One of the most relevant questions when considering the option of a Gibraltar Fund is how this fits into the Swiss Legal and Regulatory framework, in particular the Collective Investment Schemes Act (CISA) which governs the promotion of non-Swiss collective investment schemes in Switzerland. This, along with the guidance offered by the Swiss Federal Banking Commission (SFBC) on public offering and private placements allows us to create a picture of how a Gibraltar Experienced Investor Fund might fit into a Swiss asset manager´s business model.
By way of background it is worth noting that CISA imposes relatively strict rules with regard to investment restrictions (permitted investments, limited leverage etc.), subscriptions/redemptions as well as administration, all of which place Switzerland at a regulatory disadvantage relative to hedge fund jurisdictions such as Gibraltar. Furthermore, Swiss collective investment schemes are as a general rule subject to a 35% withholding tax on any income realised by the fund, or on redemption of shares or interests in the fund. Although it is possible that most or even all of this withholding tax is refundable depending on the residency of the investor, this is still a major issue for non-Swiss resident investors. There is no withholding tax on distributions or redemptions from a Gibraltar Fund.
A Gibraltar Experienced Investor Fund (EIF) is a fund that is geared as its name suggests towards ´experienced investors´ as defined under Gibraltar law. There are no investment restrictions, diversification requirements or leverage restrictions (other than those that the manager chooses to include in the prospectus) imposed by law or regulation. In Switzerland, an EIF would be categorised under CISA as a ´foreign collective investment scheme.' It may not be marketed to retail investors or ´publicly offered´ in Switzerland without prior approval by FINMA. In practice, this registration is not usually possible as the investment policy of the hedge fund will not comply with the corresponding restrictions applicable to Swiss collective investment schemes. However, typically the target market for an EIF will not be a public market but rather the private banking and institutional client for alternative investments.
Marketing of an EIF as an unregistered foreign collective investment scheme in Switzerland is permissible only to the extent that the marketing does not constitute a ´public offering.' This public offering concept encompasses all forms of direct and indirect marketing of collective investments regardless of the form of the offering but there are specific exemptions, e.g., publicity which is directed solely at Qualified Investors and which is made through the usual channels (such as one-to-one contacts, road shows, etc.) without any advertising being made to the general public. Such publicity will not constitute a form of public offering for the purposes of the legislation. Similarly, the publication of subscription prices, NAV and similar information which is made by regulated financial intermediaries will not constitute a public offering (provided such publication does not contain contact details). As such, interests in a Gibraltar EIF may be offered in or from Switzerland within the limits of private placement exemption.
Typically, interests in an EIF might be offered to Qualified Investors through this private placement. The concept of Qualified Investors comprises the following categories of investors.
- regulated financial institutions such as banks, broker-dealers and fund management companies.
- regulated insurance companies;
- public entities and retirement benefit institutions (pension funds) with professional treasury management;
- companies with professional treasury management;
- high-net-worth individuals, defined as being individuals holding, directly or indirectly, a minimum wealth of CHF 2 million in net financial assets; and
- investors having entered into a written discretionary management mandate with either:
- a regulated financial institution (i.e. those which are referred to under (1) above); or
- an independent asset manager, provided that the said asset manager is subject to (i) AML supervision; (ii) rules of conduct of a recognised professional organisation; and (iii) the relevant management agreement complies with the directives of a recognised professional organisation (e.g. Swiss Bankers' Association guidelines) (a "Qualifying Asset Manager"); and
- Qualifying Asset Managers, which fall within the "qualified investors" definition since the entry into force on 1 October 2007 of the revised SFBC Circular 03/118.
Alternative investments and hedge funds are an integral part of even a typical asset allocation for most of these Qualified Investors. The Gibraltar EIF offers an EU fund product, with the security that dealing with an onshore and OECD white-listed jurisdiction offers, but with the flexibility that the manager or promoter is able to build in to the product on the basis that it is not a retail instrument. Used appropriately, the EIF can also offer managers flexibility in being able to allocate appropriate and permitted percentage allocations of discretionary management contracts to alternative or hedge fund strategies that could be managed through the EIF. i.e., a manager would be able to allocate part of a DPM to an EIF provided the manager was operating within its guidelines/risk profile etc.
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.