The Saudi regulator has appointed new personnel and issued new draft laws for funds. James Stull, Nabil Issa and Phillip Sacks of King & Spalding assess the changes.
In recent months, the staff at the Capital Market Authority (CMA), the Saudi Arabian regulator, has changed with almost an entirely new team arriving this summer. In May, the CMA released draft regulations which overhaul the Investment Funds Regulations adopted in 2006.
The draft regulations are more comprehensive and arguably an improvement on the 2006 regulations. Yet, in the past, the CMA had adopted a flexible stance on many of the provisions of the 2006 regulations and had an organised, although partially uncodified, way of reviewing and approving proposed fund offerings.
Saudi CMA funds are arguably the most efficient vehicle for structuring investment into Saudi Arabia. If properly structured, they create the ability to avoid restrictions from the Saudi Arabian General Investment Authority (SAGIA) and can also provide certain tax efficiencies not available with other structures.
The funds department of the CMA is often applauded as being a practical government department with a focus on growing the funds industry in Saudi Arabia. It remains to be seen what impact the new personnel and draft regulations, when and if adopted, will have on the Saudi Arabian funds market.
CHANGE IN REGIME
For the past few years, the funds department at the CMA had been effectively run by Khalid Al-Hamoud, manager of mutual funds. The funds department had adopted a flexible approach to the offering of funds – more so for private investment funds – and had been known to regularly waive unpractical provisions of either the 2006 regulations or the Real Estate Investment Funds Regulations. For private funds, the CMA often allowed complex investment strategies and economic terms for funds that were not contemplated by the funds regulations as long as the fund manager made clear and complete disclosure.
On July 1, Ahmed Abdullah Al-Sheikh assumed a leadership position following his appointment as general manager of capital market institutions. This followed the appointment of Mohammad Al-Sheikh as head of the CMA, which was widely welcomed by the private sector because of Mohammad Al-Sheikh’s experience as the managing partner in an international law firm handling capital market transactions.
While in the long run the new funds team may adopt the same stance as the prior team and become as efficient, if not more, many fund managers are concerned it will take them time to fully understand the industry and its importance to the local economy.
BRINGING CLARITY
The CMA has intended for years to revamp both the 2006 regulations and real estate laws to address problems of investor protection, which arose during the financial downturn, and to cover the launches of a diverse range of new funds, many of which were not contemplated by the 2006 regulations and real estate regulations. Many, but not
all, of the uncodified procedures and stances taken by the CMA found their way into the draft regulations.
TYPES OF FUNDS
1. There are clear distinctions between the offering and operations of private investment funds and public investment funds, with much more discretion granted to managers of private funds.
2. A public fund must have an information memorandum in the form prescribed by the CMA (previously, neither public nor private funds were required to have offering memoranda, although many did).
3. Public real estate funds will be governed by the real estate regulations while private real estate funds would be governed by the draft regulations (this is a stance the CMA had previously taken as the real estate regulations impose many costly requirements on funds which are not feasible for smaller funds).
OPERATIONS AND GOVERNANCE
1. There is no requirement for a private fund to have a fund board.
2. Fund documents must provide a policy for unit holder meetings.
3. All funds must have an independent custodian.
Point three could be a significant added cost for funds as (i) the custodian must be licensed by the CMA, (ii) the custodian must be the majority shareholder in any special purpose vehicle established and (iii) there are very few 100% Saudi-owned or 100% GCC-owned companies offering custodial services in Saudi Arabia (it is vital that the custodian vehicles not be regulated by SAGIA to improve the efficiency of the operation of the CMA fund). Therefore, custodian fees are normally higher than in other jurisdictions.
OFFERINGS OF SAUDI FUNDS
1. There are no restrictions on the nationalities of investors in funds (previously certain funds were limited to Saudi and GCC investors).
2. There is no requirement that offering documents be in Arabic.
3. There is no limit on the length of the offering period (currently one year limit).
4. There is no limit on the number of offerees for a private fund (currently a maximum 200 investors in Saudi Arabia); however, a private fund may only be offered to sophisticated investors or investors with a minimum subscription amount of 1 million Saudi riyals ($270,000).
Although the removal on the limit of the number of offerees is a welcome change, many were disappointed the CMA did not provide an exemption for sophisticated investors and high-net-worth individuals, even though such exemption was not ever realistically expected.
OFFERINGS OF FOREIGN FUNDS
1. Foreign funds may only be offered in Saudi Arabia as a private placement (to sophisticated investors or investors making an investment of at least 1 million Saudi riyals) and must be placed by a CMA licensed distributor.
2. The manager of the foreign fund must be “authorised in a jurisdiction that employs regulatory standards and requirements at least equivalent” to those of the CMA. It is unclear whether managers established in many offshore jurisdictions would meet these criteria.
3. There is a limit on the offering period of foreign funds in Saudi Arabia, but the length of this period is unclear.
4. The distributor must provide a report to the CMA of all Saudi investors that subscribed for units in the fund.
WAIT AND SEE
King & Spalding is taking a wait-and-see approach with the new CMA team and draft regulations. Although some updates to the offering of funds were welcome, the process for launching funds was clear and the CMA had the reputation as a tough, but fair and flexible, regulator. Saudi Arabia was a success story compared with the rest of the GCC and locally-domiciled funds flourished. We are hopeful the changes do not have a negative impact on the Saudi investment fund environment.
Nabil A Issa (pictured) is a partner at King & Spalding’s Dubai and affiliated Riyadh offices. Phillip Sacks is a senior associate and James Stull is an associate at King & Spalding’s Dubai office
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