The revised Swiss Federal Law on Investment Funds (Investment Fund Act, IFA), which came into effect on January 1, 1995, principally aims at the protection of the investor. This principle already applied to the IFA of 1966, but is now clearly outlined in the law. The basic reason for the revision of the IFA was, however, the increasing shift of the fund business to Luxembourg since the middle of the eighties and, due to this, the need to improve Switzerland's attractiveness as a fund location.

This required a loosening of the restrictive investment regulations on the one hand, and a corresponding shift towards investor protection on the other: the IFA of 1966 pursued investor protection via a limitation of the investment possibilities; the revised IFA on the other hand aims at strengthening the position of the investor by an improvement of the market transparency, by an increase of the publishing requirements, and by widening the competencies of the supervisory authorities. In addition, the Federal Council's Ordinance concerning investment funds (IFO) and the Ordinance of the Federal Banking Commission (FBC) regarding investment funds were revised. These Ordinances were also put into effect on January 1, 1995. The first contains the detailed investment regulations for the various categories of funds; the second regulates in particular the use of derivative financial instruments and securities lending.

The definition of the investment fund contained in Art. 2 Par. 1 IFA covers, as before, the characteristics of public advertising, collective capital investments and the trustee-character of the third-party administration by the fund management. The capital investment as a rule takes place based on the principle of distributed risk, whereby a explicit renunciation of this principle does not necessarily mean that the law does not apply. In the spirit of the existing practices of the FBC, it is now explicitly stated in the law that "public" refers to any kind of advertising that is not specifically aimed at a clearly defined and limited group of persons. Means of advertising other than the mere public advertising media (advertisements, circulars, mass sending of brochures) are also taken into consideration.

Regarding the range of application of the IFA, it must be noted that only those assets that are being managed based on a collective investment contract fall under this law. Assets administered under company law are basically excluded. For domestic investment companies to which investors contribute their assets and allow them to be administered in exchange for the issue and acquisition of participation rights in the corporate form (particularly the company limited by shares), this is always the case. Foreign corporate entities might, nonetheless, also be classed as investment funds in the sense of the IFA. The IFA also applies to the so-called open foreign investment companies, where the investor has the right to demand redemption of his share on return of the same, either from the company itself or from a close third party (promoter of the fund, repurchase agent, Art. 44 IFA).

Not subject to the law are so-called in-house special funds of banks. These are set up by banks for the pooled investment of the assets of their deposit customers. Participation in these funds is therefore reserved for customers who have given their bank a portfolio management mandate. Even though in-house special funds are not investment funds, Art. 4 IFA and Art. 3 IFO contain regulations applicable to them. For bank-in-house special funds a set of regulations and a periodical statement of accounts must be drawn up; in-house special funds must be audited by the bank's auditors.

With regard to the authorisation of investment funds, the IFA differentiates between domestic and foreign funds. The pre-condition for the authorisation of a domestic fund is first of all that the fund management and the custodian bank possess an authorisation for carrying out their activities from the FBC as the Supervisory Body. Furthermore, the fund management and the custodian bank must submit all fund regulations to the FBC for approval. The FBC will check whether the rights and duties of the fund management, the custodian bank and the investors are clearly regulated in detail in the regulations of the fund, and that the name of the investment fund is not misleading or likely to give rise to confusion.


Foreign investment funds are subject to approval if they are operated commercially in or from Switzerland. For foreign investment funds a representative must be appointed in Switzerland. This, however, does not have to be a bank, as was previously the case. Swiss sales organisations of foreign investment funds require an authorisation from the FBC unless they are a bank or an insurance company. The law creates the basis for waiving the authorisation procedure for investment funds of individual countries or groups of states on the basis of reciprocity, and the replacement of the authorisation by a simple notification procedure. Swiss security funds, - although materially EU-compatible - do not (yet) enjoy the freedom of operation found in the EU and EEA.

The revised IFA moreover contains as a new element the duty to separate the fund management and the custodian bank under the aspect of the legal structure as well as with respect to the personnel on a management level. However, as the legislators have on the other hand refrained from an economic division, group interlocking is permitted between the fund management and the custodian bank. The fund management and the custodian bank may call in third parties to discharge their duties. This does however not restrict their liability. In particular, and contrary to the old law, the delegation of current investment decisions to an external portfolio manager is now permitted.


With respect to investment regulations, the IFA on the one hand regulates the so-called EU-compatible security funds, and on the other the non-EU compatible funds.

Security funds are essentially only permitted to invest in shares which are traded on the stock exchange or other regulated markets open to the public. Investment in derivative instruments is permitted. These, however, may only be used within the framework of proper administration, and not as instruments of speculation. Short sales are not permitted.

The non-EU compatible funds include, on the one hand, the so-called "other funds", and on the other hand the real-estate funds. The fund management may also invest in instruments with limited marketability, high price fluctuations, limited diversification of risk or whose valuation is aggravated. The law mentions in particular investments in precious metals, commodities, options, futures contracts and units in other investment funds . As "other funds", money market funds can be set up. If investments in other funds contain particular risks, these may be administered by a specially qualified fund management only, and have to be clearly identified as such. The warning clause laid down by law states that all statutory information and advertising must contain clear warnings of the risks involved in a clearly visible position. In addition, acquisitions must only take place on the basis of a written contract.

With regard to real estate funds, the IFA rules still maintain that these must make their investments in accordance with the principle of adequate risk diversification in property, participations in and claims against real estate companies. Due to the tendency of real estate funds to tie up their capital on a long-term basis, such funds are required to retain an adequate portion of the assets of the fund in an easily-accessible form, i.e., assets available at short notice, so that no short-term liquidity problems might arise.

In the central area of investor rights, the strengthened information rights of the investor which have been adapted to the regulations of the EU directive should particularly be pointed out. Thereby the requirement to publish an annual report has now been complemented by a requirement to publish a half-yearly report. Annual and half-yearly reports are to be submitted to the supervisory authorities, and to be kept available for inspection by all interested parties for 10 years free of charge. Furthermore, the fund management is now also obliged in Switzerland to publish a prospectus when issuing units in an investment fund. The prospectus contains the fund regulations as well as information regarding the organisation, development and business policy of the fund, its investment policy and the structure of commission. The IFA does not explicitly mention a prospectus liability; this however results from the provisions of liability, which foresee that the fund managers, the custodian bank and their auxiliary persons shall generally be liable to the investors for damage arising from violation of their duties.

P. Herzog - KPMG Fides, Zurich

New Swiss Federal Law on Investment Funds

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