Revisions to the Swiss Collective Investment Schemes Act (CISA) were passed by the Swiss Parliament on September 18th 2012. The starting point for these changes was clearly the adoption of EU principles set out under the incoming Alternative Investment Fund Managers Directive (AIFMD). Given that Switzerland is not a member state of the EU, it is not obliged to transpose the directive into national law. However, AIFMD is likely to have a similar market segmenting effect on the manager level as the UCITS Directive has had on the retail product level where it is generally accepted that Switzerland suffered as a result of not following the trend. UCITS are of course now a global brand. On that basis, the new Swiss regime is aimed at providing at least equivalence for manager regulation, but does this solve all of the issues? This remains to be seen.
The headline changes introduced include the following.
- Swiss domiciled asset managers of foreign collective investment schemes (CIS) subject to regulation for the first time.
- New concept with respect to the regulation of distribution activities for CIS.
- Introduction of concept of Swiss Representative regarding regulated distribution to qualified investors (as defined) and requirements for approval of CIS regarding regulated distribution to non-qualified investors.
- New and more restricted definition of qualified investor.
Swiss asset managers and the Gibraltar angle
Changes introduced. But is equivalence, really 'equivalence'? Gibraltar offers the option to opt in to the full AIFMD granted passport
The changes introduced by CISA effectively layer the licensing regime applicable to Alternative Investment Fund Managers in Europe, to Swiss asset managers in Switzerland. Swiss asset managers of Collective Investment Schemes are subject to CISA. However, the de minimis threshold of 100M EUR (in the case of leveraged products) or 500M EUR (for certain unleveraged closed-end products) which exists in AIFMD has also been replicated in Switzerland, so this avoids the original concern for smaller managers being front loaded with the costs involved in the licensing and reporting requirements of becoming fully licensed under FINMA. Managers with assets under management under these thresholds will not be caught by AIFMD in Europe or by CISA in Switzerland. Bringing Swiss managers under a regime that is equivalent to AIFMD has obvious benefits and it is simple to see why this legislation has been welcomed by the Swiss Funds Association (SFA). However, the question must be, if a manager is becoming fully compliant in Switzerland, then he may also consider the alternative option of becoming fully compliant within the EU under AIFMD which would automatically grant him access to the significant European market. The value of access to this European passport needs to be considered by managers taking the step. It is not yet known whether CISA will be enough to ensure Switzerland's fund rules are considered 'equivalent' by the EU once the AIFMD is adopted. This is what will determine how Swiss-based managers will sell their products into the EU from 2015 onwards, when adoption of a passporting scheme is expected to be offered to third countries under certain conditions. In terms of long term planning and security this is a critical question to be asked now. If you are a manager based in Gibraltar, you will have access to the current MiFID passport, and come July 2013, to the AIFM passport. Gibraltar allows access to the EU market through an established passporting process immediately, with the security that this will not change in the future. This is the same passport granted to AIFM's established in other European territories but with the advantages that a business based in Gibraltar brings. This includes potentially lower running costs, lower corporate tax (set at 10% in Gibraltar), lower personal tax (with personal tax on the increase across Europe, it is on the decrease in Gibraltar), and other personal tax options available to higher executives within these companies under certain conditions. Add to this the fact that there is no VAT in Gibraltar, as well as no capital gains, inheritance tax, stamp duty, or withholding tax on distributions to nonresidents, and the options becomes even more attractive.
De Minimis Exemption
Gibraltar offers the same exemption, but also provides alternative options moving forward.
In the event that the manager is operating within the de minimis exemption, Gibraltar also offers a base and equivalent solution. Such a business can be established under a standalone investment manager license that is still regulated (not under AIFMD), as part of an Investment Fund model that may be self-managed, or as part of an already established platform model solution which can reduce the cost associated with operating in a fully regulated solution. Being established in Gibraltar as either a new company, or even as a contingency option for an existing company would also allow for an 'opt in' to AIFMD if and when required. The availability for both the AIFM and non-AIFM options exist together from Gibraltar.
Delegation to Gibraltar
Within CISA it has been made clear that FINMA may exempt some asset managers from certain licensing requirements in Switzerland if the asset management function has been delegated from fund management companies to management companies which are subject to regulation regarding organisation and investors rights that are equivalent to Swiss regulation. Delegation by a Swiss manager of duties to a non- Swiss entity will require the existence of an agreement between FINMA and the competent foreign supervisory authority (in this case, the Gibraltar Financial Services Commission) regarding cooperation, and mutual exchange of information. The scope of these requirements is not yet defined but should be made clear in the CISO (the implementing Ordinance to the CISA). If such conditions are met, there are further options that may be available to managers wishing to maintain their presence in Switzerland, but operate with the benefit of the European Passport from Gibraltar. It remains to be seen how this will operate in practice.
Distribution and the Qualified Investor
The new CISA regime confirms that the following are explicitly outside the definition of 'distribution'.
- offering or marketing to regulated financial intermediaries such as banks, securities dealers, fund management companies, asset managers of CIS and central banks;
- discretionary client exemption (requirement of written discretionary management agreement with regulated financial intermediaries listed under (i) or with independent asset managers (subject to additional requirements),
- reverse solicitation and execution-only as well as new advisory client exemption (subject to further definition in the CISO).
It appears that a discretionary client will be considered to be a qualified investor so long as they have not given a written declaration that they do not wish to be treated as a qualified investor.
This is significant. In essence, Swiss banks and financial advisors will have continued access to managers from abroad who want to present their product and activities to them.
A Gibraltar manager, of a Gibraltar Fund would therefore not lose this important potential distribution chain.
In addition to this, under a situation where a manager runs a series of discretionary mandates, through a Fund Structure such as the Gibraltar Experienced Investor Fund, an allocation to those funds will not be treated as distribution. That is, rather than run 50 separate mandates, a manager should be able to allocate those discretionary clients across a series of managed funds (with for example, different risk profiles) without falling foul of distribution rules. This can be done within Gibraltar's protected cell company model with allows for legal segregation of 'cell structures' within the same corporate entity. High net worth individuals can also give written consent to be treated as qualified investors for the purpose of the rules. However the rules governing distribution to High Net Worth individuals that have taken this election do trigger the requirement to mandate a Swiss representative and paying agent. The obligations of this paying agent will include (i) to Safeguard that a Swiss representative and paying agent are appointed; (ii) to fulfil statutory reporting and information duties that are yet to be defined and (iii) to ensure on an ongoing basis that the designation of the CIS is not confusing or misleading during the time that such CIS is represented by the Swiss representative. There is no distribution license requirement if distribution is only being made to such high net worth (elected) qualified investors, but the distributor must be adequately supervised in Switzerland or the country of its domicile (such requirements to be defined in the CISO).
The Gibraltar Experienced Investor Fund
Gibraltar's Fund Regime develops and adds competitive advantages
In relation to the above it is important to note that the Gibraltar Experienced Investor Fund model continues to offer advantages over comparable products. Recent changes to Gibraltar's Experienced Investor Fund regime represent a significant step forward as a European Fund Domicile. These changes were introduced in April this year, effectively one month after the change in law in Luxembourg. One of the changes introduced in Luxembourg repealed the possibility of launching a Specialized Investment Fund (SIF), or sub-fund of an existing SIF, without approval from the Luxembourg regulator. Gibraltar retains this post launch notification mechanism, as well as introducing a prior approval process. This puts the timeframe for launch in the hands of the promoter and not the regulator. (Please see Part 3 of this newsletter for a general comparison between the Gibraltar EIF regime and the Luxembourg SIF regime)
Other recently introduced changes allow for an EU or equivalent fund administrator to act as the administrator to a Gibraltar fund (subject to approval) for the first time. The definition of the 'Experienced Investor' has been expanded on, and the re-domiciliation of funds to Gibraltar from 'offshore' territories has also been facilitated through amendments to the law. Please refer to Part 2 of this newsletter for further information on Gibraltar's updated EIF regime.
The Gibraltar funds regime offer attractive options within a European regulated environment, with full applicability of all European financial services directives.
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.