Matthew Feargrieve investment management and investing news blogsite: November 2019

Matthew Feargrieve: Regulatory Overview Hedge Funds Part II

3:19 PM

Welcome back to the Matthew Feargrieve blog. In the first part of this two-part blog post, we looked at the market overview, legislation and regulation and marketing for Hedge Funds regulatory overview. In this, the second part, we offer some further overview for managers and operators, restrictions and requirements, tax; private placement rules and upcoming reform. We start with a consideration of the role of the managers and operators

Investment restrictions

6. Are there any restrictions on local investors investing in a hedge fund?

There are no such explicit restrictions imposed on Swiss investors under CISA (other than the distribution requirements referred to in Question 4). However, Swiss pension funds, for example, are subject to the Swiss Federal Act on Old Age and Survivors Insurance (OASI) that sets out certain investment principles and restrictions for Swiss pension funds if they intend to invest in (alternative) collective investments schemes, such as hedge funds.

Matthew Feargrieve

Assets portfolio

7. Who holds the portfolio of assets? What regulations are in place for its protection?

For domestic funds (such as FCPs) and SICAVs, the CISA requires the portfolio of assets to be held by a separate local custodian on deposit. The custodian bank must be both:

A Swiss bank (that is, must hold a banking licence pursuant to the Swiss Federal Act on Banks and Savings Institutions and have an appropriate organisational structure to act as a custodian bank for such funds).
Authorised by FINMA to act as custodian bank pursuant to CISA.

A custodian bank may delegate its safekeeping task to regulated third party (sub-)custodians and securities depositories in Switzerland or abroad. Such delegation must, however, be appropriate. Should the fund go bankrupt, the assets held by the custodian on deposit will be segregated from the bankruptcy estate in favour of the investors. For foreign funds, the respective foreign provisions apply.

Requirements

8. What are the key disclosure or filing requirements (if any) that must be completed by the hedge fund?

Investors

For Swiss funds, the following must be published in an appropriate publication media:

All facts subject to a disclosure requirement (in relation to which investors are entitled to lodge objections with FINMA) (see below).
The dissolution of an investment fund.

The fund prospectus determines the applicable publication media, which can be either

Print media (for example, Neue Zürcher Zeitung or Le Temps).
A publicly accessible electronic platform approved by FINMA

In particular, the following must be published by the FCP's fund management company or the SICAV:

Annual report, indicating where the report can be obtained free of charge, within four months of the end of the financial year.
Semi-annual report, indicating where the report can be obtained free of charge, within two months of the end of the first half of the financial year.
The issue and redemption price or net asset value (NAV) each time units or shares are issued or redeemed. Prices for securities funds must be published at least twice a month and prices for real estate funds and funds where the right of redemption at any time is restricted must be published at least once a month.
Details of any amendments to the following (including an indication of where the amendments can be obtained free of charge):

prospectus, simplified prospectus or key investor information document (KIID);
fund contract or articles of association and investment regulations.

In addition, investors are entitled to request further information from the FCP's fund management company or SICAV about:

The basis for the calculation of the NAV.
Further details on individual businesses.
The exercise of membership or creditors' rights or risk management upon claiming a legitimate interest.

Regulators

FINMA must be notified in relation to:

Any change in the persons responsible for the management and business operations (and any facts which could question the good reputation and guarantee of proper management by these persons).
Any change in significant equity holders, with the exception of company shareholders in a SICAV (and any facts which could question either the good reputation of such equity holders or the prudent and sound business practice, due to the influence of the significant equity holders).
Any change in relation to financial guarantees, particularly if the minimum requirements are no longer met.
Any change of executive persons entrusted with the performance of the custodian bank's duties.
Any amendments to any of the following:
prospectus, simplified prospectus or KIID;
fund contract or articles of association and investment regulations.

FINMA must approve any change of circumstances relevant to the continued authorisation of the collective investment scheme. In relation to foreign collective investment schemes, the Swiss representative must notify FINMA of:

Any measures taken by a foreign supervisory authority against the fund, specifically its withdrawal of approval.
Any changes to the relevant documents of the foreign fund such as:
the prospectus, simplified prospectus or KIID;
the fund contract or articles of association and investment regulations;
any other documents necessary for approval under applicable foreign laws and those for Swiss collective investment schemes.

9. What are the key requirements that apply to managers or operators of hedge funds?
Any parties managing or operating local and/or foreign collective investment schemes in or from Switzerland must obtain prior authorisation from FINMA.

Fund management companies

The primary object of the fund management company is the conduct of the fund business. Fund management companies:

Conduct the fund business for FCPs.
Perform the administration and the portfolio management for SICAVs (to the extent such tasks have been delegated to the fund management company by the SICAVs).

The fund management company must be a company limited by shares and have its registered office and main administrative office in Switzerland. The main administrative office will be deemed located in Switzerland if all the following requirements are met:

The tasks of the board of directors (which are inalienable and non-transferable under Swiss corporate law) are carried out in Switzerland.
In relation to each of the investment funds it manages, at least the following tasks are carried out in Switzerland:

decision on the issue of units;
decision on the investment policy and valuation of the assets;
valuation of the assets;
determination of the issue and redemption prices;
determination of the profit distributions;
determination of the content of the prospectus, the simplified prospectus, the annual and semi-annual report as well as other publications intended for investors;
fund accounting.

Fund management companies can also provide the following ancillary services:

Discretionary management of individual portfolios.
Investment advisory services.
Safekeeping and technical administration of collective investment schemes.
Fund business for foreign collective investment schemes, provided an agreement exists on the co-operation and the exchange of information between FINMA and the relevant foreign supervisory authorities in relation to the fund business (and the foreign law requires such an agreement).

Fund management companies can also delegate certain other tasks to qualified third parties. However, the fund management company can only delegate investment decisions to asset managers of collective investment schemes subject to a recognised supervision (that is, asset managers that are either subject to the supervision of FINMA or of a foreign supervisory authority).

SICAVs

The sole object of a SICAV is a collective capital investment, whereby:

A self-managed SICAV performs its own administration.
Externally-Managed SICAV delegates the administration to an authorised fund management company (see above, Fund management companies).

SICAVs can also delegate portfolio management to a fund management company. However, a SICAV (self-managed or externally managed) can only delegate investment decisions to an asset manager of collective investment schemes that is subject to recognised supervision.

Asset managers

Asset managers make investment decisions and ensure that the proper conduct of portfolio and risk management for one or more (local or foreign) collective investment schemes is carried out. Asset managers of Swiss collective investment schemes managed investment funds based on a delegation from an FCP or a SICAV.Asset managers of collective investment schemes with their registered office in Switzerland can be any of the following:

Legal entities, in the form of:

companies limited by shares;
partnerships limited by shares; or
limited liability companies.
General and limited partnerships.
Swiss branches of foreign asset managers of collective investment schemes, provided:
the asset manager, including its branch, is subject to an appropriate supervisory control at its registered office;
the asset manager is adequately organised and has commensurate financial resources and qualified personnel to operate a branch in Switzerland;
an agreement exists on co-operation and the exchange of information between FINMA and the relevant supervisory authorities.
A "Swiss branch of a foreign asset manager" means a foreign asset manager of a collective investment scheme that employs persons in Switzerland to conduct asset management on its behalf on a permanent, commercial basis in or from Switzerland, in accordance with CISA and CISO.

All asset managers of collective investment schemes operating in or from Switzerland require FINMA authorisation for their activities, regardless of whether they manage local or foreign collective investment schemes. However, the following exemptions apply:

De minimis. No FINMA authorisation is required for asset managers whose investors are solely qualified investors and which meet one of the following requirements:

the assets under management (including the assets acquired through the use of leveraged finance) amount to no more than CHF100 million;
the assets under management consist of non-leveraged collective investment schemes where investors are not permitted to exercise redemption rights for a period of five years after their first investment is made in each of these collective investment schemes, and the amount is for no more than CHF500 million;
the investors are exclusively group companies of the group of companies to which the asset manager belongs.

Regulated financial intermediaries. Swiss banks, securities dealers, insurance companies, and fund management companies are exempt from obtaining an asset manager's licence (since they are already subject to the prudential supervision of FINMA). Asset managers can also perform ancillary services, including:

Fund business for foreign collective investment schemes, provided an agreement exists on the co-operation and the exchange of information between FINMA and the relevant foreign supervisory authorities in relation to the fund business and the foreign law requires such an agreement.
Discretionary management of individual portfolio.
Investment advisory services.
Distribution of collective investment schemes.
Representation of foreign collective investment schemes.

Delegation of specific tasks to qualified persons is permitted. Asset managers can only delegate investment decisions to asset managers of collective investment schemes that are subject to a recognised supervision.

Legal fund vehicles and structures

10. What are the main legal vehicles used to set up a hedge fund and what are the key advantages and disadvantages of using these structures?

Local hedge funds are mostly structured as funds of hedge funds in the form of open-ended funds (either contractual investment funds (FCPs) or SICAVs of the category "other funds for alternative investments". Other funds for alternative investments include open-ended collective investment schemes whose investments, structure, and investment techniques (short-selling, borrowing of funds and so on) and investment restrictions exhibit a risk profile that is typical for alternative investments.
The permitted investments for these funds are basically the same as for traditional investments (in particular, securities, precious metals, real estate, derivatives and structured products and units of other collective investment schemes). Short-selling is also permitted and the FINMA can also grant exceptions. However, funds for alternative investments are subject to lower restrictions compared to funds for traditional investments, as follows:

Loans can be raised for an amount of up to 50% of the fund's net assets.
Up to 100% of the fund's net assets can serve as collateral.
Overall exposure can be up to 600% of the fund's net assets.

Reference must be made in the fund name, as well as in the prospectus and marketing material, to the special risks involved in alternative investments. The prospectus must be offered free of charge to interested persons prior to an agreement being concluded or prior to subscription. FINMA may allow the transaction-related settlement services of a directly investing another fund for alternative investments to be provided by a regulated institution specialising in such transactions (prime broker). It may specify which monitoring functions must be undertaken by the fund management company and the SICAV.

Swiss investment fund regulation does not provide for additional vehicles specifically designed for hedge funds. In practice, however, these funds for alternative investments are no alternative to established hedge fund locations such as the Cayman Islands that provide for much more flexibility as to the possible investments, leveraging and customisation.

Tax treatment
11. What is the tax treatment for hedge funds?

Funds

The following applies to open-ended funds, closed-ended funds, and hedge funds:

Corporate income tax. Contractual investment funds (FCPs) and investment companies with variable capital (SICAVs) are generally tax-transparent and therefore not subject to corporate income tax. The fund's income is taxed in the hands of the investors (see below, Resident investors). The only exception applies to income derived from directly-owned real estate which is subject to corporate income tax at the level of the fund, but at reduced rates.
Capital tax. Capital tax is levied at LPs and is only subject to capital tax for directly-owned real estate.
Withholding tax. Profit distributions or accumulated profits from non-distributing (yearly deemed distributions) FCPs, SICAVs are subject to a 35% withholding tax. However, to the extent that such distributions or accumulated profits derive from real estate, no withholding tax is due. Further, capital gains and capital contributions by the investors can also be distributed without being subject to withholding tax, provided they are reported separately.
Issuance stamp tax. The issue of interests or shares in FCPs and SICAVs is not subject to issuance stamp tax.
Transfer stamp tax. The issue of interests or shares in Swiss FCPs and SICAVs is exempt from transfer stamp tax.

Resident investors

The following tax considerations are only applicable to resident individual investors who hold the interests or shares in an FCP or a SICAV as private assets:

Income tax. Distributions or accumulated profits of non-distributing FCPs or SICAVs are in principle subject to income tax at the level of the individual investors. Distributions or accumulated profits stemming from realised capital gains or from directly-owned real estate are not subject to income tax, provided they are reported separately by the collective investment scheme. Income derived from foreign open-ended collective investment schemes is subject to the same taxation rules.
Withholding tax. Withholding tax withheld from distributions or remitted on accumulated profits can be fully reclaimed by resident investors based on national law.
Transfer stamp tax. The issue of interests or shares in foreign collective investments schemes is subject to 0.15% (foreign investment schemes being exempt investors) transfer stamp tax, provided a Swiss securities dealer is involved in the transaction. Secondary market transactions in Swiss FCPs or SICAVs are subject to transfer stamp tax at a rate of 0.075% per party, provided a Swiss securities dealer is involved in the transaction. For interests and shares in foreign collective investment schemes, the transfer stamp tax rate amounts to 0.15% per party.

Non-resident investors

Non-resident investors are not subject to Swiss income tax simply because of an investment in a Swiss FCP or a SICAV. Withholding tax on distributions or accumulated profits of non-distributing funds is levied independently of the state of residence of the investor (see above, Funds). If at least 80% of the fund's income is from foreign sources, a non-resident investor can reclaim the withholding tax based on national law (or alternatively, the Federal Tax Administration may not levy the withholding tax at all). If the foreign-sourced income amounts to less than 80%, a non-resident investor can potentially reclaim (part of) the withholding tax based on a double tax treaty between Switzerland and the non-resident investor's state of residence.

Restrictions

12. Can participants redeem their interest? Are there any restrictions on the right of participants to transfer their interests to third parties?

Alternative investments that are structured as open-ended funds may issue new units or shares at any time in accordance with the fund regulations. Equally, investors may, as a rule, request the redemption of their units or shares in investment companies with variable capital (SICAVs) and contractual investment funds (FCPs) at the net asset value (NAV) at any time.

However, the regulations of a fund, whose value is difficult to calculate or which has limited marketability, can provide that redemption may only be requested on specific dates, but at least four times per year. This must then be explicitly stated in the fund regulations, the prospectus and the simplified prospectus. In addition, on a justified request by the FCP's fund management company or SICAV, FINMA can restrict the right of redemption at any time, depending on the particular investments and investment policy of the fund. This especially applies if the fund invests in the following:

Assets not listed or not traded on a regulated market open to the public.
Mortgages.
Private equity.

The restrictions must equally be stated in the fund regulations, the prospectus and the simplified prospectus. However, in both cases, the right to redeem at any time can only be suspended for a maximum of five years.

The SICAV and FCP's fund regulations can also provide for repayment to be deferred temporarily and on an exceptional basis in the following circumstances:

Where a market, which serves as the basis for the valuation of a significant proportion of the fund's assets is closed, or if trading on such market is restricted or suspended.
In the event of political, economic, military, monetary or other emergencies.
If owing to exchange controls or restrictions on other asset transfers, the fund can no longer transact its business.
In the event of large-scale withdrawals of units or shares, which may significantly endanger the interests of the other investors.

The SICAV or FCP must immediately inform the FINMA and its auditors of any decision to defer redemptions and communicate the decision to its investors in a suitable manner. In addition, in exceptional circumstances FINMA can grant a limited deferment for the repayment of units or shares if this is in the interests of all investors. There are no statutory restrictions on transferring the investors' units of an FCP. However, restrictions can be determined in the fund contract. The shares in a retail SICAV are freely transferable. However, the articles of association may restrict investor eligibility to qualified investors if the shares are not listed on an exchange.

Private placement

13. Are private placements of hedge funds permitted under national private placement rules in your jurisdiction?
For the "private placement" and distribution rules in Switzerland, see Question 4.

14. What are the requirements for making a private placement of hedge funds?
For the "private placement" and distribution rules in Switzerland, see Question 4.
Reform

15. What (if any) proposals are there for the reform of hedge fund regulation?
The Swiss financial market regulation is currently undergoing major changes. Existing rules already have or will soon be complemented or replaced by new laws, in particular by the following:
Financial Market Infrastructure Act (FMIA).

FinSA.

FinIA.
The FMIA entered into force on 1 January 2016, while the Swiss Federal Council's dispatch including revised draft bills for the FinSA and FinIA was published in late 2015. The Swiss Parliament adopted both bills in the final votes on 15 June 2018, which are expected to enter into force on 1 January 2020. FinSA and FinIA (as well as the implementing ordinance) will also have an impact on Swiss collective investment schemes regulation, for example:

The licensing of fund management companies and asset managers of collective investment schemes (newly designated as managers of collective assets) will be governed by the FinIA.
The provisions on distribution in the CISA will be deleted and the distributor licence will be abandoned. The definition of distribution under the CISA will be replaced by the definition of offering under the FinSA. The offering of foreign collective investment schemes to qualified investors will no longer require the appointment of a Swiss representative and a Swiss paying agent.

The FinSA will contain a definition of professional clients and the definition of qualified investors under the CISA will be amended accordingly. The FinSA will provide for a suitability and appropriateness test. Pursuant to the FinSA, financial service providers will be required to group their clients into institutional clients, professional clients and private clients.

A duty to prepare a basic information sheet will be introduced by the FinSA if collective investment schemes are offered to private clients (which shall replace the KIID and simplified prospectus).
The FinSA also contains rules of conduct that will apply in addition to those already set forth in the CISA.

Matthew Feargrieve is a qualified financial services lawyer in the UK and as a commercial lawyer in the Cayman Islands and the Eastern Caribbean. He is also familiar with the regulation of investment funds and management companies based in Luxembourg and Ireland. Learn more about Matthew Feargrieve on his website here. You can also join Matthew Feargrieve's professional network by connecting on his Linkedin page here. Alternatively, you can also follow Matthew Feargrieve here for more updates.

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Matthew Feargrieve: Regulatory Overview Hedge funds

2:48 PM

Matthew Feargrieve Shares regulatory overview of hedge funds in Switzerland

Welcome to the Matthew Feargrieve blog. Matthew Feargrieve is a qualified financial service lawyer in the UK. This blog post is part 1 of 2, and offers Q&A guide to hedge funds law in Switzerland, providing you a high-level overview of hedge funds in Switzerland. Areas covered include a market overview, legislation and regulation, marketing, managers and operators, restrictions and requirements, tax; private placement rules and upcoming reform.

Market overview

1. What is the structure of the hedge funds market? What have been the main trends over the last year?

To date, Switzerland has not been a very significant domicile for single hedge funds. However, Switzerland is a major market for the placement of funds of offshore hedge fund products and an attractive jurisdiction for the management and distribution of foreign hedge funds. Most Swiss-managed hedge funds are incorporated in the Cayman Islands.

Matthew Feargrieve

Regulatory framework and bodies

2. What are the key statutes and regulations that govern hedge funds in your jurisdiction? Which regulatory bodies regulate hedge funds?

The key statutes and implementing ordinances governing local hedge funds (as a type of alternative fund) and foreign hedge funds, as well as Swiss asset managers of alternative funds, are the:

Swiss Collective Investment Schemes Act (CISA).
Swiss Collective Investment Schemes Ordinance (CISO).
Swiss Collective Investment Schemes Ordinance of the Swiss Financial Market Supervisory Authority (FINMA) (CISO-FINMA).
Swiss Ordinance of FINMA on Bankruptcy of Collective Investment Schemes (CISBO-FINMA).

In addition, circulars and guidelines published by FINMA also form part of the current regulatory framework, which includes, for example:

FINMA Circular 2016/7 on Video- and Online Identification.
FINMA Circular 2013/9 on the Distribution of Collective Investment Schemes.
FINMA Circular 2013/8 on Market Conduct Rules.
FINMA Circular 2009/1 on the Guidelines on Asset Management.
FINMA Circular 2010/1 on the Minimum Standards for Remuneration Schemes of Financial Institutions.
FINMA Circular 2008/10 on the Self-Regulation as a Minimum Standard, according to which the following guidelines published by the Swiss Funds and Asset Association (SFAMA) and the Swiss Bankers' Association (SBA) are recognised as a minimum standard within the industry:
SFAMA Guidelines on the Distribution of Collective Investment Schemes;
SFAMA Guidelines on the Calculation and Disclosure of Total Expense Ratio (TER);
SFAMA Guidelines on Transparency; and
SBA Guidelines on the Duty to Keep Documentary Records according to section 24(3) of CISA.

As the SFAMA and SBA guidelines are recognised as regulatory minimum standards, market participants must comply with these guidelines. The Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) will be enacted from 1 January 2020. When enacted, the FinSA and the FinIA will become part of the standard regulatory architecture for hedge funds. However, the draft implementing ordinances for the FinSA and the FinIA has not yet been adopted and the final versions of the draft ordinances are expected to be published in November 2019.

Regulatory bodies

For Swiss hedge funds, the regulatory bodies are the same as for retail funds. Therefore, the regulatory bodies are the:

Swiss Financial Market Supervisory Authority (FINMA). FINMA is the competent regulatory body and supervisory authority for hedge funds in Switzerland. FINMA is responsible for the:
authorisation and supervision of (among other things) fund management companies, asset managers of Swiss collective investment schemes and foreign collective investment schemes, distributors and representatives of foreign collective investment schemes;
the approval of fund products (if approval is required for distributing the respective fund product in or from Switzerland).
Swiss Funds and Asset Management Association (SFAMA). SFAMA is the representative industry association of collective investment schemes and their managers in Switzerland. The industry standards of SFAMA are of great significance. As mentioned, FINMA has recognised many of SFAMA's industry standards as minimum standards for all market participants (see above, Regulatory framework).

For auditing purposes, a dual supervisory regime applies says, Matthew Feargrieve. Such a regime requires regulated fund management companies and asset managers.

3. How are hedge funds regulated (if at all) to ensure compliance with general international standards of good practice?

The Swiss regulatory framework's applicability to hedge funds and the level of regulatory requirements primarily depends on:

Whether the fund is organised under Swiss laws or foreign laws (that is, whether the fund is organised as a local hedge fund or a foreign hedge fund).
The category of investors to which the funds are distributed (for example, whether the fund is distributed to qualified investors or non-qualified investors).

In general, an investment fund qualifies as a "collective investment scheme" if the following requirements are met:

The assets are raised from investors for collective investment and managed on the investors' behalf.
The investment requirements of the investors apply on an equal basis.

CISA governs the following business activities in relation to collective investment schemes (funds):

Swiss funds and persons responsible for the management and distribution of funds and the safekeeping of assets.
Foreign funds distributed in Switzerland.
Persons managing foreign funds in or from Switzerland.
Persons distributing foreign funds in Switzerland.
Persons representing foreign funds in Switzerland.

CISA distinguishes between open-ended and closed-ended funds:

Open-ended funds will take the form of either:
contractual funds (FCPs) (where investors enter into a contract with a fund management company and a custodian); or
investment companies with variable capital (SICAVs).

The fund management company and the SICAVs must be authorised by FINMA. The relevant documents, such as fund contracts or the articles of association and investment regulation, must be approved by FINMA. Investors have the right to redeem their units at the net asset value.

Closed-ended funds take the form of either:
limited partnerships for collective investment schemes (LPs) or
investment companies with fixed capital (SICAF),

The LP or SICAF must be authorised by FINMA. The relevant documents, such as limited partnership agreement for LPs or articles of association and investment regulation for SICAFs, must be approved by FINMA. Investors have no right to redeem their units at the net asset value. Persons applying for a FINMA authorisation to operate, a fund management company, SICAV or SICAF must meet certain minimum requirements, for example:

Persons responsible for the management and business operations must have a good reputation, guarantee proper management and possess the requisite specialist qualifications.
Compliance with applicable CISA duties or obligations must be ensured by internal guidelines or regulations and appropriate organisation.
Sufficient financial guarantees must be available.
Significant equity holders must have a good reputation and must not exert their influence to the detriment of prudent and sound business practices.

CISA distinguishes between non-qualified investors and qualified investors to which funds may be distributed in or from Switzerland:

Qualified investors. These can be any of the following:
regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes, as well as central banks;
regulated insurance institutions;
public entities and retirement benefits institutions with professional treasury operations;
companies with professional treasury operations;
independent asset managers within the meaning of Article 3(2)(c) of the CISA;
high-net-worth individuals who declare in writing that they want to be classified as qualified investors (opting-in), provided they have education, professional experience or comparable experience in the financial industry, and therefore have the knowledge to comprehend the risks of the investments and have a net wealth of a minimum of CHF500,000; or they have confirmed in writing that they have a net wealth of at least CHF5 million (in this calculation, immovable assets can only be taken into account up to CHF2 million);
investors who have concluded a written asset management agreement with a regulated financial intermediary or an independent asset manager, unless they have declared in writing that they do not wish to be deemed as such (opting-out);
other categories of investors designated by the Swiss Federal Council as qualified investors (however, no such additional categories currently exist).

Non-qualified investors. These are all investors that are not classified as qualified investors.

The duration and the costs of the authorisation and approval process depending on the complexity of the fund management companies and funds (for example, the organisational structure, target markets, investment policy, and investment techniques) as well as whether the fund is organised under Swiss law or foreign laws.

Marketing

4. Who can market hedge funds?

Any person/entity planning to distribute local or foreign collective investment schemes on the retail market and/or to qualified investors, as applicable, in or from Switzerland requires prior authorisation from FINMA as a distributor. This is because any marketing activity that qualifies as a "distribution" under the CISA may trigger authorisation requirements for the distributor and for the fund.

However, the following are exempt from obtaining a distribution licence (since they are already regulated by FINMA):

Banks.
Securities dealers.
Insurance companies.
Fund management companies.
Asset managers of collective investment schemes.
Representatives of foreign collective investment schemes.

Distribution of collective investment schemes includes any offering of and advertising for collective investment schemes not exclusively directed at regulated financial intermediaries (that is, collective investment schemes not exclusively directed at banks, securities dealers, fund management companies and asset managers of collective investment schemes, central banks, and regulated insurance companies). Marketing activities constitute a "distribution" within the meaning of the Collective Investment Schemes Act (CISA). However, the following activities do not constitute distribution and are often referred to as "private placement rules":

The provision of information and the subscription of collective investment schemes at the instigation of or at the own initiative of investors, especially in the context of investment advisory agreements or for execution-only transactions.
The provision of information and the subscription of collective investment schemes based on a written discretionary asset management agreement with a regulated financial intermediary.
The provision of information and the subscription of collective investment schemes, based on a written discretionary asset management agreement with an independent asset manager which:
acts in its capacity as a financial intermediary according to Swiss anti-money laundering regulations;
is governed by the code of conduct issued by a specific industry body (provided the code of conduct is recognised as the minimum standard by FINMA); or
is based on a discretionary asset management agreement that complies with the standards of a specific industry body (provided the standards are recognised as the minimum standard by FINMA).
The publication of prices, net asset values (NAVs) and tax data by regulated financial intermediaries, as long as the publication does not contain contact details.
The offering of stock option schemes in the form of collective investment schemes to employees.

However, less stringent rules apply if foreign collective investment schemes are exclusively marketed to qualified investors (see Question 3). Authorisation from the Swiss Financial Market Supervisory Authority (FINMA) is not required to distribute foreign collective investment schemes, if all of the following requirements are met:

The foreign collective investment schemes are exclusively distributed to qualified investors.
The distributing financial intermediary is adequately supervised in its home jurisdiction.
A licensed representative of the foreign collective investment scheme and paying agent in Switzerland are appointed.
The name of the collective investment scheme does not give rise to any deception or confusion.

Hedge funds are, in principle, available to both qualified investors and non-qualified investors. However, more stringent rules apply to Swiss or foreign hedge funds distributed to non-qualified investors: the Swiss regulatory framework (if applicable) is less burdensome if alternative funds are exclusively distributed to qualified investors.

Therefore, and as Swiss managed or Swiss marketed hedge funds are most often incorporated in jurisdictions outside of Switzerland and/or the EU, these funds are typically only distributed to qualified investors.

5. To whom can hedge funds be marketed?

Hedge funds are in principle available to both qualified investors and non-qualified investors. However, more stringent rules apply to Swiss or foreign hedge funds that are distributed to non-qualified investors. In other words: the Swiss regulatory framework (if applicable) is less burdensome if alternative funds are exclusively distributed to qualified investors.

Therefore, and as Swiss managed or Swiss marketed hedge funds are most often incorporated in jurisdictions outside of Switzerland and/or the EU, these funds are typically only distributed to qualified investors.

Join us for the second part of this blog.

Matthew Feargrieve is a qualified financial services lawyer in the UK and as a commercial lawyer in the Cayman Islands and the Eastern Caribbean. He is also familiar with the regulation of investment funds and management companies based in Luxembourg and Ireland. Learn more about Matthew Feargrieve on his website here. You can also join Matthew Feargrieve's professional network by connecting on his Crunchbase page here. Alternatively, you can watch the Matthew Feargrieve video here

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