Switzerland remains a very important European distribution market for the alternative fund industry. Institutional investors, as well as HNWIs, still have an appetite for hedge funds and other alternative investment vehicles, and have generally not been impacted by the recent revision of the Swiss fund regulations on the distribution of foreign funds. The purpose of this contribution is to highlight the main changes resulting from the revision of the relevant Swiss legal framework.
Revised legal framework
As a non-EU country, Switzerland was not directly impacted by the implementation of the Alternative Investment Fund Managers Directive (AIFMD). The third countries provisions of the AIFMD led Switzerland to adapt its own legal framework in order to preserve the access of Swiss-based managers to the European Union. In this context, the Swiss parliament has enacted a partial revision of the relevant Swiss fund regulations. On 1 March 2013, the revised Federal Act on Collective Investment Schemes of 23 June 2006, (CISA) and its implementing ordinance of 22 November 2006, the Collective Investment Schemes Ordinance (CISO), as amended, entered into force. On 1 October 2013, the Swiss Financial Market Supervisory Authority (FINMA) issued further guidance in relation to the interpretation of the CISA and CISO, in particular as regards the definition of the concept of distribution and the notion of qualified investors.
Notion of distribution
The revised CISA and CISO have resulted in the replacement of the long-established concept of “public offering” with that of “distribution”. Under this new concept, any offer or advertisement for funds not exclusively directed at supervised qualified investors is construed as distribution. This very broad concept includes any activity aiming at the acquisition, by an investor, of units in a fund. According to the guidance of FINMA, the offer must be a specific offer to subscribe for a fund whereas an “advertisement” refers to any type of marketing activities regarding a specific fund. Moreover, the nature of the fund (open-ended/closed-ended) and the legal form (unit trusts, contractual funds, investment companies) of the fund are irrelevant in assessing whether a fund is distributed. As in the past, the concept of “distribution” also includes indirect distribution, for instance through fund-linked structured products. Indirect distribution of funds is permissible under the same conditions as if the funds were distributed directly. It follows from the foregoing that the offer or marketing of funds to supervised qualified investors, such as banks, fund management companies, or securities dealers is not considered as distribution. Consequently, the CISA and CISO are not applicable when a hedge fund is offered/marketed exclusively to such supervised qualified investors.
Despite the very broad definition of distribution, fund distributors may rely mainly on three exemptions under which the promotion of funds does not fall within the ambit of the CISA and the CISO.
The first exemption is applicable when the distribution takes place at the sole initiative of the investors. This exemption is commonly referred to as “reverse solicitation”. We believe that it would be preferable to designate this exemption as “unsolicited request”. Its application is subject to two strict conditions: namely the investor must require information about or acquire units of a specific fund, and its request must be spontaneous, i.e., not directed by the fund distributor or a related party. This first exemption is applicable to third-party marketers, i.e., fund distributors only. In practice, the application of the unsolicited request exemption is limited, in particular if a manager/distributor wishes to market its funds actively in Switzerland. By definition, relying on the unsolicited request exemption requires a passive attitude in relation to the marketing of funds. Even in this situation, the scope of this exemption remains narrow. Typically, if one investor spontaneously contacts a manager in relation to a specific fund and obtains the requested information, the manager would not be in a position to send additional marketing material or provide the investor with further investment proposals based on this first contact. The unsolicited request will be relevant in responding to the very first request of the investor only.
The second exemption is applicable when the distribution takes place on the basis of an advisory agreement entered into on a long-term basis and for consideration by the investor with a regulated financial intermediary, suchas a bank or a fund management company, or with an independent financial adviser (IFA). The third exemption is applicable in the context of a written discretionary asset management agreement entered into by the investor with a regulated financial intermediary or with an IFA, subject to certain specific requirements. These second and third exemptions are relevant only within the context of a relationship between the investment advisor or manager and the relevant investor.
The aforementioned exemptions apply regardless of whether the investor is a qualified investor. There will therefore be no restrictions as regards the type or the strategy of funds. That being said, the investment manager/advisor is bound by the terms and conditions of the relevant advisory/investment management agreement.
There are two levels of regulatory requirements. One level relates to the fund distributor and the other relates to the fund itself. In this context, the applicable transitional regime is particularly relevant.
At the distribution level, if the distributor was already active in Switzerland prior to 1 March 2013, it is entitled to continue such activities until 28 February 2015. If such a distributor has never distributed funds in Switzerland prior to 1 March 2013, it must be appropriately authorized and supervised in its home jurisdiction before engaging in any distribution activities in Switzerland. As of 1 March 2015, fund distributors will have to be authorized and supervised to distribute funds to qualified investors in their home jurisdiction. FINMA has not made available any list of appropriate foreign authorities, but FCA or SEC supervisory regimes, which directly or indirectly cover distribution activities, should generally be considered as appropriate.
At the fund level, the funds will be required to appoint a Swiss representative and a paying agent (i.e., a Swiss bank). By 1 March 2015 at the latest, the appointment of a Swiss representative is mandatory, unless the distributor may rely on an exemption. The Swiss representative will be the point of sale for Swiss-based investors. This distributor will have to enter into a Swiss law distribution agreement with the Swiss representative. The contact details of the Swiss representative as well as the contact details of the paying agent must be included in the relevant fund documentation. It is important to note that the distribution of foreign funds to qualified investors only does not trigger any registration requirement for the fund, foreign distributor or manager.
Contrary to what the industry feared when the first draft of the CISA was published in 2012, the distribution of hedge funds on a cross-border basis to qualified investors remains possible. That being said, the Swiss parliament has decided that this liberal regime should be accompanied by certain requirements, namely the appointment of a Swiss representative and paying agent.
Today, every manager of hedge funds that wishes to be active in Switzerland must review its business model and make a definite decision, i.e., restrict distribution activities to supervised qualified investors, or pursue broader distribution activities, in particular towards HNWI. Given that the transitional period ends on 28 February 2015, it is now key that such managers choose their business model. They would also be well advised to start putting the relevant arrangements in place, such as the representative, distribution and paying agent agreements, if they choose to distribute their funds to Swiss-based institutional investors as well as HNWIs.