Part 5 Part 5 Rules Specific to Different Types of Domestic Funds
Article 13 of the Law defines
Fundsas either Domestic Fundsor Foreign Funds. Article 15 of the Law further defines Domestic Fundsas falling into three categories, i.e. Public Funds, Exempt Fundsand Qualified Investor Funds. While the core requirements in CIR Part 4 of this module are of common application to most types of Domestic Funds, the requirements in this Part apply only to certain types of Domestic Funds, depending on whether they are Public Funds, Exempt Fundsor Qualified Investor Funds. Where a certain type of Fundis also a specialist class of Funds, there are additional requirements that are prescribed in CIR Part 6.
CIR 10 CIR 10 Requirements Specific to Public Funds
CIR 10.1 CIR 10.1 Application
CIR 10.1.1 CIR 10.1.1(1) This chapter applies to a
Fund Managerand Trusteeof a Domestic Fundwhich is a Public Fund, and also to Personsproviding the oversight function for such a Fund.(2) A Fund Managerand Trusteeof a Public Fundare not subject to the oversight requirement in (1) if the Fund'sinvestments are limited to those that require passive management and the Fund'ssystems and controls contain adequate measures to address any risks arising in that context.
CIR 10.1.1 Guidance
Fundsare passively managed if they are investing in products such as index tracking products.
A reference in this chapter to:(a) a "
Fund Manager" or " Trustee" includes a reference to a Personproposing to be the Fund Manageror Trusteeof a Domestic Fund;(b) a " Fund" includes a reference to a Fundregistered or seeking to be registered as a Public Fund; and(c) a reference to a " Personproviding the oversight function" includes a reference to an individual or a body corporate appointed or to be appointed as a Personproviding oversight function for a Fund.
CIR 10.2 CIR 10.2 Registration of Public Funds
The Application for Registration
CIR 10.2.1(1) An application pursuant to Article 28 of the Law for the registration of a
Public Fundmust be made to the DFSAby the Body Corporatewhich is to be the Fund Managerof a Domestic Fund. If the Fundis an Investment Trust, then the Trusteeand Fund Managermust jointly apply.(2) The Fund Managerand, if applicable, the Trusteemust complete and submit the appropriate form or forms in AFN.(3) In addition to the requirements of Article 28(4) of the Law, the application must be accompanied by certification by the Fund'slegal advisers to the effect that:(a) the Constitutionof the Fundcomplies with the requirements prescribed under the Law and under these Rules;(b) the Prospectuscomplies with the requirements prescribed under the Law and under these Rules; and(c) if the Fundis managed by an External Fund Manager, the requirements in CIR section 6.1 are met.
In assessing an application for registration, the
DFSAmay:(a) make any enquiries which it considers appropriate, including enquiries independent of the Fund Managerand Trustee; or(b) require the Fund Manageror Trusteeto provide further information.
Requirements for Registration
CIR 10.2.3 CIR 10.2.3
Subject to the provisions of these
Rules, a Fundwill only be registered by the DFSAif it satisfies the following conditions:(b) the registration or other legal formalities relating to the formation of the Fundas referred to in (a) are completed;(c) the Fundhas appointed to it a Fund Managerwhich is:(i) authorised by the DFSAunder its Licenceto carry on the Financial Serviceof Managing a Collective Investment Fund; or(ii) an External Fund Manageras defined in Article 20(5) of the Law;(d) the Fund, if it is an Investment Trust, has a Trusteewhich meets the requirements in the Investment Trust Law 2006;(e) the Fund Managerhas made satisfactory arrangements in relation to the oversight function of the Fundand the delegation of the activity of Providing Custodyas required under the Law and this module;(f) the Fund Managerhas appointed an Auditorof the Fundwho complies with the requirements in CIR section 9.3; and(g) the name of the Fundis not undesirable or misleading and its purpose is reasonably capable of being successfully carried into effect.
CIR 10.2.3 Guidance1. Article 26(1) of the Law requires every
Domestic Fundto have the form of an Investment Company, Investment Partnershipor Investment Trust. An Investment Companycan also take the form of a Protected Cell Company(PCC).2. In the case of an Investment Company(including a PCC) or Investment Partnership, the legal formalities relating to formation of the Fundinvolves registration by the Company Registrarof the Investment Companyor Investment Partnershipwhich is to be the Fundvehicle. In the case of an Investment Trust, the legal formalities relating to the formation of the trust involve the execution by the Fund Managerand the Trusteeof the relevant trust deed pursuant to the requirements in the Investment Trust Law of 2006.3. Under CIR Rule 8.2.2(2), the Fund Managerof an Investment Companyor Investment Partnershipmust delegate the function of holding safe custody of Fund Property(i.e. the Financial Serviceof Providing Custodyin relation to Fund Property) to an Eligible Custodian. In the case of an Investment Trust, the Trusteeof the Fundprovides the safe custody function relating to Fund Property. However, this obligation does not apply in the case of certain types of specialist Fundswhere alternative safe custody arrangements are permitted (see the custody requirements for Private Equity Fundsand certain types of Property Fundsin Rules CIR 13.3.1, CIR 13.4.2, CIR 13.4.2A and CIR 13.4.2B).
Rejection of an Application
Guidance1. Under Article 31 of the Law, once the
DFSAgrants registration to a Fund, it will without undue delay inform the relevant applicant in writing of:a. such decision; andb. the date on which the registration shall be deemed to take effect.2. The DFSAmaintains a list of Public Fundswhich have been registered on its Public Register.
Withdrawal of Registration
Under Article 32 of the Law, the
DFSAmay withdraw the registration of a Fundin specified circumstances.
DFSAmay reinstate the registration of a Fundpursuant to Article 33 of the Law if it is satisfied that the Fundshould not have been deregistered or if the defect that led to registration being withdrawn has been remedied.
CIR 10.3 CIR 10.3 Oversight Arrangements for Public Funds
CIR 10.3 Guidance
Chapter 2 of the Law (see Articles 39–42) sets out the general requirements relating to the oversight arrangements which a
Public Fundmust have, including the powers and duties of the Personsappointed to a Public Fundto provide the oversight function. The Rulesin this section provide further detailed requirements relating to that function.
Permitted Oversight Arrangements
CIR 10.3.1 CIR 10.3.1
The following oversight arrangements are hereby prescribed by the
DFSAfor the purposes of Article 39(1)(a) of the Law:(a) an Oversight Committeecomprising at least three individuals each of whom meets the suitability criteria prescribed in CIR Rule 10.3.2; or(b) the Eligible Custodianor Trusteeof the Fund, where the individuals undertaking the primary responsibility for the oversight function meet the suitability criteria prescribed in CIR Rule 10.3.2.
CIR 10.3.1 Guidance1. Article 39(1)(a) of the Law requires the
Fund Managerof a Domestic Fundwhich is a Public Fundto establish and maintain one of the permitted oversight arrangements prescribed by the DFSA. Accordingly, such a Fund Managermust appoint one of the oversight arrangements specified in CIR Rule 10.3.1 to every Public Fundwhich it manages.2. The membership of the Oversight Committeemay comprise individuals including but not limited to members of the board of directors of the Fund Manageror that of the Fund, or the individual directors of the Corporate Director, or the members of the General Partnerof an Investment Partnership, or external experts, provided such individuals can meet the suitability criteria prescribed in CIR Rule 10.3.2(1). The criteria include a test of independence.3. For example, for an individual such as a member of the board of directors of the Fund Managerto be able to meet the independence test, the starting point is that such an individual would need to be a non-executive member of the Fund Manager'sboard. But that alone may not be sufficient, as the independence requirement has a range of other elements against which such an individual's ability to be independent of the Fund Manageris assessed. See Article 42 of the Law and CIR Rule 10.3.2. The other elements of the suitability test encompass a fit and proper test and relevant expertise. These too need to be satisfied by such individuals.
Suitability Criteria for Persons Providing Oversight Function
CIR 10.3.2 CIR 10.3.2(1) For the purposes of CIR Rule 10.3.1, a
Personundertaking the oversight function meets the relevant criteria if that Person:(a) is suitably qualified;(b) is fit and proper; and(c) meets the independence criteria in Article 42 of the Law.(2) A Fund Managermust, in the case of each individual to be appointed as a member of an Oversight Committeereferred to in CIR Rule 10.3.1(a), undertake appropriate due diligence to ascertain whether the individual meets the suitability criteria in (1).(3) A Fund Managermust, where an Eligible Custodianor Trusteeis to be appointed as the oversight provider of the Fund, undertake appropriate due diligence to ascertain whether the individual meets the suitability criteria in (1) in respect of those individuals within the organisation of the Eligible Custodianor Trusteewho will be undertaking the primary responsibility for performing the oversight function for the Fund.(4) A Fund Managermust ensure that there is a written agreement:(a) by which an individual is appointed to an Oversight Committeeor the Trusteeor Eligible Custodianis appointed to the oversight function of the Fund, as is relevant; and(b) which contains express provisions that the appointee agrees to discharge the oversight function in accordance with the requirements in the Law and this module.(5) If requested by the DFSA, a Fund Managermust provide to the DFSAany information relating to the appointment or intended appointment of a Person to provide the oversight function for the Fund.
CIR 10.3.2 Guidance1. The Guidance under Appendix 6 (App6) sets out matters which a
Fund Managershould take into account when assessing the fitness and propriety of an individual who is to be appointed to carry out the Fund'soversight function.2. In the case of a Trusteeor Eligible Custodianappointed to provide the oversight function, a Fund Managershould, before making such an appointment, identify the most senior individuals within the organisation who will carry the primary responsibility for the oversight function. The suitability assessment should then be applied to each such individual.3. Trusteesare required to be independent of the Fund Manager(see Article 19 of the Investment Trust law 2006, which is incorporated in the independence requirement for oversight providers under Article 42(1)(f) of the Law). However, if the primary responsibility for providing oversight function within a Trusteerests on individuals other than its board members, the Fund Managershould assess whether such individuals possess the required degree of independence from the Fund Managerin assessing their fitness and propriety to carry out the oversight function effectively. A Fund Managershould, when making that assessment, focus particularly on whether the Personsproviding the oversight function have access to sufficient resources to perform their duties objectively and independently of the Fund Manager.4. In assessing the competence of a prospective appointee, a Fund Managershould:a. obtain details of the knowledge and skills of the individual in relation to the knowledge and skills required for the role;b. take reasonable steps to verify the relevance, accuracy and authenticity of any information acquired;c. determine whether the individual holds any relevant qualifications with respect to the functions to be performed; andd. determine the individual's relevant experience.
CIR 10.3.3(1) The systems and controls which a
Fund Manageris required to have in place must include adequate measures to monitor whether the Personsappointed to provide the oversight function for the Fundmeet the suitability criteria specified in CIR Rule 10.3.2(1) on a continuing basis.(2) If a Personappointed to provide the oversight function for the Fundis either unable to fulfil his duties or no longer meets the suitability criteria in CIR Rule 10.3.2(1), the Fund Managermust, within 21 days of the event causing such inability, dismiss and replace that Person, subject to the requirement in (4).(3) If a Personappointed to provide the oversight function for the Fundresigns from or otherwise vacates that position, the Fund Managermust, within 60 days of the event causing the vacancy, appoint a replacement, subject to the requirement in (4).(4) An appointment made under (2) or (3) must meet the relevant requirements relating to the oversight arrangement of the Fundas specified in CIR Rule 10.3.1 as is relevant to that particular Fund.(5) The Fund Managermust notify the DFSAand, in the case of an Investment Trustwhere the Trusteeis not the appointed oversight provider for the Fund, the Trustee, of the matters referred to in this Rule, giving reasons for the relevant cessation and replacement of the oversight provider.
General Oversight Duties
CIR 10.3.4 CIR 10.3.4
Personsproviding the oversight function must:(a) monitor whether the Fund Manager:(i) is managing the Fundin accordance with the Constitutionand the most recent Prospectusof the Fund, including in particular, any investment and borrowing limitations, requirements relating to the valuation of Fund Propertyand any other requirements or restrictions imposed on the Fundunder the Law or any Rulesin this module;(ii) is complying with any terms and conditions on the Fund Manager's Licence, particularly with respect to the management of the Fund; and(iii) if it is an External Fund Manager, is complying with the specific requirements that apply to such a Personby virtue of being an External Fund Manager;(b) assess whether the Fund Manager'ssystems and controls, particularly those relating to risk management and compliance, operate as intended and remain adequate;(c) report to the Fund Manageron its findings, including any actual or potential breaches or inadequacies in relation to the matters specified in (a) and (b), as soon as such breaches or inadequacies are identified or suspected; and(d) report to the DFSAif:(i) the Fund Managerhas failed, or is reasonably likely to fail, to take appropriate action to rectify or remedy a matter reported to it within 30 days of that matter being so reported; and(ii) that Personbelieves on reasonable grounds that the matter has had, or is likely to have, a materially adverse impact on the interests of the Unitholdersof the Fund.
CIR 10.3.4 Guidance
External Fund Managersare subject to specific requirements, for example in CIR section 6.1.
Proceedings of the Oversight Provider
CIR 10.3.5 CIR 10.3.5
Personsproviding the oversight function for a Fundmust conduct and regulate their proceedings in such a manner so as to be able to discharge the duties and responsibilities relating to the oversight function efficiently and effectively in accordance with the requirements of the Law and this module, and in the case of a Trustee, the requirements in the Investment Trust Law 2006.
CIR 10.3.5 Guidance1. The
Personsproviding the oversight function should hold in the DIFCsuch number of meetings during every annual accounting period as are considered appropriate for the nature and scale of the activities of the Fund.2. The Personsproviding the oversight function should keep minutes of their meetings and records of their reports and recommendations for a minimum of six years.
Principles and Disclosure of Interests
CIR 10.3.6 CIR 10.3.6
Each individual appointed to carry out the oversight function for a
Fund, in carrying out his oversight functions, must abide by the four principles set out in Rules CIR 10.3.7 to CIR 10.3.10. These principles apply:(a) in the case of an Oversight Committeereferred to in CIR Rule 10.3.1(a), to each member of that Committee; and(b) where a Trusteeor Eligible Custodianis appointed for providing the oversight function for a Fund, to each individual responsible for carrying out the oversight function for the Fund. .
CIR 10.3.6 Guidance1. The principles do not apply to an individual in respect of any other functions he may carry out, although his conduct in those functions may be relevant to his fitness and propriety.2. Breaching a principle makes an individual liable to disciplinary action and may indicate that he is no longer fit and proper to perform an oversight function and the
DFSAmay consider exercising its power under Article 39(2) of the Law to object to the appointment and require the Fund Managerto appoint a replacement.3. The onus will be on the DFSAto show that he is culpable, taking into account the standard of conduct required under the principle in question. In determining whether or not the particular conduct of an individual complies with the principles, the DFSAwill take into account whether that conduct is consistent with the requirements and standards relevant to an individual's role and the information available to him.
Principle 1 - Integrity
An individual must observe high standards of integrity and fair dealing in carrying out every oversight function and disclose to the
Oversight Committeeor the senior persons responsible within the Trusteeor Eligible Custodianfor the discharge of the oversight function any direct or indirect financial interest that he has or is likely to have in a matter that is being considered, or about to be considered by that committee or those persons if his interest could conflict with the proper performance of his duties in relation to the consideration of the matter.
Principle 2 - Due skill, Care and Diligence
An individual must act with due skill, care and diligence in carrying out every oversight function.
Principle 3 - Market Conduct
An individual must observe proper standards of conduct in financial markets in carrying out every oversight function.
Principle 4 - Relations with the DFSA
An individual must deal with the
DFSAin an open and co-operative manner and must disclose appropriately any information of which the DFSAwould reasonable be expected to be notified.
Systems and Controls Relating to Oversight
CIR 10.3.11 CIR 10.3.11(1) Without limiting the generality of the obligation under Article 38(1) of the Law and any requirements relating to systems and controls set out in the
Rules, the systems and controls established and maintained by the Fund Managermust be adequate to ensure that the Personsproviding the oversight function:(a) have adequate resources and access to accurate, timely and comprehensive information relating to the management of the Fundto be able to effectively monitor and assess the matters specified in CIR Rule 10.3.4(a) and (b); and(b) can report any actual or suspected compliance breaches or inadequacies that are identified by such Personsto the Fund Manageras required under CIR Rule 10.3.4(c) and, for this purpose, have recourse to the Fund Manager's Governing Bodyor any other relevant committee established by that Governing Bodywhere relevant.(2) The Fund Managermust also ensure that its systems and controls make provision to enable:(a) the Compliance Officerto have unrestricted access to the Personsproviding the oversight function and, to their reports and recommendations;(b) the Fund Managerto promptly act upon and remedy, to the satisfaction of the Personsproviding the oversight function, any matter identified and reported to it by such Persons; and(c) the Personsproviding the oversight function to report to the DFSAof any compliance breaches or inadequacies that are reported to the Fund Managerwhich are not remedied within the period specified in CIR Rule 10.3.4(d).(3) The monitoring and reporting processes and procedures in (1) and (2) must be approved by the Personsproviding the oversight function before implementation.
CIR 10.3.11 Guidance
The nature and extent of the systems and controls will depend upon a variety of factors including the nature, size and complexity of the
Fund'soperations. While all Fund Managersand appointees, irrespective of size, legal structure or organisation need to comply with this section, the DFSAwill take into account these factors and the differences that exist between Fundswhen assessing the adequacy of a Fund Manager'ssystems and controls. Nevertheless, neither these factors nor the differences relieve a Fund Manageror appointees from compliance with their regulatory obligations.
CIR 10.3.12(1) The
Personsappointed to perform the oversight function must report to the Fund Manageras to whether the Fund Manager'ssystems and controls relating to the oversight function are operating as intended and remain adequate at least quarterly at a board meeting of the Fund Manager.(2) Where an Eligible Custodianor Trusteehas been appointed as the Personproviding the oversight function, the Fund Managermust provide to that Person, and to the Fund's Governing Body, a copy of the Fund'smost recent internal audit report and any compliance report as soon as such report is available to the Fund Manager.
CIR 10.3.13(1) The
Personproviding the oversight function of a Public Fundmust make a report to Unitholdersof the Fundwhich must be included in the Fund'sannual report referred to in CIR Rule 9.4.2.(2) The oversight report must contain:(a) a description, which may be in summary form, of the duties of the Personcarrying out the oversight functions and in respect of the safekeeping of the Fund Property; and(b) a statement whether, in any material respect:(i) the issue, sale, redemption and cancellation, and calculation of the price of the Unitsand the application of the Fund'sincome, have not been carried out in accordance with the Rulesand, the Constitution; and(ii) the investment and borrowing powers and restrictions applicable to the Fundincluding those specified in CIR section 10.5, if those have been exceeded.
Co-operation with Oversight Providers
Fund Managermust take reasonable steps to ensure that it and its Employeesand those of the Fund:(a) provide such assistance as the Personsproviding the oversight function reasonably require to discharge their duties;(b) give the Personsproviding the oversight function right of access at all reasonable times to relevant records and information relating to the Fund;(c) do not interfere with the ability of the Personsproviding the oversight function to discharge their duties;(d) do not provide false or misleading information to the Personsproviding the oversight function; and(e) report to the Personsproviding the oversight function any matter which may significantly affect the financial position of the Fundor which is a breach of the Law or the Rulesin this module.
CIR 10.3.15(1) A
Fund Managermust keep records of:(a) the due diligence process it has undertaken to assess whether the Personsappointed for the oversight function meet the suitability criteria in CIR Rule 10.3.2(1); and(b) the matters identified and reported to it by the Personsproviding the oversight function under CIR Rule 10.3.4(c) and any remedial measures adopted by it to address such matters.
CIR 10.4 CIR 10.4 Prospectus Requirement for Public Funds
CIR 10.4 Guidance
The disclosure requirements relating to a
Prospectusthat apply to a Public Fundare somewhat more extensive than the Prospectusdisclosure that apply to other types of Funds, in particular, Exempt Fundsand Qualified Investor Funds. However, as Prospectusdisclosure is a matter closely linked to the marketing of Funds, Prospectusrequirements relating to the relevant types of Fundsare set out in CIR Part 7 of this module, which deals with the Offer of Unitsof Funds.
CIR 10.5 CIR 10.5 Investment and Borrowing Requirements for Public Funds
This section applies to the
Fund Managerof a Domestic Fundwhich is a Public Fund, an Eligible Custodianand, where appropriate, a Trustee, and, to Personsappointed to perform the oversight function for such a Fund, to the extent specified in CIR Rule 10.3.4.
Spread of Risk and Protection of Fund Property
CIR 10.5.2 CIR 10.5.2
Fund Managermust take reasonable steps to ensure that the Fund Propertyof a Public Fundprovides a spread of risk that is consistent with the investment objectives and policy of the Fundas stated in its most recently published Prospectus, and in particular, any investment objectives as regards return to the Unitholderswhether through capital appreciation or income or both.
CIR 10.5.2 Guidance
The investment policy of a
Public Fundcan provide a wide or restrictive spread of risk, provided it is consistent with the investment objectives and policy of the Fundas stated in the most recently published Fund Prospectusof that Fund. For example, if a Fund's investment objectives and policy are to invest in a single asset (a single property Fund), or a single asset class (e.g. shares in emerging markets) or a single sector (mining or technology) that policy must be properly disclosed in the Prospectus, along with the risks associated in the particular asset or asset class. See also the additional disclosure required under CIR Rules 14.4.3 and 14.4.4 in the Prospectusof a Public Fundthat is a Property Fund.Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]
CIR 10.5.3(1) A
Fund Managermust avoid the Fund Propertybeing used or invested contrary to any provision in this section.(2) On becoming aware of any breach of a Rulein this section, a Fund Managermust take action, at its own expense, to rectify that breach.(3) A Fund Managermust take the action in (2) immediately, except in circumstances where it decides doing so would not be in the best interests of Unitholders, in which case the action must be taken as soon as such circumstances cease to apply.(4) A Fund Managermust not postpone taking action in accordance with (2) unless the Personsproviding oversight functions have given their consent.
Investment in Other Funds
Fundmay invest in Unitsof another Fund, except where otherwise provided in the Rulesin this module, only where the Fund Managerhas taken reasonable care to determine, before investing in that other Fund, it:(a) is the subject of an independent annual audit conducted in accordance with IFRS or US GAAP;(b) has mechanisms in place to enable Unitholdersto redeem their Unitswithin a reasonable time if it is an Open-ended Fund;(c) is prohibited from having more than 20% of its value in the Unitsof other Funds; and(d) has a proper and disclosed basis for asset valuation and the pricing of Unitsin that Fund.
Transactions in Derivatives
CIR 10.5.5 CIR 10.5.5(1) The total exposure of a
Public Fundto Derivativesmay not exceed the net asset value of the Fund Property.(2) The Fund Manager'ssystems and controls must include adequate risk management processes which enable it to monitor and measure as frequently as appropriate the risk of a Fund's Derivativepositions and their contribution to the overall risk profile of the Fund.
CIR 10.5.5 Guidance1. There are additional requirements relating to liquidity risk management, including liquidity risks resulting from the use of certain classes of assets (such as
Derivatives) giving rise to credit or counterparty exposure in Open-ended Domestic Funds(see CIR Rule 8.6A.1(2)).2. An Exchange Traded Fund(ETF) which is a 'synthetic ETF' (see Guidance items 11–14 under CIR Rule 13.9.6 for descriptions of different types of synthetic ETFs) would use Derivatives, such as a total return swap, to replicate the performance of the specified index or other benchmark it tracks. The Prospectusof a synthetic ETF is required to include details relating to counterparty and collateral-related risks associated with the use of synthetic replication of the performance of the relevant underlying index or benchmark through the use of Derivatives(see CIR Rule 14.4.8(i)).Derived from DFSA RM218/2018 (Made 22nd February 2018) [VER23/12-18]
Stock Lending and Borrowing
CIR 10.5.6(1) Subject to the
Fund's Constitutionand its most recent Prospectus, the Fund Manager, or the Eligible Custodianor Trusteeat the request of the Fund Manager, may enter into:(a) stock lending arrangements in respect of any Securitiesforming the Fund Property; and(b) stock borrowing arrangements.(2) The Fund Managermust ensure that the value of any collateral for the stock lending arrangement is at all times at least equal to the value of the Securitiestransferred.
CIR 10.5.7(1) Subject to the
Fund's Constitutionand its most recent Prospectus, the Fund Manager, or the Eligible Custodianor Trusteeon the instructions of the Fund Manager, may borrow money for the use of the Fundon terms that the borrowing is to be repayable out of the Fund Property.(2) The Fund Managermust ensure, except in the case of a Property Fund, that the Fund'sborrowing does not on any day exceed 20% of the net asset value of the Fund Propertyand must take reasonable care to ensure that arrangements are in place that will enable borrowings to be repaid to ensure such compliance.(3) Where the limit in (2) is breached, the Fund Managermust take immediate action to deal with that breach.(4) In this Rule, "borrowing" also includes any arrangement including a combination of Derivativesto achieve a temporary injection of money into the Fund Propertyin the expectation that the sum will be repaid.
Investment in Real Property
Fund Managerof a Fundother than a Property Fundmust before investing in Real Property, appoint, with the approval of the Personproviding the oversight function for the Fund, a Valuerwith relevant expertise who meets the requirements in CIR Rule 13.4.19 and likewise upon any vacancy to ensure that any property in the Fund Propertyis expertly valued.
CIR 10.5.9 CIR 10.5.9(1) The
Fund Managermust ensure that the Valuerappointed under CIR Rule 10.5.8 procures the proper valuation of all the property held within the Fund Property, on the basis of a full valuation with physical inspection including, where the property is or includes a building, an internal inspection at least once a year.(2) For the purposes of (1), any inspection in relation to adjacent properties of a similar nature and value may be limited to that of only one such representative property.(3) The Fund Managermust, subject to (4), ensure that the Valuervalues the property, on the basis of a review of the last full valuation, at least every 12 months.(4) If any event occurs which may on reasonable grounds have a material effect on the valuation of the relevant property the Fund Managermust consult with the Valuerwith a view to arranging a fresh valuation before any Unitsin the Fundare issued or redeemed after the date of the event.(5) The Fund Managermust require that any valuation by the Independent Valueris on the basis of an 'open market value' as defined in the Constitutionand Prospectus.
CIR 10.5.9 Guidance
DFSAwould expect the Fund Managerto define 'open market value' to be based on an authoritative text such as the Royal Institute of Chartered Surveyors' Appraisal and Valuation Standards (fifth edition) ("Red Book") or similar practitioners text used by surveyors for the valuation to be a proper valuation under CIR Rule 10.5.9(5).
CIR 11 CIR 11 [Deleted]
CIR 11.1 CIR 11.1 [Deleted]
CIR 11.1.1 [Deleted]
CIR 11.2 CIR 11.2 [Deleted]
CIR 11.2 Guidance [Deleted]
CIR 11.2.1 [Deleted]
CIR 11.2.2 CIR 11.2.2 [Deleted]
CIR 11.2.2 Guidance [Deleted]
CIR 11.3 CIR 11.3 [Deleted]
CIR 11.3 Guidance [Deleted]
CIR 12 CIR 12 Requirements Specific to Exempt Funds
CIR 12.1 CIR 12.1 Meeting the conditions to be Classified as an Exempt Fund
CIR 12.1 Guidance1. Article 16(2) of the Law provides that a
Domestic Fundmay be constituted as an Exempt Fundonly if it satisfies all of the conditions in Article 16(4). Article 16(4) provides that an Exempt Fundmust:a. have its Unitsoffered to persons only by way of a Private Placement;b. have only Unitholderseach of whom meets the criteria to be classified as a Professional Client; andc. have a minimum subscription of at least US$50,000 for a person to become a Unitholderin the Fund,and not satisfy the conditions in Article 16(5) to be a Qualified Investor Fund.2. Under Article 26(1) of the Law, an Exempt Fundis required to have one of the permitted forms, i.e. an Investment Company, Investment Partnershipor an Investment Trust. However, certain types of Exempt Fundswhich belong to a specialist class of Fundsmay be permitted to use only some and not all the permitted forms. See CIR Part 6 for those variations.3. If an Exempt Fundcan no longer meet the relevant conditions to be classified as an Exempt Fund, the Fund Managerof that Fundis required, under Article 34(3), to apply for the winding up of that Fund. Alternatively, the Fund Managermay have that Fundmoved to the classification of a Public Fund, which requires the satisfaction of the requirements and formalities specific to that type of Fund. An Exempt Fundmay also, if it wishes to, convert to a Qualified Investor Fundprovided it meets the conditions applicable to a Qualified Investor Fundin Article 16(5) of the Law.4. In addition to the requirements specific to Exempt Funds, such a Fundmust also meet, except where otherwise provided, the other requirements that are common to all Domestic Funds, which are set out in CIR Part 4 of this module.5. Units of Exempt Fundscan only be Offeredby way of Private Placementand to Professional Clients, but must meet the additional criterion of a minimum subscription test of US$50,000. The definition of Professional Clientis set out in Rule 184.108.40.206. Generally a firm will not be able to undertake mass marketing activities relating to Unitsof Exempt Fundsbecause such marketing would not meet the Private Placementrequirement, and would be likely to amount to a public offer, which can only be made in respect of a Unitof a Public Fund.7. A Fund Managerof an Exempt Fund, which is structured as an Open-ended Fund, is required to comply with the requirements relating to adequate systems and controls to manage, among others, the liquidity risk. See CIR Rule 8.6A.1.
CIR 12.1.1 CIR 12.1.1(1) A
Fundmay be classified as an Exempt Fundonly if it fulfils the criteria in Article 16(4) of the Law at the inception of the Fundand on an on-going basis.(2) A Fund Managermust ensure that a Fundwhich is or is intended to be established and operated as an Exempt Fundmeets the criteria in Article 16(4) both at the inception of the Fundand on an on-going basis.(3) For the purposes of (2), where a Fund Managermakes arrangements with other Authorised Firmsor Personsin other jurisdictions to Offerto issue or sell the Unitsof an Exempt Fund, then it must take reasonable steps to ensure that those Authorised Firmsor other Personsdo not Offerto issue or sell the Unitsin a manner that would result in a breach of the criteria in Article 16(4).(4) As soon as a Fund Managerbecomes aware that an Exempt Fundit manages no longer meets or is likely to not meet the criteria in Article 16(4) of the Law, it must immediately:(a) commence proceedings relating to the winding up of the Fund, or alternatively, take necessary steps to have the Fundregistered as a Public Fund; and(b) notify the DFSAof that fact and the measures it has taken and proposes to take under (a).(5) A Fund Managerof an Exempt Fundwhich is subject to the valuation requirement in CIR Rule 8.4.1(1) must appoint a Fund Administratoror a Personregulated by a Financial Services Regulatoras the Personundertaking the valuation of that Fund.
Fund Managerof an Exempt Fund, when notifying the DFSApursuant to Article 34 of the Law, must also include:(a) a general description of the Fundincluding the nature of its investments and the intended size of the Fundin monetary terms;(b) if it is a Hedge Fundwhich has appointed a prime broker pursuant to CIR Rule 13.6.3:(i) the details relating to the identity of the prime broker and its Regulator; and(ii) a legal certification that all the requirements in CIR Rule 13.6.3 relating to the use of prime brokers have been fully complied with by the Fund Manager;(c) if it is an External Fund, the name of the jurisdiction in which the Fundis established or domiciled; and(d) if it is an External Fund Manager, the name of the jurisdiction in which that Fund Manageris domiciled, and the details of the Appointed Fund Administratoror Trusteeto that Fundfor the purposes of CIR Rule 6.1.3.
CIR 12.2 CIR 12.2 Exempt Fund Prospectus
CIR 12.2 Guidance
The disclosure requirements relating to a
Prospectusthat apply to an Exempt Fundare different from the Prospectusdisclosure required for Public Funds. As Prospectusdisclosure is a matter closely linked to the marketing of Unitsof Funds, Prospectusrequirements relating to the relevant types of Fundsare set out in CIR chapter 14.
CIR 12A CIR 12A Requirements Specific to Qualified Investor Funds
CIR 12A.1 CIR 12A.1 Meeting the conditions to be classified as a Qualified Investor Fund
CIR 12A.1 Guidance1. Article 16(2) of the Law provides that a
Domestic Fundmay be constituted as a Qualified Investor Fundonly if it satisfies all of the conditions in Article 16(5). Article 16(5) provides that a Qualified Investor Fundmust:a. have its Unitsoffered to persons only by way of Private Placement;b. have only Unitholderseach of whom meets the criteria to be classified as a Professional Client; andc. have an initial subscription to be paid by a person to become a Unitholderin the Fundof at least US$500,000.2. The definition of "Professional Client" is set out in Rule 220.127.116.11. Generally a firm will not be able to undertake mass marketing activities relating to Unitsof Qualified Investor Fundsbecause such marketing would not meet the Private Placementrequirement, and would be likely to amount to a public offer, which can only be made in respect of a Unitof a Public Fund.
CIR 12A.1.1(1) A
Fundmay be classified as a Qualified Investor Fundonly if it fulfils the conditions in Article 16(5) of the Law at the inception of the Fundand on an on-going basis.(2) A Fund Managermust ensure that a Fundwhich is or is intended to be established and operated as a Qualified Investor Fundmeets the conditions in Article 16(5) of the Law both at the inception of the Fundand on an on-going basis.(3) For the purposes of (2), where a Fund Managermakes arrangements with other Authorised Firmsor Personsin other jurisdictions to Offerto issue or sell the Unitsof a Qualified Investor Fund, then it must take reasonable steps to ensure that those Authorised Firmsor other Persons do not Offerto issue or sell the Unitsin a manner that would result in a breach of the conditions in Article 16(5) of the Law.(4) As soon as a Fund Managerbecomes aware that a Qualified Investor Fundit manages no longer meets or is likely not to meet the conditions in Article 16(5) of the Law, it must immediately:(a) commence proceedings relating to the winding up of the Fund, or alternatively, take necessary steps to have the Fundreconstituted as an Exempt Fundor registered as a Public Fund; and(b) notify the DFSAof that fact and the measures it has taken and proposes to take under (a).[Added] DFSA RM137/2014 (Made 21st August 2014). [VER17/06-14]
CIR 12A.2 CIR 12A.2 Responsibilities of a Fund Manager of a Qualified Investor Fund
CIR 12A.2 Guidance1. While a
Fund Managerof a Qualified Investor Fundis exempt from many of the detailed requirements applicable to Public Fundsand Exempt Funds, it will continue to be subject to most of the main obligations of Fund Managers. Therefore, such a Fund Managershould be mindful that when managing a Qualified Investor Fund, it is subject to some of the overarching obligations applicable to Fund Managers, particularly:(a) Article 22 of the Law (Fund Manager's general duties and functions);(c) GEN section 4.2 (The Principles for Authorised Firms).2. For example, a Fund Managerof a Qualified Investor Fundneeds to observe high standards of integrity and fair dealing, and apply due skill, care and diligence, in managing the Fund. Similarly, it must have adequate systems and controls to ensure that the affairs of the Fundare effectively managed, taking into account the nature, scale and complexity of the Fund's operations and the investment objectives and needs of its investors.3. A Fund Managerof a Qualified Investor Fund, which is structured as an Open-ended Fund, is required to comply with the requirements relating to adequate systems and controls to manage, among others, the liquidity risk. See CIR Rule 8.6A.1.
CIR 12A.3 CIR 12A.3 Custody of Fund Property
CIR 12A.3.1 CIR 12A.3.1(1) For the purposes of Article 27(1)(e) of the Law, the
Fund Managerof a Qualified Investor Fundthat is not an Investment Trustmust ensure that the legal title to Fund Propertyis registered with an Eligible Custodian.(2) The requirement in Article 27(1)(e) of the Law does not apply to the Fund Managerof a Qualified Investor Fundif it is:(a) a Property Fund;(b) a Private Equity Fund;(c) a Venture Capital Fund; or(d) a Fundin so far as it is investing in an interest in the operation of a Real Propertyasset (such as investment in an infrastructure project).(3) If the Fund Managerof a Qualified Investor Fundreferred to in (2) itself holds Fund Propertyof any kind or if it uses a Fund Platform and the Incorporated Cell Company holds Fund Property of any kind, it must have in place effective arrangements which ensure that the Fund Propertyis not available to creditors in the event of the insolvency of the Fund Manageror the Incorporated Cell Company (as the case may be).
CIR 12A.3.1 Guidance1. Article 27(1)(e) of the Law requires a
Domestic Fundthat is not an Investment Trustto have legal title to the Fund Propertyregistered with an eligible person (unless the Rules provide otherwise). CIR Rule 12A.3.1(1) specifies that the person must be an Eligible Custodian. CIR Rule 12A.3.1(2) disapplies the requirement in relation to Fund Propertyof certain kinds of Qualified Investor Funds. Regardless of who holds title to Fund Property, the Fund Managermust always ensure that, in accordance with Article 22(2)(f) of the Law, Fund Propertyis clearly identified as such and held separately from property of the Fund Managerand any other Funds. Where Fund Property consists of cash or liquid assets, the assets must also be held under arrangements that clearly identify them as belonging to the Fund, and must be properly segregated from similar assets belonging to the Fund Manager and any other Funds.2. Where a Fundinvests in infrastructure projects (for example, the development of public facilities such as roads, railways or bridges), the Fund Managermay hold self-custody of the Fund Propertywhich consists of the interest in the infrastructure project. However, where it does so, the Fund Manageris not exempt from the overarching obligation under CIR 8.2.2(1) to Unitholdersof the QIF to ensure safe custody of the Fund Property. This envisages proper identification and segregation of the interest in the infrastructure project as Fund Propertyof the QIF.