Part 6 Part 6 Rules Specific to Specialist Classes of Domestic Funds
Guidance1. Article 17 of the Law confers on the
DFSAthe power to prescribe any type of Domestic Fund(i.e. a Public Fund, an Exempt Fund, or a Qualified Investor Fund) as a "specialist class" of a Domestic Fundand in so doing apply any requirements as are suitable for that specialist class of Funds. This Part sets out the requirements that apply to such a Fundby virtue of being a specialist class of Fund.2. Most of the requirements that are set out in this part as applying to specialist classes of Domestic Fundsare generally in addition to the core requirements that apply to every Domestic Fund(see CIR Part 4). Further, depending on whether it is a Public Fund, an Exempt Fund, or a Qualified Investor Fund, the additional requirements in CIR Part 5 of this module would also apply to a specialist class of Fund.3. A Qualified Investor Fundmay be constituted as a specialist class of a Domestic Fundwithout being subject to most of the detailed requirements that would normally apply to such specialist classes of Funds. However, there are some requirements which need to be met as the obligation to do so arises under the general provisions applicable to certain specialist classes of Funds, regardless of whether such Fundsare Public Funds, Exempt Fundsor Qualified Investor Funds. An example is a Fundconstituted as an Islamic Fund. While some of the detailed requirements such as the appointment of a Shari'a Supervisory Boarddo not apply to the Fund Managerof an Islamic Qualified Investor Fund(see IFR 6.2.1), the other general requirements such as ensuring compliance with Shari'arequirements continue to apply to such Fundsand the Fund Manager.4. The only specialist class requirements in this chapter that apply to a Qualified Investor Fundare those in Rule 13.6.3 and section 13.7 (Umbrella Funds).5. Generally, a Fund Manager using the Incorporated Cell Company structure can manage any specialist classes of Funds using the infrastructure of the Fund Platform. However, some types of specialist classes of Funds may not be easily established on a Fund Platform, such as a Fund of Funds, Master Fund or an Umbrella Fund because of their unique structures. If an applicant wishes to establish one of these specialist classes of Funds on a Fund Platform, the DFSA will consider what practical difficulties would arise in that context, including any additional clarification or Rule changes if needed.
CIR 13 CIR 13 Additional Requirements for Specialist Funds
CIR 13.1 CIR 13.1 Application to Qualified Investor Funds
CIR 13.1A CIR 13.1A Fund of Funds
CIR 13.1A Guidance
See CIR Rule 3.1.3 for the definition of a
Fund of Funds.
CIR 13.1.1A(1) A
Fundmanager of a Fund of Fundsmay not invest in:(a) another Fund of Funds;(b) a Feeder Fund;(c) any Fundwhich is dedicated to investment in a number of Funds;(d) any Fundwhich is dedicated to investment in a single Fundor in a single investment trust; and(e) any Sub-Fundof an Umbrella Fundor Sub-Fundof any other Fundwhich is equivalent to a Fundwithin (a) to (d).(2) Not more than 25% in value of the Fund Propertyis to consist of Unitsin anyone Fund.(3) For the purpose of (1) and (2), each Sub-Fundof an Umbrella Fundand of an equivalent Fundis to be treated as if it were a separate Fund.
CIR 13.2 CIR 13.2 Feeder Funds
CIR 13.2 Guidance
See CIR Rule 3.1.4 for the definition of a
CIR 13.2.1(1) A
Fund Managerof a Feeder Fundmust ensure that the Fund Propertyof a Feeder Fund, except where otherwise provided in the Rulesin this chapter, only consists of:(a) Unitsor Debenturesof a single Master Fund; or(b) in the case of a Feeder Fundwhich is a Public Fund, Unitsor Debenturesof an eligible Master Fund.(2) A Master Fundis eligible for the purposes of (1)(b) only if:(a) the borrowing of the Master Funddoes not exceed 200% of the net asset value of the Master Fundor the market value of the Unitsof the Master Fundat the mid-value share price;(b) the Unitsin or Debenturesof the Master Fundare regularly Offeredfor purchase and sale by at least three market makers who are recognised or registered as members of an Exchangeor an exchange regulated by a Financial Services Regulator;(c) the Feeder Fundowns not more than 20% of the Units(or of any class of Unitsin or of the Debenturesor of any class of Debentures) of the Master Fund; and(d) the Master Fundhas no limit on its duration.
Fund Managerof a Feeder Fundmust also ensure that the Feeder Fundinvests in a Master Fundonly if:(a) the Fund Managerof the Master Fundis regulated by a Financial Services Regulator;(b) the Master Fundis itself registered or authorised by a Financial Services Regulatorand is itself subject to independent oversight;(c) the investment objectives of the Master Fundhave been disclosed in detail in the Prospectusof the Feeder Fund;(d) it has made available to prospective Unitholdersin the Feeder Fundcopies of the Prospectusand the last audited annual reports and accounts of the Master Fund; and(e) the Fund Managerof the Master Fundhas waived any initial charges which it is otherwise entitled to make in relation to the acquisition of Unitsin its Fund.
Feeder Fundinvests in a Master Fundmanaged by the same Fund Manageror by an associated or related company, the Fund Managerof the of the Feeder Fundmust ensure that the Master Fundin which the investment is being made does not charge subscription or redemption fees on account of the investment; and commission or rebates received by the Fund Managerof the Feeder Fund, by virtue of the investment into the Master Fund, must be paid into the property of the Feeder Fund.
CIR 13.3 CIR 13.3 Private Equity Funds
CIR 13.3 Guidance
See CIR Rule 3.1.6 for the definition of a
Private Equity Fund.
CIR 13.3.1 CIR 13.3.1(1) A
Fund Managerof a Private Equity Fundis not required to appoint an Eligible Custodianfor the Fundpursuant to CIR Rule 8.2.2 where it meets the requirements in (2) and (3).(2) A Fund Managerof a Private Equity Fundmust call a meeting of Unitholdersto vote on the election of at least three experts who are independent of the Fund Managerto sit on an investment committee of the Fund.(3) The committee members in (2) must not involve themselves in the day to day management of the Fundbut are appointed to review investment opportunities.
CIR 13.3.1 Guidance1. The
DFSAexpects Fund Managersof Private Equity Fundsto have proper regard to best practice standards or guidance issued by the DFSAas well as leading international trade bodies in relation to such Funds.2. Experts are persons whose profession, expertise or reputation gives authority to a statement or opinion made by that person in relation to the subject matter of the statement or opinion.3. Where a Private Equity Fundappoints an investment committee pursuant to CIR Rule 13.3.1(2), the annual report of that Fundmust also include a report by that committee (see CIR Rule 9.4.7(1)).
Fund Managerof a Private Equity Fundmust ensure that:(a) unless the purpose of the Fundis to invest in a single venture or undertaking, it does not invest more than 25% of the Fundin one such venture or undertaking; and(b) it does not invest in companies which are Related Partiesin relation to the Fundor the Fund Manager, except where it does so in compliance with the requirements in CIR Rule 8.3.2.
Fund Managerof a Private Equity Fundintends to invest in any venture, the Fund Managermust ensure that it makes adequate arrangements for the undertaking of due diligence in respect of that venture including investigating its corporate governance standards.
Fund Managerof a Private Equity Fundhas placed a Personon the board of the Undertakingin which it is investing, it must take reasonable steps to ensure that it manages conflicts and follows good corporate governance.
CIR 13.4 CIR 13.4 Property Funds
CIR 13.4 Guidance
See CIR Rule 3.1.7 for the definition of a
Permitted Form and Listing
CIR 13.4.1 CIR 13.4.1(1) A
Fund Managerof a Domestic Fundwhich is a Property Fundmust use only a Closed-ended legal structure for the investment vehicle, unless it is an Exempt Fundor a Qualified Investor Fund.(2) In the case of a Property Fundwhich is or intends to be a Public Fund, the Fund Manager:(a) may only use either an Investment Companyor Investment Trustas the investment vehicle of the Fund;(b) must ensure that it is listed and traded on an Authorised Market Institutionor is listed and traded on an exchange in a Recognised Jurisdictionwithin 3 years from the date on which the Unitsof the Fundare first Offeredto the public or any other shorter period as specified in the Fund's Prospectus; and(c) must ensure that the Constitutionof the Fundincludes provisions that deal with:(i) the manner in which the issue and redemption of Unitsof the Fundwill be made to ensure that the Fundis Closed ended; and(ii) if applicable, the circumstances in which any Private Placementsmay be made.(3) If the offer document or marketing material of a Property Fundwhich is an Exempt Fundor QIFstates that it intends to be listed and traded on an Authorised Market Institution, or on an exchange in a Recognised Jurisdiction, it must:(a) be registered as a Public Company;(b) list and trade its Unitson the exchange specified in its offer document or marketing material within 3 years of its registration; and(c) during the period pending its listing and trading, comply with all the requirements applicable to a Public Fundother than the requirements relating to:(i) the independent oversight function; and(ii) the issue of a Public Fund Prospectus.
CIR 13.4.1 Guidance
See Article 18A of the Law for the definitions of Open-ended Fund and Closed-ended Fund.
Self-custody of Real Property for Public Funds
CIR 13.4.2 CIR 13.4.2(1) A
Fund Managerof a Public Property Fundis not required to appoint an Eligible Custodianunder CIR Rule 8.2.2(2) for Real Propertyif the Fund Manager:(a) acts as custodian of the Real Property;(b) has in place adequate systems and controls to ensure the proper segregation and protection of the Real Property; and(c) has in place effective arrangements which ensure that the real Property is not available to creditors if the Fund Managerbecomes insolvent.(2) The systems and controls referred to in (1)(b) must, as a minimum, ensure that:(a) legal title to the Real Propertyis registered in the name of the Fund;(b) the Fund Manageridentifies, manages and monitors any conflicts of interest that may arise due to it acting as custodian of the Real Property;(c) the Fund Managerclearly designates the employees who are responsible for safeguarding the ownership rights of the Fundover any Real Propertyincluding but not limited to:(i) safekeeping title deeds and other legally relevant documents relating to the Real Property; and(ii) ensuring that legal title to the Real Propertyis registered in the name of the Fund; and(d) the employees referred to in (c) are not required to carry out duties and functions which may conflict with their duties and functions referred to in that paragraph.(3) If a Fund Manager referred to in (1) uses a Fund Platform, the Incorporated Cell Company (ICC) may act as the custodian of the Real Property.(4) If an ICC acts as the custodian under (3), this Rule applies as if a reference to:(a) the Fund Manager acting as custodian is to the ICC acting as custodian; and(b) the Fund Manager becoming insolvent is to the ICC becoming insolvent.
CIR 13.4.2 Guidance1. A
Fund Managerof a Public Property Fundmay itself act as custodian of Real Propertyif it has in place adequate systems and controls to ensure the segregation and protection of the Real Property. This option only applies for Real Property(defined as land or buildings, whether freehold or leasehold, where the unexpired term of any lease exceeds 20 years). It does not permit the Fund Managerto act as custodian of Property Related Assetssuch as Sharesin a Body Corporatewhich invests in Real Propertyor Units in another Property Fund.2. In identifying, managing and monitoring conflicts of interest that may arise due to it acting as custodian, the Fund Managermust take into account that it is required under the Law to give priority to Unitholders'interests if there is a conflict between its own interests and the interests of Unitholders.3. If a Fund Managerdecides to act as custodian of Real Propertyas permitted under this Rule, it must disclose in the Fund's Prospectus that it acts as custodian, the additional risks that may arise due to it acting as custodian, and how it has addressed those risks (see CIR Rule 14.4.4A).
Self-custody of Real Property for Exempt Funds
CIR 13.4.2A CIR 13.4.2A
Fund Managerof an Exempt Property Fundis not required to appoint an Eligible Custodianunder CIR Rule 8.2.2(2) for Real Propertyif:(a) the Fund Manager acts as custodian of the Real Property or, if the Fund Manager uses a Fund Platform, the Incorporated Cell Company acts as custodian of the Real Property; and(b) the Fund Manager has in place effective arrangements which ensure that the Real Property is not available to creditors if the Fund Manager or the Incorporated Cell Company (as the case may be) becomes insolvent.
CIR 13.4.2A Guidance
Under this Rule, the arrangements must be legally effective to ensure that the
Real Propertyis not available to creditors if the Fund Manageror ICC becomes insolvent. This might involve, for example, the use of trust arrangements or registration of title in the name of the Fund. This option only applies to custody of Real Propertyand not, for example, to Property Related Assets.
Alternative Custody Arrangements for Real Property in Certain Jurisdictions
CIR 13.4.2B CIR 13.4.2B(1) If a
Fund Managerwishes to rely on CIR Rule 8.2.2(3)(a)(ii), or a Trusteeof an Investment Trustwishes to rely on CIR Rule 8.2.3(b), to make alternative arrangements for the purposes of those Rules, it may do so only if the requirements in (2) and (3) are met.(2) The Fund Manageror, in the case of an Investment Trust, the Trustee, for the purpose of meeting the legal or regulatory requirements in relation to the ownership of Real Propertyapplicable in the jurisdiction in which the Real Propertyis situated, may implement alternative arrangements for safekeeping where the arrangements:(a) in the case of an Investment Trust, enable the Trusteeto continue to control the Fund Property; and(3) If the Fund Manageror, in the case of an Investment Trust, the Trustee, implements arrangements in accordance with (2), it must satisfy the DFSAthat the arrangements have the effect specified in (2) and are legally effective in the DIFCand in the jurisdiction where the Real Propertyis situated.
CIR 13.4.2B Guidance1. CIR Rule 13.4.2B applies in limited situations such as where legal title to Real Property cannot be held in a GCC country due to an applicable law in another jurisdiction. It enables
Fund Managersand Trusteesto find suitable alternative arrangements to those mandated under Rule CIR 8.2.2(2) and CIR 8.2.3(b) for the safekeeping of Real Property. In such situations appropriate use of declarations of trust, indemnities and resolutions may produce an acceptable alternative. The DFSAhas previously permitted such alternative arrangements by way of waiver and modification to earlier provisions preceding the enactment of Rule CIR 8.2.2(2) and CIR 8.2.3(b).2. Note that in relation to an Investment Companyor Investment Partnership, CIR Rule 8.2.2 requires a Fund Managerto delegate the activity of Providing Custodyto an Eligible Custodian. In relation to an Investment Trust, CIR Rule 8.2.3(b) also permits a Trusteeto delegate the activity of Providing Custodyto an Eligible Custodian.
CIR 13.4.3(1) A
Fund Managerof a Property Fundmust, subject to (2), call a meeting of Unitholdersto vote on the election of at least three experts who are independent of the Fund Managerto sit on an investment committee of the Fund.(2) A Fund Managerof a Fundwhich is constituted as an Investment Trustneed not appoint an investment committee.(3) The committee members in (1) are appointed to review investment opportunities and must not involve themselves in the day to day management of the Fund.
CIR 13.4.4 CIR 13.4.4(1) A
Fund Managermust, subject to (2), ensure that the assets of a Property Fund, except where otherwise provided in the Rulesin this section, consist only of any or all of:(a) Real Property;(b) Property Related Assets; or(c) Units in another Property Fund; and(d) cash, government and public Securities, up to a maximum of 40%.(2) The requirements in (1) do not apply to a Fund Managerduring the initial 6 month period of the Fund'soperation and in any case, will be subject to any other time period set out in the Prospectusor as approved by a Special Resolutionof the Unitholders.(3) A Fund Managermust ensure that:(a) Property Related Assetsof a Public Property Fund:(i) are listed and traded on an Exchangewhich is provided for in the Prospectusof the Fund; or(ii) if not listed and traded as specified in (i), are approved and reviewed regularly by the investment committee of the Fundto ensure that they are sufficiently liquid and can be accurately valued; and(b) the Property Fund does not grant any Person an option to acquire any property included in the Fund.(4) The Fund Manageror, where appointed, the Trustee, must, subject to (5), ensure that the Fundholds good marketable legal and beneficial title in all its Real Property, whether directly or via Special Purpose Vehiclescontrolled by the Fund. The Fundmay hold such title as joint tenants or tenants-in-common with one or more third parties provided that the Fundmust hold the majority interest and control and have the freedom to dispose of its interest.(5) Any special arrangement entered into in respect of Fund Propertyfor the purposes of Islamic finance arrangements where the legal title to the property is held by a financial institution will be acceptable for the purposes of (4) provided information relating to such arrangements either disclosed in the Prospectusof the Fundor approved by Special Resolutionof Unitholders.(6) The Fund Managerand, if appointed, the Trustee, must take all reasonable care to ensure that the Fund Managerarranges adequate property insurance and public liability insurance coverage in relation to the Real Propertyof a Fund.
CIR 13.4.4 Guidance1. CIR Rule 13.4.4(5) enables
Fund Managersand Trusteesto use certain Islamic structures such as ijara for property financing which require the legal ownership of the real property to be held by the financial institution providing the financing.2. CIR Rule 13.4.4.(5) does not require individual transactions to be specified in the Prospectusor approved by Special Resolutionof Unitholders. Instead, it would be sufficient for general information relating to such arrangements, such as their legal effect, to be included in the Prospectus, failing which Unitholderapproval by Special Resolutionwill be required. Similarly, Unitholderscan by Special Resolutiongrant general approval for use of such Islamic financing arrangements, obviating the need for each specific transaction to be separately approved.
CIR 13.4.5 CIR 13.4.5(1) The
Fund Managerof a Public Property Fundmay borrow either directly or through its Special Purpose Vehiclefor financing investment or operating purposes, but aggregate borrowings must not at any time exceed 65% of the gross asset value of the Fund.(2) The Fund Managerof a Fundmay pledge the Fund'sassets to secure borrowings under (1).(3) In the event that the borrowing limit under (1) is exceeded, the Fund Managermust inform the Trustee(if appointed), the Unitholdersand the DFSAof the magnitude of the breach, the cause of the breach, and the proposed method of rectification. The Fund Managermust use its best endeavours to reduce as soon as reasonably possible the excess borrowings.(4) All borrowings by the Fundmust be conducted at arm's length.(5) Borrowings by any Special Purpose Vehiclesheld by the Fundmust be aggregated for the purpose of calculating borrowings of the Fundfor the purposes of this Rule.
CIR 13.4.5 Guidance
The gross asset value of a
Fundshould be calculated as the total value of the Fund Property, based on the most recent valuation under CIR Rule 8.4.1(1), but without making the deductions provided for in the other paragraphs of that Rule.
Joint Ownership Arrangement
Fund Managermust ensure that when a joint ownership arrangement is entered into, the Fundhas a majority stake or holding in respect of that arrangement, that is, more than 50% ownership and control in each property at all times.
CIR 13.4.7(1) In making any joint ownership investment under CIR Rule 13.4.6, the
Fund Managermust:(a) be able to demonstrate that the arrangement, including the decision to own less than a 100% interest in the property, is in the interests of the Unitholders; and(b) must obtain a legal opinion in accordance with (2).(2) The legal opinion referred to in (1)(b) must include:(a) a description of the significant terms of the joint ownership arrangement;(b) a statement whether the Fundwill have a good and marketable legal and beneficial interest in the property;(c) a description of the equity and profit sharing arrangements of the parties to the agreement;(d) a statement that the relevant contract and joint ownership arrangements are legal, valid, binding and enforceable under applicable law;(e) a statement that all necessary licences and consents required in the location where the subject property is located have been obtained by the Fundor its Special Purpose Vehicle;(f) any restriction on divestment by the Fundof its interest, in whole or in part, in the property; and(e) if applicable, the implication of foreign rules and regulations that may prohibit full ownership of the property by the Fund.
Fund Managermust ensure that:(a) proper due diligence is conducted in identifying restrictions and constraints that may limit a Fund'sdirect ownership of a 100% interest in a property; and(b) the liability of, or assumed by, the Funddoes not exceed the percentage of its interest in the joint ownership arrangement and there is to be no assumption of unlimited liability by the Fund.
Fund Managermust disclose to Unitholders;(a) the ownership structure of the property interest and the material terms thereof, including restrictions on divestments and the impact or implication of such restrictions on the divestment value of the interest in the property;(b) the identity, background and ownership of the remaining legal and beneficial owners in the property, transactional history of these owners with the Fundin relation to the property;(c) financial, remuneration, fee-sharing or other material arrangements that have been or will be entered into between the Fundand the other owners of that property or their associates;(d) a summary of the contents of the legal opinion in CIR Rule 13.4.7(1)(b) in relation to the property; and(e) where appropriate:(i) the nature of restrictions on foreign ownership and the duration of them, and the impact of such restrictions on the operations and financial position of the Fundas a whole;(ii) the Valuer'sopinion and evaluation of the impact of such prohibitions on the value of the property; and(iii) any other information which may reasonably be relevant to a Unitholder.
Use of Special Purpose Vehicles
CIR 13.4.10 CIR 13.4.10(1) The
Fund Managerof a Property Fundmay hold Real Propertyfor the Fundthrough a Special Purpose Vehicle, subject to (2) and (3), only if the Fundhas majority ownership and control of the Special Purpose Vehicle.(2) A Special Purpose Vehicleset up by the Fund Managerof a Fundunder (1) may itself hold Real Propertythrough another Special Purpose Vehicle(the second Special Purpose Vehicle) for the sole purpose of directly holding Real Propertyfor the Fundor arranging financing for the Fundbut the second Special Purpose Vehiclemust not hold Real Propertyfor the Fundthrough another Special Purpose Vehicle.(3) The Fund Managerof the Fundmust ensure that:(a) neither the Constitutionof any Special Purpose Vehiclenor the organisation, transactions or activities of such vehicles under any circumstance contravene any requirements of the Rulesin this section;(b) the board of directors of each of the Special Purpose Vehiclesis appointed by the Fund Managerin agreement with the Trusteeor Personsperforming oversight functions of the Fundwhere applicable and, where elected, the investment committee; and(c) both the Fundand the Special Purpose Vehiclesmust appoint the same Auditorand adopt the same accounting principles and policies.
CIR 13.4.10 Guidance
Special Purpose Vehiclesmay be permitted by the DFSAby waiver or modification under limited circumstances, such as where the Fund Managercan demonstrate to the satisfaction of the DFSAthat the arrangement is necessary for the purpose of meeting the legal or regulatory requirements of another jurisdiction.
Fundacquires Real Propertythrough the acquisition of a Special Purpose Vehicle, the following matters must be complied with by the Fund Managerfor the purpose of the purchase:(a) a report made by the Fund's Auditormust be prepared on:(i) the profit and loss of the Special Purpose Vehiclefor each of the three years preceding the transaction or any shorter period as is relevant if the Special Purpose Vehiclewas in existence for less than three years; and(ii) the assets and liabilities of the Special Purpose Vehicleas at the last date, which is no more than 6 months old from the date of the report to which the accounts of the Special Purpose Vehiclewere prepared;(b) the report required under (a) must:(i) indicate how the profits and losses of the Special Purpose Vehiclewould, in respect of the Sharesto be acquired, have affected the Fund, if the Fundhad at all material times held the Sharesto be acquired; and(ii) where the Special Purpose Vehiclehas subsidiaries, deal with the profits or losses and the assets and liabilities of the Special Purpose Vehicleand its subsidiaries, either as a whole, or separately; and(c) a valuation report in respect of the Special Purpose Vehicle'sinterest in Real Propertymust be prepared in accordance with the requirements set out in Rules CIR 13.4.18 to CIR 13.4.22.
Related Party Transactions
Fund Managerof a Public Property Fundis required pursuant to CIR Rule 8.3.2 to obtain the agreement of Unitholdersby way of an ordinary resolution before undertaking a Related Party Transactionwhere the total consideration or value of the transaction is 5% or more of the net asset value of the Fund. See also CIR App2 and CIR App3.2. A Fund Managerof a Public Property Fundmay enter into a Related Party Transactionfor the acquisition or sale of Real Propertyin the State without obtaining specific approval for the transaction under CIR Rule 8.3.2 if all of the conditions in CIR Rule 13.4.11A(1) are met.3. If a Fund Managerenters into a Related Party Transactionunder the exclusion in CIR Rule 13.4.11A, it must notify Unitholdersof details of the transaction as soon as practicable after entering into the transaction. It also must disclose in the Fund's Prospectusif it has Unitholderapproval to enter into such transactions without obtaining a resolution in each case (see CIR Rule 14.4.4B).
CIR 13.4.11A(1) The
Fund Managerof a Public Property Fundis not required to comply with CIR Rule 8.3.2(3) and (4)(a) for a Related Party Transactionif:(a) the transaction is for the acquisition or sale of Real Propertyin the State;(b) the Fund Managerhas general Unitholder approval in accordance with (2) to enter into such transactions;(c) the oversight provider of the Fundhas confirmed in writing, before the transaction is entered into, that it is on terms that comply with the requirement in CIR Rule 8.3.2(2) and that all other applicable requirements have been complied with; and(d) the investment committee of the Fundhas confirmed in writing, before the transaction is entered into, that it is on terms that comply with the requirement in CIR Rule 8.3.2(2) and it has no objection to the transaction.(2) Unitholderapproval under (1)(b) must be by way of an ordinary resolution of the Unitholdersof the Fundthat:(a) was passed at the previous annual general meeting of the Fund;(b) is valid only until the date of the next annual general meeting of the Fund(when it may be renewed): and(c) authorises the Fund Managerto enter into Related Party Transactionsreferred to in (1)(a) without obtaining prior Unitholderapproval in each case during the period for which the resolution is valid.(3) If a Fund Managerof a Public Property Fundenters into a Related Party Transactionunder this Rule, it must as soon as practicable after entering into the transaction provide written notification to Unitholdersof the Fundsetting out relevant details of the transaction including the identity of the Related Partyand the nature and extent of his interest.
CIR 13.4.12(1) The following information in relation to
Related Party Transactionsmust be disclosed to Unitholdersand where appointed, the Trustee, by the Fund Managerof a Public Property Fund:(a) any beneficial interests of the Related Party, and any changes thereof, in the Fund; and(b) any potential conflicts of interests involving the Related Partyand the measures implemented to address such conflicts.(2) If the Fund Manageroperates more than one Fundand a transaction involves two or more of the Fundsoperated by the Fund Manager, such transactions between the Fundswill be Related Party Transactionsfor each of the Fundsinvolved in the transactions.
CIR 13.4.13(1) Where any
Related Partyhas an interest in an Undertakingwhich competes or is likely to compete, either directly or indirectly, with the Fund'sactivities, the Fund Managerof a Public Property Fundmust disclose to Unitholdersand where appointed, the Trustee, the following:(a) a description of the Undertakingof the Related Partyand its management, to enable Unitholdersto assess the nature, scope and size of such business, with an explanation as to how such Undertakingmay compete with the Fund;(b) where applicable, a statement from the relevant Related Partythat it is capable of performing, and shall perform, its duty in relation to the Fundindependently of its related business and in the best interests of the Fundand its holders; and(c) a statement as to whether the Fundmay acquire any of the related business or assets of the Related Party.(2) If there is any change in information required under (1) after initial disclosure, the Fund Managermust disclose such changes to the Unitholdersand where appointed the Trustee.
Related Partyhas, for the purpose of the establishment of the Fund, agreed to sell Real Propertyto the Fund, the Fund Managerof a Public Property Fundmust disclose the following in the Prospectus:(a) a valuation report by an independent valuer of the Real Propertythat the Related Partyhas agreed to sell; and(b) the price to be paid by the Fundfor the Real Propertyand other material terms of the transaction.
CIR 13.4.15(1) The
Fund Managerof a Public Property Fundmust ensure that if any cash forming part of the Fund'sassets is deposited with a Related Party(being an institution licensed to accept deposits), interest must be paid on the deposit at a rate not lower than the prevailing commercial rate for a deposit of that size and term.(2) The Fund Managerof a Public Property Fundmust ensure that in the event of borrowing from a Related Party(being an institution licensed to lend money), interest charged on the borrowing is at a rate not higher than the prevailing commercial rate for a borrowing of that size and term.
CIR 13.4.16 CIR 13.4.16(1) This Rule applies to a
Related Party Transactionof a Public Property Fundthat involves either:(a) services provided in the ordinary course of estate management of Real Propertyof the Fund, including renovation and maintenance work; or(b) engaging a property agent to provide services to the Fund, including advisory or agency services in property transactions.(2) The Fund Manager, and if appointed, the Trustee, must ensure that if the value of the transaction is 5% or more of the most recent net asset value of the Fundas disclosed in the latest published audited accounts, it is entered into only with the prior approval of the oversight provider of that Fund.
CIR 13.4.16 Guidance
The requirements in CIR Rule 13.4.16 are in addition to other requirements in these Rules applying to
Related Party Transactions. For example, under CIR Rule 8.3.2, the Fund Managermust ensure the transaction is on normal commercial terms, is subject to Unitholderapproval if it represents 5% or more of the net asset value of the Fundand is disclosed to Unitholders.
CIR 13.4.17 [Deleted][Deleted] RM158/2015 (Made 9th December 2015). [VER19/02-16]
CIR 13.4.18(1) The
Fund Managerof a Property Fundmust, subject to the approval of the Trustee, appoint a Personwho is able to provide professional valuation services in accordance with the Rulesin this section.(2) The Fund Managermust ensure that the Personappointed under (1) values each Real Propertyprior to its acquisition and disposal.(3) The Fund Managermust commission the Personreferred to in (1) to produce a valuation report of the Property Fundeach year in accordance with CIR Rule 13.4.22. The net asset value of the Fundfollowing this valuation must be reported in the annual report of the Fund.
CIR 13.4.19 CIR 13.4.19
For the purpose of CIR Rule 13.4.18, a
Fund Managermust appoint a Person:(a) who carries on the business of valuing Real Property;(b) who is not Relatedto the Fund Manager; and(c) whom the Fund Manager, and if appointed the Trustee, have reasonable grounds to believe would be capable of providing objective valuation of Real Property.
CIR 13.4.19 Guidance1. The term "
Related" has the meaning given to it in the GLO module.2. A Fund Manager, and where appointed the Trustee, in forming the opinion required under CIR Rule 13.4.19(c), should be satisfied that the Personto be engaged for providing valuation of Real Propertymeets if not all, at least most of the following criteria:a. the Personis a, or has key personnel who are, fellow or associate members of a recognised professional body of surveyors or property valuers and who are qualified to perform property valuations;b. the Personhas or has access within the organisation to the relevant expertise, that is, knowledge of and experience in the valuation of property of the relevant kind in the relevant area where the property is situated;c. the Personhas robust internal controls and checks and balances to ensure the integrity of valuation reports and that these reports are properly and professionally prepared in accordance with international best practice;d. the Personhas adequate professional insurance to cover its usual risks;e. the Persondoes not have ownership or other commercial links with any other Personsproviding Financial Servicesto the Fund(such as investment advisers or investment managers appointed to the Fund), which would impair that Person'sability to provide independent and objective valuation services to the Fund; andf. the Personor any of his associates has not been instrumental in relation to the finding of the Real Propertyfor the Fund.
CIR 13.4.20(1) A
Fund Managermust ensure that any valuation by the Personappointed to provide valuation services to the Fundis carried out on the basis of an 'open market value' as defined in the Constitutionand the most recent Prospectusof the Fund.(2) The valuation report under (1) must confirm that if the Real Propertywas acquired for the Property Fundit could be disposed of at that valuation within a reasonable period.
CIR 13.4.21 CIR 13.4.21
Fund Managermust ensure that the property is acquired within a reasonable time from the date of the valuation report and in any event not later than six months from the date of valuation and at a price no more than 5% above the valuation price.
CIR 13.4.21 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; or International Valuation Standards issued from time to time by the International Valuation Standards Committee
Fund Managermust ensure that any valuation report prepared by the Personappointed:(a) includes all material details in relation to the basis of valuation and the assumptions used;(b) describes and explains the valuation methodologies adopted;(c) outlines the overall structure and condition of the relevant market including an analysis of the supply and demand situation, the market trend and investment activities;(d) includes a brief description of the property, its location, the nature of the interest the Fundholds in the property, its existing use, any encumbrances concerning or affecting the property, the lease expiry profile if any, the capital value in existing state at the date the valuation was performed, the net monthly income from the property, and any other matters which may affect the property or its value;(e) confirms the professional status of the valuer and that the valuation report is prepared on a fair and unbiased basis; and(f) explains the rationale for choosing the particular valuation method if more than one method is available.
Fund Managermust ensure that whenever a valuation report is prepared for the Fund, the date of the valuation report must be:(a) the date the Fundis valued, if such report is prepared for the purpose of calculating the net asset value of the Fund; or(b) a date which is not more than six months before the date on which:(i) an offering document is issued;(ii) a circular is issued, if the circular relates to a transaction that requires Unitholders' approval; or(iii) a sale and purchase agreement or other agreement to transfer legal title is signed, if the transaction does not require Unitholderapproval.
Reappointment of Valuer
CIR 13.4.24(1) A
Fund Managermust ensure that where a Personappointed pursuant to CIR Rule 13.4.19 has conducted valuations of the Real Propertyfor the Fundfor five consecutive years, that Personis not permitted to continue to provide valuation services for the Fundunless before the end of that period the position has been put out to tender and the Personhas been re-appointed in accordance with that process..(2) If the Fund Managerdecides to re-appoint the same Personto provide valuation services for the Fundfollowing the tender process referred to in (1), it must, in the next interim or annual report provided to Unitholders, specify the reasons for the re-appointment and the evidence supporting those reasons.(3) The Fund Manager, and if appointed the Trusteeon instructions of the Fund Manager, may at any time remove the Personappointed to provide the valuation services by notice in writing in any of the following events:(a) the Personenters into liquidation, becomes bankrupt or has a receiver appointed over its assets; or(b) the Fund Manager, in consultation with the Trustee, determines on reasonable grounds that it is necessary to remove that Personin the interests of the Fundand the Unitholders; or(c) an ordinary resolution is passed by the Unitholdersto dismiss that Person.(4) Upon the retirement or dismissal of the Personappointed to provide the valuation services to the Fund, the Fund Managermust appoint another Personto provide valuation services to the Fundwhere the Fund Managerand where appointed the Trusteeare satisfied that the Personmeets the requirements specified in CIR Rule 13.4.19.
CIR 13.5 CIR 13.5 Real Estate Investment Trusts (REITs)
CIR 13.5 Guidance1. See CIR Rule 3.1.8 for the definition of a
Real Estate Investment Trust(REIT).2. REITsare a subset of Property Funds. The Fund Managerof a Public Property Fund, which is, or is to be held out, as a REIT, is required, in addition to the general Rules applying to Public Property Funds(such as Rules on borrowing and Related Party Transactions), to also comply with the Rules in this section.3. An Exempt Fundor Qualified Investor Fundmay also be constituted as a REITif it meets the criteria in CIR Rule 13.5.1(2). Such a REITalso has 3 years to list and trade if its offer documents (e.g. the Information Memorandum) or its marketing material state that it intends to list and trade its Units.
Real Estate Investment Trusts (REITs)
CIR 13.5.1(1) A
Fund Manager, or any Personmaking an Offerof a Unitof a Fundor otherwise marketing a Fund, must not include the term "Real Estate Investment Trust" or "REIT" or refer to a Fundor otherwise hold out a Fundas being a Real Estate Investment Trustor a REIT, unless it is a Property Fundwhich is constituted in accordance with (2).(2) A REITis a Property Fundwhich:(a) is constituted either as an Investment Companyor as an Investment Trust;(b) is primarily aimed at investments in income-generating Real Property; and(c) distributes to the Unitholdersat least 80% of its audited annual net income.(3) If at any time during the operation of the Fundthe requirements in (2) are not met, the Fund Manager, and, if appointed the Trustee, must immediately notify the DFSAand the exchange of the failure to meet the requirements in these Rulesand what measures have been or will be taken to remedy the breach.
CIR 13.5.2(1) A
Fund Managerof a REITmust ensure that it distributes to the Unitholdersas dividends each year an amount not less than 80% of its audited annual net income.(2) The Personsproviding oversight functions in respect of a Public REITmust determine if any;(a) revaluation surplus credited to income, or(b) gains on disposal of Real Property,shall form part of net income for distribution to Unitholders.
Public REITholds any Real Propertyvia one or more Special Purpose Vehicles, the Fund Managermust ensure that each Special Purpose Vehicledistributes to the Fundall of its income as permitted by the laws and regulations of the jurisdiction where the Special Purpose Vehicleis established.
CIR 13.5.4 CIR 13.5.4(1) A
Fund Managerof a Public REITmust ensure, subject to (2), that any investment made in respect of property under development whether on its own or in a joint venture is undertaken only where the REITintends to hold the developed property upon completion.(2) The total contract value of the property under development in (1) must not exceed 30% of the net asset value of the Fund Propertyof the Public REIT.
CIR 13.5.4 Guidance
For the purposes of CIR Rule 13.5.4, the
DFSAwould not consider property development activities to include refurbishment, retrofitting and renovation.
CIR 13.5.5 [Deleted][Deleted] RM158/2015 (Made 9th December 2015). [VER19/02-16]
CIR 13.6 CIR 13.6 Hedge Funds
CIR 13.6 Guidance
See CIR Rule 3.1.9 for the definition of a
CIR 13.6.1 CIR 13.6.1
Fund Managerof a Hedge Fundmust ensure that the risks inherent in the operation of a Hedge Fundare adequately addressed, with due regard to the nature of the strategies and investment process employed by the Fund Managerand the role of Fund Administratorsand Custodiansand where appointed, prime brokers.
CIR 13.6.1 Guidance
A prime broker is a
Personwho provides to a Funda range of services including custody and depository services, trading and execution services, clearing and settlement services and financing to support the Fund's investment activities. Such financing activities generally include stock lending and borrowing. The restrictions in Rules CIR A1.3.1(c) and (f) of Appendix 1 (App 1) prevent a Fund Managerof a Hedge Fundfrom authorising a prime broker to commingle the assets of the Fundwith any other assets held by or available to the prime broker and use those assets as collateral to support the prime broker's cross lending and borrowing activities involving Fundsto which it acts as the prime broker. However, the restrictions in CIR A1.3.2(c) and (f) do not apply if a Fund Managerof a Hedge Fundcan comply with the requirements relating to the use of prime brokers set out in CIR Rule 13.6.3.
CIR 13.6.2 CIR 13.6.2(1) The
Fund Managerof a Hedge Fundmust ensure functional separation and independence between:(a) the functions of Fundvaluation and asset pricing; and(b) the investment management process.(2) Where the Fundmanager is unable to demonstrate adequate separation and independence in accordance with (1), the DFSAmay require the Fund Managerto appoint an independent, suitably competent and experienced Fund Administratorto perform the functions specified in (1)(a).
CIR 13.6.2 Guidance
To provide segregation of the net asset value determination process of the
Fundfrom the investment management process, generally personnel involved in the former should not be involved in the latter. An effective method of achieving such segregation is to delegate the calculation, determination and production of the net asset value to a suitably competent and experienced third party Fund Administrator.
Use of Prime Brokers
CIR 13.6.3 CIR 13.6.3
Fund Managerof a Hedge Fundmay only grant to a prime broker authority to combine the assets of the Fundwith any other assets held by or available to the prime broker as collateral for any financing activities to be undertaken by the prime broker where, and so long as, all the following conditions are met:(a) the Fundis an Exempt Fundor a Qualified Investor Fund;(b) the Prospectusof the Fundcontains, in addition to the disclosure required under CIR chapter 14, the following mandatory disclosure and warnings:(i) the identity and profile of the prime broker, including where it is located and how it is regulated;(ii) the services which the prime broker provides to the Fundand the nature and extent to which the prime broker has the power and authority to combine the assets of the Fundwith any other assets held by or available to the prime broker as collateral for any financing activities undertaken by the prime broker; and(iii) a prominent health warning in the Prospectusto prospective Unitholdersto the facts that:(A) the Fund'sappointed prime broker has the power and authority to use as collateral the assets of the Fundin conjunction with any other assets held by or available to the prime broker; and(B) where the prime broker uses Fundassets as collateral pursuant to the above power, the Unitholdersmay lose all the assets of the Fundin the event of the insolvency of the prime broker;(c) the Personappointed as the prime broker qualifies as an Eligible Custodian;(d) the agreement between the prime broker and the Fund Managercontains mandatory contractual provisions that:(i) prohibit the prime broker from using as collateral the assets of the Fundto an extent exceeding 140% of the Fund'sindebtedness to the prime broker at any given time; and(ii) create an irrevocable right in favour of the Fundthat enables any indebtedness of the Fundto the prime broker to be set off against any amounts that are owing by the prime broker to the Fund, including in the event of the insolvency of the prime broker; and(e) the Fund Managerhas in place adequate valuation procedures to mark positions to market daily in order to meet on an ongoing basis the restriction referred to in (d)(i) relating to the limit to which the prime broker may use as collateral the assets of the Fund.
CIR 13.6.3 Guidance1. If the prime broker holds the legal title to the
Fundassets, the prime broker must, in any event, qualify as an Eligible Custodian. However, even if a prime broker does not hold the legal title to the Fundassets, CIR Rule 13.6.3(c) requires it to meet the Eligible Custodianrequirements in certain circumstances. This is where it has the power to use Fundassets as collateral for its financing activities (e.g. by having a charge over the Fundassets) in conjunction with any other assets held by or available to it.2. In relation to the matters referred to in Rules CIR 13.6.1 and CIR 13.6.2 and in relation to management of Hedge Fundinvestments, the DFSAexpects Fund Managersof Hedge Fundsto have proper regard to best practice standards and guidance set out in CIR App 8, DFSA's Hedge Fund Code of Practice as well as international developments relating to Hedge Funds.
CIR 13.7 CIR 13.7 Umbrella Funds
CIR 13.7 Guidance
See CIR Rule 3.1.10 for the definition of an
Form of an Umbrella Fund
CIR 13.7.1 CIR 13.7.1
Subject to any restrictions in the Law and the
Rulesin this module, an Umbrella Fund:(a) may be formed as a Protected Cell Company(PCC); and(b) must be an Open-ended Fund if formed as a PCC.
CIR 13.7.1 Guidance1. A
Protected Cell Company(PCC) is a form of Investment Companywhich needs to be registered as a PCCunder the Companies Regulations. An Umbrella Fundusing the PCCstructure has the benefit of legal segregation of Fund Propertyforming part of each individual cell. Accordingly, Fund Propertyof one cell of a PCCis not available to pay any obligations arising in relation to another cell of that PCC.2. It is not mandatory for an Umbrella Fundto be constituted as a PCC. Instead, such Fundsmay be formed as a conventional Investment Companyor Investment Trust. However, the legal segregation available to each cell of a PCCis not available to Sub-Fundsof Umbrella Fundsnot formed as a PCC.
Investments of an Umbrella Fund
CIR 13.7.2 CIR 13.7.2
Fund Managerof an Umbrella Fundmust ensure that none of its Sub-Fundsinvests in another of its Sub-Funds.
CIR 13.7.2 Guidance
Requirements that apply to other
Fundsapply to Umbrella Fundsequally, although there are some Umbrella Fundspecific requirements. For convenience of reference, key provisions specific to Umbrella Fundsare identified in the following Table.
Additional requirements specific to Umbrella Funds
Rule Requirements CIR Rule 3.1.10 Definition CIR Rule 13.7.1 Form of an Umbrella Fund CIR Rules 9.4.2 Annual and interim reports CIR Rules 9.4.6 Content of the annual report of an Umbrella Fund CIR Rules 9.4.9 Fund Manager's Report CIR Rules 13.7.2 Investment restrictions applicable to Fund of Funds when investing in a Sub-Fund CIR AppA7.1.1(2)(h)&17 Content of a Public Fund Prospectus CIR Rules 14.3.5 Content of a Short Form Prospectus Rules CIR 16.1.1, CIR 16.1.3(3) (4) & (5) Transfer schemes Rules CIR 17.1.1 & CIR 17.1.6 Winding up
CIR 13.8 CIR 13.8 Money Market Funds
Investment Conditions and Borrowings
CIR 13.8.1 CIR 13.8.1(1) A
Fund Managerof a Money Market Fundmust ensure that the Fund'sinvestment strategy is consistent with the investment objectives of such a Fundas set out in CIR Rule 3.1.11.(2) Without limiting (1), the Fund Managerof a Money Market Fundmust ensure that:(a) at least 90% of the net asset value of the Fund Propertyis invested in Deposits or Debentures that are of high quality, as determined by the Fund Managerin accordance with CIR Rule 13.8.2;(b) at least 10% of the net asset value of the Fund Propertyconsists of cash in accounts that permit the cash to be withdrawn immediately on demand;(c) Depositswith, or Debenturesissued by, a single entity do not exceed 10% of the net asset value of the Fund Property;(d) the Fundinvests only in Depositsor Debentures:(i) with a residual maturity until the legal redemption date of not more than two years; and(ii) where the time remaining until the next interest rate reset date is not more than 397 days;(e) the Fund Propertyhas a weighted average maturity of not more than 6 months;(f) the Fund Propertyhas a weighted average life of not more than 12 months;(g) the Funddoes not invest in Financial Instrumentsother than Depositsor Debentures, except for:(i) Unitsin other Money Market Fundsthat have investment objectives and strategies consistent with those of the Fund; or(ii) Derivatives that are used solely to hedge against foreign exchange rate risk; and(h) the borrowings of the Funddo not, at any time, exceed 10% of the net asset value of the Fund Property.(3) In (2):(a) the "net asset value" of Fund Property, means the value of Fund Propertyat the most recent valuation under CIR Rule 8.4.1;(b) the "weighted average maturity" of Fund Property, means the average length of time to maturity of all the Financial Instrumentsheld as Fund Property, weighted to reflect the relative holdings in each Financial Instrument, where the maturity of a floating rate instrument is the time remaining until the next interest rate reset; and(c) the "weighted average life" of Fund Property, means the weighted average of the remaining life of each Financial Instrumentheld as Fund Property, where the remaining life of a Financial Instrumentis the time until the due date for repayment of the principal.
CIR 13.8.1 Guidance
IFR 6.12 sets out further Rules and Guidance about how the requirements in this section apply to Islamic
Money Market Funds.
Due diligence on investment quality
CIR 13.8.2 CIR 13.8.2
To determine whether a
Depositor Debentureis of high quality for the purposes of CIR Rule 13.8.1(2)(a), a Fund Managerof a Money Market Fundmust carry out due diligence to an adequate standard on the Depositor Debenture, taking into account the following factors:(a) the credit quality of the Issuer, and any guarantor, of the Investment;(b) the nature and quality of the asset class represented by the Investment;(c) the liquidity of the Investment; and(d) any other risks associated with the Investmentor the market in which it is traded.
CIR 13.8.2 Guidance1. A
Fund Managermust carry out the due diligence required under CIR Rule 13.8.2 as part of its internal procedures. However, this does not prevent it from using a service provider to carry out the necessary due diligence, provided the outsourcing requirements in these Rules are met.2. A Fund Managerwill not meet the due diligence requirements in the Rule if it relies solely on credit ratings issued by a credit rating agency. This is because assessment of credit quality is only part of the due diligence required under the Rule.3. A Fund Managershould keep appropriate records of the due diligence it has conducted on an Investmentto demonstrate that it has complied with the Rule.
CIR 13.9 CIR 13.9 Exchange Traded Funds (ETFs)
Restriction on holding out to be an ETF
CIR 13.9.1 CIR 13.9.1
Fund Manager, or any Personmaking an Offerof a Unitof a Fundor otherwise marketing a Fund, must not describe the Fundin its offer document or marketing material as an " Exchange Traded Fund" (or "ETF") or otherwise hold out the Fundas being an Exchange Traded Fundor ETF, unless the Fundmeets the criteria in CIR Rule 3.1.12.
CIR 13.9.1 Guidance
Guidanceitem 4 under CIR Rule 13.9.6 for the difference between an Exchange Traded Fundor ETF and other exchange traded Open-ended Funds.
Systems and controls
CIR 13.9.2 CIR 13.9.2
Fund Managerof an ETF must take reasonable steps to ensure that any Authorised Participant it appoints has adequate systems and controls to ensure that the Unitsof the ETF are traded on-market at a price that does not significantly vary from the most recent Net Asset Value(NAV) of the ETF, or the indicative Net Asset Value(iNAV) of the ETF, if available.
Investment objective and strategy of an ETF
CIR 13.9.3 CIR 13.9.3
Fund Managerof an ETF must ensure that the investment objective and strategy of the Fundis to track the performance of an index or benchmark specified in its Prospectus.
Criteria for underlying indices or other benchmarks
CIR 13.9.4(1) A
Fund Managerof an ETF may use an index or other benchmark for the purposes referred to in CIR Rule 13.9.3 only if it is provided by a Price Information Providerthat meets the requirements in App 9.(2) In (1), a Price Information Provideris a price reporting agency or an index or benchmark provider which constructs, compiles, assesses or reports, on a regular and systematic basis, prices of Investments, rates, indices, commodities or figures, which are made available to users, including a Fund Manager.
Index or benchmark provided by a Related Party
CIR 13.9.5 CIR 13.9.5
Fund Managerof an ETF must treat an arrangement between the Fund Managerand a Related Partyto use an index or benchmark provided by the Related Partyas a Related Party Transaction.
CIR 13.9.5 Guidance1. An index or other benchmark referenced by an
ETFis not the property of the ETF. If the index or benchmark is provided by a Related Party(for example, if it is custom made for the Fund Manager), it can give rise to conflict of interests that may pose the risk of distortion of information in favour of the Fund Manager, to the possible detriment of investors in the ETF. Therefore, CIR Rule 13.9.5 also applies the Related Party Transactionprovisions in CIR Rule 8.3.2 to an arrangement under which a Fund Managerof an ETFuses or proposes to use an index or benchmark provided by a Price Information Providerwhich is a Related Party.2. A Fund Managerof an ETFwill also need to comply with CIR Rule 13.9.4 in relation to a Related Party Price Information Providerwhich provides the index or the other benchmark it tracks.
Types of ETFs and their characteristics
CIR 13.9.6 CIR 13.9.6
Fund Managerof an ETF must take reasonable steps to ensure that the Fund's Prospectusand marketing material describe the type of ETF in a way that is clear and not misleading to enable investors and potential investors to understand the type of ETF, and its characteristics.
CIR 13.9.6 Guidance
General1. The terminology ETFs use are specific to ETFs. Depending on the type of ETF, their features could also be different.
FSB, IOSCOand ESMAhave issued guidance relating to types of ETFs, ETFterminology and ETF characteristics, to enable retail investors, in particular, to understand ETF terminology, different types of ETFs, and their associated characteristics better. The following Guidanceis based on the material issued by those bodies, and is designed to assist Fund Managersof ETFs to meet their overarching obligation in CIR Rule 13.9.6.
(Annual) tracking difference2. (Annual) tracking difference measures the actual performance of the ETF, compared to the annual return of the tracked index or other benchmark, generally over a 12 month period (but this could be over a shorter specified period).
Indicative Net Asset Value (iNAV)3.
iNAVis a measure of the intraday value of the net asset value (NAV) of an index-based ETF, based on the most up-to-date information. iNAVis not the value at which investors buy and sell ETF Unitsthrough the Authorised Participant. iNAV is calculated and made available by the operator of the exchange on which an ETFis traded—based on the information made available to the relevant exchange by the ETF manager and the APrelating to the underlying portfolio of ETF assets.
Exchange traded products (ETPs)4. ETF include a wide variety of different investment products that are traded on an exchange, such as exchange-traded commodities (ETCs), exchange-traded notes (ETNs), exchange-traded instruments (ETIs), and exchange-traded vehicles (ETVs). Most of these are debt instruments, and not equity participation rights conferred by a
Unitof an ETF.
ETF features5. While an ETF is a
Collective Investment Fund( Fund), as it has special features, it has been classified as a specialist class of Fund.6. An ETF differs from other Fundsbecause unlike other exchange traded Funds, ETF Unitshave concurrent primary market and secondary market trading, primary market trading occurring in 'creation Units' between the Fund Managerand its Authorised Participant(AP), and secondary market trading between the AP and investors. See also Guidanceunder CIR Rule 184.108.40.206. Investors in an ETFmay incur additional costs and fees as they have to buy and sell ETF Unitsthrough an Authorised Participant(who directly buys and sells 'creation units' in the ETF from the ETF Fund Manager). These are different to the Unitsof the ETF which are traded on the relevant exchange, and are generally of a larger denomination than the Unitsavailable to investors on the relevant exchange.
Types of ETFs
Index tracking ETF (Index-tracker)8. An Index-tracking (based) ETF typically seeks to replicate the performance of an underlying index or benchmark. It may do so either as a physical
ETFor as a synthetic ETF.
Physical ETF9. The investment strategy of a physical ETF is to hold physical securities and other assets to obtain returns that correspond typically to those of an underlying index or benchmark by replicating (and where appropriate, by sampling) the component securities of the relevant index or benchmark. Replication generally involves investing in the component securities of the underlying index or benchmark in the same approximate proportions as in the underlying index or benchmark.10. In certain cases, it may not be possible for an ETF to own every stock of an index (for example, due to, transaction costs, the index being too large, its components being illiquid, or because its market capitalisation weighting would result in the ETF violating regulatory requirements for asset diversification). In such instances, a physical ETF may rely on sampling techniques. For example, by acquiring a subset of the component securities of the underlying index, and possibly some securities that are not included in the corresponding index designed to improve the ETF's index-tracking.
Synthetic ETF11. The investment strategy of a
Synthetic ETFis to meet its investment objective by entering into a derivative contract (typically through a total return swap) with a selected counterparty. The swap contracts can take one of two forms:a. an unfunded structure; orb. a funded (or prepaid swap) structure, as described below.12. In both models, the derivative exposure is collateralised or reduced through the use of collateral or a portfolio management process, that may involve the services of a third party as collateral agent (in the funded model) or is covered by the substitute basket as assets of the ETF(in the unfunded model).
Synthetic ETF (unfunded)13. In a synthetic
ETFadopting the unfunded structure, the ETF Fund Managerinvests the cash proceeds from investors in a so-called substitute or reference basket of securities (typically bought from a bank). The basket's return is swapped via a derivative contract with an eligible counterparty (frequently, the derivatives desk of the same bank), in exchange for the return of the index referenced in the ETF's investment objective.
Synthetic ETF (funded)14. In a synthetic ETF adopting the funded structure, the ETF<
Fund Managerenters into a swap in exchange for cash (or for the entire ETF portfolio) without the creation of a substitute basket.
A leveraged ETF15. A leveraged ETF (which is often an index-tracking ETF) can have leverage exposure to an index, or exposure to a leveraged index.
Actively managed ETF16. An ETF is actively managed if the
Fund Managerexercises discretion over the composition of the invested portfolio in an attempt to outperform a chosen index or other benchmark. The key difference, compared to an index tracking ETF, is a Fund Manager'sability to adjust the portfolio without being subject to the set rules of the index or other benchmark referenced. An actively managed ETF could be a physical ETF or a synthetic ETF—with a portfolio selected at the discretion of the Fund Manager or derivatives designed at the discretion of the Fund Manager.17. The DFSAregime does not permit the creation of actively managed ETFs (see CIR Rule 13.9.3) as there is less transparency relating to the underlying portfolio of assets. This gives rise to potential difficulties in clearly identifying risks associated with exposures to counterparties and any collateral used in such ETFs, compared to ETFs that passively track the performance of a specified index or other benchmark.
CIR 13.10 CIR 13.10 Venture Capital Funds
CIR 13.10 GuidanceSee CIR Rule 3.1.13 for the definition of a Venture Capital Fund.
CIR 13.10.1A Fund Manager must ensure that the investment vehicle used for a Venture Capital Fund is:(a) a Closed-ended legal structure; and(b) either an Investment Company or an Investment Partnership.
CIR 13.10.2 CIR 13.10.2(1) The requirement in Article 27(1)(e) of the Law does not apply to the Fund Manager of a Venture Capital Fund that is an Exempt Fund.(2) If the Fund Manager of a Venture Capital Fund referred to in (1) itself holds Fund Property, it must have in place effective arrangements which ensure that the Fund Property is not available to the creditors of the Fund Manager, or of any other Fund it manages, in the event of the Fund Manager’s insolvency.
CIR 13.10.2 Guidance1. Article 27(1)(e) of the Law requires a Fund Manager to appoint an Eligible Custodian with whom the legal title to the Fund Property is registered, unless the Rules provide otherwise. CIR Rule 12A.3.1(2)(c) provides that this requirement does not apply to a Qualified Investor Fund that is a Venture Capital Fund. CIR Rule 13.10.2 makes similar provision for the requirement not to apply where a Venture Capital Fund is an Exempt Fund.2. Where a Fund Manager of a Venture Capital Fund holds Fund Property of any type, whether investments, cash or other liquid assets, the Fund Manager must ensure that the property is clearly identifiable as Fund Property and is properly segregated from all other assets belonging to, or managed by, the Fund Manager, so that it is not available to creditors in the event of the insolvency of the Fund Manager.3. The Fund Manager of a Venture Capital Fund does not need to have an internal audit function (see GEN Rule 5.3.13) or a Finance Officer (see Gen Rule 7.5.1) if the Fund Manager only manages Venture Capital Funds. The DFSA may, in the case of such a Fund Manager, also consider granting temporary relief from requirements in GEN section 7.5 for the appointment of other Authorised Individuals (such as a Compliance Officer) during the period between authorisation and any initial commitment of capital.4. The DFSA may, in the case of a Fund Manager of a Venture Capital Fund, also consider granting temporary relief from the requirements in CIR Rule 9.2.1 for the preparation of financial statements for the Fund for the period between authorisation and any initial commitment of capital.5. The requirements in CIR sections 8.3 and 8.4, other than CIR Rules 8.3.1(2) and 8.4.1(1)(a), do not apply to a Fund Manager of a Venture Capital Fund (see CIR Rule 8.1.1(3) and (4)).6. If a Fund Manager of a Venture Capital Fund obtains the services of special advisers, for example, to select venture capital businesses to invest in, or to monitor their on-going performance, those advisers should not be held out as being an investment committee of the type referred to in CIR Rule 13.3.1. Such a description would be misleading, unless the Fund Manager chooses to follow the requirements in that Rule.