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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 CMAs 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:

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:

All other amendments to the SBRs and the CMIRs will have effect as of 01 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:

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 CMIs 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 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.

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Publication of the New CMIRs and Amendments to the SBRs by the CMA in Saudi Arabia - Lexology