Promotion and Introduction of Financial Products in the UAE – The New Framework

On 10 January 2017, the Emirates Securities and Commodities Authority (the SCA) issued Decision No. 3 of 2017 concerning the Regulation of Promotion and Introduction Activities (the PIR). These were published in the UAE Official Gazette on 31 January 2017 and came into force on 1 February 2017. The PIR regulates the marketing, distribution, announcement, publication or dissemination of data, information or advertising materials related to Financial Products (Promotion), by any means. The relevant regulated “Financial Products” are securities, commodities contracts, derivatives, structured products, or any other foreign securities. The PIR also regulates introduction activities through which an SCA licensed person (or person regulated by a similar authority) is introduced to another to receive a financial service, including the provision of trading services (Introduction).

The PIR represent the next stage in the development of the UAE "onshore" financial regulatory regime which applies in the UAE outside the two financial free zones, adding foreign securities regulation to the existing SCA regulation around locally listed securities and mutual funds.

There had previously been some uncertainty around the offshore promotion of financial products and services onshore in the UAE where the relevant products or services did not fall under specific regulations such as the UAE Central Bank Law (UAE Federal Law No10. of 1980) and circulars or SCA regulations regarding mutual funds and investment management. While the financial free zones of the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) have comprehensive financial services regulations that include general prohibitions on carrying out financial services and promotions, regulatory oversight for financial products and securities onshore in the UAE has been slowly moving across from the UAE Central Bank to the SCA since its establishment in 2000 and the regulations have been developing as part of this process. With the introduction of the PIR, the SCA clarifies some of the uncertainty and closes the previous gaps in regulation by introducing a new financial products regulatory framework applicable onshore in the UAE and codifying some of the exemptions that had previously been relied upon by foreign promoters as part of a “tolerated practice”.

Here we look at the prohibitions set out in the PIR, exemptions from the same and some of the procedural requirements for obtaining SCA licences and consents.

PROHIBITIONS AND EXEMPTIONS

Subject to the exceptions set out in the PIR, the PIR explicitly prohibits onshore in the UAE:

• the Promotion of Financial Products that are not listed, registered, or recorded with the SCA; and
• the Introduction of any financial services or activities where such Introduction has not been approved by the SCA.

There are a number of entities and activities that are fully exempted from the scope of the PIR. The two most significant exemptions for foreign offerors are likely to be in respect of “Qualified Investors” and reverse solicitation.

“Qualified Investors”

As is common elsewhere in financial services regulation, the SCA has excluded qualified investors from the protections granted by the PIR. Specifically, private placements to certain “Qualified Investors” do not fall within the prohibitions set out in the PIR. “Qualified Investors” for these purposes are investors who are capable of administering their investments themselves, in particular:

• federal and local governments, government bodies and government establishments, and any companies wholly owned by them;
• international institutions and organisations;
• entities licensed to carry out a commercial activity in the UAE, provided that one of their commercial purposes is investment; and
• investors represented by an SCA-licensed investment manager.

However, this exclusion does not apply to the full scope of Qualified Investors under the PIR as promotions to individual natural persons, even where they are high net worth individuals, are not excluded. If such individuals invest through a corporate investment vehicle or family office, then the exemption should be available in respect of such vehicle.

Reverse Solicitation

The prohibitions and licensing requirements do not apply where an investor based in the UAE has requested to buy or to receive offers in respect of specific foreign securities, provided that such request is not the result of promotions carried out by the foreign issuer, promoter or distributer and such reverse solicitation can be evidenced. Such offers should be made by the Foreign Issuer from, and the transaction complete, outside the UAE, although the UAE based investor may sign documents in the UAE and send them on to the Foreign Issuer to complete overseas. In this context, “Foreign Issuer” means any juridical person incorporated outside UAE who issues foreign securities and is subject to the regulatory authority of a body similar to the SCA (i.e. a regulatory authority that is an ordinary member or an associate member of the International Organisation of Securities Commissions (IOSCO)). When relying on this exemption, Foreign Issuers will need to carefully maintain records to evidence the genuine reverse enquiry and ensure they are responding to specific requests, whether they be for specific products or a more general request.

In practice these two exemptions are likely to cover a significant percentage of the offshore marketing currently conducted by foreign issuers. They effectively codify what had previously been considered to fall within promotional practices tolerated by the authorities, namely discreet marketing to targeted investors and responding to enquiries from existing or new customers. However, since it would appear high net worth individuals have specifically been left out of the Qualified Investor exemption, foreign issuers can no longer rely on following discreet offshore marketing guidelines to solicit investors in this category. Instead they will need to limit dealings with such customers to responding to reverse enquiries or otherwise ensure that they are in full compliance with the PIR when dealing with such customers.

Other complete exemptions

Other complete exemptions from the requirements of the PIR include:

• Financial intermediary companies authorised by the SCA to trade on behalf of its clients in foreign markets within the limits set by the SCA in this respect.
• Promotion of Financial Products immediately upon listing in any market (under the PIR markets refers to securities and commodities markets licensed in the UAE by the SCA and therefore this exemption is effectively limited to UAE listed securities).
• Promotion of securities, commodities contracts, derivatives issued by the federal government or the local governments, and institutions and governmental authorities, or companies wholly owned by any of them.
• Promotion and Introduction activities carried out between the parent company and its subsidiaries or sister companies, affiliates or intra-group (i.e. related parties).
• Introduction activities by a financial consultancy and financial analysis company, or legal advisers, only when the Introduction is part of the consultancy services and provided that disclosure is made to the customer of any commissions received and to each party involved of the relationship the introducer has with each party involved in the Introduction.
• An arranging broker acting in accordance with the special regime for listing and trading commodities contracts and commodities.

Promotional and introductory activities falling within the above exemptions would not require any licence, consent or notifications to be obtained or given under the PIR.

Partial Exemption

In addition to the above, there are partial exemptions available for both foreign and local issuers and financial advisors (who are all exempted from a large portion of the PIR as detailed below). Investment fund managers also benefit from partial exemptions and are not required to obtain a promotion licence or comply with the general promoter obligations set out in the PIR when promoting their own funds in accordance with the SCA’s Investment Funds Regulation (SCA Board Decision No. (9/R.M) of 2016 Concerning the Regulations as to Mutual Funds), although they are still required to comply with the special obligations, including those for investment funds and the requirement to obtain consent for fund promotions.

Foreign and local issuers and financial advisors acting in accordance with the SCA’s Regulation regarding the Offering and Issuing of Public Joint Stock Company shares are not required to:

• Obtain an SCA licence to carry out promotion activities;
• Comply with the general promoter obligations set out in the PIR;
• Comply with the special promoter obligations set out in the PIR (which include applying for SCA approval to market funds and notifying the SCA of promotional activity undertaken in respect of financial products);
• Comply with the content requirements for promotional materials;
• Comply with the obligations relating to the promotion of foreign funds set out in the PIR; or
• Obtain SCA approval for making introductions or comply with the introducer obligations set out in the PIR.

Where the target investor, and/or the activity intended to be carried out by the promoter/introducer do not fall under any of the above exemptions, such promotions will require a licence from the SCA and any such introduction activities will require the consent of the SCA. The PIR also sets out ongoing obligations which the promoter or introducer are required to comply with in carrying out the licensed/approved activities.

Obtaining a Licence for Promotional Activities and Ongoing Obligations

It is not possible for foreign promoters to obtain a licence to carry on non-exempt promotional activity of financial products in the UAE. Instead they must appoint a locally licensed promotor to do so on their behalf or establish a local entity and obtain the requisite licences.

SCA licences to carry out promotional activity will only be granted to corporate entities incorporated in the UAE or branches of foreign companies established in the UAE. Applicants for the licence should be approved by the UAE Central Bank or the Insurance Authority (as appropriate for their activities) and their business activities should include the promotion of financial products. They must also meet (on an on-going basis) the requirements set out in the PIR in regards to capital, payment of fees and operation and risk management systems, as well as any other requirements specified by the SCA.

The SCA’s decision on whether to issue a licence will be given within 15 working days from submission of all required and requested documents. Where a licence is granted it will expire on 31 December and will be renewable annually upon satisfaction of the renewal requirements and payment of renewal fees. Where rejected, the applicant will not be permitted to make another application for 6 months from the date of rejection.

Once an SCA licence for promotion activities has been obtained, such licensed local promoter may also carry on introduction activities without seeking SCA approval.

The PIR sets out general obligations which a promoter must comply with, including requirements in relation to internal set up and controls, compliance and professional standards, SCA reporting and various consent requirements. Under the PIR’s special obligations, promoters are required to notify the SCA of promotions of most financial products immediately upon making them (the SCA may then suspend the promotion within 10 days if required in the public interest). Promotions of investment fund units, however, must be approved by the SCA in advance and cannot be notified after the event. The SCA will give their decision to approve or reject within 15 days of application. The PIR also specifies content requirements for the promotional materials and contracts between promoters and issuers as well as obligations to ensure that promotions are not misleading and investors are provided with sufficient disclosure of the investment risks involved.

Investment Funds

The PIR contains additional obligations relating to the promotion of foreign investment funds in the UAE. These are triggered where none of the exemptions noted above are available (e.g. in respect of institutional investors or reverse enquiries). In particular they will apply to promotions to individuals, including high net worth individuals since they are not included in the range of Qualified Investors that enjoy a full exemption from the PIR.

The additional obligations apply to both public offers and private placements. Public offers can only be made in respect of funds incorporated outside the UAE, or in one of the UAE free zones, if such funds are regulated by an authority similar to the SCA and are approved for public offering in their home jurisdiction.

For private placements the fund must also be regulated and approved by an authority similar to the SCA (e.g. the Dubai Financial Services Authority (the DFSA)) and promotions can only be made to Qualified Investors through direct communication with pre-identified persons. The additional requirements for private placements set out in the PIR apply to promotions to individuals who have:

• an annual income of no less than AED1 million; or
• a net worth (not including their main residence) of AED5 million; and
• sufficient knowledge and experience either themselves or with the assistance of a financial advisor) to evaluate the offering document and the advantages and risks associated with or resulting from the investment.

Approval for Introduction Activities

Introduction activities falling outside the exemptions detailed above require the approval of the SCA. To apply for consent, the introducer must be:

• SCA licensed to engage in financial activities or services;
• licensed by an authority similar to the SCA to engage in financial activities or services; or
• a bank or insurance company licensed in the UAE or abroad.

The SCA will issue its decision within 15 days of the application. When engaging in approved introductions, the introducer must comply with the obligations set out in the PIR, including disclosure of any commissions and its relationships with the parties.

Control, Supervision and Sanction

The PIR gives the SCA broad powers to supervise and inspect promoters and introducers to ensure compliance with the law and SCA regulations. The SCA shall also act as the complaints handling body and may investigate any violations reported to or discovered by the SCA.

Under the PIR the SCA also has broad powers to sanction offending promoters or introducers and the range of sanctions include warning notices, fines and suspending or cancelling licences or approvals. Individual employees of the promoter or introducer may also be liable for sanctions if they violate the PIR, including suspension from practice for up to two months.

In addition, the SCA may publish details of all offenders, including the offence and sanction imposed.

Conclusion

The PIR provides some welcome clarification on the promotion of financial products and introductions for financial services in the UAE. They fill a gap in the onshore regulation and provide a greater degree of certainty and clarity for overseas promoters and issuers looking to target UAE based investors. However, promotions of financial services are not covered under the PIR, therefore some uncertainty remains over the promotion of general capabilities rather than specific products by overseas service providers (other than investment management services which are covered under the SCA Investment Management Regulation) and some care will still need to be taken in this regard. In general the range of exclusions available will likely mean business as usual for many foreign issuers and promoters but those who routinely target high net worth individuals in the UAE will need to ensure that their promotional practices comply with the PIR going forward.