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Swiss branches of foreign securities dealers

Andreas Moll

Recently, the Federal Supreme Court rendered a decision regarding the supervision of foreign securities dealers with Swiss branches.

A limited company with its registered office in the British Virgin Islands (the Company) established two branches in Switzerland. The purpose of the Company consisted of the purchase, sale, exchange, development and issue of securities.

Together with other related companies, the Swiss branches were involved in trading securities issued by foreign companies. The relevant subscription agreements were mainly signed between the investors and the issuing companies; the Company was only party to three contracts.

In its decision of June 25 2008, confirmed by the decision of the Federal Administrative Court of January 27 2010, Finma (the Swiss Financial Market Supervisory Authority) ordered the liquidation of the Swiss branches due to violations of the Federal Act on Stock Exchanges and Securities Trading (Sesta).

The case was brought before Federal Supreme Court. One of the questions raised was whether the Company required authorisation by Finma.

Pursuant to Sesta, any person buying and selling securities, in a professional capacity, on the secondary market, making public offers of securities to the public on the primary market (issuing house) or creating derivatives and offering them to the public, requires authorisation by Finma. Pursuant to an earlier decision of the Federal Supreme Court, a company placing securities with less than 20 persons without a public offer is not considered a securities dealer.

Pursuant to Sesta, any company organised according to foreign law which holds a licence as a securities dealer abroad, uses "securities dealer" or a similar term in the company name, in the description of its business purpose or in business documents (disregarding its actual activities), or conducts securities trading within the meaning of Sesta, is considered as a foreign securities dealer.

A foreign securities dealer requires authorisation if it employs persons in Switzerland who (i) trade securities in or from Switzerland, maintain client accounts or commit the securities dealer legally (branch); or (ii) operate in another way, for example by passing on client orders to the foreign securities dealer or by representing the dealer for advertising or other purposes (representative office).

Finma and the Federal Administrative Court qualified the Company as an issuing house with its main activity in the financial sector. Despite not being party to the majority of transactions, it was assumed that the involved persons acted as a group under the control of the Company.

Before the Federal Supreme Court the Company argued that it had never publicly offered securities on the Swiss market.

The Federal Supreme Courts did not enter into the parties' arguments but simply held that, because of its statutory purpose which mentions "purchasing and selling securities", the Company was deemed to be a foreign securities dealer according to Sesta. Following the leading legal doctrine, it further stated that, if a foreign securities dealer establishes a Swiss branch, such company requires authorisation by Finma regardless of the branch's actual activity.

In view of this Federal Supreme Court decision, foreign companies with a Swiss branch are more likely than Swiss companies to require authorisation by Finma if acting as an issuing house. While a Swiss issuing house may argue that it has not made a public offer, such material argument seems to be futile for a foreign issuing house if it is deemed to be a foreign securities dealer pursuant to Sesta.

Andreas Moll

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