In brief

Following a public consultation period which commenced in December 2019, on 25 August 2020, the Capital Markets Authority (CMA) of Saudi Arabia announced that it had issued amendments to the Securities Business Regulations (SBRs) and the Authorised Persons Regulations (APRs). The ‘new APRs’ are now known as the ‘Capital Market Institutions Regulations’ (CMIRs), following the terminology change from ‘Authorised Persons’ (APs) to ‘Capital Market Institutions’ (CMIs).

These amendments represent the first comprehensive revision to the APRs and SBRs for some time and the first amendment to the SBRs since its issuance in June 2005 (the last update to the APRs occurred in September 2017).

To allow sufficient time for CMIs to comply with the more significant amendments, the CMA has implemented a phased approach whereby the changes will come into effect in two stages, the first of which will be on 1 November 2020 (15/3/1442H) (as announced by the CMA), with the second phase coming into effect on 1 January 2022 (28/5/1443H). A summary of those changes which become effective on 1 January 2022 is also set out below.

As a result, unusually, both the ‘current SBRs’ and ‘current APRs’ as well as the ‘new SBRs’ and the ‘new APRs’ (i.e. the CMIRs) are published on the CMA’s website. Accordingly, where a provision is subject to a phased approach, the current position will remain as per the current SBRs or APRs until 1 January 2022.

In summary, the key changes include the following:

  • changes to scope of ‘Securities Activities’, types of authorisations and minimum capital requirements;
  • development of requirements for CMA authorisations to carry on ‘Securities Business’;
  • the introduction of a new client classification regime;
  • the narrowing of the ‘Securities Advertisement Exemption’ to exclude Investment Institutions;
  • the requirement for all CMIs to have adequate indemnity insurance based on the nature, scale and complexity of its business;
  • codifying the corporate governance requirements which are set out in the CMA’s circular published in 2018;
  • more robust suitability and risk assessment requirements; and
  • new notification, disclosure and reporting requirements.

Transition phases

As mentioned above, in order to enable existing CMIs to implement the required changes under the amendments, the CMA has introduced a two-phased approach. As such, the following amended provisions will be effective as of 1 January 2022:

  • Article 2, SBRs (Scope of Securities Activities)
  • Article 31, CMIRs (Liability of Capital Market Institution)
  • Article 36, CMIRs (Client Classification)
  • Article 38, CMIRs (Terms of Business with Clients), as well as Annex 5.2
  • Article 39, CMIRs (Know Your Client), as well as Annexures 5.3(A) and 5.3(B)
  • Article 42, CMIRs (Understanding Risk)
  • Article 43, CMIRs (Suitability)
  • Article 45, CMIRs (Margin Requirements)
  • Article 50, CMIRs (Employees’ Personal Dealings)
  • Article 51, CMIRs (Recording Telephone Calls)
  • Article 59, CMIRs (Outsourcing)

All other amendments to the SBRs and the CMIRs will have effect as of 1 November 2022.


In detail

Changes to the scope of ‘Securities Activities’, types of authorisations and minimum capital requirements

A number of amendments to the scope of authorisations and minimum capital requirements for each of the five categories of ‘Securities Activities’ have been made which will come into effect on 1 January 2022, as part of the phased approach.

Of the changes, perhaps the most significant is the expansion of the ‘Advising’ activity to include “financial planning or wealth management” and the reduction in the minimum capital requirement for a ‘Managing’ license where activities are limited to making investment decisions for ‘non-real estate investment funds’ (but not operating these funds) or discretionary management of client portfolios.

Change to client classification and potential implications

One of the most significant changes reflected in the new CMIRs, with perhaps some of the most far reaching practical implications, is the change to the client classification which will take effect on 1 January 2022.

Under the CMIRs, from 1 January 2022, clients must be classified as either:

  • a retail client – any client who is not a qualified client or an institutional client;
     
  • a qualified client – includes a natural person who is a ‘professional investor’ (as per the current CMA definition), legal persons with net assets of between SAR 10 and 50 million or any person (natural or legal) which is a client of a CMI who is managing the person’s investments on a discretionary basis (provided the offer is made to the CMI); or
     
  • an institutional client – defined as the Government of Saudi Arabia, any recognised supranational authority (recognized by the CMA), Government-owned companies (whether as direct clients or through a portfolio managed by a CMI), legal persons with net assets of more than SAR 50 million, investment funds and ‘Counterparties’, which is defined to include ‘Capital Market Institution’, Exempt Person, a local SAMA-regulated bank, a SAMA-regulated insurance company, a Qualified Foreign Investor (QFI), or a non-Saudi financial services firm.

Under the changes, with a few exceptions, all requirements which were previously limited in application to clients classified as ‘customers’ are now applicable, or will become applicable from 1 January 2022 to all clients regardless of classification.

The above changes to client classification and the consequential changes to other provisions will have far reaching consequences for CMIs. In particular, the re-classification of all clients in accordance with the new regime could be administratively burdensome for CMIs with large client bases. Moreover, CMIs whose client base has historically been limited to ‘Counterparties’ will likely have to develop new processes, procedures and documentation to apply the requirements (previously only applicable to ‘customers’) to their clients.

However, as noted above, existing CMA licensees have until 1 January 2022 to implement these processes and become compliant with the amended provisions.

Narrowing the ‘Securities Advertisement Exemptions

A significant development is the amendment to Article 20(4) of the SBRs, often referred to as the ‘Securities Advertisement Exemption’. Previously, this provision excluded ‘Securities Advertisements’ from needing to either be made or approved by a CMI when directed only at other CMIs, Exempt Persons or Investment Institutions. The amendments have removed Investment Institutions from this exemption and, consequently, those relying on the previous provision to market to family offices, corporates and even large corporate subsidiaries of governmental entities on a cross-border basis, will potentially be affected.

Codifying corporate governance requirements applicable to CMIs

New provisions in Article 53 and Annex 6.1 of the CMIRs have been added (not previously included in the draft CMIRs circulated in December 2019) which codify the governance requirements set out in CMA Circular No. S/3/6/6970/18 dated 31 October 2018.

These include provisions addressing: (i) the inclusion of independent directors on the CMI’s board; (ii) an obligation on the board to establish a corporate governance framework infrastructure; (iii) the issuance and content of an annual report; and (iv) controls in cases where the CMI is a subsidiary of a local bank.

Article 53 clarifies that the requirements above do not apply to CMIs which are limited liability companies or whose authorisation type is limited to managing investments, arranging or advising.

These are just a sample of some of the recent amendments. We have put together a full client briefing note which analyzes the changes outlined in this client alert, as well as a wide range of other significant amendments, in greater detail.

Please contact Robert Eastwood (Partner) and Samir Safar-Aly (Senior Associate) if you would like to receive a copy of our more detailed briefing note.

Author

Robert Eastwood is a Corporate partner of Legal Advisors, Abdulaziz I. Al-Ajlan & Partners In Association with Baker McKenzie Limited, based in Riyadh. He specialises in initial public offerings and private placements and regularly advises international and local banks and financial institutions on cross border securities business, brokerage, custody, licensing and establishing business presences.

Author

Omar Iqbal has over 11 years of experience in advising on Saudi Arabian corporate and commercial legal matters involving Saudi and foreign clients, with a focus on cross-border and domestic acquisitions, divestitures, joint ventures, private equity, corporate reorganizations, securities and capital market transactions. Omar has spent time in Chicago with the Firms' Private Equity Team working on cross Atlantic deals and is also part of the Firms' Global Private Equity Group.

Author

Samir Safar-Aly is an English-qualified senior associate in Baker McKenzie's DIFC office in the UAE, focusing on financial crime and financial regulation for the wider MENA region from both an advisory and investigations perspective. Samir's expertise includes UAE, Saudi and wider international anti-money laundering (AML) and counter-terrorist financing (CTF) rules, anti-bribery and corruption laws (covering the GCC, UK and U.S.) and other areas of white-collar and financial crime. He also advises governments in Africa and Asia on public policy and legal and regulatory reform. Samir has particular expertise in financial and economic sanctions and regularly provides guidance on UN, U.S. (OFAC), UK, EU and GCC sanctions regimes and export-control issues across a wide range of sectors. With regards to financial regulation, Samir covers the GCC and wider Middle East and provides guidance on the cross-border marketing of financial services and products, conduct issues and license applications. He regularly advises the world's leading financial institutions, asset managers, as well as FinTech start-ups.

Author

Razan Hassan worked at Legal Advisors Abdulaziz Alajlan & Partners as a Co-op in 2016 and then re-joined in 2019. Razan advises both Saudi Arabian and foreign clients on a wide range of corporate and commercial transactions and general corporate matters, and advisory work including public M&A and capital markets transactions.

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