Cross-Border Marketing: Focus on Reliance on Reverse Enquiry in Asia

Overview

In this article we look at how reverse enquiry continues to be an area of uncertainty and subject to increased regulatory scrutiny.

In a climate of continued global economic volatility and rising operating costs investment firms and funds are having to be strategic about their distribution methods. Relying on reverse solicitations to access Asian investors may be attractive from a cost and administrative perspective. However, the regulatory landscape across Asia differs greatly, with each jurisdiction taking its own approach to reverse solicitation (or not recognising it at all). Careful analysis on a jurisdiction-specific basis is therefore required to manage risk.

In the following article we take a look at the availability of reverse solicitation in Asia, and consider how firms may mitigate their risks.

Can I respond to a reverse enquiry on funds in Asia?

Broadly speaking, reverse solicitation is where an investor contacts the firm to express interest in the firm and/or its funds/services. In some jurisdictions across Asia, provided certain conditions are met, it may be possible to respond to this expression of investor interest without triggering:

• firm level requirements, such as the requirement for firms to be licensed; and/or
• fund level requirements, such as the requirement to make a filing in respect of a fund.

In such cases, the key matter to be addressed in terms of each reverse enquiry is whether it meets the relevant conditions. For example, in Singapore, although there is no legal definition of reverse enquiry, the Monetary Authority of Singapore has provided some clear guidance on conditions for permitted reverse enquiry at the firm level. These provide that activities carried on by a firm wholly outside Singapore in response to an unsolicited enquiry from a Singaporean investor should not trigger a licensing requirement, though there should be no on-going marketing/selling following an initial enquiry.  Note that there may still be other requirements at a fund level, such as a filing and/or prospectus, depending on how the marketing/selling is structured and the investor-type, which will apply even if the activity results from a reverse enquiry.

What counts as reverse solicitation in Asia?

Unlike in the EU where there is a reverse solicitation framework that shapes the approach taken by individual member states, there is no regional concept for reverse enquiry that applies across the Asia region. It is therefore necessary to consider each jurisdiction’s national legislation. In addition, what counts as a reverse solicitation that may be permitted in a particular jurisdiction is often shaped by local market practice and/or the local regulator's guidance or tolerance levels, as opposed to being specifically provided for in national legislation.  

Taiwan, for example, does not provide a clear legal definition of reverse enquiry/reverse solicitation in connection with the marketing and selling of funds. It does however have a very specific route for the distribution of funds on an “offshore transaction” basis (which is tightly drawn) in response to reverse enquiries from Taiwanese investors. This offshore transaction procedure is derived from a mixture of informal guidance from the regulator and common practice in the market and there is risk in relying on this approach.

In Hong Kong SAR, there is no specific reverse solicitation regime, but as licensing and registration requirements arise when a person “actively markets”, responding to a genuinely unsolicited enquiry about a fund may fall outside this. Likewise, in Japan, there is no specific exemption for reverse enquiry, and the term “solicitation” is not legally defined. In certain limited circumstances it may be possible to respond to a reverse enqujry but care is required 

Tips for compliance

Our extensive coverage of Asia in our Marketing Restrictions Asset Management services allows us to spot themes and trends on reverse solicitation practices. Although a jurisdiction-by-jurisdiction assessment is required, here are some best practice guidelines to bear in mind when responding to reverse enquiries from investors in Asia:

• Existence: You should clarify if there is a reverse enquiry regime (in some shape or form), and if so, its specific parameters and conditions. In particular, is it derived from legislation/regulation/guidance or tolerated practice, and what are the risks in relying on it?
• Scope: You should be clear on whether each transaction with a particular investor needs to be preceded by a separate reverse enquiry and whether each reverse enquiry needs to relate to a specific product/service or whether it can be more general. Note that follow-up communications and meetings with investors who have invested previously in a fund or have been recipients of investment services on the basis of a reverse enquiry may not continue to fall outside the scope of relevant restrictions.
• Frequency: Generally speaking, the higher the number of reverse enquiries responded to, the greater the risk of being viewed as conducting active marketing/selling activities. Also be mindful as to whether the jurisdiction has set a maximum number of investors to whom you may market/sell in response to a reverse enquiry by reference to public offer rules, or otherwise.
• Evidence: It should be demonstrated that the request was genuinely unsolicited and made at the initiative of the investor. This can often be done by keeping an audit trail of any communications and obtaining a written acknowledgement from the investor.
• Cross-border versus onshore activities: In many jurisdictions in Asia, reverse enquiries can only be responded to from offshore, on a cross-border basis.  You should check whether attendance at fly-in meetings or any onshore activities, even where requested by an investor, will negate the reverse enquiry.  
• Type of investor: Often reverse enquiries from retail investors require more care and in many cases, reverse enquiries can only be accepted by institutional investors. Also be aware that in some jurisdictions pre-existing relationships with an investor may make it harder to prove the genuine nature of the reverse enquiry. 

Final thoughts

Asia has a diverse regulatory landscape, and each jurisdiction has its own unique regulatory framework for the marketing and selling of funds.  Unlike the EU, there is no region-wide framework of legislation or guidance.  Careful analysis of each jurisdiction’s regime should be undertaken to manage risks.

We have in-depth content on responding to reverse enquiries in relation to funds and financial services for all the below jurisdictions:

• Asia-Pacific: Australia, Brunei, China, Hong Kong SAR, India, Indonesia, Japan, Kazakhstan (excluding AIFC), Macau SAR, Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam
• Americas: Argentina, Bahamas, Bermuda, Brazil, British Virgin Islands, Canada (Alberta, British Colombia, Ontario and Quebec), Cayman Islands, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Panama, Paraguay, Peru, United States, Uruguay and Venezuela
• Europe: Austria, Belgium, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hungary, Iceland, Ireland, Isle of Man, Italy, Jersey, Liechtenstein, Luxembourg, Malta, Monaco, Netherlands, Norway, Poland, Portugal, Russian Federation, Spain, Sweden, Switzerland, Turkey and United Kingdom

• Middle East and Africa: Abu Dhabi Global Market (ADGM), Bahrain, Botswana, Dubai International Financial Centre, Egypt, Israel, Jordan, Kenya, Kuwait, Mauritius, Morocco, Nigeria, Oman, Qatar, Saudi Arabia, South Africa and United Arab Emirates