Regulatory Developments in the marketing of securities and financial services within Bahrain, Kuwait and the UAE
Foreign firms marketing securities to local investors in countries of the Gulf Cooperation Council (the "GCC") (in particular, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates) are subject to the their regulatory regimes, which, in most cases, restrict marketing to local investors without approval from the relevant regulatory bodies. Foreign firms have historically circumvented such requirements by taking advantage of certain "grey areas" of the laws by marketing discretely to local investors to avoid often onerous licensing requirements, or requirements to market through local agents. In most jurisdictions, other than Saudi Arabia, the regulators have turned a blind-eye to this type of activity.
However, mainly as a result of the global financial crisis, regulators in some GCC countries have recently taken measures to ratchet up enforcement of laws addressing marketing of foreign securities and financial services, laws developed to protect the local investors from predatory marketing activity. In so doing, they have replicated, to a large extent, the more restrictive rules in Saudi Arabia, where marketing onshore is permitted solely by coordinating with the Saudi Arabian Capital Markets Authority and through locally licensed persons authorized to carry out such activities (so-called "authorized persons").
This article addresses recent regulatory developments in Bahrain, Kuwait and the UAE in particular regarding marketing of securities and financial services.
Regulatory regimes of GCC countries; Summary
In each country, the offeror is subject to the restrictions applying to foreign firms marketing financial products and securities. The offeror will also be subject to overriding restrictions on foreign firms that "engage in business" without proper authorization.
As the laws have developed in each country, market practice has emerged, partly based on legislation, and partly resulting from the idiosyncrasies of each jurisdictions' regulatory bodies. For example, in Saudi Arabia, if a foreign firm intends to carry out activities, it must retain a local (licensed) firm, or failing that it must carry out all activities "outside the country". Carrying out activities "outside the country" is narrowly construed. A foreign firm is advised to refrain from "cold calling" or negotiating with potential or existing investors while inside or outside the country. However, the foreign firm may, under certain circumstances, meet with potential investors in Saudi Arabia, provided this meeting is in response to a request from the investors, and the firms' acting representative remains passive during the meeting and is accompanied by a local agent.
These themes are found, to varying degrees, in all GCC countries. Up until now, however, the GCC countries other than Saudi Arabia haven't enforced these rules strictly, allowing the "grey area" marketing noted above.
Recent Developments; Bahrain and Kuwait
In Bahrain, the Central Bank of Bahrain and the Financial Institutions Law (the "CBB Law") regulates the financial services industry. Pursuant to the CBB Law, a foreign firm cannot market or sell securities or financial services (or any other "regulated" activity) unless licensed by the Central Bank of Bahrain (the "CBB").
Notwithstanding this general prohibition, foreign firms have historically approached investors without approval from the CBB, taking advantage of the CBB's relatively lenient approach to marketing activities of a discrete nature. For example, foreign firms have typically taken the following measures: (i) avoiding "cold calling", (ii) ensuring that personal visits where discrete in nature, (iii) ensuring that, in advance personal visits to Bahrain, the Bahraini investor provides written confirmation that such visit was a result of the Bahraini's investors request, (iv) ensuring that all documents are executed abroad and (v) avoiding public presentations or road shows.
Recently, the CBB's attitude towards "discrete" marketing, formerly a grey area of the CBB law, has taken a more restrictive tone. On 3 April 2011, the CBB proposed a regulation with respect of financial services/products offered to Bahraini investors. If adopted, the draft regulation will make it a criminal offense to market, promote or offer financial services in Bahrain without a license (or without an express exemption from the CBB). The draft regulation defines "markets, promote or offer" to mean any announcement, advertisement, broadcast or other communication made for the purpose of inducing recipients to purchase or otherwise acquire financial service in return for monetary payment or some other form of valuable consideration.
In Kuwait, the marketing of foreign securities and financial services was formerly governed by Decree law No. 31 of 1990 ("Law 31"), with the Ministry of Commerce and Industry (the "MOCI") responsible for enforcement of the Law 31. Under Law 31, the marketing, offer and sale of any foreign securities in Kuwait were only permissible upon the approval of the MOCI. Under Law 31, no foreign firm was able to sell, market or offer foreign securities or services in Kuwait, except through a licensed Kuwaiti agent.
The Kuwaiti government has recently passed Law No. 7 of 2010 and the Executive Bylaws for Law No. 7 of 2010 Concerning the Establishment of the Capital Markets Authority (the "CMA") and Organization of Securities Activity (collectively, the "Capital Markets Law"). Pursuant to the Capital Markets Law, the CMA is now the sole regulatory authority primarily responsible for regulating the marketing, offer and sale of securities and financial services in Kuwait (while the Central Bank may be involved if necessary).
The Capital Markets Law does not differ substantially from the regime under Law 31 in respect of the marketing of securities and financial services: if a foreign firm intends to market, offer or sell securities in Kuwait the foreign firm may either (i) apply to the CMA for a license to market, offer and sell securities in Kuwait or (ii) market, offer or sell securities in Kuwait through a licensed entity in Kuwait.
However, the establishment of a more formal regime under the Capital Markets Law may be seen as a reaction to the global financial crisis, and an attempt to formalize the Kuwait's regulation of foreign marketing activities.
In the UAE, the Securities and Commodities Authority and the Central Bank have entered into an MOU, which may, among other things, pave the way for the enactment of amendments to the Federal Securities and Commodities Law, providing more regulatory clarity in respect marketing of local and foreign securities. Although the MOU was adopted in 2009, the expectation is that laws adopted pursuant to the MOU will follow the approach taken by Kuwait and Bahrain.
The recent measures by many of the GCC countries to monitor and restrict marketing activities more closely represents a departure from prior practice and can be seen as a local effort to correspond to the more publicized and burdensome legislation enacted in the US and across the EU. Fund managers and sponsors should closely monitor their marketing activities in the GCC in the upcoming months to ensure compliance. In the end, the GCC remains a very liquid investor market. Local authorities recognize the interests of local investors in global funds. Therefore, a compliant manager should still be able to tap the local markets as has always been the case.
Zeeshan Ahmedani is a partner in our Abu Dhabi office. Zeeshan is a member of the Firm’s Investment Funds practice. He has substantive experience advising managers and sponsors on the organization and establishment of private investment funds both onshore and offshore (tax haven) jurisdictions, including hedge funds, private equity funds, real estate funds, distressed debt funds, hybrid funds and Shari’ah compliant funds. Zeeshan represents managers, placement agents and sponsors around the world, with equity diverse investment and distribution strategies.
He has also represented fund sponsors on the establishment of management companies and compensation arrangements, as well as on US regulatory issues, including investment advisory, investment company, ERISA, securities listing, distribution strategy, and commodities and futures trading matters.
Zeeshan also represents institutional investors on their alternative asset portfolios included negotiating investments in all classes of private investment funds, separately managed account and investment management agreements.
He has had articles published on topics such as securities issues related to private investment funds, hedge fund advisor performance compensation, and US broker-dealer issues.
Zeeshan has also spent time in the Firm’s London, Palo Alto, Hong Kong and Tokyo offices, and continues to counsel Asia-based and Europe-based clients. Zeeshan can be contacted on +971 2 495 0133 or by email at email@example.com.
Salim is a corporate associate based in Abu Dhabi. His experience includes corporate transactions, international joint ventures, corporate offshore restructuring and international commercial matters.
Prior to joining White & Case, Salim represented a wide range of UAE and US companies related to international acquisitions and commercial matters. Examples of Salim's transactional experience include advising on and structuring share and asset acquisitions, and drafting, reviewing and negotiating various transaction documents.
In New York, Salim advised companies on corporate and commercial matters, and handled all aspects of business litigation. Salim can be contacted on +971 2 4950 125 or by email at firstname.lastname@example.org