1 Regulatory Framework
1.1 What legislation governs the establishment and operation of Alternative Investment Funds?
The establishment and operation of Alternative Investment Funds ("AIFs") (and their managers) is governed by the Federal Act on Collective Investment Schemes of 23 June 2006 ("CISA", SR 951.31) and its implementing ordinances, the Ordinance on Collective Investment Schemes of 22 November 2006 ("CISO", SR 951.311), the Ordinance of the Swiss Financial Market Supervisory Authority on Collective Investment Schemes of 27 August 2014 ("CISO-FINMA", SR 951.312) and the Ordinance of the Swiss Financial Market Supervisory Authority on Collective Investment Schemes of 6 December 2012 ("CISIO-FINMA", SR 951.315.2). In addition, the Federal Act on Financial Institutions of 15 June 2018 ("FinIA", SR 954.1) and its implementing ordinance, the Ordinance on Financial Institutions of 6 November 2019 ("FinIO", SR 954.11) set out the legal framework for financial institutions acting as fund management companies and investment managers of AIFs and their assets. Finally, the Federal Act on Financial Services of 15 June 2018 ("FinSA", SR 950.1) governs, among other aspects, the sale of financial instruments to clients in Switzerland. In addition, a number of guidelines of the Asset Management Association Switzerland ("AMAS") have been recognised as a minimum standard by FINMA. The AMAS self-regulation and certain template documents provided by the association are currently undergoing substantial revisions in connection with the lapse of transitional periods under the FinIA and FinSA as of the end of 2021.
Investment companies that are incorporated as a Swiss corporation and that are either listed on a Swiss stock exchange or restricted to qualified investors (within the meaning of the CISA) do not fall within the scope of the CISA. Accordingly, the establishment and the operation of such investment companies are governed by Swiss corporate law and, in the case of listed companies, the listing rules and any additional regulations of the relevant stock exchange.
1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body?
Subject to limited e de minimis exemptions set out in the FinIA for asset managers of collective investment schemes up to a certain level of assets under management, asset managers to AIFs have to obtain a licence as a manager of collective assets from FINMA prior to engaging in asset management activities for AIFs. The licensing requirement applies to asset managers of Swiss and foreign collective investment schemes. The licence is subject to specific licence requirements that include, inter alia, minimum capital requirements and rules regarding the organisation and the operation of the asset manager. Asset managers who fall within the e de minimis exemptions, however, require a licence as portfolio manager and are subject to the ongoing supervision of a FINMA approved supervisory organisation. Investment advisors of AIFs which provide only advisory activities, without any formal or de facto authority to execute orders, do not need a licence from FINMA.
1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body?
As a matter of principle, four types of vehicles are available to set up an alternative investment fund in Switzerland: (i) a contractual collective investment scheme; (ii) a corporate collective investment scheme with variable capital (SICAV – see question 1.4 below); (iii) a limited partnership for collective investments; and (iv) an investment company.
Further, all Swiss AIFs require a licence from FINMA irrespective of their organisational structure (whether established contractually or as a company) and the type of investors. CISA provides that investment companies organised as a company limited by shares are out of the scope of the act, provided that (a) all their shareholders are qualified investors, or (b) they are listed on a Swiss stock exchange. Furthermore, a revision of the CISA is currently pending that would introduce a new type of collective investment scheme (the limited qualified investor fund or "L-QIF"), which does not require any licence if offered exclusively to qualified investors (see also question 7.2 below).
AIFs organised under a foreign law are subject to a licensing requirement only if they are offered to non-qualified investors. By contrast, there are no licensing requirements for foreign AIFs that are exclusively offered to qualified investors. However, Swiss rules on offering and marketing of AIFs apply (see below section 3).
1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different types of funds or strategies (e.g. private equity vs. hedge)) and, if so, how?
The CISA distinguishes four different vehicles for structuring Swiss collective investment schemes. These are divided into open-ended and closed-ended variants. Open-ended collective investment schemes entitle investors to request the fund or a related party to redeem their units at their net asset value at regular intervals. Closed-ended investment schemes exclude this right. The CISA provides for two types of open-ended collective investment schemes: the contractual investment fund; and the investment company with variable capital (Société d'investissement à capital variable; "SICAV"). The contractual investment fund and the SICAV constitute two variations of open-ended funds and are largely interchangeable. They allow for a broad category of structures, ranging from securities funds which are based on the EU-UCITS standard, to real estate funds, so-called other funds for traditional investments and so-called other funds for alternative investments.
Closed-ended investment schemes include limited partnerships for collective investments ("LPCIs") and investment companies with fixed capital (Société d'investissement à capital fixe; "SICAFs"). The SICAF and the LPCI do not share many commonalties other than being closed-ended structures: the SICAF is an investment company organised as a company limited by shares which is open to retail investors, whereas the LPCI is a special form of limited partnership reserved to qualified investors.
The contractual investment fund, the SICAV and the SICAF can be used for any generally permissible investment strategy. Typically, open-ended AIFs will be set up as "other funds for alternative investments", which provide the broadest flexibility in terms of permitted investments. However, depending on the strategy, an investment fund or a SICAV can be set up as another fund for traditional investments or even a securities fund if it can meet the demanding restrictions applicable to UCITS.
By contrast, the LPCI is conceived primarily as a vehicle for investments in venture capital, private equity and construction, real estate and infrastructure as well as alternative investments.
1.5 What does the authorisation process involve and how long does the process typically take?
The authorisation process for Swiss AIFs, fund management companies or managers of collective assets usually starts with a preliminary discussion with FINMA. Based on the outcome of such discussion, a licence application will be prepared and filed. The applicant has to demonstrate that it complies with the regulatory requirements and explain its business model and investment strategy.
When seeking a licence as a fund management company or manager of collective assets, the applicant will need to appoint a regulatory auditor to review its application and provide an assessment to FINMA. Later, the applicant has to appoint another recognised audit firm as its regulatory auditor.
The duration of the authorisation process varies and depends in particular on the complexity and the scope of the application, the applicable investment strategies, and also on the organisation of the applicant. FINMA seeks to approve AIFs that are open to all investors within a deadline of eight weeks and AIFs that are only open to qualified investors within a deadline of four weeks. These deadlines start once FINMA receives a complete filing and are merely indicative. No deadlines exist to authorise fund management companies or managers of collective assets. However, FINMA will usually take four to six months to process an application based on a complete submission (including the report of the licence application auditor).
Foreign AIFs are not subject to a licensing process. However, if they are offered to non-qualified investors, FINMA must authorise them: FINMA will grant the authorisation if the following conditions are satisfied: (i) the collective investment scheme, the fund management company or the fund company, the asset manager as well as the custodian, are subject to public supervision intended to protect investors; (ii) the regulatory framework regarding the organisation of the fund management company, the fund company and the custodian, the rights granted to investors and investment policy are equivalent to the framework set forth by the CISA; (iii) the designation of the collective investment scheme does not give reason for deception and confusion; (iv) the fund has appointed a Swiss representative and Swiss paying agent; and (v) FINMA and the foreign supervisory authorities have entered into an agreement on the co-operation and exchange of information regarding the offering of the fund.
As a practical matter, over the last decade, FINMA has only authorised UCITS for the offering in Switzerland. Existing foreign AIFs maintained their authorisation and can continue to be offered to the public. However, no new foreign AIF was authorised for offering to all investors.
There are no licensing requirements for foreign AIFs that are exclusively offered to qualified investors. However, Swiss rules on offering and marketing apply (see section 3 below).
1.6 Are there local residence or other local qualification or substance requirements?
Swiss AIFs must be administered, i.e. have their place of effective management, in Switzerland. Consequently, the ultimate supervision of the AIF must be carried out in Switzerland. However, the investment decisions may be delegated to third parties, including those domiciled outside of Switzerland. Such persons need to be supervised by a recognised supervisory authority, which entered into a co-operation agreement with FINMA, whenever such jurisdictions condition the delegation to managers in third countries on the existence of co-operation agreements. This is typically the case for EU Member States under the Directive on Alternative Investment Fund Managers ("AIFMD").
The members of the executive board of Swiss fund management companies or Swiss managers of collective assets must reside in a place which allows them to ensure the proper management of the business operations. Practically speaking, this means that they must reside in Switzerland or in the neighbouring areas.
Furthermore, the members of the board of directors and senior management must meet fit-and-proper requirements and possess adequate professional qualifications. These requirements are construed broadly and will generally be examined on a case-bycase basis.
1.7 What service providers are required?
Fund management companies, SICAVs, SICAFs and LPCIs must appoint a regulatory auditor, which acts as an extension of FINMA by carrying out most on-site audits and reporting on a recurring basis to FINMA.
Open-ended Swiss AIFs are required to appoint a custodian. The custodian must be a Swiss bank. AIFs may, subject to the approval of FINMA, also appoint a prime broker. If the prime broker is a licensed Swiss securities firm or a Swiss bank, a separate custodian is not required. Foreign AIFs that are offered or, more broadly, marketed in Switzerland, are required to appoint a Swiss representative and a Swiss paying agent, unless the offering or marketing is strictly limited to qualified investors who are not high-net-worth individuals or private investment structures set up for them who opted to be treated as professional clients under the FinSA (i.e. only to "per se" qualified investors and not "elective" qualified investors) Marketing foreign AIFs to per se professional investors (such as banks, securities firms, insurance companies or Swiss-licensed fund management companies or managers of collective assets, pension funds with a professional treasury, undertakings with a professional treasury) as well as to retail clients who entered into a long-term investment advisory or an asset management agreement with a regulated financial intermediary in Switzerland or a foreign financial intermediary subject to equivalent prudential supervision would not trigger the requirement to appoint a Swiss representative and a Swiss paying agent.
1.8 What rules apply to foreign managers or advisers wishing to manage, advise, or otherwise operate funds domiciled in your jurisdiction?
Foreign managers or advisers cannot act as fund managers of Swiss funds or Swiss AIFs. However, Swiss fund management companies, SICAVs, Swiss managers of collective assets or Swiss representatives of foreign collective investment schemes may delegate certain fund administration activities and the asset management function to foreign asset managers who are supervised by a recognised supervisory authority. The tasks delegated to third parties must be set out in written agreements, which have to precisely describe the delegated tasks, powers and responsibilities, authority to further delegate any tasks, reporting duties and inspection rights. The delegation should not prevent the audit company from auditing or FINMA from supervising the activities of the AIF or the AIFM. In particular, where tasks are delegated to foreign managers, the Swiss regulated entity must be able to demonstrate that the regulatory auditors, FINMA and itself are able to exercise their inspection rights and enforce them if necessary. The regulatory auditors must review the documentation before outsourcing takes place.
1.9 What relevant co-operation or information sharing agreements have been entered into with other governments or regulators?
In December 2012, FINMA entered into a co-operation arrangement with the EU securities regulators (represented by the European regulator ESMA) for the supervision of AIFs, including hedge funds, private equity and real estate funds. The co-operation arrangements include the exchange of information, cross-border on-site visits and mutual assistance in the enforcement of the respective supervisory laws. This co-operation arrangement applies to Swiss AIFMs that manage or market AIFs in the EU and to EU AIFMs that manage or market AIFs in Switzerland. The agreement also covers co-operation in the cross-border supervision of depositaries and delegates of AIFMs. In addition, with respect to the offering of foreign collective investment schemes to non-qualified investors, FINMA has entered into various agreements regarding co-operation and the exchange of information. As of 29 April 2020, FINMA had entered into such agreements with the supervisory authorities of Austria, Belgium, Denmark, Estonia, France, Germany, Guernsey, Hong Kong, Ireland, Jersey, Liechtenstein, Luxembourg, Malta, the Netherlands, Norway, Sweden and the United Kingdom.
Originally published by International Comparative Legal Guides (ICLG), Ninth edition, Switzerland Q&A Chapter, p. 197-206
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.