Last week WealthBriefing reported on the new Swiss Federal Banking Commission rules governing the distribution and sale of foreign funds, in...

Last week WealthBriefing reported on the new Swiss Federal Banking Commission rules governing the distribution and sale of foreign funds, including foreign hedge funds, to high net worth individuals in Switzerland. We examine this in more details. Previous to the rule changes, the sale of funds based outside Switzerland to HNWIs in the country, was restricted. The solicitation of foreign funds not licensed by the SFBC was limited to not more than 20 persons per business year and per product. As of April 1 this year, the SFBC will have amended the “qualified relationship” between the native HNWIs and foreign-based fund distributors. These funds can then be marketed and sold to Swiss investors provided the following two requirements are met. Firstly, the bank or securities dealer has a written, general advisory agreement with the HNWI, which is entered into for an unlimited period of time. Secondly, the HNWI must prove to own directly or indirectly (e.g. via trust structures) funds exceeding SFr5 million ($3.9 million). These two conditions need to be met cumulatively and the bank or securities dealer has to verify on a regular basis whether they are still satisfied. But commentators on the rule change have so far pointed out that these capital requirements appear rather high, especially compared to other jurisdictions. Dr Dominik Oberholzer of Zurich-based Hess Dallafior, a law firm, told WealthBriefing: “There are jurisdictions where the limit is €500,000 for instance. Given this much higher level in Switzerland, one could have expected that HNWIs were to be treated like institutional investors, meaning no written agreement would be necessary. But I suppose getting such a written agreement is not too difficult.” Dr Oberholzer said there has been a lot of interest in the rule changes from hedge funds and he expects many more will try to sell their shares in Switzerland following the amendments. These changes have come about because of considerable pressure from the industry. The Swiss Federal Investment Funds Act is currently under review by the Swiss Parliament and a new law on collective investment schemes is to enter into force in 2007/2008. To draw out the comparison, the Financial Services Authority, the UK regulator, requires HNWIs investors to obtain a certificate signed by either their employer or accountant stating that they earn at least £100,000, or have assets worth at least £250,000 excluding primary residence or tied up in life assurance policies. Dr Oberholzer said: “I think the SFr5 million level is too high. If things go wrong, the final question will be whether the advisor of a bank informed the investor of the risks related to the investment.” The crucial questions now are firstly, what qualifies as “funds” to be proved and, secondly, how a banker can verify if a client has SFr5 million, said Dr Oberholzer. He said: “Regarding the first question, it remains open whether real estate qualifies, in particular real estate which an investor purchased not to live in but to make money with. “The second question principally arises with banks who manage less than SFr5 million for a client but 'know' that this client has more than SFr5 million. How can the banker get this proof? The client himself will most likely not render this information.”