I OVERVIEW OF RECENT ACTIVITY
With its long tradition of banking and finance, Switzerland is one of the leaders at the international level in the asset management industry. Swiss asset management constitutes one of the main pillars of the Swiss financial centre.
The asset management industry in Switzerland is heterogeneous and applies different business models. Large banking institutions active in wealth management (private banking) coexist with a number of smaller niche players. Independent asset managers represent the lion’s share of the para-banking sector within the Swiss financial industry, with a limited level of regulatory oversight for the time being (see Section V.i, infra, on the future regulatory developments in this respect). In recent years, a number of alternative asset managers have decided to relocate to Switzerland.
Current challenges to the asset management industry in Switzerland include a wave of new regulatory activity spurred by the 2008 financial crisis and the regulatory developments occurring at the EU level. The Swiss legal and regulatory framework is being adjusted on an ongoing basis to ensure its euro-compatibility to keep it in line with international standards and to enhance the protection granted to investors.
II GENERAL INTRODUCTION TO the REGULATORY FRAMEWORK
Switzerland does not have a comprehensive licence for all financial services providers. Certain financial activities do require licences, whereas others can be conducted on a largely unregulated basis. The following financial services providers are subject to prior licensing and ongoing prudential supervision by the Swiss Financial Market Supervisory Authority (FINMA): banks, insurance companies, securities dealers, fund distributors, fund administration companies and managers of collective investment schemes (CISs). Switzerland is not a Member State of the EU; therefore, EU rules and regulations do not apply directly to financial services activities conducted in Switzerland.
With the exception of general rules that apply to all asset managers in Switzerland (see Section II.i, infra), the conduct of asset management activities is subject to specific regulations only where such services are rendered in connection with a CIS (see Section II.ii, infra) or involve the trading of securities (see Section II.iii, infra) or the management of Swiss pension funds assets (see Section II.iv, infra). In light of its practical relevance, we further set out an overview of the rules applicable to the distribution, in or from Switzerland, of interests in a non-Swiss CIS (see Section II.v, infra).
i Regulation of asset management in general
Direct regulation under the Swiss Anti-Money Laundering Act (AMLA)
Contrary to the situation prevailing in a number of other jurisdictions, asset management activities are not, as a matter of principle, subject to prudential supervision in Switzerland unless these activities are conducted in connection with a Swiss or non-Swiss CIS (see Section II.ii, infra), the asset manager is characterised as a securities dealer (see Section II.iii, infra) or he or she manages assets of Swiss pension funds (see Section II.iv, infra).
That said, asset managers will in all instances qualify as financial intermediaries within the meaning of Article 2(3) of AMLA and, as such, be subject to the Swiss regulations against money laundering, which are based on the standards adopted by the Financial Action Task Force on Money Laundering (FATF). In particular, AMLA requires that the relevant financial intermediary registers with, and is subject to the supervision of a self-regulatory body recognised by FINMA or is supervised by FINMA directly (Article 12(c) AMLA).
The duties imposed upon the financial intermediary under AMLA are essentially know-your-customer rules and procedures, as well as certain organisational requirements (e.g., internal controls, documentation and continuing education) (Article 3 et seq. AMLA). In addition, financial intermediaries are required to report to the regulatory body the business relationship in the event of suspicion of criminal activity. Such reporting duty presupposes that the financial intermediary is aware of, or has reasonable suspicion, as regards the criminal origin of the assets involved (Articles 9 and 10 AMLA). In this context, the regulatory body is also entitled to request information from third-party financial intermediaries that appear to be involved in the transaction or business relationship that triggered the reporting by another financial intermediary.
Further, since 1 January 2016 and as per the revised AMLA implementing the revised FATF recommendations, financial intermediaries must implement a two-step process after the reporting of suspicions to the regulatory body. First, they have to monitor the account in question for a period of up to 20 days during the analysis of the case by the regulatory body (so as to suspend any transaction that may result in preventing the confiscation of the concerned assets). As a second step, if the case is assigned to a criminal prosecution authority, the financial intermediaries have to implement a full freeze on the account for up to five days until a decision to maintain the freeze is made by the criminal authority. An immediate freezing of assets is, however, required for assets connected to persons the details of whom were transmitted to the financial intermediary by FINMA, the Federal Gaming Board or a self-regulatory organisation due to a suspicion of being involved with or supporting terroristic activities. It is worth noting that financial intermediaries may incur criminal liability, should they fail to comply with these duties.
Indirect regulation under FINMA Circular 01/2009
Furthermore, FINMA has defined certain requirements (outlined in the FINMA Circular 01/2009) that asset managers are required to comply with in order for such managers and their clients to benefit from certain exemptions under the Collective Investment Schemes Act (CISA) (see Section II.v, infra). The duty to enforce the provisions of FINMA Circular 01/2009 lies with the self-regulatory bodies, which are in turn supervised by FINMA. As a result, it is generally considered that asset managers are only indirectly regulated in Switzerland.
Inter alia, FINMA Circular 01/2009 imposes on asset managers certain duties of care, loyalty and information in relation to their clients, as well as a duty to comply with a fit and proper test. In addition, FINMA Circular 01/2009 provides for a requirement to specify in the asset management agreement entered into with clients the terms of the remuneration of the asset manager.2
FINMA Circular 01/2009 also regulates the third-party inducements (retrocessions) that may be received by asset managers. From a Swiss law perspective, the term retrocessions generally refers to certain forms of fee payments agreed upon between financial intermediaries (e.g., banks, securities dealers, asset managers). Typically, in the field of private wealth management, a custodian bank may pay certain retrocessions to an external asset manager who manages client assets deposited with the custodian bank. In a decision rendered on 30 October 2012,3 the Swiss Supreme Court ruled that the distribution fees that the promoter of a financial product pays to the distributor could be characterised as retrocessions, and therefore be subject to the legal regime set out below (for the same topic within the context of the distribution of CISs, see Section II.v, ‘SFAMA guidelines on distribution and transparency’, infra).
In a landmark decision rendered on 22 March 20064 (confirmed in subsequent decisions), the Swiss Supreme Court held that retrocessions are subject to a statutory restitution duty and are, as a matter of principle, payable to the client of the receiving financial intermediary. Nonetheless, according to the Court, an arrangement whereby the client agrees that a financial intermediary may retain retrocessions received from third parties is valid, provided the client was duly informed of the existence and calculation formula of such retrocessions, and the client expressly waived his or her statutory restitution claim.
As a result of this case law, a Swiss financial intermediary (such as an asset manager) intending to retain retrocessions received from third parties should ensure that the contractual documentation governing its client relationships meets the requirements set forth by the Swiss Supreme Court.
In this context, the level of information (ex ante disclosure) that needs to be provided to clients is set forth in FINMA Circular 01/2009 and in the guidelines of the relevant professional organisations. Asset managers must typically advise their customers of any conflicts of interest that might arise as a result of accepting third-party inducements. According to the FINMA Circular 01/2009, they are to inform their clients of the calculation parameters, as well as of the spread of inducements they receive or might receive from third parties. In doing so, the information provided must differentiate between various product classes, insofar as this is possible. Upon a client’s request, asset managers must also disclose the amount of any third-party inducements already received by them (ex post reporting). The FINMA Circular 01/2009 further requires that asset managers establish a client risk profile to cover the client’s experience and knowledge in the financial field, risk appetite (subjective criteria) and risk capacity (objective criteria); and cover in their asset management mandate the investment objectives of the client based on this risk profile. These amendments were essentially triggered by the 30 October 2012 decision as well as the CISA revision in March 2013 (see Section V.i, infra).
ii Regulation of CIS managers
In the wake of the adoption of the EU Alternative Investment Fund Managers Directive (AIFMD), the CISA has been amended to ensure the euro-compatibility of the Swiss regulatory framework. One of the purposes of the CISA revision was to ensure that Swiss asset managers are in a position to continue to manage the assets of CISs that fall within the ambit of the AIFMD. Pursuant to the CISA, asset managers of both Swiss and non-Swiss CISs must obtain a licence from FINMA.
That said, the CISA contains a de minimis rule, according to which asset managers of non-Swiss CISs whose investors are qualified investors (as defined in the CISA; see Section II.v, infra) are not regulated if they satisfy one of the following requirements:
- a the assets under management, including those resulting from the use of leverage, do not exceed 100 million Swiss francs;
- b the assets under management do not exceed 500 million Swiss francs, and the CISs are unleveraged and closed-ended for a five-year period (irrespective of whether the CIS are invested in target funds or other investments); or
- c the investors are exclusively group companies.
According to the FINMA Ordinance on Collective Investment Schemes, assets whose management is entrusted to third-party managers are to be included in the calculation of the above thresholds. The value of the assets under management is also to be determined for each collective investment scheme in light of the valuation rules provided in the legislation of the home jurisdiction of the CIS.
An asset manager of a non-Swiss CIS that is exempt under the de minimis rule may, however, opt in and apply for a FINMA licence, provided that its registered office is in Switzerland, and Swiss law or the applicable foreign law requires such regulated status for the management of the assets of the CIS.
One important novelty triggered by the 2013 revision of the CISA is the possibility for a non-Swiss asset manager to operate in Switzerland as a branch for both Swiss and non-Swiss CISs. The authorisation of a branch is, however, subject to the following cumulative requirements:
- a the non-Swiss asset manager is subject to adequate supervision by its home regulator;
- b the non-Swiss asset manager has adequate organisation, sufficient financial resources, as well as competent staff to operate a branch in Switzerland; and
- c a specific cooperation agreement is in place between FINMA and the non-Swiss asset manager’s home regulator.5
Further, in December 2012, FINMA announced that it had reached an agreement in principle with the European Securities and Markets Authority (ESMA), acting on behalf of the national supervisory authorities of the EU Member States, as regards a model cooperation agreement. In July 2013, FINMA announced that this agreement with ESMA is to be supplemented by bilateral agreements with each national supervisory authority in the EU and in the European Economic Area. These bilateral agreements entered into force on 22 July 2013. Cooperation includes the exchange of information, cross-border on-site visits and mutual assistance in the enforcement of the respective supervisory laws, namely the AIFMD and the CISA, and covers the activities of Swiss alternative investment fund managers who distribute or manage alternative investment funds in the EU, as well as the European alternative investment fund managers who manage them or distribute them in Switzerland to qualified investors (as defined in the CISA; see Section II.v, infra). It is also worth noting that in July 2015, ESMA published initially positive advice to the EU authorities on the extension of the marketing passport under the AIFMD to Switzerland (as a third country). In its communication of 18 July 2016, ESMA confirmed its position as regards Switzerland considering that there are no significant obstacles under Swiss law that would impede the application of the AIFMD passport as regards Swiss funds managers. ESMA’s advice will now be reviewed by the European Commission, Parliament and Council, which are to make a decision on a political level as to such extension. For the time being, Swiss-based alternative investment fund managers are to rely on the national private placements regimes in each EU country for the purposes of their marketing activities.
As a consequence of the above-mentioned AMLA revision (see Section II.i, supra), in June 2015, FINMA also revised its Ordinance on Money Laundering (AMLO-FINMA). According to the revised AMLO-FINMA, which entered into force on 1 January 2016, asset managers of foreign CISs benefit from a certain relaxation of their due diligence requirements. Thus, the identification of the subscriber and the beneficial owner is required in the event that the foreign CIS or its investment management company are subject to adequate supervision in terms of AMLA and counter-terrorist financing, and the amount invested by the subscriber does not exceed 25,000 Swiss francs.
iii Regulation of professional securities trading
Depending upon the structure of their activities and of their client relationships, certain Swiss asset managers could fall within the ambit of the Swiss regulatory framework governing securities traders.
Professional trading in securities as a principal (either for own account or on behalf of clients) is, subject to certain exceptions, a regulated activity under the Swiss Federal Act on Stock Exchanges and Securities Trading (SESTA). The concept of a securities dealer is defined in Article 2(d) SESTA as any person or entity who:
[…] purchases and sells securities in a professional capacity on the secondary market, either for its own account with the intent of reselling them within a short period of time or for the account of third parties, or makes public offers of securities to the public on the primary market, or creates derivatives and offers them to the public.
The Swiss regulatory definition of securities dealer covers five types of trading activities, which are detailed in Article 3 of the Swiss Federal Ordinance on Stock Exchanges and Securities Trading and may be summarised as follows:
- a trading in securities as a principal on a short-term basis (own-account dealer);
- b underwriting and public offering on the primary market of securities issued by third parties (issuing house);
- c issuance and public offering on the primary market of derivatives as a principal or as an agent (derivative supplier);
- d trading in securities as a principal on a short-term basis, and offering sale or purchase prices in certain securities either permanently or upon request (market maker); and
- e trading in securities as an agent for clients, and either holding accounts for the clients or holding securities in safe custody for the account of clients, either directly or with third parties (securities dealer operating for the account of clients).
Swiss securities dealers are subject to FINMA supervision, and are required to comply with organisational, conduct of business and prudential requirements broadly comparable with those applicable to Swiss banks. As a rule, asset managers or investment advisers that manage the assets of third parties on the basis of powers of attorney (i.e., who are acting as agent) are not characterised as securities dealers for the purpose of the SESTA and are, as things stand, only regulated under AMLA (see Section II.i, supra).
iv Regulation of Swiss pension fund asset managers
Since 1 January 2014, Swiss pension funds may only appoint as external asset managers financial intermediaries that are subject to official supervision in Switzerland (or abroad). Regulated financial intermediaries such as banks and securities dealers may act as asset managers of Swiss pension funds without being subject to further licensing requirements. By contrast, unregulated asset managers (i.e., independent asset managers) that intend to manage assets of Swiss pension funds are to apply for a licence with the Swiss Supervisory Commission for Pension Funds (Commission).
In February 2014, the guidelines of the Commission on the issuance of licences to asset managers of Swiss pension funds (Guidelines) entered into force. The Guidelines clarified that unregulated asset managers or distributors of CISs under the CISA (which do not, according to the Guidelines, benefit from the above dispensation) intending to manage assets of Swiss pension funds must apply for a three-year licence. This should be a temporary solution, inasmuch as independent asset managers are likely to be subject to regulatory supervision in the near future, regardless of whether or not they manage pension funds, following the enactment of the reform summarised under Section V, infra.
v Regulatory framework applicable to the distribution of interests in non-Swiss CISs
The regulatory concept of distribution
The entry into force of the revised CISA on 1 March 2013 resulted in the replacement of the long-established concept of public offering with the concept of distribution of CISs. Any offer or advertisement for a CIS that is not exclusively directed towards regulated financial intermediaries (e.g., banks, insurance companies, securities dealers, fund administration companies, asset managers of CISs and central banks) is now construed as distribution. Distribution, irrespective of whether being public or private, is regulated under the CISA.
It is important to note that the CISA excludes the following four situations from the definition of distribution. The provision of information on or the offer of interests in non-Swiss CISs are not deemed to constitute a distribution if they take place:
- a at the investor’s request in the context of a long-term and remunerated advisory agreement or an execution-only relationship with a regulated financial intermediary (e.g., banks, securities dealers, fund administration companies, asset managers of CISs) or with an independent asset manager (subject to certain conditions);
- b upon the sole request of the investor in relation to a specific fund, and without any intervention or initial contact made by the financial intermediary (reverse solicitation);
- c within the context of a written discretionary asset management agreement entered into by the investor with a regulated financial intermediary or with an independent asset manager (subject to certain conditions); or
- d through the publication of prices, net asset values and tax data by regulated financial intermediaries.
Following the CISA revision, FINMA revised its implementing FINMA Circular 09/2013 on the distribution of CISs. This Circular aims at clarifying the concept of distribution and, in particular, the concept of qualified investors (see ‘Qualified investors’ below).
Likewise, the Swiss Funds and Asset Management Association (SFAMA) published revised Guidelines on the distribution of CISs. These Guidelines impose certain duties upon distributors and promoters of CISs, and provide for minimum standard provisions to be included in distribution agreements (for further details, see Section II.v, ‘SFAMA guidelines on distribution and transparency’, infra).
Finally, the Guidelines of the Swiss Bankers Association on protocol requirements under Article 24(3) CISA are also of relevance for the distribution of CISs. According to these Guidelines, distributors must record in writing the client’s needs and document their recommendations made in view of the subscription to a CIS. Although FINMA initially recognised these Guidelines as minimum standard for a period of up two years (until 31 December 2015), these will, however, continue to apply to all distributors until the entry into force of the future Federal Financial Services Act (FinSA) (see Section V.i, infra).
The concept of qualified investor is another important regulatory concept in the context of the distribution of interests in non-Swiss CISs. The CISA narrows the definition of qualified investors as follows:
- a Regulated qualified investors:
• regulated financial intermediaries, including banks, securities dealers, fund administration companies and managers of CISs, as well as central banks; and
• regulated insurance institutions.
- b Unregulated qualified investors:
• public entities and retirement benefit institutions (pension funds) with professional treasury management (this concept presupposes that the entity has at least one qualified professional in charge of the management of its financial assets);
• companies with professional treasury management;
• high-net-worth individuals (HNWIs) and private investment structures created for them, provided they have declared in writing that they wish to be deemed qualified investors (subject to certain conditions, such as minimum financial assets and technical competences) (opt-in declaration); and
• investors who have concluded a written discretionary asset management agreement with a regulated financial intermediary or with an independent asset manager (subject to certain conditions), provided that they do not exercise their right to opt-out of the qualified investors status.
The latest revision of the Collective Investment Schemes Ordinance, which entered into force on 1 January 2015, clarified that private investment structures created for HNWIs may qualify as qualified investors.
FINMA clarified in its Circular 09/2013 that asset managers may be treated as qualified investors subject to certain conditions, and provided that they undertake in writing that any information or materials in relation to the CIS be solely used for the benefit of qualified investors. Such written undertaking must be obtained from the asset manager before any provision of information on the CIS, as such discussion may otherwise be deemed to constitute an unauthorised distribution activity targeting non-qualified investors. It should be noted, however, that FINMA Circular 09/2013 does not address the issue of asset managers based outside Switzerland.
The characterisation of an investor as being qualified has a bearing on the regulatory restrictions applicable to the distribution of interests in non-Swiss CISs. The regulatory situation under the CISA can be summarised as follows.
Distribution of non-Swiss CISs to non-qualified investors
The offering documentation of non-Swiss CISs distributed to non-qualified investors must be approved by FINMA. Regular filing, notification and publication duties apply to the CIS, which must appoint a Swiss representative and paying agent. Additionally, the CISA requires the entering into of cooperation agreements between FINMA and the relevant foreign supervisory authorities. As of today, FINMA has entered into such cooperation agreements with the regulators of the following countries: Austria, Belgium, Denmark, Estonia, France, Germany, Guernsey, Ireland, Jersey, Liechtenstein, Luxemburg, Malta, the Netherlands, Norway, Sweden and the United Kingdom.
Any Swiss-based financial intermediary that distributes non-Swiss CISs to non-qualified investors must be licensed as a distributor by FINMA.
In addition, all distributors involved in the distribution of the CIS to non-qualified investors in Switzerland must enter into a written, Swiss law-governed distribution agreement with the Swiss representative, based on the requirements of the SFAMA Guidelines on distribution of CISs and its template distribution agreement.
Distribution of non-Swiss CISs to qualified investors
The offering documentation of non-Swiss CISs distributed to qualified investors is not subject to approval by FINMA, but a Swiss representative, as well as a paying agent, must be appointed by the CIS.
Any Swiss-based financial intermediary that distributes non-Swiss CISs to qualified investors must be licensed as a distributor by FINMA. By contrast, non-Swiss financial intermediaries that are regulated in their home country may conduct distribution activities in connection with qualified investors, provided the foreign supervision is deemed appropriate by FINMA (i.e., their foreign regulatory status allows them to distribute CISs in their own jurisdiction). This carve-out could, for example, apply to the (regulated) non-Swiss asset manager of a non-Swiss CIS intending to distribute interests to certain qualified investors in Switzerland (without appointing a Swiss distributor).
In addition, all distributors involved in the distribution of the CIS to qualified investors in Switzerland must enter into a written, Swiss law-governed distribution agreement with the Swiss representative, subject to the conditions set out in the SFAMA Guidelines on distribution of CISs and its template distribution agreement.
SFAMA Guidelines on distribution and transparency
On 22 May 2014, the SFAMA issued its revised Guidelines on the distribution of CISs (Distribution Guidelines), as well as its revised Guidelines on the charging and use of fees and costs (Transparency Guidelines), which specify certain requirements regarding the distribution of CISs and investors’ information. These Guidelines have been recognised as a minimum standard by FINMA. As such, they are of general application for all Swiss and non-Swiss market participants.
The Distribution Guidelines apply, inter alia, to fund promoters and fund managers. They include mandatory provisions for distributors that are to be incorporated into the distribution agreements concluded between foreign distributors and the Swiss representative of the non-Swiss CIS. In addition, the Guidelines provide for due diligence and information duties both for promoters and distributors of CISs. These include, in relation to distribution to non-qualified investors, the obligation to provide them with objective information on the investment character, opportunities and risks associated with the CIS, by taking into account their experience and knowledge and the complexity of the CIS.
The Transparency Guidelines, which apply to distributors and Swiss representatives of non-Swiss CISs, impose on them duties of information on fees, costs, rebates and retrocessions. In a nutshell, rebates (i.e., any payment by fund managers, SICAVs or their agents directly made to investors that result in a reduction of the fee or cost attributable to the CIS) are allowed to the extent they are based upon objective criteria (e.g., the subscription amount). The criteria and conditions upon which they are granted must be disclosed in the fund documentation in order to enable the investors to verify whether they are entitled to benefit from such rebates. In the same vein, retrocessions paid to distributors and advisers are allowed but are subject to disclosure requirements (see also Section II.i, supra). They are to be disclosed in the fund documentation and must specify for which services they are paid. In addition, the recipient of the retrocessions is subject to a certain number of specific disclosure duties. He or she must spontaneously inform the investor on the amount of the compensation that he or she receives for distribution by giving the calculation parameters or the spread of these inducements. Upon the investor’s request, the recipient is to further disclose the amount actually received. Finally, the recipient is to indicate the existence and nature of any conflicts of interest that are or may be triggered by the payment of retrocessions.
In order to incorporate the new disclosure requirements, in March 2015, the SFAMA amended its template notice to Swiss investors to be included in the documentation of foreign CIS guidelines.
III COLLECTIVE INVESTMENT schemes
From a Swiss legal perspective, asset management services can be rendered either on the basis of a power of attorney that the client grants to the asset manager in relation to assets deposited with a bank (managed account) or through an investment, by the client, in interests or shares of a collective investment scheme.
The CISA provides for four different types of collective investment schemes for Swiss CISs:
- a the contractual investment fund;
- b the SICAV;
- c the Swiss investment company (SICAF); and
- d the Swiss limited partnership (Swiss LP).
The main characteristics of these legal institutions are set out below. One common requirement is for the Swiss CIS to have substance in Switzerland.
i The contractual investment fund
The Swiss contractual investment fund is a contractual pool of assets constituted for purposes of common investment, which is separately administered by a licensed fund administration company. The fund administration company, acting on behalf of the investors, deposits the assets of the investment fund with a custodian bank. This legal institution is the most commonly used structure in the Swiss asset management industry.
ii The SICAV
The Swiss SICAV is a special corporate vehicle governed by the CISA and subject to the supervision of FINMA. The Swiss SICAV’s corporate purpose is limited to the collective management of its own assets. Unlike a licensed fund administration company, a SICAV may not perform other activities or services, even ancillary ones such as the management of third-party assets. The Swiss SICAV is in many respects based on the model of the Luxembourg SICAV. The CISA distinguishes between self-managed and externally managed SICAVs. The relevant criterion under the CISA is to determine whether the SICAV performs its own administration, or whether such administration is delegated to a licensed fund administration company. The Swiss SICAV has two types of shares: investor shares and promoter shares. The SICAV is thus composed of at least two segregated sub-funds, one corresponding to the contributions of the investors and one corresponding to those of the promoter. Both types of shares have, as a rule, the same rights and obligations: votes are based on the principle of one share, one vote for both types of shares, there are no restrictions for a holder of one category of shares to hold also shares of the other category, and the creation of preference shares is expressly prohibited. There are important exceptions to the principle of equal treatment among the shareholders. On one hand, the obligation to provide for the minimum capital contribution, as well as the duty to maintain the required capital adequacy requirements for self-managed SICAVs, rest only upon the holders of promoter shares. On the other hand, the holders of promoter shares have the exclusive competence to resolve on the dissolution of the SICAV, to close a sub-fund and to request FINMA to liquidate the SICAV for cause.
Following the recent revision of the AMLA framework (see Section II.i., supra), since 1 July 2015, SICAVs are required to keep a register of the ultimate beneficial owners (i.e., individuals owing more than 25 per cent of the company’s shares or voting rights) of its unlisted promoter shares. In parallel, holders of those shares are now subject to a reporting obligation towards the SICAV. They are to disclose the name and the address of the ultimate beneficial owners in the event that their participation reaches or exceeds 25 per cent. Breach of this reporting requirement may trigger restrictions or the cancellation of the economic and voting rights related to the investment. These amendments form part of the corporate law reform triggered by the implementation of the revised FATF recommendations.
iii The SICAF
The SICAF is a Swiss company limited by shares whose corporate purpose is limited to the management of its own assets. The SICAF is not allowed to pursue any entrepreneurial activity. The SICAF is a closed-ended investment scheme, meaning that the investors do not benefit from a redemption (i.e., exit) right. The regulatory framework set forth in the CISA as regards the SICAF is rather limited. The SICAF is substantially governed by the provisions of the Swiss Code of Obligations that are applicable to regular companies limited by shares (including the new disclosure requirements as regards holders of bearer shares and ultimate beneficial owners deriving from the recent revision of the AML framework (see Sections II.i and III.ii, supra)). In this context, a SICAF is not subject to the CISA if its shares are listed on a stock exchange or if its shareholders are exclusively qualified investors (see Section II.v, supra) and its shares are registered shares (as opposed to bearer shares). To our knowledge, all Swiss SICAFs have so far relied on this regulatory safe harbour. As a result, there is currently no Swiss SICAF that is regulated by FINMA.
iv The Swiss LP
The Swiss LP is a CIS that is aimed at private equity, alternative investments and real estate projects, and that has been designed to mirror the legal form of certain offshore limited partnership structures. The Swiss LP is subject to the supervision of FINMA. Swiss LPs are closed-ended investment schemes, meaning that the investors do not benefit from a redemption (i.e., exit) right. Swiss LPs are managed by one or more general partners (GPs) with unlimited liability for the commitments of a Swiss LP. The GP may delegate certain tasks to third parties to the extent such delegation is in the best interest of the Swiss LP. The asset management function may, however, only be delegated to a regulated asset manager of a Swiss CIS. The investors in a Swiss LP are the limited partners. They may not be involved in the management of the Swiss LP, which is the exclusive competence of the GP. That said, the limited partners benefit from information rights and certain governance rights, such as the delivery of periodic financial information, as well as information on the financial accounts. The Swiss LP is only open to qualified investors (see Section II.v, supra). The partnership agreement of the Swiss LP sets out the key rules that apply among the GP and the limited partners. Swiss law allows a significant freedom to the parties in the regulation of their relationship in the partnership agreement, subject to a limited set of contractual provisions that are required as a matter of law.
IV MAIN SOURCES OF INVESTMENT
The Swiss asset management industry is heavily reliant upon the assets deposited with Swiss banking institutions. According to figures published by the Swiss Bankers Association in its 2015 Banking Barometer Report, the aggregate amount of assets under management held by Swiss banks amounted to over 6,600 billion Swiss francs at the end of May 2015. This total is divided equally between assets held by Swiss-based and non-Swiss based clients. According to the Swiss Funds and Asset Management Association, the Swiss CIS market was valued at 894 billion Swiss francs in May 2016.
V KEY TRENDS
i New regulatory regime for independent asset managers
The protection of investment advisory and asset managers’ clients has been at the top of the Swiss regulator’s agenda for several years now, and will be one of the most important legislative projects in the financial services sector for years to come.
To ensure better protection of investors, Swiss authorities have recently launched a revision of the regulatory framework applicable to the provision of financial services. On 27 June 2014, the Federal Council published two new drafts: the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA). The FinSA deals with the relationship between the financial intermediary and investors, and essentially provides for rules of conduct aiming at protecting investors upon the provision of financial services or financial instruments in Switzerland. Those proposed rules are primarily based on the EU’s MiFID regulations. By contrast, the FinIA includes provisions concerning the relationship between the financial intermediary and the regulatory authority, and imposes licensing and organisational requirements.
Following a backlash by market participants on certain aspects during the consultation procedure, the Federal Council requested that the Federal Finance Department significantly amend the drafts and prepare a dispatch by the end of 2015. On 4 November 2015, the Swiss Federal Council adopted its dispatch on both revised draft instruments. The preparatory commission of the Council of States has requested some further amendments and simplifications with a view to discussing them in the second quarter of 2016. At this stage, it is difficult to assess how long the legislative procedure will take prior to the entry into force of the FinSA and the FinIA, which is currently not expected before 1 January 2018. It is, however, expected that this reform will represent a tidal change for the independent asset management industry.
According to the draft FinIA, independent asset managers who are currently not subject to prudential supervision will be newly supervised. Although they will not be directly subject to FINMA supervision, their supervision will be conducted by independent supervisory organisations approved and monitored by FINMA.
The draft FinSA implements a new regime aiming at strengthening the client protection by means of transparency provisions, reflecting the requirements provided for the EU’s MiFID II. In this context, financial services providers will have to perform an assessment of appropriateness when advising clients on individual transactions. By contrast, an assessment of suitability will be required when providing investment advice on their entire portfolio.
On the specific topic of retrocessions, which was heavily debated during the consultation procedure, on 13 March 2015, the Federal Council confirmed in a decision in principle to allow retrocessions subject to complying with the current transparency regime. The principles laid down in the Swiss case law and FINMA Circular 01/2009 (see Section II.i, supra) should also be crystallised in the FinSA.
ii Enhanced due diligence requirements in relation to foreign customers’ assets
Since 2012, the Swiss Federal Council has been keen to implement its ‘clean money strategy’ through, inter alia, the introduction of enhanced due diligence requirements applicable to financial intermediaries. To achieve its objective of a financial centre compliant with tax regulations, financial intermediaries must ensure that foreign clients’ assets over which they have control are tax-compliant according to the Federal Council’s view.
The above initiative has been subject to intense discussions and debate for years. For the time being, no specific requirements as regards the review of the tax-compliance of the clients’ assets have been implemented in the Swiss legal framework. Notwithstanding the above, this situation is about to change with the introduction of the automatic exchange of information in Switzerland (see Section V.ii, infra). As of 1 January 2017, Swiss financial institutions will become subject to a duty to obtain from their clients opening accounts after this date, a specific self-certification indicating their name, address, tax residence, tax identification number and date of birth.
iii Implementation of the automatic exchange of information in Switzerland
Another topic of current interest is the upcoming implementation of the automatic exchange of information, in particular, its practical implications in the asset management field.
In order to comply with the new obligations imposed by the legal framework, which relies on the Common Reporting and Due Diligence Standard elaborated by the OECD, as transposed into Swiss law or in an international agreement, Swiss financial intermediaries such as banks will have to collect and exchange foreign clients’ information, including information on beneficial owners, with Swiss tax authorities. These will, in turn, transmit this information to the tax authorities of the country of residence of the taxpayers, who have an agreement in place with Switzerland in this respect. The entry into force of this new automatic exchange regime will take place in January 2017 and, as a result, the first automatic exchange of information with foreign countries is expected in 2018. As of today, Switzerland has signed an agreement for the introduction of the automatic exchange of information with the EU, Australia, Canada, Guernsey, Iceland, the Isle of Man, Japan, Jersey, South Korea and Sweden.
The introduction of the automatic exchange of information constitutes a complete change of paradigm in Switzerland, where banking secrecy does not allow the disclosure of any information outside the bank–client relationship (subject to certain exceptions). The impact of this significant change on the cross-border asset management industry in Switzerland, which represents a market share of more than 25 per cent at the international level, is difficult to assess for the time being.
VI Tax aspects
Switzerland levies taxes at three different levels: the federal, cantonal and municipal levels.
i Taxation of CISs
As a matter of principle, Swiss CISs are not liable to income and capital taxes. Taxation does not take place at the level of the CIS, but usually directly targets (Swiss-resident) investors (see Section VI.iii, infra), provided the CIS is deemed transparent for tax purposes. The taxation of CISs in Switzerland largely depends upon the legal structure under the CISA. Open-ended CISs, such as the contractual investment fund and the SICAV, are not considered to be entities subject to Swiss corporate income tax in their own right. In conformity with the principle outlined above, taxation is applied directly to investors according to their country of tax residence. The same regime is applicable to the Swiss LP. There are two exceptions to these general taxation principles:
- a CISs owning real estate are taxed as corporations on the portion of their income that is directly derived from real estate; and
- b a SICAF is subject to Swiss corporate income tax as it is treated as a separate taxpayer under Swiss tax law.
All income that is distributed by these CISs is subject to a withholding tax of 35 per cent, which is entirely or partially recoverable by the investor (as regards investors based outside of Switzerland, the reimbursement of the withholding tax depends upon the provisions of the applicable double tax treaty). Exceptions to this general principle are possible. For example, a distribution of net capital gains realised by a CIS is exempted provided that these capital gains are clearly separated from the income.
ii Taxation of fund administration companies
Fund administration companies are considered as taxpayers in their own right as they are incorporated as a corporation. They are subject to corporate income tax as any other legal entity. Management and distribution services provided by such companies to Swiss and non-Swiss CISs remain generally exempt from Swiss value added tax.
iii Taxation of investors
Swiss-resident investors of CISs that are transparent for tax purposes will be taxed on their share of fund income. This taxation principle will depend upon the structure of the fund (i.e., distributing or growth) and the income received (i.e., capital gains or other ordinary income realised by the CIS). Capital gains attributable to private investors are normally exempted provided that they are distributed with a separate coupon or that they are separately booked in the accounts of the CIS.
iv Stamp duty
Stamp duty is due on the transfer of securities, including interests in CISs, provided that the transaction involves a Swiss securities dealer for stamp duty purposes acting as a broker or as a counterparty. Many exemptions may apply in specific cases: for example, Swiss or non-Swiss CISs qualify as exempt investors for stamp duty purposes. Accordingly, transactions involving Swiss or non-Swiss CISs acting as purchasers or sellers of taxable securities normally trigger a reduced stamp duty liability. Swiss asset managers usually qualify as Swiss securities dealers for stamp duty purposes and may in practice delegate most of their obligations in relation to stamp duty to other Swiss securities dealers. Swiss stamp duty rules nonetheless involve specific compliance requirements, such as a duty to register with the Swiss tax authorities.
In coming months, the main legal and regulatory development will be the publication of the draft legislation regarding the supervision of independent asset managers following the consultation procedure on the FinSA and FinIA, as well as the introduction of the automatic exchange of information (see Section V, supra). These legislative reforms represent another example of the regulatory adjustments implemented in Switzerland to achieve a Swiss regulatory framework in line with international standards. Another topic of interest will remain the issue of retrocessions (see Sections II.i, and II.v, supra). Following the case law, the regulatory intervention by FINMA, the issuance of self-regulatory regulations and, in view of the entry into force of the FinSA, asset managers are – and will continue to be – subject to strict rules in this respect. In line with the developments taking place at the international level, Switzerland’s asset management industry is in the process of adjusting its remuneration structure to be less reliant on retrocessions. Nevertheless, contrary to the situation prevailing in certain European countries, the Swiss legislative and regulatory perspective should remain not a prohibition of retrocessions but rather one of enhanced transparency.
1 Shelby R du Pasquier is a partner and Maria Chiriaeva is a senior associate at Lenz & Staehelin.
2 Certain professional organisations also limit the level of compensation of asset managers. For instance, the Code of Conduct issued by the Swiss Association of Asset Managers sets out a maximum amount of management fees corresponding to 1.5 per cent per year calculated on the basis of the net asset value of managed assets, or performance fees of a maximum 20 per cent of the net capital increase (i.e., the increase in value taking into account deposits and withdrawals in addition to any unrealised losses). If both above-mentioned systems of fees are combined, management fees are capped at 1 per cent per year and the performance fees to a maximum of 10 per cent.
3 Decision of the Swiss Supreme Court of 30 October 2012 and published in the Official Court Reporter under No. ATF 138 III 755.
4 Decision of the Swiss Supreme Court of 22 March 2006 and published in the Official Court Reporter under No. ATF 132 III 460.
5 In August 2015, FINMA entered into such cooperation agreement with the Jersey Financial Services Commission.