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New SCA Rulebook: important changes to the UAE’s financial promotions regime

  • Legal Development 16 juin 2021 16 juin 2021
  • Moyen-Orient

  • Droit réglementaire et enquêtes

On 9 May 2021, the UAE's Securities and Commodities Authority (SCA) issued a major Decision* enacting its new consolidated “Rulebook”. The Rulebook came into force on 17 May 2021. In this article, we provide a high-level overview of the changes to the SCA’s financial promotions regime introduced by the Rulebook.

Background

We set out below an overview of the main changes to the SCA's regime regulating the promotion of “financial products” in “Onshore UAE” (the UAE outside the financial free zones) which the Rulebook introduces. Note that we have not set out all of the changes introduced by the Rulebook, just some of the key amendments regarding the promotion of financial products in the UAE.

At the moment, the Rulebook is only officially available as an Arabic edition. 

The Decision repeals 17 SCA Board Decisions, including those in relation to financial promotions, which are now incorporated into the Rulebook.

A wider exemption for “Professional Investors”

The most notable change to the new SCA’s financial promotions regime introduced by the Rulebook is a new, wider exemption for promotions made to “Professional Investors” (New Exemption) (which replaces the exemption regarding promotions to institutional “Qualified Investors” under the existing regulations).

The New Exemption is available for promotions made to Professional Investors, which now expressly includes regulated firms and private investment vehicles, and natural persons who meet the criteria to be classified as Professional Investors i.e. individuals with a net worth of more than AED 4 million (c. $1.1 million), or those with sufficient experience and understanding of the relevant investments.

We note that the SCA promotions regime still does not apply to the promotion of financial services. The Rulebook provisions on the promotion of financial services are conduct of business rules which only apply to SCA-licensed firms.

The new “Investor” categories

The Rulebook requires SCA-licensed firms to classify clients as retail investors, professional investors or counterparties. The concept of “Professional Investor” in the Rulebook is similar to that found in the comparable UAE financial free zone (FFZ) regulations.

The New Exemption is available to promotions made to all types of Professional Investors, including individuals. Previously, the SCA regulations on promotions treated sophisticated individual professional clients as retail clients. Interestingly, it appears that FFZ or foreign financial institutions that wish to rely on the New Exemption will need to undertake a client classification of a UAE-resident client prior to making a promotion in order to properly assess whether the client meets the definition of a Professional Investor.

We set out below the three new categories of Professional Investors under the Rulebook, which include (among others):

Investor Category

Description

Professional Investor by nature

  • regulated financial institutions (including investment funds, pension funds and fund managers)
  • listed companies
  • single family offices (with assets more than AED 15 million)
  • “Large Undertakings”

Professional Investor (assessed)

  • A natural person:
    • whose net worth is more than AED 4 million
    • who is approved by the SCA or a similar regulatory authority
    • who is employed by a regulated firm, or had been employed by one in the preceding 2 years
    • who has sufficient knowledge and experience in the proposed investment and its risks
    • who is represented by an SCA-licensed firm
    • who holds a joint account with a Professional Investor (subject to conditions)
  • A special purpose vehicle or trust, which is established to manage the assets of an individual who meets the criteria to be classified as a Professional Investor
  • A legal person which meets a specified asset test and has adequate expertise and understanding of the risks involved

Professional Investor (service-based)

  • a provider of credit to an “undertaking”, the controller of an “undertaking”, any member in the same group as an “undertaking”, or any joint venture with an “undertaking”
  • an arranger of credit and deals in investments in relation to corporate finance

 

Changes to other definitions

A new definition of “Promotion”

Under the Rulebook, a “promotion” goes beyond the mere provision of information on “Financial Products” and includes an invitation or inducement to buy or subscribe to a Financial Product. This is likely to benefit persons who act as a mere conduit, i.e. those who communicate information on Financial Products without promoting the product themselves (e.g. media companies, online forums and websites).

Improved definitions of a “Security” and “Foreign Security”

While the definition of Financial Product remains essentially the same (i.e. comprised of “Securities”, “Foreign Securities”, “Structured Products” and “Commodities Contracts”), we summarise enhancements made to the definitions of a “Security” and a “Foreign Security” in the comparative table below: 

 

Under the previous regulations

Under the Rulebook

Security

Stocks, bonds and notes issued by joint stock companies, and bonds, notes issued by the federal government and local governments, public bodies and public institutions in the State and any other local or non-local financial instruments accepted by the SCA.

Shares, Pre-emptive Rights, Bonds, Sukuks, Fund Units, Certificates of Deposit, Covered Warrants, Derivatives Contracts, and any other financial instrument deemed a Security by the SCA.

Foreign Security

Stocks, bonds, sukuk, units of investment funds, commodities contracts, derivatives and other securities or financial instruments issued by foreign issuers.

Same as above but issued by a foreign issuer.

 

Conclusion

By making the New Exemption available to a considerably expanded pool of investors, the SCA’s financial promotion regime is now comparable to those of the FFZs and other sophisticated jurisdictions. The New Exemption allows local and foreign financial institutions to promote to a much larger segment of UAE investors with much-welcomed clarity, certainty, and flexibility.


* Decision No. 13/R.M of 2021

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