Matthew Feargrieve: Switzerland’s Regulatory Changes to Hedge Fund Industry

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Matthew Feargrieve shares about Switzerland regulatory changes to the hedge fund industry 

Read the Matthew Feargrieve blog. Switzerland’s hedge fund industry may face more regulation and oversight because of a revamp of the country’s Collective Investment Securities Act (Cisa). Few are expected to leave as a result, reports Hedge Fund Review.

Planned changes in Switzerland’s hedge fund rules have generated much discussion about the future for the industry in the country. Despite the government’s intention to tighten oversight and regulation of funds, many in the industry in Switzerland believe the country will be able to maintain its attraction for alternative investment fund managers. It is currently the third most popular location for managers after the US and UK. The debate on whether Switzerland will remain attractive was sparked by draft changes to the Swiss Collective Investment Securities Act (Cisa) first published in July last year.
Matthew Feargrieve
Collective investment schemes governed by the act include open-ended (Sicavs) and close-ended (Sicafs) as well as limited partnerships, which is the structure used by hedge funds and fund of hedge funds (FoHFs). However, until now hedge funds have usually been sold on a private placement basis to qualifying investors, placing them outside the scope of Cisa. Under the planned changes, all distributors will require authorisation by the Swiss Financial Market Supervisory Authority (Finma), even if only distributing funds for qualified investors.

Currently “qualified investors in general include all regulated financial intermediaries, other institutional investors with a professional treasury function (pension funds, government, corporates), private investors with financial assets of at least Sfr2 million [US$2.2 million] and private investors who have a discretionary asset management agreement with a regulated financial intermediary,” according to PricewaterhouseCoopers (PwC).

The definition is subject to some changes. For example, wealthy individuals and investors with a written portfolio management contract with a supervised financial intermediary will no longer be classed as qualified investors, according to KPMG.

The aim of the revisions is to bring Swiss law into line with the EU’s alternative investment fund managers (AIFM) directive. The EU rules are scheduled to come into effect in July 2013, by which time Finma hopes Cisa’s changes will already be passed into law. The idea is to make sure Swiss managers operate under a regime similar to that of the AIFM directive. Such ‘equivalency’ should guarantee Swiss managers and funds access to the EU.

The Swiss Federal Council published a dispatch in March detailing the proposed changes, which has been sent to parliament for consultation. There is pressure for revisions to be passed soon and the law’s revision is urgent because Swiss institutions cannot operate foreign-domiciled collective investment schemes in Europe without approval as asset managers of collective investment schemes, according to KPMG.

Until now, only managers of Swiss funds have been subject to supervision, but three-quarters of funds distributed in Switzerland are not Swiss-domiciled. The draft revisions propose managers of Swiss and foreign collective investment schemes, including Swiss managers with a fund domiciled offshore, should have a license from Finma.

Other changes include a requirement for distributors of funds to be authorised by Finma, including distributors of qualified investment funds (QIFs). Exemptions apply only if distribution is limited to supervised financial intermediaries and insurance institutions.

Foreign QIFs will not need authorisation but will need to appoint a representative in order to be distributed in or from Switzerland. Revisions to the requirements for custodians are included in order to bring the level of liability in line with changes to EU legislation.

It is unclear if the changes will be enough for Cisa to be considered ‘equivalent’ and secure Swiss funds access to the EU. The question mark over this point is due to the continued uncertainty over the final version of the AIFM directive. Clarity is expected when the European Securities and Markets Authority (Esma) publishes implementation guidelines, expected in mid-2012.
If the changes are enough, managers in Switzerland will be eligible for a passport to allow free distribution through the EU after 2015, provided Esma decides to introduce it and nothing in the final version stymies an agreement.

The Swiss proposals have prompted a spate of newspaper articles claiming the changes will be harmful to the hedge funds industry. Those working within the industry do not see any serious cause for concern. “Let’s not have any more of this hype… saying the regulator is cracking down on hedge funds and Switzerland is no longer going to be a centre for hedge fund managers,” says Matthew Feargrieve.

As with the AIFM directive, nothing is final with Cisa’s revisions. Although opinion across the Swiss fund industry is that the changes will not prompt a sudden exit of managers from Switzerland, some have expressed concerns the authorities may make requirements even more prohibitive than the EU.'

The revisions will include some exemptions. For example, as under the AIFM directive, managers with assets under management (AUM) below a certain amount will not be subject to the revised Cisa rules. While the EU’s rules contain specific details relating to exemptions, Cisa has been criticised for being too vague. “The AIMF directive has pages and pages on how these thresholds are to be calculated,” says Christoph Steiner, partner at Swiss law firm Naegli and Partners. With Cisa “we don’t have a clue” what exactly the exemptions will be, he says.

Whatever the concerns, most agree it is unlikely the final version of Cisa will be too restrictive for managers. “Switzerland exists to do business with the rest of the world so we think common sense will prevail,” says Feargrieve.

Even so, the industry is eagerly awaiting the final version of Cisa and hoping it has put enough pressure on the authorities to avoid a restrictive regulatory framework. Matthew Feargrieve delivers legal advice and solutions to managers and general partners of investment funds, as well as to fund investors and service providers.

Matthew Feargrieve has extensive experience of advising fund managers which makes him a valued member of the boards of investment funds in various jurisdictions, on which he acts in a non-executive capacity. Before becoming an independent financial services consultant, Matthew Feargrieve worked for leading law firms in the UK and in Switzerland. Read more about Matthew Feargrieve legal news here. Find out more about Matthew Feargrieve online here. You can follow his latest updates on the Matthew Feargrieve Twitter page and also connect with him on the Matthew Feargrieve Linkedin page. Read the latest Matthew Feargrieve news here.

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