Proposal and Distribution
According to the Federal Law on Investment Funds of March 18 1994, the distribution of foreign funds in Switzerland is prohibited unless (i) the foreign funds have been authorized by the Swiss Federal Banking Commission (SFBC) and (ii) the representatives/distributors are agreed upon by the SFBC.
An 'investment fund' under Swiss law is
"constituted of assets contributed by investors based on public advertising for the purpose of common investment, and is managed by the fund manager for the account of the investors, normally according to the principle of an adequate diversification of risks"(Article 2(1)).
Advertising is regarded as 'public', regardless of its form, if it is not addressed to a narrowly defined and limited group of persons (Article 2(2)). According to SFBC practice, a 'limited group of persons' means no more than 20 potential investors.
The Law on Investment Funds identifies the following funds as foreign investment funds subject to regulation on the distribution of units in Switzerland:
- any funds, generated on the basis of a collective investment contract or another contract with similar effects, which are administered by a management company with its registered offices and administrative headquarters outside Switzerland (Article 44(1) a);
- any foreign company which has a corporate purpose of collective investment activity with a right of redemption available to the investor (Article 44(1) b); and
- any foreign funds or foreign companies which are regulated in terms of investments by their home country legislation on investment funds (Article 44(2)).
This broad Swiss definition of 'investment fund' covers open-ended investment funds registered abroad.
With respect to closed-end funds, the SFBC has ruled that these fall within the scope of the Law on Investment Funds if they are regulated in their home jurisdiction (Article 44(2)). However, authorization will only be granted if this supervision is comparable to Swiss standards. If it is insufficient (eg, Bermuda), then no authorization may be obtained.
In cases where no supervision exists (eg, Bahamas, British Virgin Islands, Cayman Islands), Article 44(2) does not apply, and thus such funds would not be subject to authorization. However, this rather illogical result, which is contrary to the Law on Investment Funds's basic purpose of protecting investors (Article 1), has led the SFBC to state that even if they are not regulated in their home jurisdiction, closed-end funds could nonetheless fall within the scope of the Law on Investment Funds if investors are not in a position to protect their interests themselves (Article 3(4)).
Closed-end funds which are not subject to licensing requirements in Switzerland may not be distributed in Switzerland under the label, denomination or name 'fund', or under a similar label, denomination or name (Article 5, LIF).
Pursuant to Article 45, a person must apply for an authorization to act as a representative or distributor of a foreign fund in Switzerland if (i) the person "proposes and/or distributes" units of a foreign investment fund in Switzerland, and (ii) the proposal or distribution of units in Switzerland is done "on a professional basis".
These conditions are explained in a circular which the Secretariat of the SFBC issued in June 1995.
The concept of 'proposal and/or distribution' is broadly construed, in order to cover any professional contact with interested investors in Switzerland. The SFBC circular specifies that a proposal and/or distribution can occur in Switzerland even where the targeted investors belong to a limited and specific circle, and regardless of the scope of distribution. In this respect, the Law on Investment Funds differs from the previous legal regime, in that the 1971 Ordinance on Foreign Investment Funds was based on the criterion of a 'call to the public', that is, public solicitation, which allowed some flexibility with respect to Swiss licensing requirements when dealing with a limited number of so-called 'sophisticated investors'.
The activity is carried out 'on a professional basis' if the person earns direct or indirect remuneration from it.
The SFBC has admitted that a strict interpretation of these criteria would produce inappropriate results. The circular describes situations in which the SFBC has confirmed the need to obtain a licence. It also mentions situations in which licensing is not normally required. The criteria which the SFBC applies in its analysis include the following:
- if the client takes the initiative to buy fund units himself;
- the existence of a discretionary investment mandate for the Swiss portfolio manager who buys units for his client;
- the intensity of sales, that is, whether occasional or repeated; and
- direct promotion in Switzerland.
However, there still is a large grey area outside the typical situations set forth in the circular. The SFBC suggests that cases which fall within this grey area should be submitted to it for a ruling. If a situation fits exactly the criteria described in the circular, then an advance ruling is not necessary, since the projected activity is not subject to licensing.
As an exemption to Swiss fund licensing requirements, the distribution of foreign funds targeting Swiss-based institutional investors (eg, banks, insurance companies and pension funds) is authorized without obtaining a licence from the SFBC, but no public solicitation is permitted (Article 2(4) of the Ordinance on Investment Funds of October 19 1994, as amended). This means that no more than 20 Swiss-based institutional investors may be invited to invest in the foreign investment fund concerned.
Finally, the SFBC has stated that an investment company may seek potential investors in Switzerland through public solicitation in order to increase its share capital, as long as the following conditions are met:
- The company is not subject to supervision as an investment fund in the country of its incorporation;
- The shareholders have voting rights and other shareholder rights comparable to those of a Swiss company's shareholders; and
- The company does not refer to the label, denomination or name 'investment fund', or use equivalent or analogous wording, either in its materials or its communications with prospective Swiss investors.
For further information on this topic please contact Didier de Montmollin or Eric W Fiechter at Secretan Troyanov by telephone (+41 22 789 70 00) or by fax (++41 (22) 789 70 70) or by e-mail ([email protected]). Alternatively, contact Eva Stormann at Secretan Troyanov's London office by telephone (+44 20 7404 1199) or by fax (+44 20 7405 0240) or by e-mail ([email protected]). The Secretan Troyanov web site can be accessed at www.secretantroyanov.com.
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