Switzerland: Switzerland Proposes to Revise It´s Legislation on Investment Funds

On February 15, 2004, the Swiss Federal Council has released for comments the draft Federal Act on Collective Investment Schemes ("CISA" or the "Act") meant to replace and supersede the Swiss Federal Act on Investment Funds ("IFA").¹

The innovations brought by CISA consist in introducing New forms of "collective investment schemes", transposing the recent amendments made to the European directive on collective investment scheme (the "European Directive")², and impose certain enhanced obligations in the Swiss investment fund industry.

1. New forms of "collective investment schemes" and need for an authorization;

CISA maintains an obligation to request an authorization from the supervisory authority both for the product, i.e. the collective investment scheme, and the services provider.

The IFA subjects to a prior authorisation only Swiss investment funds that are structured as a contract. With CISA, Swiss investment companies with variable capital (SICAV)³, Swiss investment companies with a fix capital (SICAF), Swiss limited partnerships for collective investments⁴ and Swiss investment foundations, shall all qualify as collective investment schemes subject to the Act. It shall be noted that only qualified investors⁵ may invest in Swiss limited partnerships for collective investments and SICAF that are not listed on a stock exchange while only pension funds can invest in Swiss investment foundations.

In this respect, companies conducting a commercial or industrial activity, holding companies, investment clubs (as long as their members can manage their funds) are expressly excluded from the scope of the Act. It shall be noted that CISA does not subject to any authorization "financial instruments structured like investment funds" (such as "index certificates", "structured notes", "index tracking stocks", etc.) issued by Swiss or foreign banks or securities dealers to the extent it is clearly indicated in the marketing material, in case of a public solicitation, that the instrument is not a collective investment scheme pursuant to CISA.

Foreign collective investment schemes fall under CISA, independently of their legal form, as soon as there is a public solicitation in or from Switzerland.

The European Directive has been amended on December 4, 2001 under the heading "UCIT III" by two additional directives. CISA has also transposed most of these amendments.

Under the Act, asset managers that are managing a Swiss collective investment scheme must be authorized by the Federal Banking Commission ("FBC") to the extent that they are not already subject to a state supervision. Even if the formalities and specific requirements of this authorization shall be defined in the implementing ordinance of the CISA, it is likely that they would be similar to those provided by the amended European Directive (i.e. capitalization requirements, guarantee of an irreproachable activity, qualification, education, etc...).

The activities of a fund management company shall not be restricted to the mere management of an investment fund as provided for under IFA. Thus, and more generally, thanks to CISA, a fund management company will be entitled to provide (i) general asset management activities, (ii) investment advisory activities, and (iii) custody and technical administration of collective investment schemes.

It shall also be noted that pursuant to the Act, a fund management company can only delegate investment decisions to an asset manager that is subject to an equivalent supervision. Furthermore, for securities funds, the delegation of investment decisions to the custodian (or to companies affiliated to the fund management company) will not be authorized.

We shall point out that the most important innovation of the CISA, in light of the European Directive, is that a simplified prospectus shall be published for securities funds, "other funds" making traditional investments and real estate funds.

CISA lays upon certain intermediaries active in the investment fund business additional duties that can be summarized as follow:

As already applicable to other financial intermediaries, such as banks, securities dealers⁶ and fund management companies⁷, the CISA introduces a duty to report for all the persons or products subject to an authorization; this duty to report must address all changes concerning (i) qualified participations with a threshold percentage similar to SESTA⁸, (ii) directors or managers, or (iii) by-laws, regulations or partnership agreements.

Article 12 IFA provides already for a duty of loyalty applicable to fund management companies. However, similarly to Article 11 SESTA, the Article 26 CISA introduces rules of conduct, namely a duty of loyalty, a duty of diligence and a duty of information, for all entities subject to an authorization as well as their agents.

Finally, it shall be noticed that CISA also embeds other rules of conduct contained already in the SFA rules of conduct for the Swiss fund industry.

With the exception of distributors of collective investment schemes, all the other persons or entities subject to an authorization must be audited by auditors that have been accredited by the supervisory authority, i.e. currently the FBC.

The question of the taxation of collective investment schemes is, in fact, what has considerably delayed the release of CISA. In principle, collective investment schemes will be considered as transparent for income tax purposes. All services, including distribution efforts, provided to collective investment schemes will also be exempt from VAT in Switzerland.

The comments pertaining to the Act were due last month. The various Swiss financial associations (e.g. Swiss Funds Association, Swiss Banker Associations) all concur that it is necessary to replace IFA with a new Act. Furthermore, the bilateral treaties negotiated by Switzerland seem to go forward. Therefore, it is possible that CISA could be enacted by the end of the year 2005 already.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.