EXPERT VIEW: Laven Partners On Marketing, Distribution Of Foreign Funds To Switzerland

Tom Burroughes

2 January 2014

The Swiss financial regulator has tightened investor protection and rules governing how foreign funds are sold and distributed into the country on a private placement basis, requiring a number of changes the wealth management industry must heed, points out , the consultancy.

In September, FINMA issued a new circular on the Distribution of Collective Investment Schemes and it came into force on 1 October.

While authorisation is needed for distribution to non-qualified investors, distribution to qualified investors does not require a FINMA authorisation. But Laven said the definition of “qualified investor” has been changed, which will have major consequences. For example, when distributing a foreign fund in Switzerland, it is crucial, Laven says, to check that the target investors meet the qualified investor criteria. If not, the foreign fund and its promoter/distributor, will be considered as carrying on unauthorised distribution to non-qualified persons in Switzerland which entails substantial criminal sanctions provided for under CISA.

The rules reduce the list of investors defined as qualified: these include regulated financial institutions, high net worth individuals (as defined in the law) and investors who have signed a discretionary asset management mandate with a regulated financial institution.

As a result, non-regulated independent asset managers and family offices shall not be considered as qualified investors as such. Instead a look-through must be applied by the fund and its promoter/placing agent to qualify the ultimate client, which must be done at the time of any relevant promotion.

The general effect is that non-regulated independent asset managers and family offices can invest in foreign funds restricted to qualified investors (such as offshore hedge funds) only to the extent that their underlying investors are qualified investors.

Such non-regulated independent asset managers and family offices will have to confirm in writing that the information received will be used for qualified investors only, Laven says.

New obligations

Although distribution of a foreign CIS to qualified investors is not regulated by FINMA, it is nonetheless caught by new obligations as well, the Laven note says.

A foreign CIS marketed in Switzerland (on a private placement basis and to qualified investors only) will be required, from 1 March 2015, to appoint a Swiss legal representative and a paying agent regardless of the type of investors to which the CIS is marketed. This is a new requirement.

Signalling how the internet is changing regulatory behaviour, the Laven note points out that “the use of websites or web forums and chat rooms is strictly regulated by the Circular, which provides very specific and detailed guidance on protection mechanisms to avoid distribution to non-qualified investors. Marketing should generally be subject to access restrictions and disclaimers”.