There are currently 1,740 Swiss domiciled funds registered with the Swiss Financial Market Supervisory Authority (FINMA). This number includes both retail funds and funds open to qualified investors only. By comparison, there are currently 8,177 funds established abroad (foreign funds) that are registered with FINMA for marketing in Switzerland. These are overwhelmingly retail funds established as European UCITS (retail) funds.
Since foreign alternative funds (offered exclusively to qualified investors in Switzerland) are not subject to registration with any local governmental body, there are no statistics available regarding their number. Nevertheless, it is clear that this number very substantially surpasses that of the foreign funds registered with FINMA and the Swiss funds combined.
Switzerland is a jurisdiction of choice for raising capital among managers from all over the world, particularly for alternative investment funds. This is due to factors such as the high concentration of private wealth in the country and the strength of the Swiss banking and asset management industry. Swiss banks, pension funds and the numerous family offices located in Switzerland are often a focus of interest for promoters seeking investment.
Switzerland as a Fund and Service Provider Jurisdiction
As a fund domicile, Switzerland appears somewhat less competitive on an international basis, with Swiss funds catering mainly to the needs of local institutional and retail investors. This is due, largely, to the taxation system, which can make foreign investment in a Swiss fund less attractive. For more information on the taxation system, please see 2.6 Tax Regime.
Nevertheless, Switzerland's financial market stands out for the quality of its infrastructure and its large numbers of highly skilled professionals. As a result, even though foreign funds established for international investment are seldom domiciled in Switzerland, Swiss banks and asset managers are often a part of the service structure. Finally, wealthy investors often choose Swiss banks to hold their assets.
The formation of Swiss funds is subject to the Swiss Collective Investment Schemes Act (CISA) and its implementing ordinances, the Swiss Collective Investment Scheme Ordinance (CISO) and the FINMA-Swiss Collective Investment Scheme Act (FINMA-CISO).
There are two forms of regulated Swiss open-ended collective investment schemes. The first is a contractual fund with no legal personality (FCP), and the second is a corporate fund in the form of an Investment Company with Variable Capital (SICAV). Both FCPs and SICAVs are subject to the same investment rules. They are both divided into "fund categories", based on their investment strategy.
The most common and flexible categories for open-ended Swiss alternative investment funds are the so-called "other funds for alternative investments" and "real estate funds". Depending on the overall strategy and asset allocation, it is also possible to structure a vehicle investing in alternatives as a fund for "traditional investments".
There have even been "securities funds" (the Swiss equivalent to the European Undertakings for Collective Investment in Transferable Securities – UCITS) used to pursue an alternative strategy. However, in such a case, it is very challenging to meet the strict investment restrictions imposed by the legislation on these vehicles (please also see 3.3.1 Regulatory Regime).
Regulated alternative funds can also be set up as closed-ended structures. CISA provides for a Limited Partnership for Collective Investment Schemes (LPCI) and a Company with Fixed Capital (SICAF).
The LPCI's sole purpose is collective investment, primarily in venture capital. Investments in companies or projects can take the form of equity capital, lending or mezzanine financing. Permitted investments generally include real estate development and infrastructure projects. Investments in LPCIs are open to qualified investors only (as described in 2.3.7 Investor Protection Rules). LPCIs do not have legal personality, but can enter into obligations and exercise their rights as a company with legal personality can.
At least one partner’s liability is unlimited (the general partner). Only a Swiss corporation can act as the General Partner. The other investors' (limited partners) liability is limited to the amount of their contribution to the partnership. There are currently 22 registered LPCIs in Switzerland.
Not a single SICAF exists at this time. For this reason, this structure will not be addressed in detail.
Unregulated Investment Companies
Finally, unregulated Investment Companies (ICs) can be established for investment in alternative assets. Such companies are subject only to the applicable company law rules in the Swiss Code of Obligations (CO). To remain out of scope of CISA, the following conditions need to be met:
If any of these conditions is not fulfilled, the company falls within the scope of the (regulated) SICAF.
Based on the information available regarding listed ICs, they are most used for investment in private equity, hedge funds, venture capital and real estate vehicles. No information is publicly available for unlisted ICs.
FCPs are established by a collective investment agreement (the Agreement) entered into between (i) the investors, (ii) a licensed fund management company and (iii) a licensed custodian bank. Under the Agreement, the fund management company undertakes to manage the assets of the fund in accordance with the Agreement, independently and in its own name. It is further obliged to ensure the investors participate in the investments proportionally to their interests.
The fund management company then submits the Agreement (with the integrated prospectus) to FINMA for approval, with the explicit consent of the custodian.
The establishment of a SICAV, for the most part, takes place according to the company law rules on corporations as set out in the CO. Only those corporation formation rules in the CO appertaining to contributions in kind, acquisitions in kind and particular advantages are not applicable to the formation of SICAVs. CISA governs those situations specifically.
SICAVs generally delegate management to a third party. Only a FINMA licensed fund management company is enabled to carry out this delegated function.
An act of incorporation in the form of a public deed is required to establish a SICAV. The deed must include the articles of incorporation and the investment guidelines. Furthermore, the officers of the SICAV are appointed upon incorporation.
Since the SICAV itself is subject to authorisation by FINMA, and its documentation is subject to approval by FINMA, all the documents must be submitted to the regulator prior to the issuance of the public deed. The SICAV cannot be registered in the commercial register (and thus acquire legal personality) until FINMA has issued a certificate confirming the prior authorisation of the SICAV and the approval of the documents.
The establishment of an LPCI, for the most part, takes place according to the company law rules on ordinary limited partnerships and foreseen by the CO. The general partner must be a Swiss corporation and can only act in such capacity for one LPCI, unless it holds a FINMA licence as a manager of collective assets. Investors are limited to qualified investors only. Registration in the commercial register can only take place after FINMA has licensed the partnership itself and approved the limited partnership agreement.
To establish a SICAF, mainly the CO rules pertaining to ordinary corporations apply. As in the case of the LPCI, the SICAF itself must obtain a licence from FINMA confirming that its internal organisation is appropriate according to CISA. Furthermore, the articles of incorporation and the investment guidelines themselves are subject to review regarding their compliance with the legislation, and ultimately to approval by FINMA. As stated above, there are still no registered SICAFs despite their inclusion in CISA in January 2007, so they are not of practical relevance.
Unregulated Investment Company
To establish an unregulated IC, the ordinary process to form and register a corporation according to the rules of the CO takes place. The articles of incorporation must foresee that only qualified investors can become shareholders. Once the relatively simple paperwork is prepared, the incorporation and registration of the company can take place in a matter of days, since no regulatory licensing process or approval is required.
Timing of Licensing Process
The timing to obtain an approval of any of these funds can vary greatly depending on the workload of FINMA, the complexity of the project and the sophistication of the parties involved. It is common for an approval process to take between three and six months. However, with respect to specific standardised applications (so-called "fast track" processes), funds open only to qualified investors are to be "automatically" approved upon submission – except for funds in the category "other funds for alternative investments", for which the approval is deemed to take place after four weeks. Nevertheless, since these deadlines only begin to run once FINMA is satisfied with the documentation provided, the approval process can easily take longer than the foreseen deadlines.
Investors in Swiss open-ended funds (FCPs and SICAVs) are only liable to pay for their interest in the fund. They have no further liability as investors.
However, in the case of the closed-ended LPCI, at least one partner’s liability is unlimited (the general partner). The other partners (the limited partners) are not liable beyond paying for their investment.
On 1 January 2020, the new Swiss Financial Services Act (FinSA) and the Swiss Financial Services Ordinance (FinSO) entered into force, entailing a revision of CISA and CISO, which now mainly address the fund products themselves. FinSA and FinSO now provide the unified standards with which all financial service providers must comply. They include client information and conduct rules, which also apply to investment fund linked services.
The approval of the relevant disclosure documents for funds remains in the scope of responsibility of FINMA. CISA, as amended on 1 January 2020 to be in line with FinSA, provides for the applicable process.
FCPs and SICAVs must issue a prospectus. The fund regulations (respectively the articles of incorporation) are usually an integral part of the prospectus. FINMA must approve the fund regulations of the FCP and the SICAV as well as the articles of incorporation of the SICAV as required by CISA. FINMA may waive all or some of the disclosure requirements when the fund is open only to qualified investors.
Furthermore, any fund that may be offered to retail investors requires a "key investor document" (KID) based on the EU PRIIP KID. For open-ended funds established prior to the change of legislation, there is a transitory period until 31 December 2020 during which they can continue to use their existing "simplified prospectus" or "key investor information document" (KIID). The minimum information to be included in all these documents is set out in FinSO.
LPCIs must issue a prospectus that includes the partnership agreement, which is subject to FINMA approval. Its content requirements are to be found in CISA. The SICAF is also required to issue a prospectus, which includes the articles of incorporation and the fund regulations. Both are subject to FINMA approval. As mentioned, there are currently no SICAFs registered by FINMA and, accordingly, they are factually of no relevance in the Swiss fund landscape.
Since LPCIs cannot be open for investment to retail investors, no KID is required. However, if a SICAF was ever established in Switzerland, the rules noted above pertaining to the issuance of a KID would apply.
Alternative foreign funds can only be marketed to qualified investors in Switzerland. Up until 31 December 2019, this implied appointing a Swiss Representative and a paying agent. Furthermore, the offering and marketing documents needed to include specific disclosure regarding, in particular, the Swiss representative and the paying agent, the country of origin of the fund, the place of performance and jurisdiction, and information on the payments of retrocessions and rebates. Transitional provisions foresee that, until all service providers (such as a fund intermediator) are fully compliant with all the new rules applicable to them under FinSA, these appointment and disclosure obligations continue to apply. The transitional period ends either upon full compliance with the new FinSA rules or 31 December 2021, whichever is earlier.
Further to the disclosures in the fund documents, FinSA includes numerous generally applicable disclosure obligations for all kinds of service providers to abide by in their interactions with clients. These disclosures apply, inter alia, to services relating to investment funds. It is notable that financial service providers who, for example, market or advise on fund investments must disclose in advance to the client any payments they receive from third parties (such as the manager of the fund) in connection with this activity (retrocessions). Unless the client provides a waiver, it is entitled to claim the amount of the retrocessions paid to the financial service provider.
Swiss funds generally must issue and provide FINMA with (unaudited) semi-annual reports within two months of the end of the first half of the business year. Audited annual reports are to be prepared and filed with FINMA within four months of the end of the business year. Furthermore, open-ended funds must publish the net asset value of their shares at regular intervals. Finally, there are numerous reporting obligations to FINMA concerning changes to the approved organisation of the fund, changes pertaining to persons in management, and changes of the fund documents. Many of these changes require approval from FINMA before they can be implemented. Furthermore, numerous publications on the platform chosen by each fund are required in such instances as a means to inform the investors.
Foreign alternative funds, which are usually not approved by FINMA for marketing in Switzerland, shall not, after the expiration of the transitional period on 31 December 2020 (with the exception of marketing to high net worth individuals) have any specific reporting obligations. This is different for foreign retail funds (please see 3.1.4 Disclosure Requirements).
There is substantial appetite for alternative funds among investors in Switzerland. Investor interest in such funds continues to increase in the light of the poor returns in several forms of traditional investments. The negative interest rate environment in particular is adding to the search for higher yields, even if doing so results in taking higher risks.
Banks and other asset managers looking for better returns for their clients will consider allocations to alternative funds within the limits of their client mandate. Swiss pension funds are currently allocating to more alternatives, hoping to compensate for insufficient yields within the scope of the legal restrictions applicable to them. High net worth individuals also invest in this asset class themselves or through family offices. It is important to point out that this substantial interest does not particularly focus on Swiss products. Much of the Swiss investors' allocation to alternative products flows into funds established outside of Switzerland.
Please see 2.1.1 Fund Formation regarding the Swiss legal structures used for alternative funds. As previously noted, there is a large fund-raising market in Switzerland for alternative investment established outside of Switzerland as well.
A sponsor of Swiss open-ended alternative funds can choose whether it wants to limit the scope of the investors to qualified investors or to also offer the product to non-qualified investors (considered as retail investors in Switzerland). Limiting the circle of investors to qualified investors enables FINMA to exempt the funds from some of its obligations pertaining to, eg, disclosure, redemptions, cash issuance and redemptions of shares and risk diversification.
As for closed-ended funds, LPCIs can only be open for investment to qualified investors by definition. As regards a Swiss investment company, limiting investment to qualified investors or not will determine whether or not the vehicle needs to be regulated by FINMA. If non-qualified investors are accepted, the company qualifies as a SICAF and is subject to authorisation by FINMA. If only qualified investors are admissible (or if the company is listed on a Swiss exchange), the company qualifies as an (unregulated) investment company.
Please see 2.1.1 Fund Structures regarding the different categories of alternative funds established in Switzerland and their investment categories; the licensing process is described in 2.1.2 Common Process for Setting up Investment Funds.
Open-ended Alternative Funds
Two common categories for "truly" alternative investments for FCPs and SICAVs are "other investment funds for traditional investments" and "other investment funds for alternative investments".
Both of these categories can invest in equity, funds, money market instruments, call and time deposits of up to 12 months, precious metals, derivatives and structured products with varied underlyings.
The investment techniques permitted for other funds for traditional investments include loans of up to 25% of the net assets, pledging or transfer as collateral of up to 60% of the net assets, and commitments to an exposure of up to 225% of the net assets. They can engage in short selling.
Other investment funds for alternative investments provide the most flexibility and minimal diversification requirements. Further to the above, they may also invest in all kinds of commodities, raw materials and their respective certificates. Permitted investment techniques include loans of up to 50% of the net assets, pledging or transfer as collateral of 100% of the net assets, and committing to an exposure of up to 600% of the net assets. They can also engage in short selling.
FCPs and SICAVs can also take the form of real estate funds, which are often considered a distinct alternative asset class and may invest, in particular, in real estate, real estate companies, interests in real estate funds and real estate assets abroad. The use of derivatives is permissible, subject to limitations. As security for loans, real estate funds may not encumber their real assets on average for an amount exceeding one third of their market value.
Closed-ended Alternative Funds
LPCIs are closed structures intended for investment in venture capital, private equity, real estate and infrastructure projects, and "other alternative investments". The applicable legislation does not provide for restrictions on the investment techniques, so they are set out in the fund documents, subject only to approval by FINMA. These vehicles are not very common and have been used mainly for real estate and real estate development.
As mentioned, there are no SICAFs, even if this form of closed-ended fund is a theoretical alternative to setting up an alternative investment vehicle. CISA refers to the permissible investments for "other funds" described above, but does not address any investment restrictions or techniques regarding the SICAF. Accordingly, as for the LPCI, such rules need to be included in the fund documents, subject only to approval by FINMA.
The fund management company, the SICAV, the LPI, the SICAF and the investment manager of a Swiss fund must all hold a FINMA licence to act in their respective capacity. Furthermore, only a licensed Swiss bank can act as the custodian of a Swiss fund.
Switzerland must remain the place of effective management of Swiss funds. Nevertheless, it is possible to delegate specific tasks to third parties if they have the required capability, knowledge and experience, and – as the case may be – hold the required licences. The outsourcing of investment decisions and certain administrative tasks to third parties must be in the interest of sound management. Investment decisions can only be delegated to a manager outside of Switzerland subject to equivalent prudential supervision. Finally, even when delegation is possible in principle, a delegation abroad is addressed on a case-by-case basis with the regulatory auditor and, as the case may be, the regulator. The delegation abroad may not hinder the supervisory tasks of the auditors or the regulator. Adherence to Swiss regulatory obligations must be ensured, even if a task is delegated outside of Switzerland.
Swiss funds cannot be managed by a foreign manager, as the place of effective management must be in Switzerland (please see 2.3.2 Requirements for Non-local Service Providers).
Please see 2.1.2 Common Process for Setting up Investment Funds regarding the establishment of Swiss funds.
As previously mentioned, FinSA just entered into force on 1 January 2020 and applies (alongside its implementing ordinance FinSO) to all financial service providers, including firms marketing alternative and retail funds in Switzerland. The well-established marketing rules of CISA based on the concept of "distribution" no longer exist.
Marketing as a Financial Service
Based on FinSA, the sale and purchase of a financial instrument (which includes interests in collective investment schemes) constitutes a financial service. FinSO further details that "any activity undertaken directly towards a client specifically aiming to purchase or sell a financial instrument" is in its scope. In view thereof, it appears likely that classic marketing of fund interests to end clients is in the scope of FinSA. Contrarily, the sale or purchase of a financial instrument between regulated financial intermediaries should not be a financial service, since the purpose of the legislation is to protect the end client.
New client advisers and register
A substantial novelty under FinSA is the concept of client advisers. Any natural person providing financial services (such as fund intermediation to end clients) in or into Switzerland qualifies as a client adviser under FinSA, irrespective of whether they act in the name of an entity providing financial services or in their own name.
Client advisers of Swiss and foreign unregulated financial service providers (such as previously regulated "distributors" and other unregulated fund marketers and placement agents) must register in a new client adviser register in Switzerland. Based on guidance published by the Federal Council, it should also be possible for entities to register on behalf of their individual client advisers, but there is no clear legal basis for this statement.
Client advisers of foreign financial service providers subject to prudential supervision abroad (eg, regulated fund managers) are exempt from the registration obligation if they provide their services exclusively to professional or institutional clients (see 2.3.7 Investor Protection Rules) in Switzerland. Finally, client advisers of FINMA regulated Swiss branches and representative offices of foreign financial service providers do not need to register in the client adviser register.
Client advisers are granted a transitional period of six months to notify the client adviser register of their intention to become registered. As no such register has been authorised by FINMA prior to 1 January 2020, the six-month period begins to run as of the first authorisation of a client adviser register.
New Ombudsman office
All financial service providers active in Switzerland, including those marketing funds, must join an ombudsman office. This is to ensure there is a possibility of mediation for differences between financial service providers and their clients in Switzerland. Financial service providers must inform their clients of the possibility to make use of a mediation process with the ombudsman office. Affiliation with an ombudsman office is one of the requirements to obtain registration in the client adviser register.
Financial service providers enjoy a six-month transitional period to comply with the affiliation requirement. Since no ombudsman office was authorised by 1 January 2020, the six-month period begins to run as of the first authorisation of an ombudsman office.
Marketing as an Offer
Under FinSA, an offer is a different concept to providing financial services as described above. Based on the new legislation, an offer implies "providing sufficient information on the terms and the financial instrument itself". The offer must further "usually be intended to draw attention on the particular financial instrument and to sell it".
Whether the activity in Switzerland qualifies as an offer or not is relevant to determine when fund documentation such as a prospectus or a KID is required. Furthermore, for foreign funds it is the trigger, when applicable, for the requirement to appoint a representative and paying agent in Switzerland.
For information about marketing foreign alternative funds, please see 2.3.6 Marketing of Alternative Funds.
Fund managers can generally market open-ended Swiss funds to all investors, but can choose to limit access to qualified investors only upon establishing the fund. This allows the requesting of certain exemptions from the general investor protections rules from FINMA pertaining to disclosure, redemptions, cash issuance and redemptions of shares and risk diversification, for example.
Closed-ended LPCIs and unregulated ICs may only be marketed to qualified investors, irrespective of their investment strategy. However, by listing the shares of an IC on a Swiss exchange, they can be made available also to non-qualified investors without triggering a licence obligation. Finally, a SICAF pursuing an alternative strategy is open for investment to non-qualified investors. However, as previously stated, there have not yet been any SICAFs authorised by FINMA.
As mentioned, CISA underwent a revision because of the coming into effect of FinSA. Based on these changes, foreign alternative funds may now generally be marketed in Switzerland to qualified investors without appointing a Swiss representative and paying agent. There is, however, one exception: such appointments remain necessary for marketing to high net worth individuals who have opted out. To market to such individuals, a Swiss representative and a paying agent must be appointed (as was the case for marketing to all qualified investors in Switzerland until 31 December 2019.)
Nevertheless, it is crucial to bear in mind that the transitional provisions of FinSO foresee the obligation to appoint and maintain a Swiss representative for foreign funds marketed to all qualified investors until the relevant marketer is fully compliant with FinSA. This means that a foreign fund marketer must have implemented all FinSA registration, affiliation, conduct and organisational rules to the extent applicable before they can effectively do without those Swiss agents. During the transition period, further to the continued obligation to appoint a Swiss representative and paying agent, pre-existing relationships with the Swiss distributors should be maintained as well. Finally, the conduct rules issued by the Swiss Fund and Asset Management Association (SFAMA) remain in force for the same period of time. In any case, all service providers must be entirely FinSA-compliant by 31 December 2021 at the latest.
As protection for unsophisticated investors, many Swiss and foreign funds are only accessible to qualified investors (see also 2.3.1 Regulatory Regime). The list of qualified investors in CISA now refers to the client segmentation generally undertaken for all financial service clients in FinSA. Under these new rules, the following are deemed qualified investors:
Clients who are not professional investors are retail/non-qualified investors.
Further protection of the investors takes the form of, in some instances, appointing a Swiss representative and paying agent. This is the case, for example, to obtain FINMA approval for a foreign UCITS fund.
Finally, the investment and borrowing restrictions for the various fund categories set out in CISA are also intended to protect the investors.
FINMA's approach towards market members can vary substantially from one department or one responsible officer to another. Recently, however, there has been increased willingness to informally discuss regulatory questions and to consider new ideas. In addition, it now takes less time to obtain certain decisions and licences than in the past.
FINMA was one of the first to publish guidance for the market on the legal and regulatory issues connected to the fast-paced technological developments. Although a cautious regulator, it is nevertheless open to new ideas. At the same time, FINMA is not hesitating to initiate enforcement proceedings against market participants that act outside of the regulatory boundaries.
The restrictions on alternative funds mostly concern the kind of investors that can be approached, as well as the investment and investment technique limitations foreseen for each of the categories. For more information, please see 2.3.1 Regulatory Regime.
Protection of assets is addressed separately by the requirement to appoint a custodian bank, which must be a licensed Swiss bank for open-ended Swiss alternative funds and SICAFs (in theory). Further to the banking licence, the establishment's organisation must be adapted to the purpose of acting as a custodian bank. Its role is not limited to custody of the assets: the custodian bank is also responsible for the payment flows as well as the issuance and redemption of fund interests, and is further entrusted with control functions pertaining to the compliance of the fund management company with its legal obligations.
If deemed appropriate, FINMA can approve the appointment of a prime broker instead of the custodian bank. The prime broker must hold either a Swiss banking licence or a Swiss securities dealer licence.
Please see 2.3.1 Regulatory Regime for the risk control mechanisms set out in CISA. Detailed rules on bookkeeping and the valuation of assets are also imposed on the fund management company by CISA and its implementing ordinances, CISO and FINMA-CISO. For real estate funds, the fund management company must appoint special valuators, which must have FINMA approval. Investors in open-ended funds are also entitled to request information on valuations from the fund management company.
FinSA provides conduct rules that apply to all financial service providers, addressing common issues such as best execution, conflicts of interest, use of insider knowledge and market manipulation. As the case may be, criminal sanctions may apply.
Borrowing is generally possible for the main types of alternative investment funds. Nevertheless, restrictions on the amounts and on providing security differ from one category of funds to another. FINMA may grant exemptions to the rules in the CISA on a case-by-case basis.
Securities funds may take out loans temporarily and up to a limit of 10% of their net assets. They can pledge or transfer the ownership of securities as collateral up to a maximum of 25% of the fund’s net assets.
As collateral for loans, real estate funds may not encumber their real assets on average for an amount exceeding one third of their market value.
Other funds for traditional investments can borrow up to 25% of the fund's net assets. They can pledge or transfer as collateral up to 60% of the fund's net assets. Total exposure is limited to 225% of the net assets.
Other funds for alternative investments can borrow up to 50% of the net assets. They can pledge or transfer as collateral up to 100% of the net assets. Total exposure is limited to 600% of net assets.
Generally speaking, it is common for alternative funds to take out loans and to grant security by pledging or transferring ownership as security for financing the assets of the funds within the limitations above. However, financing of investor subscription money appears to be more limited in Switzerland than it is in other jurisdictions. Such financing has not (yet) become a "specialised field" of both finance and law as is seen in other countries. Nevertheless, loans to high net worth individuals to finance their commitments in a private equity fund, for example, do occur. Furthermore, general partners may in some instances make use of bridge financing to have the committed funds available until the money flows in from capital calls.
Swiss FCPs, SICAVs and limited partnerships for collective capital investments (LPCCIs) are fiscally transparent. The income from net assets of those funds is directly attributed to the investors.
There are two exceptions to that regime: funds that directly hold real estate are liable to income tax and annual capital tax for the income and net assets from such real estate; they remain transparent with respect to other assets and income. Moreover, SICAFs are fiscally opaque entities – ie, subject to income and annual capital taxes like corporations.
However, SICAFs do not play a significant role in the Swiss fund industry.
The Swiss tax treatment of foreign collective investment schemes follows the tax treatment of the Swiss scheme with the closest resemblance in terms of legal form and supervision.
For individual investors holding the units as private assets, the income earned by transparent funds, whether distributed or not, is generally subject to ordinary income tax at the level of the investors. To the extent the fund income derives from capital gains, it is tax exempt if disclosed separately in the fund accounts or distributed by a separate coupon. The profits from direct (Swiss or foreign) real estate investments by the funds are also tax-exempt. Capital gains realised upon the sale of units/participations in a collective investment scheme (CIS) are tax-exempt.
Private individuals holding the fund units in a CIS as business assets, as well as legal entities, are subject to income taxes for any income realised by a transparent CIS, excluding income from direct (Swiss or foreign) real estate income.
Private individuals holding fund units in contractual funds, SICAVs or LPs as private or business assets are subject to cantonal and communal net wealth taxes (art. 14 para. 1 and para. 3 LHID). The fund units are valued at current market values.
Dividend payments by a SICAF to investors domiciled in Switzerland are subject to income taxes like dividends paid by any corporation. A dividend relief can apply to substantial interest/participations exceeding 10%. The dividend amount is then only partially (40-70%) subject to tax. Corporate investors may benefit from the participation exemption regime.
The net income (except capital gains and income from directly held real estate) earned by transparent Swiss CISs is generally subject to Swiss withholding tax at 35%, whether distributed or retained. In the case of a SICAF, only actual dividend payments are subject to withholding tax. Swiss investors may generally claim back the Swiss withholding tax on distributions from a Swiss CIS or SICAF in full. However, Swiss investors cannot reclaim any Swiss withholding tax suffered by a foreign CIS on revenues from its underlying Swiss investments.
Non-resident investors may qualify for an exemption from Swiss withholding tax under the affidavit procedure that is applicable to Swiss CISs that generate at least 80% foreign sourced income.
If the affidavit procedure is not applicable, foreign investors may reclaim Swiss withholding tax based on an applicable double tax treaty, either partially or in full.
The majority of Swiss retail funds are open-ended, and can take the form of either contractual funds (FCPs) or investment companies with variable capital (SICAVs). For retail investors, these funds can use the following asset class categories:
Although a closed-ended structure (investment company with fixed capital – SICAF) could be used for a retail fund, no such vehicle has been registered in Switzerland since its introduction into CISA in 2007.
For further information on the fund structures available in Switzerland, please see 2.1.1 Fund Structures.
Different market participants can act as investment managers of these funds. For an FCP to obtain approval from FINMA, the fund manager must be a FINMA licensed Swiss fund management company. Nevertheless, the fund management company can delegate the investment management to a licensed investment manager of collective investment schemes if this is deemed to be in the interest of the investors. This enables the fund management companies to directly manage their own group's fund investments or to set up white label funds for their investors (eg, Swiss pension funds). Finally, Swiss fund management companies can also establish Swiss funds for licensed investment managers of collective investments with their own investment concept. In such a case, the fund management company (under its own liability) retains the overall management of the fund but delegates the investment decisions to the initiator (licensed investment manager of collective investment schemes) of the fund. This last set-up can be interesting from a synergy perspective. It must nevertheless be borne in mind that there are risks involved for both the fund management company and the investment manager. The fund management company retains responsibility and, as the case may be, can be held liable for damages. Contrarily, the investment manager is at the mercy of the fund management company, which can recall its appointment as investment manager at any time without having to relinquish control over the fund itself.
Please see 2.1.2 Common Process for Setting up Investment Funds for all types of funds except the LPCI, which is by definition closed for retail investment.
Investors in Swiss open-ended funds (FCPs and SICAVs) are only liable to pay for their interest in the fund. They have no further liability as investors.
As for closed-ended vehicles, the LPCI is not available for investment by retail investors. For a SICAF, the shares are those of a typical corporation. Investors are only liable for full payment of their investment.
Please see 2.1.4 Disclosure Requirements, which applies to both alternative and retail funds.
Further to the reporting requirements described in 2.1.4 Disclosure Requirements, foreign retail funds (UCITS) approved by FINMA are subject to numerous reporting obligations, which are the responsibility of the Swiss representative. Ordinary amendments to the fund documents need to be reported to FINMA and, if material, published in Switzerland within 30 days of the relevant changes becoming effective in the home jurisdiction. For certain corporate actions (eg, liquidations and mergers), specific reporting obligations must be met prior to the effective action.
Swiss retail funds are mainly established for and purchased by local investors. There is little interest, generally, in purchasing Swiss funds by foreign investors due to the taxation impediments (withholding tax). Furthermore, unlike UCITS, these funds cannot be passported outside of Switzerland, which also reduces interest beyond the Swiss border. Swiss banks and other local financial institutions are the most likely to purchase their own establishment's products for the portfolio of their local discretionary clients, or to advise such a purchase to their clients.
However, Swiss investors are also interested in investing in European retail funds. That is why Swiss and European banks and other financial institutions set up UCITS outside of Switzerland that can be marketed in the entire EU as well as in Switzerland after having them approved for marketing to Swiss clients by FINMA.
Please see 2.2.2 Legal Structures Used by Fund Managers.
As mentioned, there are two forms of regulated Swiss open-ended collective investment schemes. The first is a contractual fund with no legal personality (FCP), and the second is a corporate fund in the form of an Investment Company with Variable Capital (SICAV). Both FCPs and SICAVs are subject to the same investment rules, and are divided into categories based on their investment strategy.
The category most typically used for retail investors is securities funds, which are the Swiss equivalent of UCITS funds and offer a conservative investment strategy. Nevertheless, real estate funds can also be structured as FCPs and SICAVs which are open to retail investors.
Finally, open-ended funds in the category of "other funds for traditional investments" are considered to follow strategies that present risks comparable to those of the other retail funds.
There are no limitations: anyone can invest in retail funds in Switzerland.
Securities funds are open-ended schemes that invest their assets in securities and comply with the laws of the European Union. They may invest in transferable securities issued on a large scale and in non-securitised rights with the same purpose traded on a stock exchange or on another regulated market. Permissible investments include securities, derivatives, shares of collective investment schemes, money market instruments and short-term deposits. Prohibited investments include precious metals or precious metal certificates, commodities or commodities certificates. Short selling is forbidden. Admissible investment techniques include (within limitations) securities lending, repurchase agreements, credit up to 10% of the net assets, and the pledging and transferring as security of up to 25% of net assets.
Real estate funds may invest, in particular, in real estate, real estate companies, interests in real estate funds and real estate assets abroad. The use of derivatives is permissible, subject to limitations. As security for loans, real estate funds may not encumber their real assets on average for an amount exceeding one third of their market value.
Please see 2.3.2 Requirements for Non-local Service Providers.
A Swiss fund can only be managed by a Swiss fund management company or an authorised Swiss fund in corporate form.
Please see 2.3.4 Regulatory Approval Process.
No licences are required to market funds to retail investors. However, a registration as a client adviser and an affiliation with an ombudsman may be necessary. Please also see 2.3.5 Rules Concerning Marketing of Alternative Funds.
All Swiss funds except LPCIs and ICs can be marketed to anyone, unless they are specifically restricted to qualified investors in the fund documentation. Foreign UCITS funds with FINMA approved documentation may also be offered to all investors.
Swiss retail investors can only invest into Swiss open-ended products (and theoretically SICAFs) that have not been set up to restrict access to only qualified investors. They may not invest in LPCIs. They may only invest in foreign funds established as UCITS and approved by FINMA for marketing in Switzerland.
The disclosure and reporting obligations described in 2.1.4 Disclosure Requirements and 3.1.4 Disclosure Requirements apply.
Finally, an open-ended Swiss fund structured as an "other fund for alternative investments" must include warning wording pertaining to the risks involved in the investment on the front page of the prospectus.
Please see 2.3.8 Approach of the Regulator.
Please see 3.3.1 Regulatory Regime regarding investment and borrowing limitations.
For information on the protection of assets, conduct rules and best practices, please see 2.4 Operational Requirements.
Please refer, generally, to 2.5 Fund Finance, since all categories mentioned (except LPCIs) can be open to retail investors.
Swiss tax law does not distinguish between sorts of funds (alternative, retail or non-retail) but between the type of legal structure of the fund.
Please see 2.6 Tax Regime for further comments.
Please see 2.3.5 Rules Concerning Marketing of Alternative Funds and 2.3.6 Marketing of Alternative Funds regarding FinSA/FinSO and the amendments to CISA.
An initiative for a new Swiss unregulated fund to be included in CISA was launched in June 2019. This would allow the establishment of a new category of Swiss fund – the "Qualified Investors Fund", which would not require FINMA approval and would be the first Swiss unregulated vehicle qualifying as a fund of its kind. The preliminary draft provides for a wide range of investment categories. This is a welcome potential addition to the Swiss fund products on offer. Time to market would increase substantially, which would allow Switzerland to become more competitive as a fund domicile. Nevertheless, the preliminary draft foresees that only a Swiss registered fund management company can manage the vehicle. Also, withholding tax issues affecting foreign investment have not yet been addressed.
A consultation period ended on 17 October 2019. The results and potential adaptations to the suggested draft legislation are not yet available.
The key tax legislative change is Tax Project 17, which entered into force on 1 January 2020. The key aim of the tax reform was the abolition of privileged tax regimes and the introduction of compensatory measures. Most cantons have decreased their corporate income tax rate to 13%. This is particularly relevant to SICAFs, which are subject to corporate income tax.
On 26 June 2019, the Federal Council approved the objectives and key figures for a withholding tax reform. Interest payments to Swiss entities and foreign investors shall be exempt from withholding tax. Indirect investments in debt instruments (eg, through an investment fund) should be treated the same as direct debt investments. This measure is designed to eliminate existing tax disadvantages for Switzerland as a fund centre.
For Swiss resident individuals, withholding tax shall also be applied on interest from foreign investments if held through a Swiss paying agent.
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On 1 January 2020, the Swiss Financial Services Act ("FinSA") and the Swiss Financial Institutions Act ("FinIA") entered into force, together with the implementing ordinances (Financial Services Ordinance ("FinSO") and Financial Institutions Ordinance ("FinIO")). This article aims to highlight the major impacts of the new laws on the investment funds industry, and to give an overview of the introduction of a new Swiss fund category – the Limited Qualified Investor Fund.
FinSA and FinIA and their Major Impacts on the Swiss Funds Industry
In March 2012, the Swiss Federal Council commissioned the Swiss Federal Department of Finance to develop a cross-sector regulation of financial products and services, as well as their distribution. The result of this mandate was the drafts of the FinSA and of the FinIA, which the Federal Council submitted for consultation in the summer of 2014. Some elements of the drafts for consultation met with harsh criticism. In particular, it was argued that the very extensive client protection provisions would severely restrict the freedom of movement of Swiss financial service providers and lead to excessive costs. After partial consideration of the criticism, the Federal Council released the revised drafts for parliamentary deliberations at the end of 2015. Swiss parliament concluded its discussions in June 2018. Following the working out of the implementing ordinances FinSO and FinIO in Q4 2019, the legislative package entered into force at the beginning of 2020.
The main goals of the new supervisory laws are to strengthen investor protection, to create uniform regulatory rules for the provision of financial services and the offering of financial instruments, and to harmonise Swiss financial market law with European requirements, particularly Directive 2014/65/EU on Markets in Financial Instruments (MiFID II), to ensure access for Swiss financial service providers to the European markets.
More specifically, the FinSA defines the conditions under which financial services may be rendered and financial instruments offered. It applies to financial service providers (ie, all natural or legal persons who provide financial services as defined by the law on a professional basis in Switzerland or for clients in Switzerland) and financial instruments makers. The FinSA will also have an impact on the performance of inbound cross-border services, which so far was only partially and – compared to EU and US regulations – extremely liberally regulated.
The FinIA sets the regulatory standards to be met by financial institutions as defined by the law. In the interests of client protection, the FinIA establishes uniform licensing conditions for certain financial service providers and creates new licensing categories. In particular, the FinIA imposes a state licensing and supervision regime on independent asset managers and trustees, which to date have not been prudentially supervised. As a further novelty, the FinIA imposes new licensing requirements for Swiss branches and representative offices of foreign financial institutions.
Impacts of FinSA and FinIA on the investment funds industry
Introduction of new fund marketing concept
So far, the marketing of collective investment schemes ("CIS") has been entirely governed by the Swiss Collective Schemes Act ("CISA"). Under the old regime applicable until the end of last year, the term "distribution" marked the separation line between regulated and unregulated marketing of CIS in and out of Switzerland. This term was defined in article 3 of the old CISA. In the course of the revision of the CISA in view of the entry into force of the FinSA, this provision was deleted, together with the "distribution" concept introduced in 2013.
Instead, as of 1 January 2020 the "offering" of CIS in Switzerland may trigger regulatory duties under the CISA, and to the extent it involves an interaction with an end client, the FinSA.
The term "offering" is defined in article 3 let. g FinSA to encompass "any invitation to acquire a financial instrument that contains sufficient information on the terms of the offer and the financial instrument itself." The communication normally aims at drawing attention to and selling a particular financial instrument (article 3 para. 5 let. b FinSO).
The offering of units of CIS in Switzerland has the following consequences:
The above consequences do not only apply to an offering but also to advertising foreign CIS in Switzerland (article 127a of the Collective Investment Schemes Ordinance ("CISO")). Whereas an offering is only assumed if the invitation to acquire a financial instrument is sufficiently detailed to allow the addressee to take an investment decision, less specific communication addressed to investors is considered advertising if it is aimed at drawing attention to specific financial services or financial instruments (article 95 para. 1 FinSO).
The previous CISA contained various code of conduct provisions that explicitly applied in the "distribution" context. These duties have basically been shifted to the FinSA. This law only applies if a financial service in the sense of article 3 let. c FinSA is concerned. The "offering" (as the "advertising") triggering duties under the CISA is not considered a financial service, per se. However, to the extent that the offering of CIS is "aimed directly at specific customers and specifically aimed at the purchase" of CIS-units (cf. article 3 para. 2 FinSO), or entails a personal recommendation for the acquisition, it is deemed a financial service in the sense of article 3 let. c ciph. 1 (acquisition / disposal of financial instruments) or ciph. 3 (investment advice) FinSA.
The applicability of the FinSA triggers the following core duties:
Articles 20 et seq. of the former CISA contained rules of conduct with which "licensees […] and their agents" had to comply. These rules were shifted to the FinSA to the extent that they specifically address point of sale situations. Outside the point of sale context, they remain applicable to "persons who manage, hold in safe custody or represent collective investment schemes and their agents." To the extent such persons and particularly their agents also carry out financial services according to the FinSA, they must adhere to the conduct rules of the FinSA and the CISA.
Other major changes introduced by FinSA and FinIA
Asset managers of Swiss CIS that perform their task on a mandate basis continue to be subject to a FINMA licence requirement. The same holds true for Swiss asset managers of foreign CIS that either (i) not only permit "qualified investors" within the meaning of article 10 para. 3 or 3ter CISA or (ii) manage total CIS assets above specific thresholds (open-ended structures: above CHF100 million / non-leveraged closed-ended structures: above CHF500 million). These asset managers previously governed by the CISA are now considered "Managers of Collective Assets" according to articles 24 et seq. FinIA. Swiss asset managers of foreign CIS that only permitted qualified investors and did not manage collective assets exceeding the thresholds mentioned above were so far not required to apply for a FINMA authorisation. These financial intermediaries are now considered "Asset Managers" in accordance with articles 17 et seq. FinIA and are newly subject to a licence requirement. Whereas FINMA is competent to grant and recall the licence, ongoing supervision over Asset Managers will be exercised by Supervisory Organisations yet to be authorised by FINMA. Managers of Collective Assets are licensed and supervised by FINMA, and must meet increased regulatory requirements compared to Asset Managers, which are substantially identical to those previously required under the CISA.
In terms of product documentation, the overriding principles applicable under the old CISA remain unchanged. In particular, a prospectus has to be drawn up for every Swiss CIS (articles 48 – 50 FinSA); the FINMA may grant exemptions on a case-by-case basis, provided that the CIS are open to CISA-qualified investors only and the protective purpose of the law is not impaired thereby. According to the explanatory report of the Federal Department of Finance on the implementing ordinances of FinSA and FinIA, p. 48, the new prospectus rules of the FinSA are not applicable to foreign CIS and the respective documentation requirements remain entirely governed by the CISA, including the permissibility to use offering memoranda drawn up under relevant foreign laws, subject to certain amendments. However, the entry into force of FinSA and FinIA and the adaptions that became necessary in this context led to several modifications with regard to the documentation requirements and the modalities according to which the documentation must be made available to the investors.
The revised CISA entered into force on 1 January 2020, like the FinSA and the FinIA. However, according to the FinSA and its implementing ordinance, various obligations do not have to be implemented until certain transition periods have expired. In particular, a two-year transition period applies for the duty to perform a client segmentation, to adhere to the rules of conduct and to implement the organisational requirements. To make sure that there is no lack of client protection during the transition period when marketing CIS in Switzerland, article 105 para. 3 FinSO states that, as long as a financial service provider does not implement the FinSA rules of conduct, the old CISA distribution rules must be adhered to. This also applies to the duty to comply with the distribution agreements that had to be entered between the representatives of foreign CIS and Swiss distributors, and which ensured that CIS are distributed in a professional and transparent manner in accordance with the Guidelines on the Distribution of Collective Investment Schemes promulgated by the Swiss Funds & Asset Management Association (cf. article 105 para. 5 FinSO). However, all CISA distributor authorisations issued by FINMA were cancelled as of 1 January 2020.
Financial institutions and client advisers must join an Ombudsman office within six months of the FinSA coming into force, or (if later) after the Federal Department of Finance has recognised the responsible Ombudsman office.
Client advisers who are subject to registration must register with the registration office for entry in the adviser register within six months of the FinSA coming into force, or (if later) within six months of the approval of a registration office by FINMA.
Also, the FinIA contains transition provisions. Most importantly, financial institutions that newly require a FINMA authorisation under the FinIA (such as Asset Managers of CIS that were not yet subject to a FINMA licence requirement under the old legislation) must notify FINMA of their existence by 30 June 2020 and comply with the FinIA within three years of such law’s entry into force. Within the same period (ie, by 31 December 2022 at the latest), they must further submit a licence application to FINMA if they were already active on 1 January 2020 (article 74 para. 2 FinIA). Shorter transition periods apply for Asset Managers that commence their activities within one year of the FinIA entering into force (article 74 para. 3 FinIA), and no transition periods apply for those that will commence their activities from 2021 onwards. Financial institutions that were already supervised by FINMA before the FinIA entered into force do not require a new FINMA licence but must comply with the new law within one year of its entry into force (article 74 para. 1 FinIA).
Limited Qualified Investor Fund
Switzerland is an important location for the asset management and distribution of CIS, but not so much for their production. This is due to restricted market access of Swiss investment fund products (and their managers) to the European Union, the Swiss withholding tax regime and the Swiss legal framework essentially providing for a licence requirement for the financial institution administering / managing the CIS as well as for a product approval, leading to internationally substandard time-to-market.
In an attempt to strengthen the competitiveness of the Swiss investment fund production site and the Swiss financial centre as such, the Federal Council proposes to introduce a new investment fund type, the Limited Qualified Investor Fund ("L-QIF"). In June 2019, a preliminary draft of the new CISA provisions governing the L-QIF ("L-QIF Draft") was released for general consultation, according to which the L-QIF shall have the following core features:
The consultation for the L-QIF Draft ended in October 2019. In general, the majority of reactions to the new law were positive. Specific criticism was raised, inter alia, with regards to the narrow circle of the financial institutions eligible for an L-QIF’s fund administration and the requirement to appoint an L-QIF-specific audit company. It is now expected that, following the analysis of the 48 submissions made in the consultation proceeding, the Federal Council will rework the L-QIF Draft for parliamentary debate and that the new law will enter into force in 2022.