On January 1, 1995, an entirely revised Swiss Investment Fund law (hereinafter the "New Law") entered into force along with both the Federal Council's and the Federal Banking Commission's ordinances relative thereto.
Indeed, a complete revision of the existing legislation became painfully necessary in the second half of the 1980s, when, due to its weaknesses, even many Swiss banks began to incorporate practically all their new investment funds outside of Switzerland, for the most part in Luxembourg.
The major flaws of the system in place pertained, in particular, to particularly strict investment regulations which did not correspond to the investors' needs for flexible and modern investment instruments; the fact that other countries' funds (such as the Luxembourg funds) could already distribute their shares in the EC without tedious formalities; excessive taxation in Switzerland of the issuance of investment fund shares.
Such issues were taken into account in the revision of the investment fund legislation on the one hand, and in an amendment of the Federal Stamp Duty Law which abolished the above-mentioned taxation of the investment funds shares on the other hand.
2. Purpose of the New Law
The purpose of the New Law, "the protection of the investors" remains unchanged (Art 1 New Law). Nevertheless, it must be noted that under the New Law, contrarily to the concept prevailing previously, the investors are assumed to be knowledgeable in the field they are acting in and to accept the risks linked with their activities.
3. Compatibility with EC-regulations
To ensure competitiveness of the Swiss market, the legislator chose to implement EC-regulations into the Swiss legal systems. Furthermore, in order to avoid having to revise the new legislation on an ongoing basis to future evolutions of EC-regulations, a quite unusual provision was enacted: Art 32 II New Law enables the Federal Council (without involving the legislator) to allow other forms of securities funds than those explicitly provided for in the New Law, in particular if such other forms are authorised under the EC-regulations.
4. Scope of application of the New Law
Only funds managed by collective placement agreements are subject to the New Law.
Collective investment schemes which are managed in another form, in particular as foreseen by company law, are not subject to its regulations (Art. 3 II New Law)
5. Content of the New Law and of the Ordinances
The wording of the New Law itself only sets out the general principles to be respected. The details are now, as a rule, foreseen in the Ordinances, in order to enable more time efficient adaptations to new forms of investments.
6. Different types of funds
The New Law foresees three categories of funds:
6.1 Securities Funds
As a principle, in the case of securities funds, the fund manager may only invest in securities issued in great numbers and in rights which are not incorporated in securities but serve the same purpose and are traded on a stock exchange.
Nevertheless, the Federal Council's Ordinance has already extended the list of such admissable investments and allows, for example, that up to 15% of the fund's assets be invested in warrants on such rights as well as that up to 25% of the fund's assets consists of bank deposits.
6.2 Real estate funds
No major changes were implemented as regards the possibility for such funds to invest in real estate and in participations in or claims against real estate companies.
However, in order to avoid alleged systematic underevaluations of the assets to the disadvantage of investors withdrawing from the fund and, accordingly, to the advantage of new investors, various measures were taken:
The valuation expert must now be approved by the supervisory authority; the valuation principles used as well as the capitalization rates applied must be disclosed in the annual report.
Furthermore, in the event of issuance of new fund shares, a preferential subscription right has now been granted to the prior investor.
6.3 Other funds
Other funds are, in particular, allowed to proceed with placements in assets for which only a limited market exists, are subject to strong price variations, imply a limited risk spread or which are difficult to evaluate.
"Funds linked with particular risks" are a sub-category of the "other funds". They are defined as bearing risks which are not comparable to those linked with a securities fund. Various special conditions to protect the investors and to warn them of the risks at hand, in particular with respect to publicity for such funds, are foreseen.
Further admissible "other funds" now include inter alia:
Funds of funds, funds for investments in precious metals, commodities, futures and options and in other rights. Although they are not explicitly mentioned in the law, money market funds are deemed admissible.
6.4 Umbrella funds
The New Law explicitly allows the establishment of umbrella funds.
7. "Fund like" collective placements
The New Law foresees that the Federal Council may subject specific "investment fund like" collective portfolios to the Investment Fund Law. In particular, new rules are set out regarding collective internal portfolios of banks.
8. Foreign Investment Funds
Although proceedings regarding foreign funds have indeed become somewhat more flexible, it must be noted that, in order to be able to be registered in Switzerland, a foreign fund must demonstrate that it is subject in its own country to regulations comparable to those existing in Switzerland with regard to supervision, organization and placement policy.
9. Fund management, custodian banks and share distributors
9.1 Fund management
The fund management must be a Swiss corporation ("Aktiengesellschaft") with its head offices and management in Switzerland. The purpose of the corporation must consist exclusively of investment fund activities. The fund management's task is to manage the fund in its own name and for account of the investors. Its authorities include the issue of shares, the investments, the setting of issue and repurchase prices, the distribution of profits as well as the exercising of the rights of the fund itself. Such activities are to be carried out in the sole interest of the investors.
New higher qualifications are required of the persons holding key positions. It is also new, that the fund management may be transferred to another entity, thus avoiding the dissolution of the fund in the event of a withdrawal of the fund management.
9.2 The custodian bank
A custodian bank, which must be recognised pursuant the Federal Law on Banks, is compulsory. Its role is to safeguard the assets of the fund. Contrarily to the previous regulations, the fund management and the custodian bank must now imperatively be separate. These requirements actually go beyond those of the relevant EC-regulations.
9.3 Distributors of fund shares
Any professional distributor of fund shares who is not part of the fund management or the custodian bank requires authorization from the supervising authority.
10. Investment and valuation regulations
As previously mentioned, in order to attract more institutional investors, the new regulations no longer foresees an excessive protection of the investor. This implies greater flexibility in the type of funds which are allowed and which can therefore be better adapted to the investors needs. Obviously, this also implies that the investor is indeed less well protected against funds presenting higher risks.
11. Collective placement agreements and the position of the investor
11.1 The collective placement
The contractual structure in place under the previous legislation has been maintained:
The investor on the one hand, and the fund management and the custodian bank on the other hand, enter into an agreement pursuant to which the investor acquires rights against its counterparties individually and separately from the other investors. The most important such right is obviously that to a participation in the assets and the earnings of the investment fund. Such right is limited, in the case of umbrella funds, to the assets and earnings of the compartments invested in.
In the event of bankruptcy of the fund, the assets are segregated for the benefit of the investors and do not fall into the bankrupt estate.
11.2 Delegation of decisions
In order to take into account the need for special knowledge in certain fields (for example investments in foreign or particularly complex markets), the New Law allows the fund management to delegate certain decisions, to the extent such delegation is in the interest of the investors. Nevertheless, the delegation does not restrict the liability of the fund management for the decisions made under the delegation.
As regards the delegation of fund management decisions to the custodian bank, a conflict arises between the obvious interest of the investors in having specialists from the custodian bank participate in the management of the fund as well as in investment decisions and the ultimately desired clear separation between the fund management and the custodian bank.
Business policy related decisions must remain of the sole responsibility of the fund management. Such tasks include, in particular, the choice of products, the investment policy, as well as the issuing of general directives.
In any case, as stated, the fund management bears the entire liability, as if it had acted itself.
At this time it is still unclear whether or to what extent fund management decisions can be delegated to the custodian bank.
11.3 Information to be provided
The new legislation sets higher standards regarding the information to be provided:
The fund regulations must be more detailed than before; amendments of such regulations are now to be approved by the supervisory authority and no longer by the judge; the annual report must now contain more complete information and be at hand four months after the end of the business year. Furthermore, as is the case pursuant to the relevant EC-regulations, interim non-audited half-year reports must be at hand two months after the end of the first half of the business year; finally, every investment fund must now publish a prospectus.
12. First experiences under the new law
- As regards the content of the new law, despite various open issues which still need to be resolved, general feedback seems to be positive.
- As regards the number of funds, it must be stated that since the entering into force of the New Law only 6 new funds were incorporated in Switzerland.
Contrarily, 233 foreign funds were admitted in Switzerland since January 1, 1995.
To this date there were no transfers of foreign funds to Switzerland under the New Law.
13. Conclusion
The revision of the investment fund legislation is generally advantageous for the investors, who now enjoy a much broader choice of investments and are provided with more comprehensive information.
It may be assumed that the Swiss market as such will only truly benefit from the new system once Swiss fund shares will be more easily admitted in the EC. This still implies the conclusion of bilateral treaties.
It can nevertheless be stated that the competitiveness of the Swiss market has now to a large extent been reestablished since the applicable regulations are now liberal, modern and easily adaptable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.