Recent Changes To ADGM And DIFC Funds Framework

Introduction

Both of the United Arab Emirates’s (UAE) major financial free zones are actively reshaping their fund management frameworks. On September 16, 2026, the Abu Dhabi Global Market (ADGM) Financial Services Regulatory Authority (FSRA) published amendments to several key Rules that took effect immediately, while the Dubai International Financial Centre (DIFC) regulator, the Dubai Financial Services Authority (DFSA), recently closed its consultation on a comprehensive overhaul of its own funds regime.

This alert covers:

1. ADGM: The FSRA’s newly enacted amendments to the fund management regulatory framework, introducing specialized fund manager categories, a framework for Employee Investment Vehicles and tightened requirements for Foreign Fund Managers.
2. DIFC: The DFSA’s Consultation Paper No. 173 (CP173), proposing wide-ranging reforms to the DIFC collective investment fund framework, including employee co-investment provisions, the removal of the External Fund Manager regime and a shift away from prescriptive fund classifications.

1. ADGM Amendments (Effective September 16, 2026)

A. New Specialized Fund Manager Categories

The amendments introduce three specialized fund manager categories, each with tailored eligibility criteria and regulatory privileges.

(i) Sub-Threshold Fund Manager

The FSRA has introduced a new “Sub-Threshold Fund Manager” (STFM) category, designed to provide a proportionate regulatory approach for managers of smaller funds. To qualify as an STFM, an Authorized Person or Applicant must satisfy the following eligibility criteria:

• The Committed Capital of all Funds managed by it must not exceed USD 200 million.
• The Funds managed by it may not be open to Retail Clients (i.e., only Exempt Funds, Qualified Investor Funds (QIFs) or equivalent Foreign Funds).
• All Funds managed by it must be closed-ended.
• The STFM must not operate as a “host” fund manager (i.e., it may not lend its license to allow a third party to manage funds without separate FSRA authorization).

In recognition of the lower risk profile associated with smaller, closed-ended funds targeting professional investors, STFMs benefit from several regulatory privileges (but remain subject to all other application requirements under the FSRA’s funds framework): (a) STFMs are required to maintain a Base Capital Requirement of USD 50,000, but are not subject to the Expenditure Based Capital Minimum that applies to full-scope fund managers; (b) STFMs are exempt from the requirement to establish and maintain an internal audit function; (c) STFMs are not required to appoint a Finance Officer as a mandatory Approved Person, though they must still have appropriate expertise to prepare and oversee financial accounts; and (d) the FSRA applies a more streamlined authorization process for STFMs compared to full-scope fund managers.

(ii) Institutional Fund Manager

The FSRA has also introduced the concept of an “Institutional Fund” (IF) and “Institutional Fund Manager” (IFM).

• An IF is defined as a QIF or Foreign Fund with a minimum subscription threshold of USD 5 million that does not accept subscriptions from natural persons. A Master Fund may only qualify as an IF if the Feeder Funds that invest in it are also IFs.
• An IFM is an Authorized Fund Manager that manages only IFs.

In recognition of the sophisticated nature of institutional investors (e.g., sovereign wealth funds and similar entities), IFMs benefit from several regulatory privileges (but remain subject to all other applicable requirements under the FSRA’s funds framework): (a) IFMs are required to maintain the higher of a Base Capital Requirement of USD 50,000 or an Expenditure Based Capital Minimum of 6/52nds of Annual Audited Expenditure (compared to 13/52nds for full-scope fund managers); (b) IFMs are exempt from the requirement to establish and maintain an internal audit function; (c) IFMs are not required to appoint a Finance Officer as a mandatory Approved Person; (d) unlike STFMs and full-scope fund managers, IFMs are not required to maintain professional indemnity insurance; and (e) the FSRA applies a more streamlined authorization process for IFMs compared to full-scope fund managers.

(iii) Venture Capital Fund Manager

Venture Capital Fund Managers (VCFMs) are a sub-category of STFM. To qualify as a VCFM, an Authorized Person or Applicant must satisfy the STFM eligibility criteria and only manage VC Funds (i.e., funds generally limited to investing in instruments issued by companies at an early stage of development). For a VCFM, the Senior Executive Officer it appoints must have a minimum of 10 years’ relevant experience, and the Licensed Director (for a Body Corporate) or Licensed Partner (for a Partnership) it appoints must have a minimum of five years’ relevant experience, in each case in operating a VC or private equity fund, or in-depth industry expertise within the VCFM’s target sectors. A VCFM may also apply for additional permissions to facilitate co-investments alongside the VC Funds it manages: if it wishes to recommend that a client invest in an investee company alongside a VC Fund, and to advise on the strategy and structure required to make that investment, it must hold a Financial Services Permission (FSP) for Advising on Investments or Credit; if it wishes to make arrangements to facilitate such co-investments, it must hold a FSP for Arranging Deals in Investments.

In recognition of the specific nature of the VC ecosystem, VCFMs benefit from the same regulatory privileges as STFMs (including reduced capital requirements, no internal audit function and no Finance Officer requirement), as well as one additional privilege: authorization fees and annual supervision fees for a VCFM are capped at USD 10,000.

(iv) Application Process

Existing Authorized Fund Managers that satisfy the relevant eligibility criteria may apply to vary their FSP to use the STFM or IFM framework. Where such variation is granted, a restriction will be placed on the fund manager’s FSP to indicate its specialized status, and the fund manager will then benefit from the applicable regulatory privileges noted above. An Applicant seeking to operate as a VCFM should apply for the STFM framework and, as part of that application, indicate its intention to operate as a VCFM.

New applicants seeking to use the STFM, IFM or VCFM framework must apply for a FSP to carry on the Regulated Activity of Managing a Collective Investment Fund and satisfy the relevant eligibility criteria. An FSP granted to a successful applicant will be subject to a restriction indicating the fund manager’s status (e.g., as an STFM, IFM or VCFM). Applicants seeking to operate as a VCFM should complete the STFM authorization form and indicate their intention to operate as a VCFM.

(v) Comparative Overview

The FSRA has published guidance that provides an overview of the new fund manager categories, including a helpful comparative table, an excerpt of which is set out in Annex A of this alert.

B. Employee Investment Vehicles

The amendments introduce a framework enabling Employees to invest their own capital in the Funds they manage through a vehicle known as an Employee Investment Vehicle (EIV). An EIV is defined as a Body Corporate or Partnership established for the purpose of enabling investment by Employees or Directors in an Exempt Fund or QIF.

Key features of the EIV framework include:

• An EIV is not subject to fund licensing, prospectus requirements or ongoing fund regulatory reporting.
• The minimum subscription amounts otherwise applicable to Exempt Funds (USD 50,000), QIFs (USD 500,000) and Institutional Funds (USD 5 million) do not apply to an EIV, allowing eligible Employees and Directors to invest any amount.
• An EIV is classified as a “deemed” Professional Client.

Six conditions must be satisfied for the EIV exemption to apply:

1. All investors in the EIV (each, a Participating Employee) were, at the time of their investment, Employees or Directors of the Fund Manager of the underlying Fund, or of an investment manager or investment advisor appointed by the Fund Manager to manage the Fund Property or advise on the investment strategy.
2. All Participating Employees must, at the time of their investment, be directly involved in the execution of the investment strategy or providing investment advice in respect of the underlying Fund.
3. The Fund Manager has reasonable grounds to believe that each Participating Employee has sufficient knowledge and understanding of the risks inherent in investing in the underlying Fund.
4. Prior to their investment, the Fund Manager has provided each Participating Employee with: (a) written disclosure describing the operation of the EIV and the rights of Participating Employees, in a manner that is clear, fair and not misleading; and (b) a copy of the Prospectus of the underlying Fund.
5. The Fund Manager has received written acknowledgment from each Participating Employee acknowledging their understanding of the risks inherent in investing in the underlying Fund, as well as the risks and limitations inherent in investing through the EIV.
6. The Participating Employee has not invested in the EIV as a requirement imposed as a condition of their employment or appointment to the Board of the Fund Manager, investment manager or investment advisor, as the case may be.

If an ineligible person is admitted to an EIV, the vehicle ceases to qualify as an EIV and becomes subject to the full fund regulatory requirements, including minimum subscription and client classification rules.

C. Foreign Fund Managers

The amendments introduce several additional requirements for Foreign Fund Managers (FFMs) of Domestic ADGM Funds. Under the revised framework:

• An FFM may now only manage a Domestic Fund that is a QIF and is closed-ended.
• The FFM must submit to ADGM laws and the jurisdiction of the ADGM Courts. The previous alternatives (submission to Zone 1 or Recognized Jurisdiction laws, or laws “reasonably equivalent” to ADGM) have been removed.
• Any Fund Administrator or Trustee appointed to the Fund must now be FSRA-licensed; the previous alternative of “such other administrator as is otherwise acceptable to the Regulator” has been removed.
• The FFM must be regulated in a Recognized Jurisdiction; the previous discretionary fallback for a jurisdiction “otherwise acceptable to the Regulator” has been removed.
• Before commencing management of a Domestic Fund, an FFM must ensure a natural person who is a UAE resident is appointed to the Board of the Fund (or the general partner).
• The FFM must appoint an ADGM-licensed corporate service provider as agent for receipt of process.

The FFM may not engage any third party for the purpose of providing investment advice or managing Fund Property, i.e., host fund manager structures are no longer permitted.

A transition period until March 31, 2027, applies for existing FFMs to get into compliance with the new rules.

2. DIFC Consultation Paper No. 173

On July 7, 2026, the DFSA published Consultation Paper No. 173, setting out proposals to modernize its collective investment fund framework—the most significant review of the regime since 2010. The consultation closed on September 7, 2026. While the scope of CP173 is broader than the ADGM amendments, several of the key themes are strikingly similar.

The principal proposals include:

• Removal of specialist fund classifications. The DFSA proposes to move away from prescriptive specialist class labels (such as Money Market Fund, Private Equity Fund and Credit Fund) for Exempt Funds and QIFs, replacing them with a risk-based, activity-focused approach that would give fund managers greater flexibility to deploy hybrid and multi-strategy investment strategies.
• Employee co-investment. Similar to the ADGM’s new EIV framework, the DFSA proposes to allow employees directly involved in a fund’s investment management to invest in the private funds their employer manages—either directly or through dedicated employee investment vehicles—with minimum subscription and net asset thresholds disapplied.
• Abolition of the External Fund Manager regime. The DFSA proposes to remove the External Fund Manager (EFM) regime, which currently permits non-DIFC managers to manage Domestic Funds without a physical DIFC presence. Going forward, such managers would require full DFSA authorization and a local presence. A three-month transition period is proposed.
• Venture capital fund relief. The existing VCFM regime would be retained and extended, with reduced fees and relief from certain capital, internal audit and valuation requirements.
• Other reforms. CP173 also proposes modernizing Master-Feeder fund arrangements, broadening the Fund Manager definition, granting the DFSA power to waive provisions of the Collective Investment Law itself and invites early-stage feedback on fund unit tokenization and a potential Long-Term Investment Fund (LTIF) regime for retail investors.

The DFSA has not yet published a feedback statement or final rules. We will continue to monitor CP173’s progress and will report on the final form of the amendments once they are enacted.

Looking Ahead

Taken together, these developments reflect a broader trend across the UAE’s financial free zones toward more proportionate, risk-based regulation of fund management activities. The ADGM has moved first (its amendments are already in force) while the DIFC’s proposals, though still at the consultation stage, signal a similar direction of travel. Fund managers operating in or considering either jurisdiction should assess how these changes may affect their existing structures, authorizations and compliance arrangements.

For more information on these developments and their implications for your business, please contact any of the Akin professionals listed below.

ANNEX A

* Table from Supplementary Guidance – Regulatory Framework for Specialised Fund Manager Categories (VER01.160926), available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.