Two regulators, one transaction, and the question of whose rule binds first.

A fund formed in a financial centre and investing in a Gulf state has two regulators before it has a position. The centre's regulator licensed the manager, registered or authorised the fund, and reads the manager's conduct, the fund's constitution and the marketing of its units. The state's regulator, or its several regulators, reads the fund's entry into the state: the onshore vehicle's licence, the foreign ownership of the asset, the approval of the acquisition, the marketing of the fund to the state's residents, the repatriation of the proceeds. Neither regulator defers to the other. Each rule binds by its own terms on its own facts, and the transaction runs in the order the rules bind: a step the state's regulator must approve before the centre's rule lets the fund commit to it, or a step the centre's rule requires before the state's regulator will receive the application. The order is the sequence, and a transaction planned as one decision in one place is a transaction that discovers the order when the second regulator's rule binds first.

This note sets out the two regulators and what each reads, the rules that bind by place and the rules that bind by conduct, the order question and how it is answered, the marketing overlap, the onshore vehicle's licence and the centre's registration, the acquisition approval and the fund's commitment, the repatriation and the distribution, the regulators' communication with each other, the counsel in each place, the lender's reading, a comparison, a worked transaction as a type, cases, what each party holds, the sequence, questions, terms and what to read.

The two regulators

The centre's regulator is a financial services regulator: it licenses the manager to manage and to market, registers or authorises the fund by tier, reads the constitution and the memorandum, and supervises conduct. Its rules are about the fund as a financial product and the manager as a financial firm. The state's regulators are several: the companies registrar for the onshore vehicle, the investment authority for the foreign ownership and the acquisition, the land registry for the parcel, the central bank for the currency and the repatriation, the capital markets authority for the marketing to residents, the tax authority for the onshore tax. Their rules are about the asset, the vehicle that holds it, the money that pays for it, and the people it is offered to. The two sets of rules overlap at four points: the marketing, the vehicle, the acquisition and the money.

Why neither regulator defers

The centre's regulator was created to supervise financial services in the centre, under the centre's own laws, and its rules are written for that. The state's regulators were created to administer the state's companies, land, investment, currency and capital markets, under the state's laws, and their rules are written for that. Each has a statute that binds it to apply its own rules, and no statute in either place says that the other's approval substitutes. The centre's regulator may recognise a state's regulator for the purpose of a specific rule, such as treating a firm licensed in the state as a professional counterparty; the state's capital markets authority may recognise a centre's fund for the purpose of a specific marketing route. Recognition is rule by rule and never general, and a manager that reads a recognition as deference has read one rule as all of them.

The centre's own two regulators

Within a centre there may be two: the financial services regulator for the manager's licence and the fund's registration, and the registrar for the fund's corporate existence, its filings and its beneficial ownership record. The two are in the same centre and are not one; a fund in good standing with one may be in default with the other, and a change to the fund's constitution is filed with one and notified to the other. The sequence carries both, and the manager that treats the centre as one counter finds the second.

The state's several regulators and their own order

The state's regulators have an order among themselves. The registrar licenses the vehicle; the investment authority's approval of foreign ownership may be a condition of the licence or a consequence of it, and which depends on the state; the land registry registers the parcel to a licensed vehicle with the investment authority's approval; the central bank's requirements attach to the account the licensed vehicle opens; the tax authority registers the vehicle once it exists. Counsel in the state writes the state's own order, and the fund's sequence carries it as a block with the centre's steps interleaved at the dependencies.

Rules that bind by place and rules that bind by conduct

A rule binds by place when it attaches to a thing in the regulator's territory: the onshore company, the parcel, the bank account. The state's regulators' rules mostly bind by place, and the fund cannot escape them by being formed elsewhere. A rule binds by conduct when it attaches to what a person does wherever the thing is: the centre's conduct rules on the manager, the centre's marketing rules on the manager's promotion of the fund, the state's marketing rules on promotion to its residents. The fund's manager is bound by the centre's conduct rules in the state, and by the state's marketing rules in the centre when the promotion reaches the state's residents. The two kinds of rule produce the order question, because a rule by place waits for the thing to exist and a rule by conduct binds before it does.

The order question

The order question is: which regulator's rule must be satisfied first, for the transaction's next step to be lawful in both places. The answer is found by listing each step, each rule that binds on it, and the condition each rule imposes, and reading the conditions for dependency. The state's investment authority approves an acquisition by a licensed onshore vehicle, so the vehicle's licence precedes the approval. The centre's rules require the fund's commitment to an acquisition to be within its constitution's restrictions and approved by its governance, so the fund's approval precedes the commitment. The state's approval may require evidence of the fund's committed capital, so the fund's approval precedes the state's application. The onshore bank account may require the vehicle's licence and the investment authority's approval, so both precede the money's arrival. The sequence is the dependencies in order, and counsel in both places writes it.

The marketing overlap

The fund is marketed from the centre under the centre's rules: to the tiers of investor the fund's registration permits, by a licensed manager, with the memorandum the centre's rules prescribe. It is marketed into the state under the state's rules: to the categories of investor the state's capital markets authority permits, by a person the state licenses, with the approvals or notifications the state requires. A holder resident in the state is reached by both sets of rules at once, and the promotion is lawful only if both are satisfied. The order here is simultaneous: the centre's licensed manager promotes through the state's licensed person, and the state's rule binds on the promotion's arrival while the centre's binds on its departure.

The onshore vehicle and the centre's registration

The fund's constitution, read by the centre's regulator, permits investment through wholly owned vehicles in named jurisdictions, and the onshore vehicle is formed under the state's companies law with the state's licence for its activity. The centre's regulator reads the vehicle as the fund's investment; the state's registrar reads it as a company with foreign shareholders. The centre's rule may require the fund's governance to approve the formation; the state's rule requires the formation to be approved by the registrar and, for foreign ownership, by the investment authority. The order: the fund's governance approves the formation under the constitution, the state's applications are made with the fund's approval as evidence, the state's approvals issue, the vehicle exists, and the centre's regulator is notified of the subsidiary if its rules require.

The acquisition approval and the fund's commitment

The state's investment authority approves the acquisition of the parcel by the licensed vehicle, and its approval may be conditional on the purchase price's source, the vehicle's capital, and the foreign ownership proportion. The fund commits to the acquisition under its constitution by its governance's approval, and the commitment is conditional on the state's approval. The seller wants a binding commitment and the fund cannot give one unconditional on the state, so the sale agreement carries the state's approval as a condition precedent, with a long-stop date, and the fund's commitment is the conditional contract. The centre's regulator reads the conditional contract as within the constitution; the state's authority reads it as the evidence of the transaction it is approving.

The onshore regime's reading of the fund

The state's regulators read the fund as the onshore vehicle's foreign shareholder, and they ask about it what they ask about any foreign shareholder: who owns it, who controls it, where its money comes from, whether it is on any list. The fund's register of holders is the answer to the first, its manager and constitution to the second, its subscription records to the third, and the administrator's checks to the fourth. The state's authorities may ask for the information in a form the centre's rules on confidentiality do not permit the manager to give without the holders' consent, and the subscription documents carry the consent for that reason. A fund whose holders did not consent to disclosure to onshore authorities has a sequence that stops at the investment authority's question.

The currency regulator

The central bank's rules on the currency bind the money's entry and exit: the account the vehicle may hold, the currency it may hold it in, the conversion at entry and exit, the documentation for each transfer, and the reporting. In some states the rules are light for foreign investment through licensed vehicles; in others the repatriation of proceeds is a documented process with the tax authority's clearance as its first step. The sequence carries the currency regulator's conditions at the money's entry and at its exit, and the fund's drawdown and distribution notices are timed to them.

The repatriation and the distribution

Proceeds of the parcel's sale arrive in the onshore vehicle's account, and leave the state under the state's rules on repatriation: the tax cleared, the central bank's requirements met, the currency converted at the permitted rate. They arrive at the fund and are distributed under the constitution's waterfall, which the centre's regulator reads. The order: the state's tax and repatriation conditions are satisfied before the money moves, the money moves, the fund's administrator computes, the distribution issues under the centre's rules. A distribution notice issued before the repatriation cleared is a notice for money the state has not released.

The regulators' communication

The two regulators may or may not talk to each other. Memoranda of understanding between the centre's regulator and the state's capital markets authority provide for information sharing on supervised firms and marketing, and a manager's breach in the state may be reported to the centre. The registrar, the investment authority and the land registry do not have such arrangements with the centre's regulator and do not read the fund's constitution. A manager that satisfies the centre's regulator and assumes the state's authorities will defer to it has assumed a communication that does not exist, and one that satisfies the state's authorities and assumes the centre's regulator will not learn of a marketing breach in the state has assumed the opposite.

The regulator's reading of the sequence

Each regulator reads the transaction from its own counter and sees the steps that reach it. The centre's regulator sees the governance approvals, the subsidiary notification and the marketing; the state's authorities see the applications, the evidence and the money. Neither sees the sequence, and neither needs to; the sequence is the manager's instrument for reaching each counter with what it asks for, in the order it asks. A manager that presents the state's authority with the fund's conditional approval, the constitution's permission and the holders' consent to disclosure has presented what the authority's rule asks for, and the authority reads its own rule satisfied.

The counsel in each place

The transaction needs counsel in the centre, who reads the constitution, the centre's rules and the manager's licence, and counsel in the state, who reads the companies law, the investment law, the land law, the tax law and the marketing rules. Neither can write the other's column, and the structure paper's sequence is the two columns read together for dependencies. A manager with counsel in the centre alone has a sequence with one column and discovers the other's conditions at the state's counter.

The lender's reading

A lender to the fund or the onshore vehicle reads both sets of rules for its security and its enforcement: the centre's rules on the fund's borrowing and the security it may grant, the state's rules on the onshore vehicle's borrowing, the foreign lender's standing to take security over onshore assets, and the enforcement's route. The lender's conditions precedent are the sequence's steps in the lender's order, and a lender that requires the state's approval of the acquisition before drawdown has put the state's rule first in its own document.

By point · by regulator	The centre's regulator reads	The state's regulators read	What binds first	The dependency
Marketing	The manager's licence and the memorandum	The licensed person and the investor category	Both at once	The promotion is lawful only under both
The onshore vehicle	The constitution's permission and the governance	The registrar and the investment authority	The fund's governance	The state's application needs the fund's approval as evidence
The acquisition	The constitution's restrictions and the governance	The investment authority's approval	The fund's conditional commitment	The state's approval is the condition precedent
The money in	The fund's drawdown under the constitution	The bank's and the central bank's requirements	The state's account opening	The drawdown is timed to the account
The money out	The waterfall and the distribution	The tax clearance and the repatriation	The state's clearance	The distribution waits for the release
A breach	Conduct	The state's penalty	Each independently	The memorandum of understanding may carry one to the other

A transaction, as a type

A fund registered in a centre for professional investors, managed by a manager licensed there, is to acquire a parcel in a Gulf state through an onshore vehicle. Counsel in the centre lists the constitution's restrictions, the governance approvals and the centre's marketing and subsidiary rules. Counsel in the state lists the onshore licence, the foreign ownership approval, the acquisition approval, the account opening, the tax registration and the repatriation conditions. The two lists are read for dependencies and the sequence is written: the fund's committee approves the formation and the conditional acquisition; the state's applications are made with the approvals as evidence; the vehicle is licensed; the acquisition is approved; the account is opened; the sale agreement is signed conditional on nothing further; the fund draws and the money arrives; the parcel is registered. At exit: the sale completes onshore; the tax is cleared; the repatriation is released; the fund distributes. The marketing to a holder resident in the state was done through a person the state licensed, under the centre's memorandum, before the first close. Each regulator's rule bound in its place in the sequence, and the transaction ran on the sequence.

The structure paper's page

The structure paper carries a page per state: the two columns, the dependencies, the sequence with its contingencies, the memoranda of understanding between the regulators, the licensed person for marketing, and the exit's clearances. The page is written before the first application because the sequence is the application's timing, and it is the page the committee reads when it gives the conditional approvals.

The third regulator

A fund with holders in a third jurisdiction has a third regulator: the holders' own, which reads the fund's marketing to them and may read the fund's structure for the holders' regulatory treatment. A pension institution's regulator reads the fund's eligibility for the institution's portfolio; a bank holder's regulator reads the fund's capital treatment. The third regulator's rules bind on the holder and reach the fund through the holder's conditions, and the side letter carries them. The sequence for a fund with holders in several jurisdictions has several third columns, read at the first close rather than at the acquisition.

The second transaction's reading

A manager's second transaction in the same state runs on the first's sequence, and the second state's sequence is the first's method with the second state's columns. A manager that wrote the first sequence has a template, and a manager that ran the first transaction on discovery has a memory. The structure paper's page per state is the template, and the second fund's anchor that asks how the manager handles two regulators reads the pages.

Four cases, as types

A manager signs an unconditional sale agreement for the parcel on the fund's approval, then applies for the state's approval. The approval takes longer than the completion date, the seller terminates and keeps the deposit, and the centre's regulator asks why the fund committed to a transaction its constitution made conditional on a permission it did not have.

A manager promotes the fund to a state's residents from the centre under the centre's rules alone. The state's capital markets authority finds the promotion, penalises the manager, and reports it to the centre's regulator under their memorandum, which reads the state's finding as a conduct matter.

A fund issues a distribution notice on the onshore sale's completion. The repatriation is held for a tax clearance the onshore vehicle had not obtained, the notice's date passes, and the holders' own accounts carry a distribution receivable the state has not released.

A manager writes two columns with counsel in each place, reads the dependencies and runs the sequence. Each regulator's rule bound when the sequence reached it, and nobody's counter was the place of discovery.

What each party holds

The manager holds the sequence and the two columns.

Counsel in the centre holds the constitution, the centre's rules and the manager's licence.

Counsel in the state holds the companies, investment, land, tax and marketing rules.

The committee holds the conditional approvals the sequence needs as evidence.

The state's licensed person holds the marketing into the state.

The lender holds its conditions precedent in its own order.

Where it surfaces

It surfaces at the first onshore application, when the state's authority asks for evidence the fund's governance has not yet produced. It surfaces at the sale agreement, when the seller asks for an unconditional commitment and the constitution cannot give one. It surfaces at the first marketing trip to the state, when the manager's promotion to a resident is read by the state's rules. It surfaces at the account opening, when the bank's requirements wait on the licence. It surfaces at the repatriation, when the tax clearance is the condition nobody scheduled. And it surfaces at the centre's regulator, when a breach in the state arrives under the memorandum of understanding.

The cost of getting it wrong

A transaction run without the sequence pays the seller's deposit, the state's penalty, the centre's conduct finding, or the distribution's delay, and sometimes all four. The cost of the sequence is two counsel's columns and a week's reading for dependencies, and the cost is paid once per structure because the sequence for the second transaction in the same state is the first's with the dates changed.

The contingency in the sequence

A sequence has contingencies: the state's approval declined or delayed, the centre's regulator's query on the subsidiary, a rule changed mid-transaction. Each contingency has a response the sequence names: the long-stop in the conditional contract, the alternative onshore vehicle form, the re-application with the changed rule's condition met. A sequence without contingencies is a plan for the transaction that runs as planned, and the one that does not is the one the structure paper was for.

A timeline, as a type

At the structure's design counsel in each place writes its column and the dependencies are read. Month one: the fund's committee approves the formation and the conditional acquisition. Month two: the state's applications are filed with the approvals as evidence; the centre's regulator is notified of the intended subsidiary. Month four: the vehicle is licensed and the investment authority approves the foreign ownership. Month five: the acquisition is approved, the account is opened, the sale agreement is signed with the remaining condition satisfied. Month six: the fund draws, the money arrives, the parcel is registered. Years one to six: the marketing to a state resident in year one runs through the state's licensed person; the centre's regulator is notified of the subsidiary's accounts annually. Year seven: the sale completes, the tax is cleared in month two, the repatriation is released in month three, the distribution issues in month four. Each regulator's rule bound in its place.

The sequence

1. Counsel in each place lists the rules that bind on each step and the conditions each imposes.
2. The conditions are read for dependencies and the order is written.
3. The fund's governance gives the conditional approvals the state's applications need as evidence.
4. The state's approvals issue in their order and the vehicle, the account and the acquisition follow.
5. The marketing into the state runs through the state's licensed person under the centre's memorandum.
6. At exit the state's clearances precede the repatriation, and the repatriation precedes the distribution.

Questions a manager asks

Does the centre's registration help with the state's authorities. As evidence of the fund's standing, sometimes; as a substitute for any approval, never.

Which rule wins in a conflict. Neither; a step lawful under one and unlawful under the other is unlawful, and the structure is redesigned until both are satisfied.

Can the state's approvals be obtained before the fund's governance approves. Some authorities accept an application with the governance's approval to follow; most want the evidence first, and the sequence says which.

What if the state changes its rule mid-transaction. The rule binds on its own terms from its date; the conditional contract's long-stop and the sequence's contingency provide for it.

Who tells the centre's regulator about the onshore vehicle. The manager, under the centre's rules on subsidiaries and material changes, within the period those rules fix.

Do the regulators share the manager's file. Under a memorandum of understanding, on request, for supervised matters; the manager assumes they do for conduct and do not for approvals.

Terms used

The centre: the financial free zone or jurisdiction in which the fund is formed and the manager licensed.

The state: the Gulf state in which the asset sits and whose regulators read the entry.

Rule by place and rule by conduct: rules attaching to a thing in a territory and rules attaching to a person's acts anywhere.

The order question: which regulator's rule must be satisfied first for the next step to be lawful in both places.

Conditional commitment: the fund's binding contract subject to the state's approval as a condition precedent.

Memorandum of understanding: the arrangement between regulators for information sharing.

What to read

The constitution's restrictions and governance; the centre's rules on marketing, subsidiaries and conduct; the state's companies, investment, land, tax and marketing laws; the memoranda of understanding between the regulators; the sale agreement's conditions; the facility's conditions precedent. On this site, the interfaces, jurisdictions and onshore rooms.