For a better understanding of the Swiss capital market, it is worth highlighting that Switzerland is neither a member of the European Union (EU) nor the European Economic Area (EEA). Consequently, the EU prospectus rules and other EU or EEA capital markets rules and regulations are not applicable in Switzerland. Since Swiss capital market participants largely depend on free and unrestricted access to the European (capital) markets, Switzerland regularly adapts its legislation to EU equivalence requirements to facilitate market access. As part of Switzerland's efforts to meet EU-equivalent standards, it is in the process of implementing a comprehensive reform package fundamentally changing the Swiss financial market regulatory framework, which is expected to enter into force by 1 January 2020. One of the aims of the new rules is the regulatory harmonisation with the relevant EU rules (MiFID II,2 MiFIR,3 the Prospectus Directive,4 the PRIIPs Regulation)5 with adjustments made to reflect the specific Swiss circumstances.
The Swiss initial public offering (IPO) market in 2019 was not as strong as in 2018, with four IPOs during the first three quarters of 2019 on the SIX Swiss Exchange Ltd with an aggregate issue volume of approximately 2.3 billion Swiss francs and a total market capitalisation of 34.99 billion Swiss francs. The Swiss debt market is also active, particularly with respect to bonds and structured notes issues. According to the SIX website, as at September 2019 a total of 3,618 bonds were listed on SIX (of which 1,146 were Swiss bonds denominated in Swiss francs, 638 were foreign bonds denominated in Swiss francs and 1,834 bonds were not denominated in Swiss francs). Further, there exists an active market for unlisted bonds or notes and privately placed debt securities.
i Structure of the law
The relevant Swiss capital market legislation governing the primary and secondary securities markets includes:
- the Swiss Code of Obligations governing the prospectus requirements for the public offering of equity and debt securities;
- the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (FMIA) governing the organisation and operation of financial market infrastructures, and the conduct of financial market participants in securities and derivatives trading;
- the Ordinance on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (FMIO) implementing the provisions of the FMIA;
- the Ordinance of the Swiss Financial Market Supervisory Authority on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (FMIO-FINMA) implementing the provisions of the FMIA;
- the Federal Act on the Swiss Financial Market Supervisory Authority stipulating provisions regarding supervision of the financial markets by the Swiss Financial Market Supervisory Authority (FINMA);
- the Ordinance of the Takeover Board on Public Takeover Offers providing rules on the requirements for public takeover offers;
- the Regulations of the Takeover Board, stipulating regulations governing the organisation of the Takeover Board;
- the listing rules and all other rules, directives, circulars, prospectus schemes of SIX Swiss Exchange Ltd governing the listing and trading in securities on the SIX Swiss Exchange and laying down the principles for maintaining listings of equity and debt securities on the SIX Swiss Exchange;
- the Guideline for Notes issued by Foreign Borrowers dated 1 September 2001 of the Swiss Bankers' Association;
- the Federal Act on Collective Investment Schemes (CISA) governing the issue of structured products;
- the Federal Ordinance on Collective Investment Schemes implementing the provisions of the CISA;
- the Federal Act on Intermediated Securities governing the custody, transfer and related issues of securities held with regulated custodians;
- the Federal Act on Banks and Savings Banks;
- the Federal Ordinance on Banks and Savings Banks;
- the Federal Act on Combating Money Laundering and Terrorist Financing and the corresponding implementing ordinances; and
- the Federal Act on Stock Exchanges and Securities Trading (SESTA) and the corresponding implementing ordinances.
ii Stock exchange regulation
The principal stock exchange for the listing and trading of equity and debt securities, structured products, derivatives and other securities in Switzerland is the SIX Swiss Exchange in Zurich. It has adopted – based on the principle of self-regulation – a comprehensive set of its own regulations, directives and notices governing, inter alia, the requirements for admission to trading and listing and disclosure requirements. The second Swiss stock exchange is the BX Swiss, in Berne, which is comparatively small and mainly focuses on domestic issuers. Since 2018, BX Swiss is a wholly owned subsidiary of the Börse Stuttgart GmbH.
iii Structure of the courts
In principle, the Swiss court system is based on a three-tier hierarchy: the first-instance cantonal courts (which apply both cantonal and federal law), the second-instance cantonal appellate courts and the Federal Supreme Court (the highest judicial authority in Switzerland). As an exception to the principle of double instance at cantonal level, there are certain specific matters that are brought directly before an inferior federal court (e.g., the Federal Administrative Court or the Federal Criminal Court) and other matters that can be directly decided by the exclusive first cantonal instance. Some cantons have established a commercial court as a sole cantonal instance competent for certain disputes relating to commercial matters. Judgments of the first-instance cantonal courts are generally subject to appeal to the second-instance cantonal appellate courts, and judgments of an inferior federal court, the second-instance cantonal courts or the sole cantonal instance courts are subject to appeal to the Federal Supreme Court, if certain conditions are met. No special courts with jurisdiction over securities-related actions exist in Switzerland.
iv Regulatory bodies
FINMA is an independent regulatory body monitoring developments at financial institutions under its supervision and the financial market in Switzerland. FINMA has statutory authority to supervise securities exchanges, licensed banks, insurance companies, securities dealers and collective investment schemes. It authorises their operations to engage in financial market activity, and ensures that the supervised institutions comply with the requisite laws, regulations and ordinances and maintain their licensing requirements. FINMA has certain limited powers to enforce the provisions of the FMIA and to proceed with and take administrative measures against any failure to disclose shareholdings, insider trading and market manipulation. As a general rule, decisions of FINMA may be challenged at the Federal Administrative Court, the decisions of which may be appealed at the Federal Supreme Court. The prosecution of insider trading and market manipulation is the responsibility of Switzerland's attorney general.
The SIX Swiss Exchange is a self-regulated organisation whose investigative bodies supervise and enforce compliance with its rules, regulations and directives. Any appeals against a sanction decision made by a SIX Exchange regulation or disputes between the SIX Swiss Exchange and any listed company concerning the listing, delisting or trading of securities on SIX are filed with the Sanctions Commission or the Independent Appeals Board and can subsequently be submitted to the Board of Arbitration.
The Swiss Takeover Board enacts rules on public takeover offers and public share buybacks, and supervises compliance with those rules. Decisions of the Takeover Board may be challenged before FINMA and, finally, the Federal Administrative Court.
In contrast to other jurisdictions (e.g., the United States, the EU and the EEA), in principle there is currently no requirement for a prospectus to be filed with, or approved in advance by, a regulatory authority in connection with the offering of equity or debt securities in, from or into Switzerland. This constitutes a major advantage for Swiss securities offerings with respect to time to market. However, with the contemplated implementation of the new prospectus regime (as discussed further in Section II.i), a requirement for ex ante approval of prospectuses, including in the case of secondary public offerings, will be introduced.
II THE YEAR IN REVIEW
i Developments affecting debt and equity offerings
Of the numerous developments affecting debt and equity offerings in Switzerland, the following are of particular interest.
Swiss Federal Financial Services Act to enter into force
On 15 June 2018, Parliament adopted the Swiss Federal Financial Services Act (FinSA). The final version of the Swiss Federal Financial Services Ordinance (FinSO), implementing the FinSA and specifying several details on how the new prospectus regime principles will be implemented, is expected in November 2019. The FinSA is expected to enter into force together with the FinSO on 1 January 2020 with a transitional period of two years. However, new public offerings and admissions to trading will need to comply with the new prospectus regime six months after a review body (as defined below) is admitted by FINMA.
The FinSA will set out cross-sector rules for the provision of financial services, introduce a comprehensive and harmonised prospectus regime to meet EU equivalence requirements while reflecting specific Swiss circumstances, and will be applicable to all public offerings of financial instruments and all securities to be admitted to trading on a trading platform in Switzerland.
With regard to the offering of equity and debt securities, fundamental innovations of the Swiss capital markets regulation include:
- the requirement for approval for all offering and listing prospectuses by a new regulatory body (review body) that is licensed and supervised by FINMA, irrespective of whether the securities are admitted to trading on a Swiss trading platform;
- an obligation to publish a prospectus not only for primary but also for secondary public offerings of securities in Switzerland;
- the codification of the private placement exemption and other exemptions to publish a prospectus in line with accepted Swiss standards and the EU Prospectus Directive;6 and
- the requirement to prepare a basis information document in the case of offerings of financial instruments other than shares (or comparable equity securities) or debt instruments without derivative character to retail investors containing all necessary information to enable a client to make a decision about its investment, presented in an easily comprehensible way and designed to make financial instruments easier to compare.
While, in principle, the review body would have to approve a prospectus prior to a public offering or an admission of securities to trading on a Swiss trading platform, a prospectus for certain debt securities (e.g., bonds) can be approved after its publication, provided certain requirements are met. By preserving the advantage of the current approval process for listing prospectuses in the Swiss debt capital markets, Switzerland continues to ensure attractive time-to-market conditions for issuers of debt instruments.
Another significant change brought in by the FinSA is that prospectuses prepared under foreign legislation may be approved by the review body if they are prepared according to international standards established by international organisations of securities regulators and the disclosure and ongoing reporting duties are equivalent to the requirements set forth in the FinSA.
Swiss Federal Financial Institutions Act to enter into force
On 15 June 2018, parliament adopted the Swiss Federal Financial Institutions Act (FinIA). The final version of the Swiss Federal Financial Institutions Ordinance (FinIO) implementing the FinIA is expected in November 2019. The FinIA and the FinIO are expected to enter into force together with the FinSA and FinSO on 1 January 2020 with a transition period of two years. The FinIA and the FinIO essentially harmonise the authorisation rules for financial service providers and will, for the first time in Switzerland, subject independent portfolio managers and trustees to licensing requirements and continuous prudential supervision.
Simultaneously with the enactment of the FinSA and the FinIA, the SESTA and the corresponding implementing ordinances will cease to exist.
The entry into force of the FinSA and FinIA will lead to important changes to the CISA. It is particularly noteworthy that certain regulatory requirements introduced in 2013 as part of the CISA Revision 2013 will already be amended or abolished. For example, the requirement to appoint a Swiss representative and a Swiss paying agent for foreign collective investment schemes distributed to qualified investors in or into Switzerland will no longer exist (some exceptions apply). Another important change consists of the abolition of the CISA distributor licence in its current form.
The scope of the CISA will be substantially reduced as a result of the entry into force of the FinSA and FinIA: in essence, the CISA will continue to contain the product level requirements for Swiss collective investment schemes and for foreign collective investment schemes offered to investors in Switzerland, whereas in contrast, the licence requirements for fund management companies and asset managers of collective investment schemes will be incorporated in the FinIA, and the fund industry specific point of sale duties of the CISA will be replaced by the new cross-sectoral code of conduct duties of the FinSA.
Under the revised CISA, distributors of collective investment schemes will no longer be subject to a licensing requirement, regardless of whether they distribute collective investment schemes exclusively to non-qualified or (also) to qualified investors.
FINMA guidelines regarding initial coin offerings
To provide increased legal certainty regarding regulatory matters and streamline the procedure for obtaining negative clearance regarding certain regulatory aspects of initial coin offerings (ICOs), FINMA published ICO guidelines in February 2018.
In August 2019, based on guidance issued by the Financial Action Task Force (FATF) on virtual asset service providers in June 2019, FINMA published guidance on the application of Swiss anti-money laundering rules to financial services providers supervised by FINMA in the area of blockchain technology (FINMA Guidance 02/2019). The FINMA standard is one of the most stringent in the world as, unlike the FATF standard, it does not include an exception for unregulated wallets. If information about the sender and recipient cannot be transmitted reliably in the respective payment system, FINMA-supervised institutions are not permitted to receive tokens from customers of other institutions or to send tokens to such customers.
In September 2019, FINMA published a supplement to its ICO guidelines outlining the treatment of stable coins under Swiss supervisory laws, noting that since mid-2018 an increasing number of ICOs and other tokenisation projects are based around the creation of stable coins. The aim of stable coins is typically to minimise value fluctuations of payment tokens such as bitcoin by backing the tokens with assets such as fiat currencies, commodities, real estate or securities. In this context, FINMA has confirmed that its treatment of stable coins under supervisory laws follows the existing approach for blockchain-based tokens, focusing on substance over form and that, in ruling on concrete projects, it will follow the 'same risks, same rules' principle. The stable coin supplement includes specific remarks on possible categories of stable coins (currencies, commodities, real estate and securities) for indicative purposes and sets out supplemental minimum requirements for enquiries concerning stable coins.
In its press release regarding the stable coins ICO guidelines supplement, FINMA also confirmed that the Libra Association had asked FINMA for an assessment of how it would classify the Libra project under Swiss supervisory law and provided an indicative classification under Swiss supervisory law. FINMA noted, inter alia, that the Libra project as currently envisaged would require a payment system licence under the FMIA and that, given the planned international scope of the project, an internationally coordinated approach would be required.
ii Developments affecting derivatives, securitisations and other structured products
FinSA stipulates that structured products may only be offered to private clients (absent an asset management agreement) into, in or from Switzerland if they are issued, guaranteed or secured in an equivalent manner by a Swiss bank, insurance company securities house or insurance company, or a pertinent foreign institution subject to equivalent standards of supervision.
iii Cases and dispute settlement
Lawsuits involving breaches of securities law are not common in Switzerland. In 2019, no relevant decisions were published in the area of Swiss capital market law.
iv Relevant tax and insolvency law
Corporate tax reform
Switzerland has been undergoing major corporate tax reforms. The third corporate tax reform package proposed by the Swiss Federal Council intended to abolish certain tax advantages for holding, domiciliary and mixed companies pursuant to an agreement with the EU as well as implementing tax advantages deemed to be in line with EU rules.
The third corporate tax reform package hit a political roadblock when voters rejected it in a referendum in February 2017, with an unexpectedly high proportion of 59.1 per cent of the popular vote. While the Federal Council has announced its intention to propose a new reform package as soon as possible, the referendum added a lot of uncertainty, in part because it is unclear whether a new package will be in place within the time frame agreed with the EU.
In the meantime, the Federal Council has proposed a well-balanced new reform package and submitted it to the Swiss Federal Parliament. On 28 September 2018, the Swiss Federal Parliament adopted Tax Proposal 17 with a clear majority.
On 19 May 2019, Swiss voters approved the reform package with 66.4 per cent of the popular vote in a referendum (combined with more than 2 billion Swiss francs of additional funding for Switzerland's statutory pension system, AHV/AVS). The aim of the reform package is to create an internationally compliant, competitive tax system for companies by abolishing existing tax privileges for companies that operate predominantly internationally (subject to phase-in) and introducing replacement measures including a general reduction of tax rates, a Patent Box, an R&D super-deduction, a step-up upon migration of companies or activities to Switzerland for tax purposes and the option for cantons to introduce a notional interest deduction.
Detailed draft regulations are expected to be issued by the Swiss Federal Tax Administration by year-end 2019. In order for the new rules to come into effect on 1 January 2020, Swiss cantons must pass amendments to the cantonal tax laws.
Withholding tax reform
Another troubled Swiss tax reform project relates to withholding tax. Currently, a Swiss issuer of bonds must deduct withholding tax at a rate of 35 per cent from interest, and certain other payments made to investors inside and outside Switzerland (debtor-based regime).
Because it may be difficult for investors outside Switzerland to reclaim Swiss withholding tax, the current system makes it impracticable for Swiss issuers to directly access investors outside Switzerland. This has had a material adverse effect on the Swiss capital markets for decades. To address this issue, the Federal Council published draft legislation in December 2014 to, among other things, replace the current debtor-based regime with a paying agent-based regime for Swiss withholding tax, whereby a withholding would be required only for Swiss investors. The Federal Council withdrew the draft legislation in June 2015 and mandated the Federal Finance Department to appoint a group of experts to prepare a proposal for reform of the Swiss withholding tax system. Because of a popular initiative to enshrine banking secrecy in the Swiss Constitution, this project was put on hold in 2015 pending the results of the referendum. To facilitate compliance by banks with the tougher capital requirements under Basel III prior to the reform of the Swiss withholding tax system, the Federal Council has exempted contingent capital instruments and bail-in bonds from withholding tax until 2021.
On 9 January 2018, its sponsors withdrew the banking secrecy initiative. Following this withdrawal, the Federal Council and the group of experts have recommenced the withholding tax reform project. Implementation of the reform is expected to take about two years.
v Role of exchanges, central counterparties and rating agencies
Financial market infrastructures (FMIs) in Switzerland include stock exchanges and other trading venues, central counterparties (CCPs), central securities depositories (CSDs), trade repositories and payment systems. FMIs require authorisation from FINMA before they can commence operations. Stock exchanges and trading venues must establish their own independent regulatory and monitoring organisations appropriate to their activities under FINMA supervision. CCPs shall require deposits of collateral in the form of initial margins, variation margins and default fund contributions from all trading participants to enable them to settle transactions in an orderly way. Furthermore, CCPs must have adequate capital and diversify their risk appropriately, and must separate their own assets, receivables and liabilities from the collateral, receivables and liabilities of its participants. CSDs must ensure the proper and lawful custody, recording and transfer of securities, and that the number of securities deposited with them equals the number of securities credited to their clients.
III OUTLOOK AND CONCLUSIONS
The continuing comprehensive reform of the Swiss financial market regulatory framework will usher in a new era of securities regulation and is essential for aligning Swiss regulations to the EU equivalence standards to preserve access to the European financial markets. In particular, the introduction of a new harmonised prospectus regime aiming to establish a level playing field with corresponding EU prospectus regulations is an important step towards ensuring that Switzerland's capital markets environment remains attractive and keeps up with international standards. While parts of the new regulation will be in line with well-established Swiss market practice (e.g., the content of prospectus and private placement exemptions), other areas will require special attention from market participants and advisers.
1 François M Bianchi, Daniel Bono and Till Spillmann are partners and Andrea Giger is a senior associate at Niederer Kraft Frey AG.
2 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments.
3 Regulation (EU) No. 600/2014 on markets in financial instruments.
4 Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading.
5 Regulation (EU) No. 1286/2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs).
6 Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading.