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The Financial Services Regulatory Authority of the Abu Dhabi Global Market recently published consultation paper number 12 of 2025 entitled The Proposed Enhancements to the FSRA's Funds Framework. The consultation, which is now closed, sought feedback on whether the FSRA's current funds framework remains appropriate in light of market developments. The paper set out a series of proposed reforms to the ADGM funds regime for smaller and institutional funds. The most material proposals can be grouped into the following key areas of reform. 1. Reconfiguration of fund manager categories. A major proposal in the consultation is the restructuring of the fund manager classification system. The FSRA has proposed a new streamlined regulatory regime for fund managers of smaller funds, aimed at enhancing proportionality within its wider funds regulatory framework. The proposal drew inspiration from the sub-threshold regime under the EU Alternative Investment Fund Managers Directive, AIFND, but adapted to suit the ADGM's regulatory architecture. The proposed framework is referred to as the Sub Threshold Fund Manager, STFM, framework. Eligibility criteria for STFM status. To qualify as an STFN, a fund manager would need to satisfy all of the following conditions. Maximum committed capital threshold of US$200 million. A fund manager must not manage more than $200 million in committed capital across all funds under its management. Limitation to closed-ended professional funds. An STFN may only manage closed-ended qualifying investment funds, QIFs, or exempt funds, or equivalent foreign funds. The effect of this restriction is that only funds targeted at professional or sophisticated investors fall within scope. No, host fund manager arrangements. A fund manager will be excluded from the STFM framework if it operates as a host fund manager. This refers to structures where the fund manager is appointed by sponsors, but investment decisions are effectively delegated to another party, or where an external investment advisor plays a central role in asset selection, including participation in investment committees. Investment flexibility. A key feature of the proposal is that STFM fund managers would not be restricted in terms of the asset classes in which they may invest, provided investments are made through eligible closed-ended funds. Regulatory implementation approach. The STFM category would not require amendments to the underlying regulated activity of managing a collective investment fund under the Financial Services and Markets Regulations, FSMR. Instead, it is proposed that STFM status would be implemented through conditions or restrictions attached to a fund manager's financial services permission, FSP. Leverage Considerations. I. The consultation did not impose a leverage cap on STFN managed funds. However, the FSRA is considering whether a leverage limit of 100% of net asset value, NAV, should be introduced. The FSRA's preliminary view is balanced. A leverage cap could reinforce the policy objective of maintaining a lower-risk, proportionate regime. However, 2. The US$200 million committed capital threshold already limits systemic exposure and financial stability risk. The FSRA therefore sought industry feedback on whether a formal leverage restriction would be necessary or appropriate. Streamlining of STFM and VCFM frameworks. The FSRA also considered the interaction between the proposed STFM framework and the existing venture capital fund manager regime. It noted that both are intended to provide proportionate regulation for managers of smaller funds, but differ in scope and eligibility criteria. Rather than maintaining two parallel frameworks, which could add unnecessary complexity, the FSRA proposed that the VCFM regime be subsumed as a subcategory within the STFM framework. Under this approach, VCFNs would generally be subject to the STFM requirements, including the US$200 million committed capital threshold, but would be limited to managing venture capital-focused funds. Certain VC-specific flexibilities would be retained, such as allowing senior executives to demonstrate relevant sector expertise instead of traditional fund management experience. A minimum base capital requirement of US$50,000 would apply alongside other Category 3C prudential requirements. 2. Streamlined regulatory framework for managers of funds targeting institutional investors. The FSRA proposed a new streamlined regime for fund managers that exclusively manage funds targeting institutional investors, to be known as institutional fund managers. The framework is designed for managers seeking to raise capital primarily from sovereign wealth funds and similar institutional investors, reflecting the lower risk profile associated with this investor base. Under the proposal, IFMs would only be permitted to manage QIFs or equivalent foreign funds with a minimum subscription of $5 million. Subscription size would therefore be a proxy for institutional capital and enhance regulatory proportionality. In addition, IFMs would be subject to a structural restriction that their funds must not have natural persons as unit holders, further reinforcing the institutional-only nature of the regime. This requirement, combined with the high minimum subscription threshold, is intended to ensure that the framework remains clearly distinct from retail or high net worth offerings. Importantly, these conditions would apply only to funds managed by an IFM, and not to QIFs generally, preserving flexibility within the broader QIF regime, while tailoring enhanced proportionality for institutional-focused fund managers. 3. Facilitation of employee participation in funds. The FSIA proposed to formally facilitate employee investment in exempt funds and QIFs through employee investment vehicles, EIVs, recognizing their importance in aligning employee and investor interests. Such arrangements are widely used by fund managers as a retention and incentive tool, particularly for senior and front office staff, and are generally viewed favorably by external investors as they demonstrate alignment between management and capital providers. The proposed framework therefore aims to clarify the regulatory treatment of EIVs and remove uncertainty around their use. Under the proposal, EIVs would be expressly excluded from being treated as funds under the funds regime, and would therefore be exempt from minimum subscription requirements and from the client classification rules under the Conduct of Business Rulebook, COBS. However, this lighter treatment would be balanced by strict eligibility conditions for participation. Only employees or directors directly involved in the investment process, such as those within the fund manager or its appointed investment manager slash advisor would be permitted to participate. In addition, fund managers must ensure participants have sufficient knowledge and experience, provide clear disclosures on risks and fund terms prior to investment, and obtain written acknowledgement from employees. If these conditions are not met, the EIV would lose its exempt status and become subject to full fund regulatory requirements. 4. Review of foreign fund manager access. The FSRAE proposed to strengthen the regulatory framework applicable to foreign fund managers, FFMs, managing domestic funds in the ADGM. In light of the reputational and supervisory risks arising from limited FSRA oversight, while FFMs are permitted to manage domestic funds under the ADGM funds rulebook, the FSRA determined that additional safeguards may be required to enhance regulatory oversight, accountability, and barriers to entry. Key enhancements include limiting FFMs to managing closed-ended QIFs only, to reduce liquidity risk, and ensure investor sophistication, requiring a UAE resident director to strengthen presence in the jurisdiction, and mandating an ADGM-based fund administrator and ADGM licensed corporate service provider be appointed to improve access to records and regulatory oversight. FFMs would be required to submit to ADGM laws and the jurisdiction of ADGM courts for their fund activities, with alternative jurisdictional options removed. They would also be prohibited from acting as host fund managers to ensure effective supervisory oversight. The FSRA has signaled a potential future streamlining of recognized jurisdictions and zone classifications. Finally, while retaining the requirement to appoint an eligible custodian, the FSRA proposed discretion or waiving of this requirement where impractical or disproportionate, aligning with current practice and enhancing flexibility. 5. The European Perspective. The FSRA's proposals sit comfortably within a broader global trend of proportionate fund regulation, and readers familiar with the European framework will find much that is recognizable. The Sub Threshold Alternative Investment Fund Managers, AIFM, concept under the EU AIFMD, is the clearest point of reference. The FSRA itself acknowledges this inspiration. However, the ADGN framework makes one significant design improvement. The STFM threshold is measured by reference to committed capital rather than assets under management. AUM. In Europe, subthreshold status turns on aggregate AUM. Closed-ended funds with a five-year lockup. Consequently, market movements alone can inadvertently push a manager into full-scope authorization, a well-documented pressure point for European managers. Anchoring the threshold to committed capital, as the FSRA proposed, offers greater predictability and is a thoughtful refinement. Additionally, the exclusion of host fund managers from the STFN category. A deliberate design choice in the consultation paper, reflecting the FSRA's view that a lighter touch regime is inappropriate where investment decisions are effectively delegated to a third party, also reflects a concern long embedded in EU regulation that delegation must not reduce the manager to a shell. That principle was further reinforced by the AIFMD2 Directive, EU 2024-927, which strengthens substance requirements and tightens controls on delegation arrangements across the EU, making it clear that a manager must retain genuine oversight and control over the delegated functions. Finally, with the FSRA consulting on whether to introduce a leverage ceiling for sub-threshold managers, it is worth noting that the AIFMD2 now provides a directly relevant European benchmark for private credit funds, introducing harmonized leverage caps of 175% of NAV for open-ended and 300% for closed-ended loan originating funds. A data point that may usefully inform the FSRA's calibration of a relevant leverage limit. Taken together, the consultation demonstrates that the FSRA has engaged seriously with a decade of European regulatory experience, selectively adopting what works, and, with certain design choices, quietly improving upon it. Conclusion. The FSRA's proposed amendments reflect a clear policy direction towards a more risk-sensitive and proportionate funds regime, calibrated according to fund size, investor type, and the degree of regulatory nexus to ADGM. Across the STFM framework, institutional only managers, enhanced treatment of VCFNs, facilitation of employee co-investment, and tighter controls on foreign fund managers, the common thread is an attempt to simplify regulatory tease while sharpening supervisory focus where risks are more pronounced. For market participants, the changes are commercially meaningful. Smaller managers may benefit from a clearer, less burdensome STFM pathway. While institutional focused managers gain a framework suited to their investor base. VCFMs retain tailored flexibility, and employee co investment is better accommodated. Foreign fund managers face tighter requirements, reflecting a focus on substance and oversight. Overall, the proposals point to a maturing regime balancing competitiveness with stronger accountability.