The ADGM’s latest consultation paper regarding proposed enhancements to the FSRA’s Funds Framework (CP No. 12 of 2025) proposes a sub-threshold fund manager regime (STFM). The STFM regime is intended to introduce a proportionate approach relative to fund size by offering a lighter regulatory framework for fund managers managing smaller funds domiciled in the ADGM whose aggregate committed capital across all funds falls below US$200 million.

The aim here is to streamline fund licensing and reduce compliance friction for smaller firms managing exempt or qualified investor funds.

As drafted, the proposed eligibility criteria a fund manager must meet to fall within the scope of the STFM framework are tied to only three variables: fund size (committed capital), investor type (institutional/exempt), and fund structure (close-ended).

However, a number of other variables are missing from the equation which makes the STFM regime deficient in a number of respects.
1. There is no leverage cap. This means smaller or “low risk” managers are not prevented from taking on excessive borrowing that could artificially amplify their exposure. The EU AIMFD shows that setting proportionate leverage caps are essential to prevent small managers from taking on outsized, systemically relevant risk.
2. There is no distinction between complex and non-complex assets so managers could effectively use the lighter regime to pursue highly structured or sophisticated investment products. The UK FCA’s framework proves this distinction to be crucial in preventing sub-threshold managers from employing overly sophisticated strategies.
3. There are no liquidity mismatch controls so a sub-threshold manager could run a fund offering daily or weekly withdrawals while investing in private credit, real estate or distressed assets. The US SEC’s liquidity management rules demonstrate the importance of aligning redemption terms with the actual liquidity of underlying assets.

Essentially, the STFM regime as currently drafted is not fit-for-purpose because it ignores core financial risks that most commonly lead to fund failures.

Proportionate regulation matters but only when coupled with foresight and a holistic view of key risks. The current variables are too reductive because they overlook fundemantal market risk drivers that can materially alter a fund’s risk profile.

Do you think the ADGM has balanced proportionality with risk?

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