Distribution of Foreign Collective Investment Schemes to Qualified Investors in Switzerland – An Overview

On March 1, 2013 the revised collective investment schemes act (“CISA”) and its implementing ordinance (“CISO”) entered into force which redefined the principles governing the distribution of foreign investment funds to qualified investors in Switzerland. In the meantime, the new provisions were further substantiated by the Swiss regulator as well as by industry organizations. In the following, a closer and consolidated look shall be taken at the regulatory framework applicable to the distribution of foreign collective investment schemes to qualified investors in Switzerland. 

1. Foreign Collective Investment Schemes

Article 7 (1) CISA defines collective investment schemes (“CIS”) as “assets raised from investors for the purpose of collective investment and which are managed for the account of such investors”. They may be organized as open- or as closed-end structures.

Article 119 CISA states that a collective investment scheme is deemed to be “foreign” if both, its registered office and its administrative center, are located outside of Switzerland. Whereas the place of the registered office by virtue to its formal connection to a jurisdiction is generally simple to determine, locating the administrative center may be more challenging. Article 42 CISO lists those activities management companies of CIS must fulfil in order to be qualified as Swiss. Hence, CIS are considered foreign if all such activities are carried out outside of Switzerland. If, therefore, the investment vehicle is at least partially ultimately governed out of Switzerland, if major decisions concerning the investment vehicle or its investment policy are taken here or if certain administrative key functions such as book keeping or NAV calculations are carried out in Switzerland, the fund might be regarded as Swiss, despite being registered abroad.

As a consequence, the fund management company or the investment vehicle itself would have to be licensed by the Swiss Financial Market Supervisory Authority (“FINMA”) and fully comply with the respective provisions of the CISA. Otherwise, foreign funds are only subject to Swiss supervision if they are distributed in or from Switzerland. The determination of a collective investment scheme being Swiss or foreign is thus of utmost importance and it is advisable to carefully analyze those foreign set-ups with ties to Switzerland.

2. Distribution of Foreign Collective Investment Schemes in Switzerland

2.1 General Rule

Generally, every offering of and every marketing for CIS in or out of Switzerland is considered distribution within the law (article 3 (1) CISA and article 3 (1) CISO). As outlined by FINMA in its Circular 2013 / 09 on Distribution of Collective Investment Schemes (the “FINMA Distribution Circular”) all activities aiming at the sale of CIS units are deemed offering or marketing.

2.2 Distribution Exemptions

This above mentioned principle is broken by various exceptions contained in article 3 (1) and (2) CISA.

a) Distribution to Regulated Institutions

Most notably, marketing activities directed either at financial institutions that are prudentially supervised pursuant to article 10 (3) (a) CISA), i.e. banks, securities dealers, fund management companies, asset managers of collective investment schemes and central banks, (“Regulated Financial Institutions”) or at insurance companies according to article 10 (3) (b) CISA (“Regulated Insurers”) are not deemed distribution in the sense of the law. Accordingly, private placements of foreign CIS into Switzerland which are outside the scope of the Swiss regulator are still possible.

b) Distribution in the Context of Asset Management and Investment Advisory Agreements

A Regulated Financial Institution that acquires units of CIS on behalf of its clients based on written discretionary asset management agreements does not distribute investment funds in the sense of the law (article 3 (2) (b) CISA). Pursuant to article 3 (2) (c) CISA, the same exemption applies to independent asset managers fulfilling the following criteria (hereinafter “Eligible IAM”):

• the asset manager is a financial intermediary in the sense of and therefore subject to the Swiss anti-money laundering act;
• the asset manager adheres to the code of conduct applied by an industry body which is acknowledged by FINMA as minimum industry standard; and
• the asset manager employs written discretionary asset management agreements that comply with such industry body’s FINMA recognized standards.

Further, investment advice for the purchase of CIS units is neither considered distribution if the advice is rendered by a Regulated Institution or an Eligible IAM based on written agreements entered into with a long term perspective and for valuable consideration (article 3 (2) (a) CISA and article 3 (2) and (3) CISO).

For the avoidance of doubt, please note that marketing towards asset managers or investment advisers to motivate them to place CIS units with their discretionary asset management or advisory clients is considered distribution unless such addressee is a Regulated Financial Institution or Regulated Insurer (pls. also see section 3. c) below).

c) Reverse Solicitation

If units of CIS are sold or respective information is made available at the instance or initiative of an investor, the distribution provisions of the CISA do not apply (articles 3 (2) (a) CISA and article 3 (2) CISO).

The Guidelines on the Distribution of Collective Investment Schemes of the Swiss Funds & Asset Management Association SFAMA of May 22, 2014 (the “SFAMA Distribution Guidelines” which were recognized by FINMA as minimum standards for the funds industry suggest that reverse solicitation will only be assumed if the information request of an investor relates to specific products rather than to product lines. As long as there is no further ascertainment by either SFAMA of FINMA, it is recommended not to stretch the concept of reverse solicitation and not to rely on reverse solicitation as marketing approach for the placement of foreign CIS in Switzerland.

Note that SFAMA requires that the fund provider or distributor appropriately record the contact by the investor (SFMA Distribution Guidelines, Appendix, n. 21).

d) Further Exemptions

The publication of prices, net asset values and tax data by Regulated Financial Institutions as well as the offering of incentive compensation programs to employees by way of CIS are neither considered distribution of collective investment schemes in the sense of the law (article 3 (2) (d) and (e) CISA).

3. Distribution of Foreign CIS to Qualified Investors (other than Regulated Financial Institutions / Regulated Insurers)

If distribution of foreign collective investment schemes under Swiss law is assumed, the regulatory consequences heavily depend on whether the fund units are offered to qualified or to non-qualified investors. In particular, no prior approval of the documentation of the CIS by FINMA is required if distribution occurs to qualified investors only. Distribution to qualified investors is assumed in the following instances:

a) Distribution to Organizations with Professional Treasury Operations

Companies, public entities and retirement benefits institutions each of which maintaining professional treasury operations are qualified investors (article 10 (3) (c) and (d) CISA). According to FINMA practice, a professional treasury operation is assumed if at least one person is charged with the management of the financial resources of the Company on a continuous basis.

b) Distribution to High Net-Worth Individuals

High net-worth individuals (“HNWI”) declaring in writing that they want to be treated as qualified investors (“opting-out”) are considered qualified investors (article 10 (3bis) CISA). A HNWI must hold assets of at least CHF 5’000’000 (article 6 (1) (b) CISO). This high financial threshold is reduced to CHF 500’000 if an individual can prove that she due to her personal education and professional or comparable experience in the financial sector is sufficiently knowledgeable to understand the risks inherent to the investment (article 6 (1) (a) CISO). The recently revised article 6a CISO makes it clear that HNWI may also invest via their private investment vehicles.

c) Distribution to Asset Managers and Investment Advisers

(i) Asset Mangers

Marketing of foreign CIS towards asset mangers or investment advisers which do not qualify as Regulated Financial Institutions is deemed distribution in the sense of the CISA (cf. section 2.2. b) above).

According to notes 19 and 20 of the FINMA Distribution Circular, distribution of foreign CIS towards Qualified IAM is considered distribution to qualified investors if the asset manager confirms in writing that it will use the information provided to it only for its qualified investors. Clients of Qualified IAM are automatically deemed qualified investors in the sense of the law unless they declare that they want to be treated as non-qualified investors, i.e. opt for higher investor protection in accordance with article 10 (3ter) CISA (“opting-in”).

Absent the advance written declaration by the Qualified IAM that it will use the information provided to it only for its qualified investors, marketing activities towards Qualified IAM are considered distribution to non-qualified investors which would require a foreign CIS to be approved by FINMA in accordance with article 120 CISA. The same holds true if distribution activities are directed at a client (not being itself a qualified investor pursuant to article 10 CISA) of an Eligible IAM without the inclusion of the asset manager (FINMA Distribution Guideline, n. 20). Likewise, distribution of CIS to an asset manager not qualifying as an Eligible IAM is treated as distribution to non-qualified investors.

(ii) Investment Advisers

Unfortunately, the FINMA Distribution Circular does not address the question how distribution activities towards investment advisers shall be treated. Investment advisers are not per se qualified investors pursuant article 10 CISA. This means that foreign funds not approved by FINMA for distribution in Switzerland may not be marketed to investment advisers that do not otherwise fulfill the criteria of a qualified investor pursuant to article 10 (3) CISA (Regulated Financial Institution, entity with professional treasury operation, etc.). This even applies if their investment advice to their clients is – subject to the requirements described in the section 2.2. b) above – not considered distribution under the CISA at all. Although there might be workarounds on a case by case basis, this is a highly unsatisfactory situation which could be resolved by FINMA applying the same look-through approach as expressed for Qualified IAM in notes 19 and 20 of the FINMA Distribution Circular. We have, however, no indication that this is the case.

4. Consequences of Distribution of Foreign CIS to Qualified Investors in Switzerland

Marketing of foreign CIS to Regulated Financial Institutions and Regulated Insurers is not considered distribution at all. As pointed out by SFAMA, distribution of foreign collective investment schemes out of Switzerland to foreign investors abroad only does not seem to be covered by the CISA’s scope. Marketing of foreign CIS to Swiss domiciled qualified investors (other than Regulated Financial Institutions / Regulated Insurers) triggers the following consequences, though:

(i) The foreign CIS needs to appoint a representative and a paying agent in Switzerland (article 120 (4) CISA).

(ii) The distributor of the foreign CIS needs a distribution license issued by FINMA (13 (1) CISA) or must be appropriately supervised by its home regulator abroad (article 19 (1bis) CISA).

(iii) The distributor and the Swiss representative must enter into a distribution agreement meeting certain minimum standards (Art. 131a para. 1 and 30a CISO). SFAMA prepared templates providing guidelines as regards the content of such contracts.

(iv) The prospectus of the foreign CIS must contain certain information for investors in Switzerland, including information on distribution fees (“retrocessions”) and rebates paid to investors (SFAMA prepared a respective model prospectus appendix).

(v) As outlined above, no approval of the foreign CIS and its documentation, respectively, is required in case the fund is only marketed to Swiss qualified investors.

The Swiss Private Equity and Corporate Finance Association SECA  as well as SFAMA published Q+As relating to the regulatory requirements applying to distribution of foreign CIS in Switzerland. Most notably, both organizations come to the conclusion that open-end structures may cancel the appointments of the Swiss representative and of the Swiss paying agent if marketing in Switzerland is discontinued; closed-end structures having Swiss investors must maintain a Swiss representative and a Swiss paying agent until the fund’s liquidation. Further, the distribution agreement between the representative and the distributor may be terminated in case distribution activities in Switzerland are stopped.

5. Outlook

In November 2015 the Federal Council issued two draft bills which will have a substantial impact on the Swiss financial industry: the Financial Services Act and the Financial Institutions Act. These bills will also influence the regime governing the distribution of foreign collective investment schemes, notably as follows: firstly, distributors of collective investment schemes who do not provide other financial services for which a license is necessary will not be subject to a license requirement anymore. Secondly, under the new laws a foreign CIS will only need to appoint a representative and a paying agent in Switzerland if the units will be distributed to non-qualified investors or to HNWI (even if such HNWI declared that they want to be treated as qualified investors). Distribution to all other types of qualified investors will neither require the appointment of a Swiss representative nor of a Swiss paying agent.

Swiss Parliament will start its debate on the Financial Services Act and the Financial Institutions Act this year and we do not expect the new laws to enter into force prior to 2018.

6. Conclusion

Distribution of foreign CIS to qualified investors in Switzerland is densely regulated. Although the distribution requirements were tightened in the course of the revision of the Collective Investment Schemes Act in 2013, there is still some scope to avoid regulation or limit the regulatory burden. For that purpose, a fundamental knowledge of the relevant legal requirements, FINMA’s practice and the pertinent self-regulatory bodies’ guidelines is necessary. We are happy to support you in building it up.