Author: | Published: 9 Nov 2000
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The cross-border marketing of financial products and services has been fully liberalized in Switzerland. A foreign bank or financial intermediary is not required to obtain a licence from the Swiss Federal Banking Commission (the FBC) to promote its products or services to Swiss residents, be they individual or institutional investors, sophisticated or otherwise, provided that it does not employ staff in Switzerland who work on a professional and permanent basis (through a branch, agency or representative office). The fact that Switzerland is not (yet) a member of the European Union is irrelevant in this respect.

There exists, however, an important exception to the principle of free cross-border marketability of financial products and services: under Article 45 of the Swiss Investment Funds Act, any person who offers or distributes units in a foreign investment fund in or from Switzerland needs a licence from the FBC. Certain cross-border services of stock exchanges would also be subject to regulation, but that is not the subject of this overview.

What is an investment fund?

Under Swiss law, the definition of an investment fund varies depending on whether the arrangement is Swiss or foreign based.

Swiss investment funds

Swiss investment funds are defined by the Investment Funds Act as unincorporated pools of assets, established following public advertisement, for the purpose of collective investment, and managed by a third party – the fund manager – generally in accordance with the principle of risk diversification. Thus, the Swiss fund in its proper sense is based on a collective investment contract, ie a contractual arrangement. Swiss pools of assets in corporate form such as investment companies are, with a few exceptions, not subject to regulation. Under the Investment Funds Act, they may not, however, use the terms "fund", "investment fund", "mutual fund", "investment trust", "hedge fund" or any other similar terms.

Foreign investment funds

The definition of a foreign investment fund as used by the Investment Funds Act is much broader. The Act distinguishes among three categories of foreign funds:

  • unincorporated (contractual) pools of assets that are managed by a company whose registered office and effective place of business are located outside Switzerland. Many European countries recognize this contractual category of funds, including Germany, Italy, France, Austria and Spain. UK unit trusts would also fall under this category;
  • open-ended pools of assets in corporate form such as investment companies with an effective place of business outside Switzerland. This category covers in particular the SICAV (Société d'Investissement à Capital Variable), well known in France, Belgium and Luxembourg, but which does not exist in Switzerland, and the increasingly marketed UK OEIC (Open Ended Investment Company); and
  • any other kind of foreign collective investment scheme, incorporated or not, closed-ended or open-ended, provided it is subject to investment fund supervision in its home country.

Pursuant to the Investment Funds Act, the distribution of shares or units in or from Switzerland in any such funds requires a licence from the FBC. As foreign closed-ended investment companies that are not subject to any investment fund supervision in their home countries are not covered by the above definitions, the distribution of their shares is not subject to any licence requirement from the FBC and may be freely made in Switzerland. This may come as a surprise, but offers flexibility to many Swiss or foreign fund promoters structuring their pools of assets for the Swiss market. Of course, terms like "fund" or "investment fund" may not be used in connection with the marketing of these products.

The flexibility and creativity of fund promoters and lawyers has its limits! Article 2 paragraph 3 of the IFO (the implementing ordinance of the Investment Funds Act), contains an anti-abuse provision specifying that foreign closed-ended investment companies not subject to any investment fund supervision in their home countries do nevertheless fall under the scope of the Investment Funds Act if the relationship between the investors and the investment company is essentially contractual in nature, and the investors are not in a position to defend their position or interests, ie are legally or de facto prevented from exercising their shareholders' rights. Fortunately, the FBC and the Federal Tribunal had the opportunity to examine this somewhat Byzantine provision and to provide some clarification of its meaning.

Foreign limited partnerships

In a decision rendered in June 1997, the Federal Tribunal reviewed the structure and organization of an Austrian limited partnership (Kommanditgesellschaft). The purpose of the partnership was to acquire, develop and sell real estate. The general partner was responsible for the management of the partnership. By entering into a limited partnership agreement, the limited partners acquired the right to participate in proportion to the amount of their investment in the profits and losses of the limited partnership, as well as in its net assets. They could not have their shares redeemed for a period of five years and did not have any voting authority at the general meetings of the partnership.

In essence, the question was whether or not the anti-abuse provision of Article 2 paragraph 3 of the IFO would apply, ie if the relationship between the limited partners and the general partner were essentially contractual in nature and the investors were de facto prevented from exercising their shareholders' rights. The Federal Tribunal concluded that, in each specific instance, careful review of all of the investors' rights is required. If the limited partners may request that a shareholders meeting be convened, if they have information rights and may revoke the general partner, if they can change the investment policy or at least block investment decisions of the general partner, then they are likely to be deemed to manage the company's assets themselves, with the effect that the limited partnership would not be subject to a licence requirement in Switzerland.

Fund-linked notes

The FBC recently had the opportunity to examine whether notes (100% capital protected) offered in Switzerland, whose proceeds are fully invested in a number of foreign investment funds, fall under Article 2 paragraph 3 of the IFO and accordingly require a licence from the FBC. In this particular case, the proceeds of the notes were fully invested in a Cayman Islands company that did not qualify as an investment fund, and that in turn invested all of its assets in a minimum number of five (unauthorized) offshore hedge funds. The FBC noted that, in spite of the fact that the investors' relationships were "essentially of a contractual nature", and that the investors had no social or voting rights, the invested capital was guaranteed by a financial institution that was rated by a rating agency recognized by the FBC. As a result, the FBC found that the investors' rights were sufficiently protected and that the notes could be distributed freely in Switzerland. In a comparable case of notes with fund-linked options, the FBC arrived at substantially the same conclusion. An important criterion in both cases was the fact that the investors' exposure was that of the guarantor and not the risk of the foreign investment funds. Thus, when structuring fund-linked products, a balance has to be found between redemption protection and fund exposure.

Professional offering or distribution of units

As discussed above, marketing activities carried out in or from Switzerland with respect to shares or units in a foreign investment fund generally require a licence from the FBC, if the distribution is made on a professional basis.

The concept of professional offering or distribution is quite broad and includes any form of advertisement or marketing activities. No private placement exemption is available.

In an attempt to limit the scope of the Investment Funds Act, the FBC decided some years ago that an offering or distribution would not be considered to be "on a professional basis" within the meaning of the Investment Funds Act and, in consequence, no licence would be required under the following circumstances:

  • when a client places an order with his or her bank (or asset manager) to buy or subscribe in shares of a foreign fund without having been advised to do so by the bank, even if the bank receives fees from the foreign fund (a so-called reverse inquiry basis);
  • when a Swiss bank or asset manager, based on a discretionary management agreement, decides to purchase units in a foreign fund and to place such units in one or several of the portfolios it manages. It may not, however, systematically place the same units in its managed portfolios; or
  • when a Swiss bank or asset manager places units in a foreign fund which is sponsored by it in the portfolios that it manages. The foreign fund must be placed exclusively in part or all of the managed portfolios (so-called private label funds).

In addition, since November 1997, no licence is required for the distribution of foreign funds in or from Switzerland to institutional investors with their own professional treasury, provided always that no public advertisements are placed.

Can the advertisement of investment funds on a website constitute an offering in or from Switzerland?

There are no specific legal provisions in Switzerland on the promotion of foreign investment funds over the internet. The standard rules apply. At present, the FBC considers, rather pragmatically, that websites containing information on unauthorized foreign funds do not per se constitute a proposal or distribution of units in or from Switzerland, provided such sites are not transaction driven as far as Swiss residents are concerned. In other words, there should be no targeting at Swiss investors, and a Switzerland-based internet user should not be able to find any information on how and where to acquire, in Switzerland, units of the unauthorized foreign investment fund displayed on the website.

Schellenberg Wittmer

Loewenstrasse 19
Postfach 6333
CH-8023 Zurich

Tel: +41 1 215 5252
Fax: +41 1 215 5200