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 on the future legislation regarding financial institutions). This situation will drastically change with the entry into force of two new statutes, expected in January 2020 – the Financial Institutions Act (FinIA) and the Financial Services Act (FinSA) (see Section II.v). As we will see, those new Acts will materially affect the organisation and activities of independent asset managers who will have to review and adapt, as the case may be, their business model.

Current challenges to the asset management industry in Switzerland include a wave of new regulatory activity and 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):

  1. banks;
  2. insurance companies;
  3. securities dealers;
  4. fund distributors; and
  5. 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), for the time being, 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), or involve the trading of securities (see Section II.iii) or the management of Swiss pension funds assets (see Section II.iv). That being said, under the new regime expected to enter into force on 1 January 2020, asset managers, as a rule, will become supervised in Switzerland and will have to obtain a specific licence to conduct their activities (see Section II.v). 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.vi).

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, for the time being (see Section II.v for an overview of the situation that will prevail in 2020), subject to prudential supervision in Switzerland unless these activities are conducted in connection with a Swiss or non-Swiss CIS (see Section II.ii), the asset manager is characterised as a securities dealer (see Section II.iii), or he or she manages assets of Swiss pension funds (see Section II.iv).

That said, asset managers qualify all instances qualify as financial intermediaries within the meaning of Article 2(3) of the Swiss Anti-Money Laundering Act (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 by FINMA directly (Article 12(c) AMLA).

The duties imposed upon financial intermediaries 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 suspicious transactions to the regulatory body. Such reporting duty presupposes that the financial intermediary is aware, or has reasonable suspicion, of 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.

Under Swiss law, 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 review of the case by the regulatory body (with the aim of blocking any transaction that may result in preventing or complicating the confiscation of the concerned assets). As a second step, if the case is assigned to a criminal prosecutor, 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 such persons being involved with or supporting terroristic activities. Financial intermediaries may incur criminal liability if they fail to comply with these duties.

It is worth noting that on 1 June 2018, the Federal Council opened up a consultation procedure on a new revision of AMLA. The purpose of this revision is to reflect the outcome of the latest review of the Swiss AML framework performed by the FATF. Among other things, the draft provides for the extension of due diligence obligations to advisory services related to the setting up, management and administration of offshore companies and trusts, regardless of the absence of any purely financial intermediation activity. The draft further provides for the removal of the 20-day deadline until which the regulatory body is to review the reporting made by the financial intermediary and revert, as the case may be. The entry into force of the revised AMLA is not expected before 2020.

Indirect regulation under FINMA Circular 01/2009

Furthermore, FINMA has defined certain requirements (outlined in 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.vi). 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 (for the time being) only indirectly regulated in Switzerland (see, however, Section II.v, below).

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 requires that the asset management agreement entered into with clients sets out 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. The Swiss Supreme Court ruled3 that the distribution fees that the promoter of a financial product pays to the distributor could be characterised as retrocessions, and are therefore subject to the legal regime set out below.

Retrocessions are subject to a statutory restitution duty and are, as a matter of principle, payable to the client of the receiving financial intermediary.4 Nonetheless, 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 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. The Swiss Supreme Court further clarified in a 2017 decision5 that claims based on the above restitution duty are time-barred for 10 years after the receipt by the manager of the inducements in question. This decision brought an end to the debate among Swiss scholars, as well as the legal uncertainties regarding the term and the starting point of the limitation period applicable to restitution claims.

Finally, it is worth noting that, in August 2018, the Swiss Supreme Court confirmed6 that, depending on circumstances, failure to disclose retrocessions may constitute criminal mismanagement under the Swiss Criminal Code.

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. They are to inform their clients of the calculation parameters, as well as of the type of inducements they receive or might receive from third parties.

The above principles laid down in the Swiss case law and the FINMA Circular 01/2009 will be crystallised in the FinSA (see Section II.v). Under this new Act, retrocessions will continue to be allowed subject to complying with transparency requirements. Of note, the disclosure duty will apply irrespective of the presence of a mandate relationship (i.e., including in case of execution only transaction).

ii Regulation of CIS managers

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.vi) are not regulated if they satisfy one of the following requirements:

  1. the assets under management, including those resulting from the use of leverage, do not exceed 100 million Swiss francs;
  2. 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 CISs are invested in target funds or other investments); or
  3. the investors are exclusively group companies.

The 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.

Of note, under the FinIA, the de minimis rule will be extended to managers of Swiss CISs and pension funds (see Section II.iv). Asset managers benefiting from this exemption will, however, be supervised as any other asset manager and will therefore have to obtain a licence to conduct their activities in Switzerland (see Section II.v).

The CISA further provides for 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: the non-Swiss asset manager is subject to adequate supervision by its home regulator; the non-Swiss asset manager has adequate organisation, sufficient financial resources, as well as competent staff to operate a branch in Switzerland; and a specific cooperation agreement is in place between FINMA and the non-Swiss asset manager's home regulator.7 Those requirements will remain generally the same under the new FinIA.

Further, an agreement in principle was reached in December 2012 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. This agreement with ESMA is supplemented by bilateral agreements with each national supervisory authority in the EU and in the European Economic Area. In July 2015, ESMA recommended to the EU authorities the extension of the marketing passport under the AIFMD to Switzerland (as a third country). In its final advice of September 2016, ESMA confirmed its position. The latter is being 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.

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). Under the current regime, 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:

  1. trading in securities as a principal on a short-term basis (own-account dealer);
  2. underwriting and public offering on the primary market of securities issued by third parties (issuing house);
  3. issuance and public offering on the primary market of derivatives as a principal or as an agent (derivative supplier);
  4. 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
  5. 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; see also, however, Section II.v).

Under the new FinIA, securities dealers, newly called 'securities firms', will remain subject to FINMA supervision. Existing securities firms will not need to obtain a new licence but will have to comply, by January 2021, with the new regime's requirements that will not significantly differ from the existing ones. The concept of securities firms will, however, be redefined in Article 41 FinIA as any person or entity who, on a commercial basis, trades in securities:

  1. in its own name but on behalf of clients;
  2. for its own account on a short-term basis, operates essentially on the financial market and (1) may have a negative impact on the functioning of the financial market or (2) participates in a trading venue; and
  3. for its own account on a short-term basis and quotes a price for specific securities on an ongoing basis or upon request (market maker).

Underwriters' and derivative houses' activities will also remain subject to licensing requirements under Article 12 FinIA and will necessarily have to be conducted by licensed banks or securities firms.

The SESTA will be repealed upon the entry into force of the new regime and a certain number of its provisions will be transferred in the FinIA.

iv Regulation of Swiss pension fund asset managers

Under the current regime, 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) and distributors of CISs under the CISA that intend to manage assets of Swiss pension funds are to secure a licence with the Swiss Supervisory Commission for Pension Funds (Commission).

Under the FinIA expected to enter into force on 1 January 2020, asset managers (other than banks, securities firms and fund management companies) will have to obtain a licence with FINMA to perform or continue to perform their activities if the assets they manage are above 100 million Swiss francs or, in the mandatory segment, if they manage more than 20 per cent of the assets of one occupational pension scheme. In the event that those thresholds are not reached, asset manages of pension funds will still be required to obtain an authorisation as asset managers under the new FinIA (see Section II.v).

FinIA's grandfathering rules provide that managers of pension funds will have to notify their intention to request an authorisation from FINMA within six months of the entry into force of this new Act. Further, such managers will have to file their autorisation request, as well as comply with the new requirements, by January 2023. In the meantime, they may continue to perform their activities, provided they are registered with a SRO for AML purposes.

v Regulation of asset managers under the new FinIA and FinSA

Under the FinIA and the FinSA expected to enter into force on 1 January 2020, asset managers will be newly supervised and will become subject to specific rules of conduct and organisational measures. In this context, asset managers will be subject to FINMA supervision (including authorisation process and enforcement proceedings). As regards their day-to-day supervision, they will be supervised by supervisory organisations approved and monitored by FINMA (SOs; yet to be established). As a result of this new supervisory framework, asset managers will cease to be under the direct supervision of FINMA for AML purposes (see Section II.i).

FinIA defines an asset manager as anyone who, acting on a professional basis, disposes of clients' assets in their name and for their benefit. Under the draft implementing ordinance of the FinIA (FinIO), an activity is considered to be undertaken on a professional basis if any of the following thresholds are exceeded:

  1. business relationships with more than 20 contracting parties;
  2. gross turnover exceeding 50,000 Swiss francs;
  3. power to dispose of third-party assets above 5 million Swiss francs; or
  4. transactions with a total amount in excess of 2 million Swiss francs.

The FinIA and FinIO further provide for a limited number of exemptions. One of them provides that asset managers who exclusively manage assets of clients with whom they have 'economic' or 'family' ties do not fall within the ambit of the FinIA and do not need to obtain a licence to conduct their activities. Likewise, pure investment advice activities (without any control over clients' assets) will remain unregulated, subject to the provisions of the FinSA (see below).

Under the new regime, in addition to the 'fit and proper' tests imposed on managers and qualified shareholders, the main licensing requirements for asset managers will be the following:

  1. the registered office and administration of the asset manager must be in Switzerland;
  2. the management is composed of at least two people having appropriate qualifications;
  3. the implementation of appropriate internal organisation, in particular as regards risk management and internal control mechanisms;
  4. a fully paid-up minimum share capital of 100,000 Swiss francs;
  5. a minimum equity equivalent to one-quarter of the fixed annual costs according to the latest financial statements, up to 10 million Swiss francs; and
  6. the conclusion of a professional indemnity insurance or the provision of sufficient financial guarantees.

The FinIA provides for grandfathering rules according to which asset managers who are already active are to notify FINMA of their intention to apply for a licence prior to July 2020 and request an authorisation prior to January 2023. By contrast, asset managers starting their activities after January 2020 will have to immediately notify FINMA and comply with the licensing requirements. In accordance with the draft FinIO, asset managers will, however, have to register with a SO and apply for a licence with FINMA within one year after an SO has been recognised by FINMA.

Foreign asset managers with a permanent presence in Switzerland will also fall within the ambit of the FinIA and will need to obtain an authorisation for a branch or representative office. Likewise, foreign asset managers providing their activities on a purely cross-border basis will have to first register the individuals providing financial services ('client advisers') in a client advisers' registry (subject to potential limited exemptions for regulated financial services providers). This registration (with respect to pre-existing activities) will have to take place by July 2020, in accordance with FinSA's grandfathering rules. As financial service providers, client advisers and the entities for which they act will also have to comply with the rules of conduct and organisational measures below.

Under the new FinSA, the provision of asset management activities (including purely investment advice activities) will require compliance with rules of conduct such as (1) an up-front obligation of information; (2) an obligation to verify whether a financial instrument or service is appropriate and suitable; (3) a documentation obligation and accountability requirement; and (4) transparency and due diligence requirements for the execution of client orders. In particular, when advising clients on individual transactions in the context of advisory or discretionary asset management services, financial services providers will have to perform an assessment of appropriateness. By contrast, they will have to perform an assessment of suitability when providing investment advice on the clients' entire portfolio and/or in case of discretionary asset management services. Furthermore, asset managers will have to classify their clients (see Section II.vi) and apply the relevant rules of conduct based on such classification. Finally, under the new regime, asset managers will have to ensure that the client advisers have technical knowledge and follow appropriate training and implement relevant organisational measures.

In accordance with the grandfathering rules of the draft FinIO, those requirements will have to be complied with by 2021. Separately, asset managers will also have to be registered with a mediation body and will have to comply with this obligation by July 2020 or, if such body is not established by this date, six months after the recognition of such a body by the Federal Department of Finance.

vi Regulatory framework applicable to the distribution or offering of interests in non-Swiss CISs

The regulatory concept of distribution

Under the current CISA (in its version until 31 December 2019), any offer of 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 construed as distribution for the time being (see also Section V regarding distribution), irrespective of whether it is public or private, and is regulated under the CISA.

The CISA excludes the four situations outlined below 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:

  1. 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);
  2. 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);
  3. 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
  4. through the publication of prices, net asset values and tax data by regulated financial intermediaries.

Under the new FinSA expected to enter into force on 1 January 2020, the concept of distribution will be replaced with the concept of 'offering'. The latter is defined as an invitation to acquire a financial instrument that contains sufficient information on the conditions of the offering and the terms of the financial instrument. The definition of 'offering' will be therefore more limited than the current understanding of 'distribution'. As opposed to the current regime, not any advertisement will therefore fall within the ambit of the FinSA. Although the above exemptions under the current law will be removed with the entry into force of the FinSA, most of them will continue to apply in practice, such as:

  1. the publication of prices, NAV and tax information, the provision of factual information will not be considered as an offering; and
  2. private clients who have entered into as asset management agreement or an advisory agreement on a long-term basis with a regulated financial services provider will be considered as a qualified investors to whom foreign CIS may be offered without the need to appoint a paying agent and a Swiss representative.

Qualified investors

The concept of qualified investor is another important regulatory concept in the context of the distribution of interests in non-Swiss CISs. The current CISA narrows the definition of qualified investors as follows:

  1. 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.
  2. 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 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.

It should be noted that the entry into force of the FinSA will not abolish the concept of qualified investor, which will coexist with the new client classification for the purposes of provision of financial services. As mentioned above, the FinSA will provide for an obligation to classify the clients of financial services providers with the following three main segments:

  1. Institutional clients:
    • financial intermediaries (subject to the Banking Act, the FinIA and the CISA);
    • foreign clients subject to a prudential supervision;
    • insurance companies;
    • central banks; and
    • national and supranational public entities with professional treasury management.
  2. Professional clients:
    • public entities with professional treasury management;
    • pension funds/schemes with professional treasury management;
    • companies with professional treasury management;
    • large companies (i.e., companies where two of the following criteria are met (1) balance sheet total of 20 million Swiss francs, (2) turnover of 40 million Swiss francs, and (3) equity of 2 million Swiss francs);
    • private investment structures with professional treasury management created for high net worth retail clients;
    • high net worth retail clients (i.e., individuals with a net wealth of 2 million Swiss francs or (2) financial assets exceeding 500,000 Swiss francs and having sufficient knowledge about risks of investment as a result of their education or professional experience) and private investment structures without professional treasury management created for them, provided they have declared an 'opting-out'; and
    • managed and advisory retail clients without an 'opt-in' declaration.
  3. Retail clients: investors that are neither institutional nor professional clients.

The FinSA will provide for an opting in and out system across the different client categories. As an example, high net worth individuals and private structures created for them (without professional treasury management) will have the possibility to opt out to be considered as professional clients (instead of private clients). The opting in and out declarations are to be made in writing.

The provision of financial services, as well as the offered financial products will be adapted to the protection needs of the respective client segment. In this context, no specific rules will apply with respect to institutional clients. Likewise, professional clients will have the possibility to waive certain protection as regards information and documentation reporting.

Distribution of non-Swiss CISs to non-qualified investors under the current CISA

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.8

Any Swiss-based financial intermediary that distributes non-Swiss CISs to non-qualified investors must be licensed as a distributor by FINMA.

Distribution of non-Swiss CISs to qualified investors under the current CISA

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).

Offering of non-Swiss CIS under the new FinIA and FinSA (as expected from 1 January 2020)

Under the new regime expected to enter into force on 1 January 2020, the requirements for the offering of non-Swiss CIS to non-qualified investors (i.e., retail clients) will not materially change. Foreign CIS will have to be subject to FINMA prior authorisation. Likewise, a paying agent and a representative will have to be appointed and cooperation agreements will have to be in place. As opposed to the current regime, distributors will no longer be regulated but will likely to be considered as financial services providers subject to the rules of conduct and organisational requirements under the FinSA.

The regime applicable to the offering of non-Swiss CIS to qualified investors will become more liberal. Only the offering of non-Swiss CIS to high net worth individuals and their investment structures without professional treasury management, provided they have opted out, will trigger the need for the non-Swiss CIS to appoint a paying agent and a representative. Otherwise, the offering of non-Swiss CIS to other qualified investors (i.e., institutional and professional clients under the new client classification), including managed and advisory retail clients without an opt-in declaration, will not be subject to specific requirements on the non-Swiss CIS. That being said, as mentioned above, the financial services providers offering the CIS will likely be subject to the FinSA and will have to comply with the new requirements.

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 CIS.

The CISA provides for four different types of CISs for Swiss CISs:

  1. the contractual investment fund;
  2. the SICAV;
  3. the Swiss investment company (SICAF); and
  4. 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 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, corresponding to the contributions of the investors and the promoter, respectively. Both types of shares have, as a rule, the same rights and obligations: votes are based on the principle of one share, one vote, 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. 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 who 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.

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 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.

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 disclosure requirements as regards holders of bearer shares and ultimate beneficial owners (see Section III.ii). 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.vi) and its shares are registered 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.vi). 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 2018 Banking Barometer Report, the aggregate amount of assets under management held by Swiss banks amounted to over 7.291 billion Swiss francs at the end of 2017. This total is divided equally between assets held by Swiss-based and non-Swiss based clients. According to SFAMA, the Swiss CIS market was valued at 1.127 billion Swiss francs in May 2019.

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 the year to come.

In November 2015, the Federal Council published the draft FinSA and FinIA. As mentioned above, the FinSA, which deals with the relationship between the financial intermediary and investors, essentially provides for rules of conduct aiming at protecting investors upon the provision, upon a professional basis, of financial services or financial instruments in Switzerland. Those 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 general licensing and organisational requirements, irrespective of the authorisation regime.

On 15 June 2018, Parliament adopted the FinSA and the FinIA. Their expected date of entry into force (including the relevant implementing ordinances whose final drafts are expected to be released by November 2019) is currently 1 January 2020.

As mentioned above, according to the FinIA, asset managers will be newly supervised. In addition, under the new FinSA, those will become subject to specific rules or conduct and, as the case may be, client advisers (i.e., individuals providing financial services) will have to register with a client advisers' registry. This new legislation will completely overhaul the current regulatory framework for financial service providers.

ii Implementation of the automatic exchange of information in Switzerland

Another topic of current interest is the recent implementation of the automatic exchange of information, and in particular, its practical implications in the asset management field.

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 have to collect and exchange foreign clients' information, including information on beneficial owners, with the Swiss tax authorities. These transmit, in turn, 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 took place in January 2017, and as a result, the first automatic exchanges of information with foreign countries have taken place in 2018.9

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.

iii Limited qualified investment funds

In September 2018, the Swiss Federal Council announced its intention to introduce a new category of funds that are neither subject to approval by FINMA nor regulated under the CISA. This new category of funds, 'limited qualified investment funds', would be limited to qualified investors such as pension funds and insurers and would be managed exclusively by FINMA supervised fund asset managers.

This project aims at creating a Swiss alternative to similar foreign products and to ensure that more collective investment schemes be launched in Switzerland.

The consultation procedure on this CISA revision is open between 26 June and 17 October 2019. The entry into force of this new category of funds is not expected before 2020.

VI TAX LAW

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), 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: CISs owning real estate are taxed as corporations on the portion of their income that is directly derived from real estate; and 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.

VII OUTLOOK

In the coming months, the main legal and regulatory development will be the publication of the final version of the executing ordinances clarifying the future supervision of independent asset managers in the context of the entry into force of the FinSA and FinIA. This legislative reform, together with the implementation of the automatic exchange of information, represents another example of the regulatory adjustments implemented in Switzerland to fully align the Swiss regulatory framework with international standards. Another topic of interest will remain the issue of retrocessions (see Section II.i). 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 the European Union, the Swiss legislative and regulatory perspective will keep allowing retrocessions albeit in a more transparent and restrictive manner.


Footnotes

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 of 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 (confirmed in subsequent decisions).

5 Decision of the Swiss Supreme Court of 16 June 2017 and published in the Official Court Reporter under No. ATF 143 III 348.

6 Decision of the Swiss Supreme Court of 14 August 2018 and published in the Official Court Reporter under No. ATF 144 IV 294.

7 In August 2015, FINMA entered into such cooperation agreement with the Jersey Financial Services Commission.

8 At the time of writing, FINMA has entered into such cooperation agreements with the regulators of
the following countries: Austria, Belgium, Denmark, Estonia, France, Germany, Guernsey, Hong
Kong, Ireland, Jersey, Liechtenstein, Luxemburg, Malta, the Netherlands, Norway, Sweden and the
United Kingdom.

9 To date, Switzerland has implemented automatic exchange of information with more than 50 partner states and territories, including the EU.