Marketing of foreign funds in Switzerland

25 November 2020

FinSA / FinIA – Our blog series with the most important findings for the business world (post 09)

The introduction of the Financial Services Act (FinSA) on 1 January 2020 has brought along significant changes in the law on collective investment schemes. In particular, the rules for the distribution and offering of foreign collective investment schemes (funds) in Switzerland have been amended. Most notably, when offering foreign funds to qualified investors (apart from high-net-worth individuals), it is no longer necessary to appoint a Swiss representative or Swiss paying agent, which is a significant facilitation compared to the previously applicable provisions. By contrast, when foreign funds are offered to retail clients, everything remains largely the same.

In the process of these changes, terms familiar under the old Collective Investment Schemes Act (old CISA) such as "distribution" were replaced by the terms "offer" and "financial service" in the new FinSA. This article shows, which new regulations apply in this context to the marketing of foreign funds in Switzerland.

Distribution pursuant to the old CISA

Under the old law, distribution was defined as any offering of and any advertising for funds. FINMA interpreted the concept of advertising very broadly, but granted numerous exceptions in return, in particular with regard to the provision of information to prudentially supervised financial institutions such as banks and insurance companies, to clients under a long-term advisory or asset management agreement or to clients who request information on their own initiative (so-called reverse solicitation).

Offer pursuant to the FinSA

With the introduction of the FinSA, the term distribution in the CISA was replaced by the term offer. An offer within the meaning of the FinSA is made when Swiss clients are invited to acquire a foreign fund and the information provided is specific enough for an investor to make an investment decision based thereon.

If such an offer is made, the foreign fund will be subject to Swiss law. As before, foreign funds must still be approved by FINMA before they can be offered to non-qualified investors in Switzerland. Even under the new law, such offer still generally requires a prospectus, which must be published at the latest at the start of the public offering. If funds are offered to retail clients, an easily understandable key information document (KID) must now be produced in addition to the prospectus. The KID must be made available at the latest before the units of the fund are subscribed.

As under the old law, foreign funds which are offered exclusively to qualified investors do not require approval from FINMA. Such offers also still do not trigger any publishing requirements for prospectuses or KIDs. As an additional facilitation, such funds no longer need to appoint a representative or paying agent in Switzerland with the exception of offers made to high-net-worth individuals who wish to be considered qualified investors (so-called opting out), which still trigger such requirements.

In case funds are offered to both qualified investors and retail clients, the obligation to obtain a distributor license from FINMA in advance no longer applies. This constitutes another significant facilitation for foreign funds under the new law.

Advertising pursuant to the FinSA

The mere advertising of foreign funds must be distinguished from the offering of such funds. An advert differs from an offer in that it is not specific enough to enable the investor to make an investment decision based thereon. For example, there is no information on the product itself, such as the risk profile and fee structure, or on the terms of the offer, in particular the purchase price. The line between offer and advertising is fluid and must be drawn based on the specific circumstances. The distinction is important because advertising activities, which do not constitute an offer, are subject to fewer regulatory obligations. Thus, the FinSA is much more liberal than the old CISA, where any form of advertising was considered a form of distribution and triggered corresponding restrictions.

However, the following regulatory requirements must also be observed under the new law when advertising foreign funds in Switzerland:

• Obligation for the fund to obtain authorization in the case of advertising to non-qualified investors;
• Possible obligation under the FinSA to register client advisers in a Swiss register of advisers (see below);
• Possible obligation to comply with the duties of conduct and the organizational obligations pursuant to the FinSA (see below).

It is also clear under the new law that reverse solicitation or the provision of purely factual information does not constitute an offer or advertisement and is therefore not covered by regulatory provisions.

Qualified investors

For most of the above-mentioned facilitations, the decisive factor is whether the foreign funds in Switzerland are offered exclusively to qualified investors. The CISA generally refers to the FinSA for the definition of qualified investors. Pursuant to the FinSA, qualified investors are in particular the so-called professional and institutional clients:

• Supervised financial institutions such as banks, fund management companies, managers of collective assets and insurance companies;
• Occupational pension schemes and companies with professional treasury operations;
• Large companies; and
• High-net-worth individuals with opting-out.

In addition, according to CISA, qualified investors also include retail clients who are not wealthy but who have concluded a long-term asset management or investment advisory agreement with a supervised financial intermediary.

Offer of and advertising for foreign funds as a financial service pursuant to the FinSA?

With the introduction of the FinSA, it is no longer necessary to obtain a distributor's license in order to offer or advertise funds. However, client protection is ensured to the extent that offering and advertising foreign funds in Switzerland may qualify as a so-called financial service under the FinSA and entail corresponding obligations. This includes, among other things, any activity that is specifically aimed at the acquisition or disposal of a financial instrument. This is always the case with an offer of foreign funds. In contrast, a distinction must be made in the case of mere advertising: If it is specifically aimed at certain clients and is aimed at the sale of a fund, it qualifies as a financial service. Mere general advertising is not enough. Where this line should be drawn is likely to be difficult to decide in practice, particularly with regard to road shows.

Entry into a Swiss register of advisers

There are various consequences associated with the qualification of an activity as a financial service. For example, client advisers of a financial service provider may have to register with a Swiss register of advisers (see blog post Client advisors must now be registered). Foreign fund providers who send their employees to Switzerland on an advertising tour should therefore carefully check in advance whether their employees need to be registered in Switzerland.

Duties of conduct pursuant to the FinSA

If the offer or the advertising of a foreign fund in Switzerland constitutes a financial service, the foreign fund providers must comply with certain obligations under the FinSA (see blog post The Duties of Conduct under the Financial Services Act (FinSA)). As with regard to the registration obligations, foreign fund providers must carefully check whether their activities in Switzerland constitute a financial service in accordance with the FinSA.

Conclusion

In summary, it can be stated that the new regulations will make fund distribution easier. For example, the distributor's license and the obligation to appoint a representative and a paying agent will no longer apply when offering foreign funds to qualified investors (except for high-net-worth individuals with opting out).

Nevertheless, offering and advertising foreign funds in Switzerland may trigger certain obligations under the FinSA, such as the registration of client advisers in a Swiss register of advisers or special duties of conduct and due diligence. Furthermore, foreign funds that are advertised to non-qualified investors in Switzerland remain subject to approval.

If you have any further questions, please contact our Banking & Finance team.

Authors: Cédric Saladin, Stefan Grieder