Guidance

This chapter contains additional requirements that apply to investment funds operated or held out as being operated as an Islamic Investment Fund. A Collective Investment Scheme is defined in the Master Glossary of the AIFC Regulations and Rules. Specific products or activities forming part of Islamic Financial Business are not regulated as Collective Investment Schemes (CIS) due to their unique characteristics and the specific regulations applied to them. Hence, such Islamic Financial Business activities are expressly excluded from the remit of these rules. Key Islamic Financial Business-related exclusions under the collective investment regime are operating a Takaful business, participation rights evidenced by Sukuk certificates and managing PSIAs both Restricted and Unrestricted.

7.1. Application

(1) This section applies in the case of a Domestic Fund:

(a) which is an Islamic Fund, to its Fund Manager and where appointed, its Trustee; or

(b) which is an umbrella Fund with one or more Islamic Sub- Funds, to its Fund Manager and where appointed, its Trustee in respect of those Sub-Funds.

(2) The requirements that apply to a conventional Fund apply equally to an Islamic Fund, except as otherwise provided in this chapter.

(3) In this chapter, except where otherwise provided, any reference to a Fund is to an Islamic Fund or to an Islamic Sub-Fund of an Umbrella Fund as the case may be and any reference to a Fund Manager is a reference to a Fund Manager of such a Fund.

Guidance

While the AIFC CIS Rules specify key requirements relating to the management and operation of conventional Investment Funds, this module sets out the additional requirements that apply where such a Fund is managed or held out as being managed as an Islamic Investment Fund. There are other requirements that apply to such firms which are found in other modules of the AIFC Rules, such as the GEN, COB and PRU Rules.

7.2. Systems and controls

(1) The Fund Manager of a Fund must establish and maintain systems and controls which ensure that its management of the Fund and the Fund Property is Shari’ah compliant.

(2) A Fund Manager may, where it is practicable to do so, include the systems and controls required under (1) within those it is required to establish and maintain pursuant to Rule 4.1 of this Rules.

Guidance

AIFC CIS Rules require a Fund Manager to establish and maintain systems and controls, including, but not limited, to financial and risk controls to ensure sound management of the Fund in accordance with the Fund’s Constitution and its most recent Prospectus, taking due account of the nature, scale and complexity of the Fund’s investments and operations.

7.3. Fund’s constitutional documents

(1) The Fund Manager of a Domestic Fund that is a Non-Exempt Fund must ensure that the relevant Fund’s Constitution and Prospectus are approved by the Fund’s SSB. In such cases, the relevant Fund’s Constitution and Prospectus must be reviewed and approved by the Fund’s SSB at least on an annual basis.

(2) The Fund Manager of an Exempt Fund must ensure that the Fund’s Constitution and Prospectus are, approved by the Fund Manager’s SSB. In such cases, the relevant Fund’s Constitution and Prospectus must be reviewed and approved by the Fund Manager’s SSB at least on an annual basis.

7.4. Islamic Financial Business policy and procedures manual

The Fund Manager of a Fund must implement and maintain an Islamic Financial Business policy and procedures manual for the Fund which addresses the following matters:

(a) the manner in which the compliance function will be undertaken, in respect of Shari’ah compliance;

(b) the manner in which the SSB will oversee and advise in regard to the Shari’ahcompliant activities conducted by the Fund Manager;

(c) the manner in which SSB’s fatwas, rulings and guidelines will be recorded, disseminated and implemented and the internal Shari’ah review undertaken.

(d) the manner in which any disputes between the SSB and the Fund Manager in respect of Shari’ah-compliance will be addressed;

(e) the process for approving those internal systems and controls which are in place to ensure not only that its activities are carried out in compliance with Shari’ah, but that information is disseminated to Unitholders in an appropriate manner; and

(f) the manner in which conflicts of interest will be identified and managed, including as prescribed in Rule 7.5.

Guidance

A Fund Manager may, instead of having a separate Islamic Financial Business policy and procedures manual both at the firm level and at the Fund level, maintain a single Islamic Financial Business policy and procedures manual for the firm which would apply to all the Funds it manages.

7.5. SSB for an Islamic Investment Fund

(1) A Fund Manager of a Domestic Fund that is a Non-Exempt Fund must, subject to (3), appoint a SSB to its Fund that meets the following requirements:

• (a) the SSB has at least three members;
• (b) the members appointed to the SSB are competent to perform their functions as SSB members of the Fund;
• (c) any appointments, dismissals or changes in respect of members of the SSB are approved by the Governing Body of the Fund Manager; and(d) no member of the SSB is a director or Controller of the Fund or its Fund Manager.

(2) A Fund Manager may comply with the requirement in (1) by appointing to the Fund its own SSB, provided the requirements in (1) are also met.

(3) A Fund Manager is not required to comply with the requirement (1) in where it relies, for the purposes of making Investments for the Fund, on a widely accepted Shari'ah screening process such as investing in securities included in, or recognised by reference to, an Islamic index, Sukuk, or treasury instruments issued by a Shari'ah compliant financial services provider.

Guidance

i) In appointing a SSB for the purposes of Rule 7.5(1), the Fund Manager should consider the previous experience and qualifications of the proposed SSB members to assess whether the proposed SSB member is competent to advise on the activities undertaken by the Islamic Fund.

ii) Although the Fund Managers of Exempt Funds are not subject to the requirement for the appointment of a SSB for such a Fund, they would need to ensure that the Exempt Funds they manage continue to meet the applicable Shari’ah requirements applicable to the Fund. They may use a member of the SSB appointed at the firm level for the purposes of ascertaining compliance with the Shari’ah requirements. The manner in which they demonstrate to the Unitholder of the Exempt Fund as to how they achieve such compliance is a matter left to negotiation (i.e. subject to contractual terms) between the Unitholders and the Fund Manager.

iii) An External Fund Manager may not be able to take advantage of Rule 7.5 (2) above, unless it has a SSB appointed for their own firm. In contrast the Fund Manager of an External Fund will be able to use its SSB to meet the SSB requirement relating to the Fund as set out in Rule 7.5(2) above.

(4) If the Fund Manager appoints to the Fund the same SSB it has appointed to meet its own requirements at the firm level, the documents required under Rule 7.5 (5) below must be included in or otherwise form part of its Shari’ah Governance policies and procedures.

(5) The Fund Manager of a Fund must establish and retain, for six years, records pertaining to:

• (a) Its assessment of the competency of the SSB members; and
• (b) the agreed terms of engagement of each member of the SSB.

Guidance

The records of the assessment of competency of SSB members should clearly indicate, at least:

i) the factors that have been taken into account when making the assessment of competency;

ii) the qualifications and experience of the SSB members;

iii) the basis upon which the Fund Manager has deemed that the proposed SSB member is suitable; and

iv) details of any other SSBs of which the proposed SSB member is, or has been, a member.

(6) The Islamic Financial Business policy and procedures manual must provide that:

• (a) a member of the SSB is obliged to notify the Fund Manager of any conflict of interest that such member may have with respect to the Fund or the Fund Manager, and if appointed, or in the case of an Investment Trust, the Trustee; and
• (b) the Fund Manager will take appropriate steps to manage any such conflict of interest so that the Islamic Financial Business is carried out appropriately and in compliance with Shari’ah, the interest of a Unitholder is not adversely affected, and all Unitholders are fairly treated and not prejudiced by any such interests.

(7) If a Fund Manager is unable to manage a conflict of interest as provided above in Rule 7.5(6), it must dismiss or replace the member as appropriate.

(8) The Fund Manager of a Fund must provide the AFSA at its request with information on the qualifications, skills, experience and independence of the individuals who are appointed or proposed to be approved as members of the SSB.

(9) The Fund Manager of a Fund must take reasonable steps to ensure that the Fund Manager and the Fund’s Employees:

• (a) provide such assistance as the SSB reasonably requires to fulfill its duties;
• (b) give the SSB right of access at all reasonable times to relevant records and information
• (c) do not interfere with the SSB’s ability to discharge its duties; and
• (d) do not provide false or misleading information to the SSB.

(10) In the event of a Trustee being appointed to the Fund, the Trustee must also take reasonable steps to ensure that its Employees comply with (a)-(d) of the rule 7.5(9) above.

7.6. External Shari’ah reviews and periodic reports

(1) A Fund Manager of a Domestic Fund that is a Non-Exempt Fund, must ensure that all Shari’ah reviews of the Fund, wherever applicable, are undertaken by the SSB in accordance with AAOIFI GSIFI No 2.

(2) In the case of a Domestic Fund that is a Non-Exempt Fund, the Fund Manager must commission an interim and an annual report relating to the Fund operations from the SSB which complies with AAOIFI GSIFI No 1.

(3) The Fund Manager must deliver a copy of the interim and annual report referred to in (2) above, to the Unitholders and must include the report of the SSB in the annual report required under the AIFC CIS Rules.

Guidance

Although the Fund Managers of Exempt Funds are not subject to the Shari’ah review process, they would need to ensure that the Exempt Fund continues to meet the Shari’ah requirements, particularly for the purposes of their annual and interim reports, which are required to be prepared under applicable the AIFC CIS Rules. However, the manner in which they demonstrate to the Unitholders of the Fund how they achieve such compliance is a matter left to negotiation (i.e. subject to contractual terms) between the Unitholders and the Fund Manager.

7.7. Internal Shari’ah review

(1) The Fund Manager of a Domestic Fund that is a Non-Exempt Fund must perform an internal Shari’ah review to assess the extent to which the Fund complies with fatwas, rulings and guidelines issued by the Fund’s SSB.

(2) The Fund Manager must perform the internal Shari’ah review in accordance with AAOIFI GSIFI No. 3.

Guidance

i) The Fund Manager of an umbrella Fund which has an Islamic Sub-Fund should, to the extent possible, perform the internal Shari’ah review in accordance with AAOIFI GSIFI No. 3 and must document the manner in which it will conduct that part of the internal Shari’ah review that is not conducted in accordance with AAOIFI GSIFI No. 3.

ii) Although the Fund Managers of Exempt Funds are not subject to the specific internal Shari’ah requirements, they would need to ensure that the Exempt Fund continues to meet the applicable Shari’ah requirements. However, the manner in which they demonstrate to the Unitholders of the Fund how they achieve such compliance is a matter left to negotiation (i.e. subject to contractual terms) between the Unitholders and the Fund Manager.

iii) The Fund Manager must ensure that the internal Shari’ah review referred to in this section is performed by the internal audit function of the Fund or the compliance function of the Fund and that the individuals or departments involved in performing the review are competent and sufficiently independent to assess compliance with Shari’ah.

Guidance

For the purposes of assessing competency of personnel or departments which perform the internal Shari’ah review, Fund Manager should consult AAOIFI GSIFI No. 3 paragraphs 9 to 16 inclusive.

7.8. Additional disclosures in the Offering Materials of a Non-Exempt Islamic Fund

Guidance

In addition to complying with the requirements set out in the AIFC CIS Rules relevant to the Offering Materials, the Fund Manager of a Non-Exempt Islamic Fund must comply with the additional requirements set out in this section.

(1) A Fund Manager of a Non-Exempt Islamic Fund must state in the Fund’s Offering Materials:

• (a) that all the operations in relation to the Fund will be conducted in accordance with Shari’ah;
• (b) if the Fund has a SSB appointed to it, the names of the members of the SSB and their qualifications and experience and, whether or not the Fund Manager’s SSB is appointed to the Fund;
• (c) if the Fund does not have a SSB appointed to it pursuant to Rule 7.5(3), what widely acceptable screening methodologies are used by the Fund to ensure Shari’ah compliance with respect to Investments made for the Fund, and the board that has approved them;
• (d) if applicable, the manner and frequency of Shari’ah reviews;
• (e) how earnings prohibited by Shari’ah will be disposed of; and
• (f) whether Zakat is the responsibility of the Fund or the responsibility of the Unitholders.

Guidance

i) The Fund Manager should provide sufficient details setting out the basis upon which the Fund has been approved and certified as Shari’ah compliant by its SSB. Such details should include the basis of the underlying principles, i.e. the Fatwas or rulings, including reference to any relevant Ijtihad, Ijma, Qiyas or other. Where applicable, reference should be made to any Islamic indices to be used. In addition, where applicable, the screening process and any filters used should be identified.

ii) The Fund Manager should set out each of the key features of the Fund and explain the rationale for determining why each of these features are considered Shari’ah-compliant by the Fund’s SSB.

7.9. Investments in other Funds

(1) A Non-Exempt Islamic Investment Fund may invest in Units of another Fund only where the Fund Manager has taken reasonable care to determine that:

• (a) the other Fund is the subject of an independent annual audit conducted in accordance with relevant IFRS or other standards as applicable;
• (b) the other Fund has mechanisms in place to enable Unitholders to redeem their Units within a reasonable time; and
• (c) the other Fund is prohibited from having more than 20% of its value in the Units of Funds.

(2) The Fund Manager must also have ascertained that there is a proper and disclosed basis for asset valuation and the pricing before investing in Units in the other Fund.