Drafting of law is both an art and science. Legalese being what it is, with all its repertoire of terms, cause and effects, including but not limited to the aforesaid, there would hardly be a situation or condition that it cannot tie in within its ambit. The more clumsy the law reads, there would be that much less confusion in its implications. A well-drafted law is one that leaves very little scope for interpretation.
The new investment fund regulations (IFR) issued by the UAE Securities and Commodities Authority (SCA) are so simple and straightforward that a lot of things already depend on interpretations. In fact, there is so much of ambiguity that senior members of the drafting team have begun holding workshops on the possible interpretations of what the rules state.
The IFRs are primarily targeted at firms and their representatives approaching clients in the UAE for investment in their products and securities. The need to rein in briefcase investment managers and bucket operators who fleece unsuspecting retail investors and institutions with their fancy offers has been felt for long and the new regulations are meant to introduce accountability on the part of these fly-in and fly-out experts.
The new rules stipulate that the promoter of a fund or any other investment product approaching prospective clients in the UAE has to be registered either by the central bank or the SCA. Unregistered foreign companies or their representatives can deal only with institutional investors who can afford investments of at least Dh10 million. The rationale behind the decision is that investors with that size of budget would have the wherewithal to understand if an offer is a safe investment or not.
In its earnestness to protect the small investors, the SCA has introduced sweeping regulations that allow only licensed firms or their representatives to approach individual investors. But what if an individual wants to invest in a foreign investment product? What powers does the SCA invoke to outlaw an individual’s right to invest in a product that he or she might be convinced about?
Clauses out of law’s purview
Perhaps it is this dilemma that prompted SCA to leave reverse solicitation, which in effect means an individual investor’s freedom to approach an agent, licensed or otherwise, rather than the agent approaching the individual, out of the purview of the SCA rule. So are cases of ongoing relationships, which may have been forged inside or outside the country or before the new rules came into being.
According to Clifford Chance representatives who attended the SCA briefing, while the Authority has not mentioned any specific documentation or record-keeping requirements in this regard, they feel it would be prudent for firms relying on the reverse solicitation exemption to maintain records evidencing that such a reverse solicitation has taken place. A written request from the investor, they say, would be ideal, but a contemporaneous file note or similar document prepared by the firm following the reverse enquiry would also be helpful.
But this, in effect, means setting the cat among the pigeons. In this new age of communication, with its multitudes of channels, an agent can always be expected to put the onus on the client and be excused from the responsibility, citing prior understanding with the client. Insertion of a reference, such as ‘further to’ in the first formal communication will do the trick for them.
The rules as such do not include non-fund structured products, insurance products, private investment portfolios managed by UAE banks and investment companies and employee benefits schemes. That by itself leaves out a vast area, including the minefields of investment-linked insurance products, which have maimed thousands of small investors.
There are also problematic areas, including jurisdictional issues about supervision of the investment product by an authority equivalent to the SCA in its home country. Further, the new rules transfer the load of regulatory responsibility from the central bank to the SCA, which is likely to take its own time to come to terms with the issues and until such time, it means interpretations will rule the roost.
— The writer is a UAE-based journalist