Cross-Border Marketing: Focus on Reliance on Reverse Enquiry in the Middle East and Africa

Overview

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 Middle Eastern and African Investors may be attractive from a cost and administrative perspective. However, the regulatory landscape across these regions 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. For example, in certain jurisdictions it may be possible to consider structuring activities pursuant to a tolerated practice in which case the activity arising from a reverse enquiry is often a key element.

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

Can I respond to a reverse enquiry on funds in the Middle East or Africa?

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 the Middle East and Africa, 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 to market 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 South Africa, passive marketing/selling of funds by a firm in response to a reverse enquiry by a South African investor is permitted without triggering a firm licensing requirement or a fund approval, if certain conditions are met (including that the enquiry must relate to a specific fund and the firm is only responding to the specific enquiry).  Even where passive marketing by a firm meets these conditions, regard must also be had to other South African regulatory requirements (for example, foreign exchange control provisions and a restriction on the use of the word “bank” in a firm name).  

In Nigeria there is no official exemption from fund approval and local agent requirements based on the investor having made a reverse enquiry. Our Nigerian local counsel are, however, aware of a tolerated, informal practice where overseas firms may carry out business a few times a year to sophisticated/institutional investors that the firm has some form of prior relationship or contact with. However, given this route is not based on law or guidance from the regulator, it carries high risk as the regulator could decide to enforce the rules at any time and in any singular case. 

What counts as reverse solicitation in Middle East or Africa?

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 either the Middle East or  Africa. 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.  

In Saudi Arabia, for example, guidance from the regulator provides that a firm may respond to a reverse enquiry from a Saudi Arabian investor without triggering licensing requirements as a tolerated practice by the regulator, but must also fulfil a number of conditions that relate more to the firm’s regulatory status elsewhere, the nature of the investor, and the nature of the fund. There is an inherent risk in relying on tolerated practice guidance of this nature that could be removed without prior warning and care is required.

By contrast, in the onshore United Arab Emirates there is a specific reverse enquiry exemption in the SCA Rulebook. One of the key practical points to note in connection with this exemption is that it is important to document transactions undertaken by way of reverse enquiry in order to demonstrate to SCA that the financial promotion has been undertaken on this basis. Having a complete audit trail is very important. Care should also be taken if the reverse enquiry comes from a retail investor as there may be some uncertainty as to whether the exemption would apply in this context.  

Tips for compliance

Our extensive coverage of the Middle East and Africa 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 the Middle East or Africa:

• 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 the Middle East or Africa, 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

The Middle East and Africa have 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 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:

• 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
• 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
• 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
• 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