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In order to grow their business, AIFMs and Asset Managers are increasingly expanding their fundraising (geographical) reach to target investors in the Middle East region. Target investors may include Sovereign Wealth Funds, High Net Worth Individuals, Government owned entities and national pension funds.
Many fund managers typically target six jurisdictions (the “core 6”) within the Middle East for their fundraising efforts: United Arab Emirates (UAE), Bahrain, Kuwait, Kingdom of Saudi Arabia, Oman and Qatar. There is no standardised cross-border fund marketing regulatory regime in the Middle East region. Each country has different regulatory regimes for the purposes of cross-border fund marketing. Read our Blog post: Cross-Border Marketing Compliance: What you need to know.
Global Sales Compliance Ltd.® has been tracking the development of country marketing regulations in the Middle East (and globally) for the past two decades. Our CEO shares some insight into how Middle East country fund marketing regulations are transforming to meet the needs of its constituents, who are increasingly investing outside their own jurisdiction in funds managed by foreign AIFMs and Asset Managers.
In this blog, we provide retroactive insight into how the Regulatory Sands of the Middle East have shifted in 2022 in several key jurisdictions in this region.
Evolution of Cross-Border Marketing Regulations in Middle East jurisdictions
If we look back to the 1990s, country fund marketing regulations in certain Middle East countries were still under development by National Financial Regulators (NFRs). This lack of clarity by NFRs on fund marketing regulations created an environment ripe for “creative legal advice” from some law firms to advise AIFMs/Asset Managers/FIs on how they could carry on doing business with investors in the Middle East jurisdictions notwithstanding unclear or vague regulations.
One of the most creative legal advice “solutions” we observed in the 1990s was advice by a Saudi Arabia law firm to a global FI’s Private Wealth Management team who wanted to target HNWI investors resident in Saudi Arabia. Their advice was for the PWM relationship managers to fly over the Kingdom of Saudi Arabia (KSA) to execute all contracts with their clients, therefore technically executing contracts “offshore” in KSA airspace (during the flight) and not onshore in KSA. This “creative legal advice solution” was intended to avoid triggering Saudi Arabia’s regulations if contracts were signed with the client during RM fly-in visits to Riyadh.
A lot has changed since then.
Over the past three decades, Middle East country NFRs have responded to the increased business activity of foreign AIFMs/Asset Managers/FIs targeting their local constituents by formalising the development of their country private placement (fund marketing) regimes to protect its constituents.
How developed are cross-border fund marketing regulations in the Middle East?
If we examine the global regulatory evolution scale (55+ countries), Middle East jurisdictions are still less developed than many jurisdictions in the West or Asia. The exception here is Israel, which sits geographically in the Middle East region yet has a sophisticated regulatory regime on par with Western jurisdictions.
Middle East jurisdictions’ fund marketing regulations have come a long way, but there is still potential lack of clarity, which underscores the need for AIFMs/Asset Managers to obtain robust legal advice. That means seeking out guidance from Sales Road Maps Online® as well as high-quality local law firms who speak the language, come from the local culture and have “red phone access (aka speed dial)” to the NFR.
For example, Counsel confirms Bahrain’s CBB does not clearly define what constitutes “marketing”. Saudi Arabia’s CMA has been known to take unofficial positions on its Investment Fund Regulations (IFR) regime as happened several years ago.
Notwithstanding this Middle East regulatory evolution, there seems to be an industry myth by some foreign AIFMs/Asset Managers that fundraising in Middle East countries is still equivalent to the “Wild West” of 30 years ago. Read about other Industry Myths in our Blog Posts: Key Myths about Marketing Compliance I & II.
We’re here to say, the days of “Cowboy (Wild West) Marketing” in Middle East countries are over.
How Investors in Middle East jurisdictions can impact National Financial Regulations
Increasingly, institutional and private clients in each of the Middle East countries are investing with foreign AIFMs/Asset Managers overseas. Government-owned entities, Sovereign Wealth Funds and Government Pension Funds are increasingly in search of Alpha and portfolio diversification, resulting in demand for funds managed by overseas AIFMs/Asset Managers. Private Wealth Management clients also invest globally, demanding access to a range of diversified investment strategies and products from foreign fund providers.
NFRs in Middle East jurisdictions are responding to this investor activity by overhauling, clarifying and “modernising” their country regulations with a balance of protection for their investor constituents and benefitting their own economy (for example, the requirement to appoint local licensed agents/fund distributors, etc.).
Here are several case studies to illustrate how the Middle East Regulatory Sands have shifted in 2022 for several key jurisdictions:
Case Study: United Arab Emirates
The UAE has historically been the standout jurisdiction among the Middle East “core 6”, with robust offshore marketing private placement exemptions and SCA licensing exemptions, so long as foreign AIFMs/Asset Managers followed certain sales practice guidelines to avoid triggering license registration. Offshore marketing of foreign funds to exempt clients resident in the UAE has been conducted by foreign AIFMs/Asset Managers for some time.
As of end of year 2021, UAE’s SCA moved the “robust exemption dial” even further and permitted offshore marketing of foreign funds under exemptions from fund registration and licensing to an extensive exempt investor category: “Professional Investors” (Per Se/Service Based/Resident) as defined. This was a big leap in regulatory permissions for foreign fund managers to market their funds from offshore to all types of investors, including HNWIs without SCA fund registration or licensing requirements.
However, by the end of 2022, UAE SCA “dialled back” UAE offshore marketing exemptions 180 degrees, with a complete reversal of its previous position. Now offshore marketing of foreign funds under private placement and licensing exemptions is only permitted to UAE Federal or Local Government Agencies and/or their subsidiaries.
SCA dialled it back because they wanted to stop offshore marketing of foreign funds directly to UAE investors other than Government Agencies (including Family Offices, HNWIs, trusts, etc.). This is an extraordinary “regulatory switch”.
Case Study: Bahrain
In 2022, the Central Bank of Bahrain totally overhauled Volume 7 of the CBB Rulebook concerning the marketing of funds to investors resident in Bahrain. CBB does not require fund “registration” for foreign (non-retail funds) anymore and has simplified the foreign fund “notification” procedure under its private placement regime (notification time: a matter of days). However, there is still the requirement to appoint a CBB-licensed fund distributor.
According to Counsel, this is a significant step in the direction of streamlining Bahrain’s private placement regulations as part of CBB’s Financial Services Development Strategy 2022-2026. Another modernising approach by the local NFR (CBB).
Case Study: Kuwait
Kuwait still has a fairly restrictive fund private placement regime, along with onerous requirements to register the fund with CMA, the need to appoint a CMA-licensed distributor and no offshore fund marketing exemptions to investors resident in Kuwait.
However, Kuwait’s CMA reduced registration fees for registering a fund for private placement through a CMA-licensed distributor. We advise clients to be very cautious about dealing with Kuwait investors, as litigation risk is a key factor, based on several high-profile lawsuits brought by Kuwait institutions and Government Pension Funds against AIFMs.
Examples include a lawsuit brought by a large Kuwait Government Pension Fund against a leading UK hedge fund manager in the UK High Court. Post-2008 financial crisis, a Kuwait institution brought a contentious lawsuit against a large US private equity firm, claiming the US firm breached Kuwait’s laws when they marketed their fund to the Kuwaiti investor.
Litigation risk of course triggers reputation and business franchise risk. Read all about litigation risk as a key component of the 5-Key Distribution Risks in our Blog post: 5-Key Distribution Risks for cross-border marketing.
Summary
Fundraising in your AIF from investors in the Middle East can be an attractive business strategy and follows industry practice.
Our advice is to check the Middle East country regulations in advance before conducting any solicitation activity in that jurisdiction and, furthermore, comply with these rules. Fundraising in the Middle East is not the Wild West of 3 decades ago: There are rules you need to follow.
Also you should be selective about the legal advice you take: Stay away from outdated “creative legal solutions” from commercially driven, low-ethic law firms. Read our Blog: Beware of Throwaway Legal Advice.
Your Middle East business franchise, hard-earned reputation and clients will benefit from your risk mitigated fund distribution approach. We are here to help.
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