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.