The Implications of New Swiss Rules on Private Equity Funds

In September 2012, Switzerland adopted a new law to regulate its prosperous but mostly unregulated financial industry. The law triggered the revision of two documents defining the distribution of collective investment schemes in Switzerland. Those documents are known as the Collective Investment Scheme Act (“CISA”) and the Collective Investment Ordinance (“CISO”). CISA and CISO entered into force on March 1st, 2013.

The major change has been the replacement of the private placement regime by a regulated distribution framework. Practically, the new law extended the regulated activity to the distribution to “qualified investors”. Hedge funds, private equity funds and other alternative investment funds have suddenly been brought into scope and obliged to comply in order to continue raising assets from Swiss investors. The two-year transitional period granted for getting compliant ended on February 28th, 2015.

After having been through the complexity of the AIFMD, investment managers will find the steps to comply with the Swiss law to be quite straightforward. Indeed, for managers targeting only qualified investors, no registration is needed, no reporting requirements are imposed and no costly reorganisation is required.

With CISA, investment managers are only three steps away from being compliant. In order to comply, managers need, for each of their funds, to appoint, for the life of the fund, a local representative, a distributor and a paying agent. The representative is a regulated entity, licensed by FINMA, responsible for representing funds towards the regulator and Swiss investors. The other duty of the representative is the supervision of the distribution activity in Switzerland. In that respect, the representative signs an agreement with the entity undertaking the distribution in Switzerland. This entity has to be regulated for distribution in its home market. The obligations and requirements of the distributors are clearly outlined in this agreement. The paying agent is a Swiss bank through which investors have the possibility, but not the obligation, to subscribe and redeem from the fund. Documents distributed in Switzerland will need to mention the name of the representative and paying agent as well as disclose the payments of retrocessions or rebates.

Reverse solicitation and speaking only to FINMA-regulated entities (banks, insurance companies and fund managers) remain valid options to avoid the extra compliance burden. However, they should be handled with care and properly documented. Violating the new law is a criminal offence and could give investors a regulatory put option against the manager in case something goes wrong.

According to a survey by Preqin published in February 2014, assets from Switzerland were representing 25% of the overall investment by European investors in US-based hedge funds. The comprehensive size of the Swiss pension assets, which stands according to Mercer at about €571 billion, is another attractive characteristic of Switzerland for fund raising activity.

Switzerland will remain a top priority for alternative funds within their global distribution strategy. The potential of the market versus the overall compliance cost remains very attractive. The Swiss regulator has succeeded in striking the right balance between investors’ protection and keeping the market’s attractiveness for foreign fund managers.