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Law \ Legal

Alternative Investment Funds 2022 – Fund Management/ REITs


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) and the Ordinance of the Swiss Financial Market
Supervisory Authority on Collective Investment Schemes of 27 August
2014 (“CISO-FINMA“, SR 951.312). In
addition, the Federal Act on Financial Institutions of 15 June 2018
(“FinIA“, SR 954.1) and its implementing
ordinances, the Ordinance on Financial Institutions of 6 November
2019 (“FinIO“, SR 954.11) and the
Ordinance of the Swiss Financial Market Supervisory Authority on
Financial Institutions of 4 November 2020
(“FinIO-FINMA“, SR 954.111) 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 (such as units in
AIFs) 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, which includes a code of conduct, guidelines for
real estate funds and several technical guidelines, as well as
certain template documents prepared by the association, were
substantially revised in line with the FinIA and FinSA and entered
into force on 1 January 2022, seamlessly replacing the regulations
of AMAS’ predecessor organisation SFAMA.

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 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 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.

Swiss AIFs require a licence by FINMA, in principle irrespective
of their organisational structure (whether established
contractually or as a company). That said, the 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. Further, a revision of the CISA entering into
force on 1 January 2023 will introduce a new type of Swiss
collective investment scheme, the so-called limited qualified
investor fund or L-QIF. L-QIFs will be exempt from licence
requirements and supervision by FINMA, but must be restricted to
qualified investors only (see also question 7.2 below).

AIFs organised under a foreign law are subject to a licensing
requirement only if they are offered in Switzerland 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.

Most of the Swiss fund types will be eligible to be structured
as an L-QIF, with the exception of SICAFs (this is because
closedended investment companies for qualified investors are exempt
from the CISA altogether; see also questions 1.1 and 1.3
above).

1.5 What does the authorisation process involve for
managers and, if applicable, Alternative Investment Funds, 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 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 the offering to non-qualified investors in Switzerland
of UCITS-type foreign funds. Certain existing foreign AIFs
maintained a previously granted authorisation and can continue to
be offered thereunder. However, no new foreign AIFs were authorised
for offering to non-qualified 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 for managers and/or
Alternative Investment Funds?

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-by-case
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
Swisslicensed 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 have
entered into a long-term investment advisory or 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 17 March 2022, 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.

Click here to continue reading…

Originally published by International Comparative Legal
Guides (ICLG), 10th edition, Switzerland Q&A Chapter, S.
173-181

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.



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