In June 2019, the Federal Council opened a consultation on the amendment of the Collective Investment Schemes Act of 23 June 2006 (“CISA”) to introduce a new fund category. The amendment aims at establishing an investment fund dedicated exclusively to qualified investors (“L-QIF”), which investment fund shall be exempt from authorisation requirements from FINMA. The L-QIF is intended to be the Swiss alternative to certain foreign funds such as the Reserved Alternative Investment Funds (“RAIF”) in Luxembourg or the Notified Alternative Investment Fund (“NAIF) in Malta, which do not require authorisation from their respective supervisory authorities. The aim of this amendment is to facilitate the launch of innovative and flexible Swiss fund products in the market, and to improve the competitiveness of the Swiss investment fund market without affecting investor protection.
DEFINITION
According to the preliminary draft of the CISA (“PD‑CISA”), a L‑QIF is a collective investment scheme[1] (i) exclusively reserved to qualified investors, (ii) whose administration will be entrusted, directly or indirectly (by way of delegation) to a fund management company and (iii) which does not require any authorisation or approval from the regulatory authorithy, FINMA [2].
CHARACTERISTICS
A product reserved to qualified investors
Although the L-QIF offers many opportunities and benefits, investing in this fund also involves some risks. The risks arise from the multitude of investment requirements in place rather than from the lack of authorisation, approval and oversight. In order to guarantee investors’ protection, the amendments state that this type of fund will only be available to qualified investors.
Definition of Qualified Investors
The term qualified investors refers to:
- Professional and institutional clients in accordance with the Financial Services Act (“FinSA”) which will enter into force in January 2020[3];
It also includes for instance:
- high-net-worth retail clients who have declared that they shall be treated as professional clients as well as the private investment structures established for the needs of these clients[4];
- investors with a written asset management contract, provided that they have not indicated that they should not be considered as qualified investors;
- pension funds having a treasury managed on a professional basis. In accordance with current legislation, pensions funds already have the possibility of investing in foreign financial products that are subject to limited or no supervision such as RAIFs;
- insurance companies[5].
Administration of L-QIFs
The lack of surveillance by FINMA will be compensated by the strict requirements imposed on the management of the L-QIF, which will have to be carried out by specific institutions subject to FINMA’s supervision such as fund management companies, investment companies with variable capital (“SICAV”), limited partnerships for collective capital investments (“LPCCI”), investment companies with fixed capital (“SICAF”), custodian banks and asset managers of collective investment schemes. All these institutions are required to obtain a license from FINMA in order to act as asset managers[6]. During the process of authorisation, FINMA will ensure that these institutions are properly organised and have sufficient knowledge and experience to manage the L-QIF.
All previous legal forms of Swiss funds, i.e. contractual funds, SICAVs, LPCCIs and SICAFs are also permitted in the form of an L-QIF:
- contractual funds: this form will no longer require approval from FINMA, however, the managing entity of the fund will still require a license.
- SICAV, LPCCI and SICAF: these fund types will not require an approval or authorisation of the fund company as an institution. To compensate the lack of these two verification procedures, the proposed amendments will require that the business management is transferred to a managing entity which in turn, can delegate investment decisions to a collective asset manager[7].
Thus, even if the L-QIFs will not be subjected to direct FINMA supervision, the institutions charged with their administration still are. FINMA will have the authority to proceed against a L-QIF or its creators if the administration of the fund is not delegated to a management entity as per the new legal requirements[8].
IMPLEMENTATION & CONSEQUENCES
Implementation
CISA is a framework law, thus it only includes the essential requirements and provisions. The details are laid down in the Collective Investment Schemes Ordinance (“CISO”) and the technical provisions in the FINMA Ordinance on Collective Investment Schemes (“FINMA-CISO”). Therefore, the proposed amendment to the CISA will also result in a revision of these ordinances.
Consequences
The exemption from obtaining FINMA authorisation or approval for L-QIFs will reduce the setting-up time usually required in order to comply with FINMA obligations and the related opportunity costs. As seen previously, the amendments presuppose that the manager of the fund already holds the necessary organisational structure, experience and knowledge to manage an investment vehicle of this type. These positive consequences combined with greater investment and risk diversification flexibility, will make it possible to create funds that were unattainable in Switzerland in the past.[9]
Tax Treatment
The tax treatment of L-QIFs will not differ from the current tax treatment of other funds. Contractual funds, SICAV and LPCCI are considered as “transparent” and are not directly subjected to taxes (revenues and assets of these transparent collective schemes are charged to investors in proportion to their investment). However, SICAF are non-transparent and, as legal persons, constitute separate tax subjects.
After the introduction of the L-QIF, funds such as pension funds will still be able to invest their capital both in authorised single-investor funds and in L-QIFs not subject to FINMA authorisation or approval[10]. The introduction of the L-QIF will not put investors at a greater risk than the current situation.
FINMA
The new L-QIFs will be excluded from any additional charges that may be charged by FINMA for the setting up of a fund, in particular charges related to the granting of the license and monitoring the fund, including the authorisation and approval of ordinary amendments such as a change of custodian banks or the amendments of particular documents of the fund.
The institutions administering the fund will still have to comply with legal, contractual, statutory and regulatory provisions as they will be subjected to FIMNA supervision.
Therefore, FINMA will still act as a supervisor and will have to carry out monitoring work in the field of L-QIFs. At the moment, it is not possible to determine the volume of this work as it will ultimately depend on the number of L-QIFs that will be set up.[11]
CONCLUSION
The introduction of L-QIFs is good news for the asset management market in Switzerland as it will bring the market up to speed with other European countries already offering this type of financial products, such as Luxembourg and Malta. The initiative is to be commended.
The consultation period on the proposed amendments ended on 17 October 2019. The next steps will be for the Federal Council to approve the draft and submit it to Parliament, initiating the Parliamentary procedure for the enactment of the law. It is expected that the new regulation will enter into force on 1 January 2021.
Footnote References:
[1] Article 7 (1) CISA.
[2] Article 118a (1) PD-CISA.
[3] Articles 4 (3 to 5) and 5 (1 and 4) FinSA; Article 10 (3) CISA).
[4] Explanatory report of the project of amendment to CISA, p.13.
[5] Article 4 (3) (b) FinSA and 10 (3) CISA
[6] Articles 28, 36, 98, 110, 72, 18 CISA.
[7] L-QIFs in the contractual, SICAV and SICAF forms must also use a custodian bank.
[8] Explanatory report of the project of amendment to CISA, p.15.
[9] Explanatory report of the project of amendment to CISA, p.32.
[10] Explanatory report of the project of amendment to CISA, p.33.
[11] Explanatory report of the project of amendment to CISA, p.34.
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