Financial Services Quarterly Report - First Quarter 2013: Marketing and Distributing Your Fund in the Middle East: If “Tolerated Practice” is Changing, Should “Market Practice” Change With It?

by Dechert LLP

Those familiar with fundraising in the Middle East will be familiar with the concept of what is loosely dubbed “market” or “tolerated” practice. The terms are, in most people’s minds, interchangeable, but in fact look at the same issue from two different perspectives.

  • “Tolerated Practice” is what regulators are willing to accept – it has arisen through a perceived inability by Middle Eastern regulators to police the market, an acceptance that activities aimed at institutional investors and high net worth (“HNW”) or sophisticated investors are less risky than those aimed at retail investors, and a long-standing lack of comprehensive regulations that are equivalent to those in place in the EU and the United States.
  • “Market Practice” is what participants look at to measure their acts – participants in the market have leveraged off the “tolerated practice” and adopted certain behaviors on the basis that a) this has been the practice for many years, and b) “everyone else is doing it.” Essentially, participants are using herd behavior to influence their attitude toward risk.

What Is Changing?

The change in approach can be traced back to a number of relatively recent developments:

  • Regulations introduced in Kuwait in 2010 have now been fully implemented by a new regulatory body, the Capital Markets Authority, which has significantly revised domestic financial services regulation.
  • New regulations were issued in the United Arab Emirates by the Emirates Securities and Commodities Authority, governing the authorization and marketing of investment funds.
  • The Capital Markets Authority of the Kingdom of Saudi Arabia has made a number of public pronouncements, reminding market participants that both conducting “securities business” and marketing financial products in the Kingdom of Saudi Arabia requires authorization, and describing the penalties for violation.
  • High-profile litigation disputes have centered on the mis-selling of financial products in the Middle East, where the complainant relies on a violation of local securities regulation to seek to rescind the investment contract.
  • There has been an overall increase in enforcement and supervision, as well as the issuance of updates and/or supplemental regulations by all regulators across the region.

If the parameters of tolerated practice are changing, should market participants therefore also re-evaluate the parameters of acceptable market practice? If this is the case, then it would be helpful to consider some of the common themes and issues that arise in respect of the marketing and promotion of not only investment funds, but financial products more generally in the Middle East. This is regardless of whether the participants are promoters, fund sponsors or financial institutions, and irrespective of whether they are based “onshore” or in special “free zones” in the Middle East region or whether they are based outside the region but are promoting their products within the region.

While there is some overlap between the following key themes, and differences from jurisdiction to jurisdiction in the detail of scope and implementation, the following provides a good sense of how the Middle East views marketing and promotion issues, and how these issues may develop in the short term.


Registration and establishment in one Middle Eastern jurisdiction (including, to an extent, UAE free zones) does not grant passporting rights into other Middle Eastern jurisdictions. The same is true for a non-Middle Eastern promoter. Local laws and regulations must be complied with on a jurisdiction-by-jurisdiction basis.

Public v. Private Placement Offers

Generally, no distinctions are made between a “public” and a “private” placement offer. The concept arises only from the twin features of tolerated and market practice, and has no basis in local regulation or laws. A distinction can at most be made (i) in as much as a notification to the local regulator is required prior to marketing an investment fund by way of a private offer, but approval is required from the local regulator for a public offer, and (ii) the classification as a “private” or “public” offer may impose certain obligations under local regulations and law on the terms of a fund (such as proscribed reporting requirements or the requirement for the inclusion of redemption rights for any placement that has been distributed by way of public offer).

Exemptions for Institutions, HNWs and Sovereign Wealth Funds (“SWFs”)

Middle Eastern financial institutions, HNWs, family offices, SWFs and so-called “quasi-SWFs” (of which there are a greater number in the Middle East than elsewhere) generally are not exempted from marketing restrictions and do not fall within safe harbor provisions under either local financial promotion rules or rules regulating financial service activities more broadly.

Financial Promotion Activities and Financial Service Activities

It is important to make a distinction between financial promotion activities (i.e., the promotion of financial products to entities in a local jurisdiction) and financial service activities (i.e., undertaking financial service activities in a local jurisdiction). Such financial service activities could include “arranging” or “advising” on financial products. Activities deemed “financial service activities” in a jurisdiction can trigger requirements for authorization of the entity in addition to compliance with any rules relating to financial promotion activities.

It is important to consider any activities in light of both requirements.

Client Servicing

Often this can be the most blurred area; for instance, it can become unclear – especially some time later – when and where an individual or entity actually becomes a client. This can lead to the question of whether client servicing may in fact be the offer of further, or first, financial products in the jurisdiction in question, which may require a consideration of financial promoting activities and financial services activities, as noted above. Regulators in the region take very different views, and it is important that the analysis be conducted on a jurisdiction-by-jurisdiction basis.

Product Registration

Investment funds generally require registration, either by way of approval or notification. Currently, most other financial products do not require either. However, the majority of regulators in the Middle East have publicly announced that they will extend regulation to other financial products, although the time period for this is not known. In any event, notwithstanding the lack of a requirement for the registration of financial products, care needs to be taken as to the activity related to the promotion of such products, so as to ensure that this does not of itself constitute a financial service activity and thus trigger a requirement for authorization or registration of the entity deemed to be undertaking the promotion activities.

Reverse Solicitation / Reverse Enquiry

Without exception, an exemption for reverse solicitation or enquiry is not enshrined in any Middle East jurisdiction law or regulation. The analysis of a reverse solicitation scenario (i.e., one where, without prompting or encouragement, a potential investor initiates contact) will always depend on facts and circumstances specific to a given jurisdiction. Care will be needed so that it can be clearly established when and how such contact was made; for instance, was it via a road show or circulation of marketing materials, a form of follow-up from a meeting or a speaking engagement? Specific advice should be sought on a jurisdiction-by-jurisdiction basis, as practice in this area differs among regulators in the region.

Territorial Effect

Generally, activities that might be deemed to constitute financial service activities and/or the promotion of financial products into the Middle East need to take place in, or be aimed at, a relevant jurisdiction in order for issues of local laws and regulation to apply. However, jurisdictional boundaries are frequently blurred by websites or investor portals that are aimed specifically at one or more jurisdictions, or where initial meetings are held or contact is made outside of a given jurisdiction, but where subsequent steps (such as the sending of materials) are taken in or made with respect to another jurisdiction.

What is Next?

In view of the increasing amount of supervision of, and the commencement of enforcement actions in relation to, financial services activities (the latter of which brings the increased possibility of fines and public censure, and therefore reputational risk), market participants should pay increased attention to a regulatory framework that is, without exception across the Middle East, increasing in complexity and sophistication. Once accepted behaviors are unlikely to be looked upon favorably by regulators, and obtaining focused advice – rather than relying on accepted practices – is more likely to ensure that a successful fundraising effort stays just that.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dechert LLP | Attorney Advertising

Written by:

Dechert LLP

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.