Author: | Published: 3 Oct 1999
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The rules proved to be a serious obstacle for the Swiss fund industry in adapting to dramatic changes in the financial markets. This was especially true after Luxembourg enacted in 1988 its Investment Funds Statute and Switzerland began, as a consequence, to lose a considerable share of the fund industry to this competitor. Swiss legislators reacted relatively late to the challenge by enacting on March 18 1994 the new Federal Statute regulating investment funds. It became effective on January 1 1995.

The goal of the new law was — besides unilaterally implementing Directive 85/611/EEC and promoting the protection of investors — to improve the competitive conditions for Swiss investment funds. As the statistics show this goal was only partially achieved: the number of domestic investment funds remained almost fixed in 1995 and then increased from 286 in 1996 to 356 in 1998. During the same period the number of foreign investment funds distributed in Switzerland increased dramatically from 873 in 1995 to 1,556 in 1998. 1,186 out of the 1,556 foreign funds are from Luxembourg.

The reason for the loss of market share of Swiss funds is twofold: the relatively high tax burden in Switzerland and the impossibility for Swiss funds to benefit from the free marketing of their units in the EU. The likelihood that this situation will change in the near future is relatively small. However, the hope remains that the Swiss Government will be able to conclude bilateral treaties which will at least facilitate the marketing of Swiss funds abroad.


The Investment Funds Statute was conceived as a framework law and contains only fundamental provisions. The details are dealt with in two ordinances issued respectively by the Swiss Government and the Federal Banking Commission. As compared to the old law, the public policy of protecting investors has remained unchanged. However, the means of attaining this goal have been fundamentally altered. Whereas under the old law strict investment rules limited investment possibilities, the new Investment Funds Statute creates a more effective transparency, sets higher professional standards for fund managers, extends investors' rights and at the same time liberalizes investment rules.

Definition of investment fund

Domestic investment funds are defined in Article 2 of the Investment Funds Statute as pools of assets collected from investors through public solicitation to be commonly invested and managed by the fund management for the account of the investors, ordinarily in accordance with the principle of diversification of risk.

Pools of assets held internally by banks for the common investment and management of clients' funds are not subject to the Investment Funds Statute provided certain conditions are met.

Domestic investment funds are based on individual collective investment contracts entered into by the fund management and the custodian bank with the investors. Domestic investment corporations which do not have such a contractual basis, but rather a corporate structure, are allowed, but are in almost every case not subject to the Investment Funds Statute. It is considered that corporate law sufficiently protects investor's rights.

Foreign investment funds are funds with management domiciled abroad. They are subject to the Investment Funds Statute as soon as they offer or sell their fund units in or from Switzerland on a commercial basis.

The collective investment contract

The collective investment contract is the legal basis of the fund. By paying a contribution and signing the agreement the investor acquires an individual contractual claim against the fund management and the custodian bank which is independent from the claims of other investors. The investor's main contractual claim is their proportional participation in the assets and revenues of the fund. The fund's assets are, however, property of the fund management. Only in the case of bankruptcy of the fund management will the fund's assets be separated from the bankruptcy assets and put at the disposal of the investors.

Fund management and custodian bank

The Investment Funds Statute provides that a fund shall be managed by a corporation with its place of incorporation and primary management in Switzerland and with fully paid capital of at least Swfr1 million ($659,200). The custodian bank must qualify as a bank according to the rules set out in the Federal Statute on Banks and Saving Banks. In addition, the Investment Funds Statute requires separate management and legal structure for the fund management and the custodian bank. This principle is set out in Circular Letter 96/5 of the Federal Banking Commission which came into force on January 1 1997. However, this rule does not apply to the members of the board respectively, of the fund and of the custodian bank.

Under the Investment Funds Statute some or all investment decisions can be delegated to third parties as has been customary for years in other jurisdictions. However, the investment policy must still be determined by the fund management, which remains fully responsible vis-à-vis the investors. The limits of delegation are to be found on the one hand in the provision that the primary management of the fund must be conducted in Switzerland, and on the other hand in the compulsory separation of fund management from the custodian bank.

Types of funds and investment rules

Besides some very special funds such as mortgage funds and funds open exclusively to professional investors, three categories of funds are provided for in the law: securities funds, real estate funds and "other" funds.

All three categories of funds can be subdivided in different segments (umbrella funds) provided the subdivision is explicitly mentioned in the fund's regulations.

Whereas securities funds are necessarily open-ended funds, it is possible to restrict to a certain extent the redemption of real estate funds and of "other funds with special risks". Mortgage funds can be organized as closed-end funds provided it is explicitly mentioned in the fund's regulations and provided the custodian bank makes sure that a market for the fund's shares exists.

Funds that are open exclusively to professional investors can be exempt from certain restrictions. Such exemptions may be granted by the Federal Banking Commission on a case-by-case basis.

Securities funds are basically identical with EU investment funds. In some specific fields the law goes even beyond the Directive 85/611 EEC since it includes the amendments proposed by the EU-Commission in its draft of July 20 1994, which have never been enacted.

Thus, not just investments in transferable securities issued in numbers and listed on stock exchanges or on other regulated markets open to the public are permitted in investment funds. The law also allows to a certain extent investments in warrants (15% of the total assets), in some specific money market instruments and in cash in banks (25% of the total assets). In addition, the total investment of a fund's assets in units of other securities funds is possible and thus the creation of funds of units (funds of funds) is allowed. The use of modern investment techniques and derivative instruments within the framework set out in the ordinances is permitted to fund management.

Real estate funds either acquire real estate in the name of fund managers and/or invest in real estate companies whose sole purpose is the acquisition, sale or lease of real estate. The Investment Funds Statute provides that the fund must acquire at least two-thirds of the capital and of the voting rights of such real estate companies.

Other funds are funds whose investments are not limited to transferable securities or real estate. They are not EU-compatible. Investments prohibited by EU law such as investments in precious metals, commodities, options and futures are permitted provided that certain conditions set out in the law are met. Therefore, investments with particular volatility, with a particular level of risk or with limited access to the market are possible for other funds. Whenever such other funds include special risks which are not comparable to the risks of securities funds, special rules for the protection of investors apply.

Investors' rights

Investors have a comprehensive right to information and of inspection from the fund manager. In addition, the fund manager has the duty to publish a prospectus for each managed fund and to make it available to investors. Finally, the fund manager must issue annual and semi-annual financial statements according to strict rules set out in the Investment Funds Statute.

A competent judge can nominate a representative of the investors should prima facie evidence show that damage claims in favour of the investment fund exist. Such representative will be able to litigate the claim at the expense of the investment fund in favour of the community of investors.

Foreign funds

Whatever form of organization the foreign investment fund chooses, the distribution of its units on a commercial basis in Switzerland or from Switzerland is subject to the Investment Funds Statute. The following structures are considered to be foreign investment funds:

  • pools of assets raised on the basis of a collective investment contract, or another contract with similar effects, and administered by a fund management with registered office and administrative headquarters abroad;
  • companies with registered office and administrative headquarters abroad, whose objective is collective investment activity, with the investors having the right vis-à-vis the company, or a company associated with it, to redeem their units; and
  • special foreign pools of assets similar to investment funds if the legal relationships between the investors and the special asset pool, irrespective of the legal form of the investment in this pool, are primarily of a contractual nature and the investors are not in a position to manage their interests themselves.

The offer or sale of units of such funds needs an authorization by the Federal Banking Commission, which will be granted to a representative of the fund if the requirements of the Investment Funds Statute are met. Such representative must be domiciled in Switzerland. However, the representative need not necessarily be a bank as was required under the old law.

As for the conditions that have to be met in order to get an authorization from the Federal Banking Commission, funds that are compatible with the EU legislature and those that are not compatible are distinguished.

Among other things, the following requirements must be met for EU-compatible funds according to the applicable Directive of December 15 1995 in order to get an authorization:

  • a confirmation by the foreign supervisory authority must be submitted stating that the fund has been registered according to Directive 85/611/EEC and further stating that the fund is supervised by the authority issuing the confirmation;
  • the name of the fund must be clear and unambiguous;
  • the managers of the Swiss representative of the foreign fund must have good standing, experience and education in the financial sector;
  • the Swiss representative must demonstrate the maintenance of sufficient insurance coverage for its risks;
  • there must be a written agreement between the Swiss representative and the foreign fund; and
  • with respect to the units sold in Switzerland there must be an agreement with the investors which provides for the place of performance and a paying agent in Switzerland. In addition, it must be stipulated that Swiss courts are competent over the subject matter in the case of dispute.

Funds that are not EU-compatible will be scrutinized much more closely by the Federal Banking Commission. The requirements for the authorization are set out in the Directive of May 5 1995 regarding non EU-compatible funds. In addition to the above, the successful applicant must demonstrate, among other things, that supervision in the country of origin of the fund is equivalent to supervision in Switzerland and that investors' protection in the country of origin of the fund is equivalent to investors' protection in Switzerland. The Federal Banking Commission held that for the time being equal protection and supervision was guaranteed in the EU member states, the US, Jersey and Guernsey.


The Federal Banking Commission as supervisory authority closely works with the statutory auditors of the fund which can be freely chosen by the fund management from auditors formally recognized by the Federal Banking Commission. The tasks of the supervisory authority are listed in the Investment Funds Statute.

The Investment Funds Statute also recognizes the right of the Federal Banking Commission to cooperate with foreign supervisory authorities and to exchange information upon certain conditions.


A Swiss investment fund is not a taxable entity according to the applicable tax laws. A minor exception applies to real estate funds which directly own real estate. For these funds the revenue from real estate is subject to taxation. In addition, taxes are imposed in Switzerland on the trading of fund units and on the distribution of profits.

Federal stamp tax

The amendment of the Federal Stamp Tax Statute with effect as of April 1 1993 abolished the stamp tax of 0.9% on the issuance of the units of a Swiss investment fund. However, the federal stamp tax on the transfer of securities remains unchanged. Such tax is levied whenever a securities dealer is involved in the trading of a fund's units. The rates are calculated on the sales price of the fund's units and range from 0.15% for units of Swiss investment funds to 0.3% for units of foreign investment funds. The rate of 0.3% is reduced to 0.15% whenever a foreign bank or broker is a party to the transaction.

Federal value added tax

The Ordinance on value added tax which came into effect on January 1 1995 provides that the remuneration received by the fund management, by the custodian bank and by their agents is tax exempt.

Federal withholding tax

Pursuant to the Federal Anticipatory Tax Statute, a withholding tax of 35% is levied on all Swiss source income. This includes distributions of Swiss investment funds. Swiss residents are entitled to a full credit (individuals) or a full refund (corporations or other legal entities) of the tax. Non-residents are not entitled to a refund of the withholding tax, unless specifically provided for by an applicable international double taxation treaty. Such treaties exist with most of Switzerland's significant trading partners.

Income tax

Swiss residents are taxed at a federal, cantonal and municipal level on their income. According to the Swiss tax authorities, not only distributions of investment funds, but also an investment fund's reinvested profits are deemed to be taxable income. This rule also applies to foreign funds irrespective of the legal form. (However, some cantons do not tax reinvested profits of foreign funds with a corporate structure.)

Recent developments

Since the enactment of the 1994 Investment Funds Statute, the highest Swiss court, the Federal Supreme Court, as well as the Federal Banking Commission as supervisory authority have dealt with several issues related to investment funds. In addition, the Swiss Exchange adopted new regulations concerning investment corporations. A selection of issues recently decided or raised by the three authorities mentioned above follows.

Listing rules for investment corporations

On October 13 1997 the Swiss Exchange passed supplementary listing rules for investment corporations, which were subsequently approved by the Federal Banking Commission and which came into force on March 1 1998. The rules provide for similar transparency, account rendering and reporting requirements for investment corporations which are not subject to the Investment Funds Statute, as are applicable to investment funds based on the Investment Funds Statute.

The Federal Supreme Court's Decision in the Matter of Imperial Kapitalbeteiligungsgesellschaft

In its decision of June 9 1997 the Federal Supreme Court confirmed its former practice in ruling that foreign investment funds fall within the scope of the Investment Fund Statute irrespective of their legal structure if the relationship between the investors and the asset pool is primarily of a contractual nature. This is the case whenever the investors are not in a position to manage their interests themselves. In the present case, the Investment Funds Statute was considered to be applicable because the investors were not able to manage their interests themselves. Therefore, an authorization of the Federal Banking Commission was required. Since Imperial was not supervised by the supervisory authority for investment funds in its country of incorporation, the Supreme Court upheld a decision of the Federal Banking Commission forbidding the distribution of units of Imperial, an Austrian company, on a commercial basis in Switzerland.

Offshore funds

The Federal Banking Commission held that a domestic investment corporation could be subject to the Investment Fund Statute if it has the purpose of investing its assets in foreign investments funds which have, due to their structure, no chance of getting an authorization in Switzerland.

Hedge funds and master-feeder funds

Hedge funds and master feeder funds are considered by the Federal Banking Commission to be other funds as defined by the Investment Fund Statute. The distribution of their units in Switzerland will be allowed provided the requirements of the law for such funds are met. Hedge funds have to meet the additional requirements for funds with special risks.

Funds with multiple classes of units

Domestic, as well as foreign investment funds with multiple classes of units, will receive the required authorizations from the Federal Banking Commission provided the necessary requirements of the law are met.

Fund-linked life insurance products

Fund-linked life insurance products do not fall within the scope of the Investment Funds Statute according to the Federal Banking Commission to the extent that the insurance companies concerned are under the supervision of the Federal Office of Private Insurance Companies. Therefore, they require no authorization from the Federal Banking Commission.

Cloning and merger of funds

According to decisions taken by the Federal Banking Commission, cloning (ie the joint management of assets belonging to different investment funds) and merger of investment funds are allowed if certain conditions are met.


The Federal Banking Commission has a very pragmatic view with respect to the measures to be taken by investment funds in order to adapt to the introduction of the euro. It has allowed the merger of funds, the conversion of funds' books to the euro and has facilitated the amendment of funds' regulations.

Ratings of foreign funds in the media

The Federal Banking Commission allowed a foreign fund which had no authorization to distribute its units in Switzerland to publish its daily ratings in domestic electronic media, but not in the domestic press, considering that electronic financial data, unlike the press, are mainly used by professionals.

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