Distribution of foreign collective investment schemes to qualified investors in Switzerland

by OpenFunds

400On 1 March 2015, the transitional period for distributors and foreign funds distributed in Switzerland to become compliant with new regulation expired.

Participants are working out how best to navigate and adapt to the new distribution regulatory framework. OpenFunds thoughts it would help by putting together a Q&A covering the most-asked questions about regulatory framework and bodies.

1- Does the AIFM Directive apply to Switzerland?

No, Switzerland is not part of the European Union and has enacted its own legislation. The aim of the Swiss legislation is to ensure compatibility with the European directive 2011/61/EU on Alternative Investment Fund Managers (AIFM Directive).

2- What are the key regulations, rules, circulars and guidelines that govern distribution in Switzerland?

1. The Collective Investment Schemes Act (CISA): CISA regulates both open-ended and closed-ended funds, regardless of whether they are aimed at retail or non-retail investors or of local or foreign origin.
2. The Collective Investment Schemes Ordinance (CISO) and the Ordinance of the Swiss FinancialMarket Supervisory Authority (FINMA) on Collective Investment Schemes (CISO‐FINMA): CISO and CISO‐FINMA state the fundamental principles that regulate the investment in collective investment schemes set out in CISA.
3. FINMA Circular 2013/9: Circular 2013/9 describes the distribution of fund units under the Collective Investment Scheme legislation, focusing on the circumscription of distribution and clarifying which activities constitute an act of distribution.
4. SFAMA’s Guidelines on the Distribution of Collective Investment Schemes – May 2014:
The Guidelines form part of the self-regulation regime of the Swiss fund industry and apply to collective investment schemes distributed in Switzerland. (http://open-funds.ch/index.php/representative-services/links-to-documents).

3- Which funds fall under the revised/new regulations, rules, circulars and guidelines?

The revised Swiss Collective Investment Schemes Regulations as well as the FINMA Circular 2013/9 and SFAMA’s Guidelines on the Distribution of Collective Investment Schemes establish a new concept for distribution. The old law only regulated the distribution of collective investment schemes to the wider public, i.e. retail investors, but the revised CISA regulates all forms of distribution, whether public or non-retail. The previous concept of “public advertising” has been replaced by the more encompassing term “distribution”. This has brought hedge funds, private equity funds and other alternative investment funds within the scope of the revised rules, obliging them to comply with the rules in order to continue doing “business as usual” with Swiss-based investors.

4- Are all Swiss-based investors considered to be the same when it comes to distribution?

No. The CISA recognizes three levels of distribution, each of them with different legal implications.
Level 1: Distribution to regulated qualified investors, i.e. private placement Placement activities do not qualify as distribution in terms of the CISA and are therefore not subject to the CISA regulations. In other words, for regulated qualified investors the private placement regime still applies. Regulated qualified investors are financial institutions such as banks, securities dealers, fund management companies, asset managers of collective investment schemes, the central bank and regulated insurance institutions ((Article 10 para. 3 lit. a and b CISA).
Level 2: Distribution to non-regulated qualified investors Non-regulated qualified investors are: a. public entities and retirement benefit institutions with professional treasury operations (Article 10 para. 3 lit. c CISA); b. companies with professional treasury operations (Article 10 para. 3 lit. d CISA); c. HNWI (with more than CHF 5 million or CHF 500k and experience within the financial sector) who decide to opt-in independently and because of their status (Article 10 para. 3bis CISA); d. non-FINMA regulated independent asset managers/family offices that are subject to the Money Laundering Act and are either governed by a code of conduct for a specific industry body or that have a discretionary management agreement in place that complies with the recognized standards of a specific industry body.
Level 3: Distribution to non-qualified investors, i.e. retail investors.

5- Do funds distributed exclusively to qualified investors have to be authorised or licensed by FINMA?

Foreign funds do not have to be registered or approved by FINMA provided they are distributed exclusively to qualified investors. In order to comply with the Swiss rules, foreign funds distributed exclusively to qualified investors foreign funds must:
•Appoint a Swiss representative and a Swiss paying agent
•Have fund documentation with notes on distribution in Switzerland
•Conclude a distribution agreement between the representative and the respective distributor in accordance with Swiss law.

6- What are the roles of the Swiss representative and Swiss paying agent?

Swiss representative: The Swiss representative is responsible for ensuring distribution activities comply with Swiss law.
The representative is a regulated, FINMA licensed entity, and must ensure a smooth flow of information between the fund and Swiss investors and FINMA. The representative is also responsible for ensuring distributors comply with Swiss law. As well as representing the fund / fund management company on all matters vis-à-vis qualified investors and FINMA, the Swiss representative must inform the fund / fund management company about all communications and notifications from the Swiss authorities and courts. It must do the same in relation to communications and notifications from shareholders in the fund it represents.
Swiss paying agent: The paying agent’s main role is to receive investors’ subscriptions and distribute any payments due to investors if requested by the Swiss investor.
The Swiss paying agent is intended to provide a certain level of assurance to investors, since the Swiss bank can be seen as a “local” counterparty which is obliged – if requested by the Swiss investor – to ensure that the payments related to the subscription, conversion and redemption of shares, dividend distribution, liquidation, and any other fund related payments are properly performed.
The agreement between a Swiss paying agent and a fund / fund management company is only legally binding within the territory of Switzerland. Therefore all fund documents can only refer to the Swiss paying agent as being the paying agent in Switzerland.

See also Switzerland: distribution of foreign collective investment schemes to qualified investors (part 1)


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