment foundation, underpinned by its political stability and consistent economic growth. This steadfast environment instils confidence in investors, providing them with the assurance necessary to engage in long-term financial commitments.

Strategic geographical positioning

Situated at the nexus of Asia and Europe, the UAE enjoys a strategic geographical advantage, serving as a pivotal commercial and logistical hub. This unique positioning facilitates seamless trade and investment flows, granting investors access to a vast array of markets and opportunities.

Favourable tax regime

One of the most compelling aspects of the UAE's investment landscape is its advantageous tax structure. The absence of personal and corporate income taxes across most sectors of the economy, particularly within the nation's free zones, acts as a powerful magnet for investors seeking to optimise their financial returns.

Sophisticated financial infrastructure

The UAE boasts a highly developed and sophisticated financial infrastructure, characterised by a robust banking system and cutting-edge financial institutions. The presence of Dubai and Abu Dhabi prominent financial centres further enhances the nation's standing as a global financial powerhouse. These centres provide investors with access to a comprehensive suite of financial services, including asset management, capital markets, and wealth management, all of which are governed by internationally recognised legal and regulatory frameworks.

The regulatory landscape for OEIFs in the UAE: a brief overview

The UAE has established a robust legal and regulatory framework for OEIFs, designed to foster a transparent and efficient investment environment. This framework encompasses a comprehensive suite of laws, regulatory structures, and standards aimed at maintaining stability, security, and investor protection.

Foundational legislation and regulations

Legislation/regulation	Description
Federal Law No. 4	Lays the groundwork for the regulatory oversight of securities market operations, setting forth the fundamental conditions for the establishment and operation of OEIFs within the UAE.
ESCA regulations	Delineate specific criteria for the licensing, structuring, management, and operation of investment funds, including stringent rules pertaining to disclosure and investor rights.
Services authorities regulatory frameworks	Instituted to supervise the provision of financial services within the Dubai and Abu Dhabi financial centres, respectively. Encompass OEIF regulations that adhere to global standards, ensuring a high degree of investor protection and market integrity.

Key regulatory authorities

The supervision and regulation of OEIFs in the UAE is carried out by several prominent institutions that play a pivotal role in maintaining a stable and transparent regulatory environment. Let us delve into the primary regulatory bodies and their respective mandates:

Regulatory authority	Description
Central Bank	Responsible for formulating and implementing monetary policy and ensuring the stability and efficiency of the nation's financial system. Overarching standards for financial institutions and can influence the operating conditions of investment funds through its regulatory authority.
ESCA	Overseeing the securities market in the UAE, including the activities of investment funds. Issuing licences for funds, approving their internal operating rules, and ensuring compliance with legislation pertaining to investments and investor protection.
DFSA	Acting as the independent financial services regulator for the DIFC, the DFSA supervises the operations of financial firms and investment products, including OEIFs, to ensure adherence to global regulatory standards.
FSRA	Establishing rules for the financial sector within the ADGM, licensing and monitoring investment funds. Creating a conducive environment for the growth of financial services while ensuring a high level of investor protection.

Key regulatory aspects

Licensing: every OEIF seeking to operate within the UAE must obtain the requisite licence from ESCA, DFSA, or FSRA, depending on the jurisdiction in which it intends to operate.
Fund structure: the regulatory framework stipulates permissible forms of fund organization, establishing criteria for constituent documents and management personnel.
Compliance and risk management: OEIFs are required to develop and implement robust compliance and risk management systems that adhere to regulatory standards.
Reporting and auditing: to ensure transparency and reliability, OEIFs must submit regular reports to regulatory authorities and undergo financial statement audits.
Investor protection: the UAE's regulatory framework places a strong emphasis on safeguarding the interests of investors, mandating comprehensive disclosure requirements, preventing conflicts of interest, and uphold

Establishing an OEIF in the UAE: key guidelines

This procedure necessitates meticulous consideration of the prevailing legal and regulatory framework. Below, we delineate the requisite steps pursuant to effectuating an OEIF entity in the UAE.

Optimal jurisdiction selection

A critical initial determination resides in an analysis of the various Emirate jurisdictions, evaluating the relative merits regarding domicile registration, regulatory strictures and incentives for the proposed Fund. The priority assessment metrics are determining the optimal balance of oversight stringency versus operational flexibility.

Drafting the requisite constitutional documentation

The Fund must enact a bespoke formulation of the salient operational documents, comprising:

(a) The Charter, enshrining the Fund mandate, investment scheme, governance and procedural code;
(b) Investment Memorandum detailing the risk factors, management methodology and fee structure for prospective investors;
(c) Binding Legal Agreements with designated service providers, including the Custodian, Auditors, Legal Counsel and Consultants.

Securing permits and licensing

The Fund must submit the requisite application and documentation to the relevant nation regulatory bodies and secure formal UAE licensure to operate as an OEIF within the chosen jurisdiction.

Structuring the fund and appointing personnel

The Fund must implement optimal selection processes and secure reputable appointments for vital positions, including:

(a) Experienced fund manager/investment director
(b) Established custodian with sufficient asset security infrastructure
(c) Accredited auditor in the UAE

Upon satisfying the aforementioned legal prerequisites, the OEIF entity may duly commence operations in the UAE, subject to continuing regulatory compliance and reporting.

Rules for the management and functioning of open-end investment funds in the Emirates

The operations of OEIFs domiciled in the United Arab Emirates are subject to stringent regulations enacted by the relevant Emirati authorities. These regulations serve to uphold fiduciary duties, ensure financial probity and stability in capital markets.

Investment parameters and restrictions

The UAE OEIFs must codify bespoke Investment Strategies delineating the underlying asset selection rubric, including diversity thresholds and concentration limits pertaining to individual assets and issuers. The Investment Scheme particulars must be memorialized within the constitutional documents and offering memoranda.

Utilization of leverage financing is subject to prescribed regulatory limits intended to circumscribe risk exposures.

Risk management and compliance mechanisms

OEIFs must implement multifaceted Risk Management Systems to facilitate identification, assessment, and mitigation of attendant hazards across pertinent domains – market, credit, liquidity and operational risks.

OEIFs must designate a Compliance Officer role to ensure adherence to all relevant AML/CTF regulations and capital markets rules.

Disclosure duties and external audit

The nation's regulations mandate furnishing timely and accurate Fund reporting to regulators and investors regarding financial position, asset composition and investment performance, enabling informed decision-making.

OEIFs must commission annual independent external audits, undertaken by accredited auditors, examining the veracity of financial accounts and consonance with pertinent regulations.

Guidance for prospective founders of open-ended investment funds in the UAE

The establishment of an OEIF in the UAE is a multifaceted endeavour that necessitates meticulous planning and unwavering adherence to the nation's legal and regulatory framework. The following advice is intended for prospective founders seeking to launch an OEIF successfully in the UAE's dynamic investment landscape.

Tip 1: Conduct a comprehensive market analysis

Prior to embarking on the establishment of an OEIF, it is imperative to undertake a thorough examination of the prevailing market conditions and investment opportunities within the UAE. This analysis should aim to identify a niche and formulate an investment strategy that aligns with the needs and preferences of the target investor demographic.

Tip 2: Optimise tax strategy

The UAE offers a favourable tax environment for investment funds, and prospective founders should seek to capitalise on these advantages by developing an optimised tax strategy. This should consider international tax considerations and the provisions of double taxation treaties to ensure the fund's tax efficiency and compliance with all applicable tax laws.

Tip 3: Prioritise transparency and investor protection

To foster trust and enhance the attractiveness of an OEIF to potential investors, it is essential to maintain a high degree of transparency in the fund's operations and to prioritise the protection of investor rights. This includes providing clear and comprehensive disclosure of the fund's investment strategy, risks, and performance, as well as implementing robust governance mechanisms to safeguard investor interests.

Tip 4: Seek specialised legal support

Given the complexities involved in the establishment and management of an OEIF in the UAE, it is strongly recommended that prospective founders seek the guidance and support of specialised legal professionals. These experts can provide invaluable assistance in navigating the regulatory landscape, structuring the fund, and ensuring compliance with all applicable laws and regulations.

YB Case is your trusted partner in the UAE OEIF establishment. We stand ready to provide expert assistance and support in registering the UAE OEIF. Our team of seasoned professionals possesses extensive experience in the realm of corporate law and can offer bespoke solutions tailored to the unique needs and objectives of your fund.

By engaging the services of YB Case, you will benefit from our comprehensive support in selecting the most appropriate jurisdiction, structuring the fund, preparing the requisite documentation, obtaining necessary licences, and ensuring full compliance with all regulatory requirements. We ensure that your OEIF will be well-positioned for success within the UAE's thriving investment landscape.