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On June 26 2019, the Swiss Federal Council initiated theconsultation on an amendment of the Swiss FederalCollective Investment Schemes Act (CISA). The initiative

is intended to create a new, unregulated fund category reservedexclusively for qualified investors. The consultation of the draft billwill last until October 17 2019.

The new fund category, a so-called Limited Qualified Investor Fund(L-QIF), is neither authorised nor approved nor supervised by theSwiss Financial Market Supervisory Authority (FINMA). The SwissFederal Council is responding to a long-standing concern of the Swissfinancial sector, which is that setting up a Swiss fund for alternativeinvestments, exclusively open to qualified or sophisticated investors, iscumbersome and takes too long. .

The fact that an L-QIF is reserved for qualified investors, such asregulated financial intermediaries or pension funds, sufficientlyrecognises investor protection. Moreover, such investors can alreadyinvest in unsupervised foreign fund structures. An L-QIF must bemanaged by an institution supervised by FINMA. This institution riskssupervisory measures or sanctions if it seriously breaches its obligations.

Since an L-QIF requires neither authorisation nor approval, it canbe established and offered on the market more swiftly and cheaply thanother funds. Liberal yet transparent investment rules also promoteinnovative and flexible products. The new fund category will offer aSwiss alternative to similar foreign fund products and ensure that morecollective investment schemes are launched in Switzerland in thefuture.

Genesis

The Swiss market for collective investment schemes or funds is animportant element of the country’s financial industry, however, it isprimarily used for asset management and fund distribution.Switzerland is, however, less important as home jurisdiction for fundsor collective investment schemes. Most of the funds managed out ofSwitzerland, or distributed to investors in the country, are those

CORPORATESWISS FUNDS

Swiss L-QIFs: a guideHomburger partner Jürg Frick explains how Swiss regulators are working to

strengthen the country’s competitiveness as a fund centre

1MINUTEREAD

To strengthen itscompetitiveness as a fundcentre, Switzerland intends tocreate a new, unregulatedfund category reservedexclusively for qualifiedinvestors, the so-calledLimited Qualified InvestorFund (L-QIF). Consultation ofthe draft bill has beeninitiated and the fundcategory may be enacted asearly as 2021. The benefit ofthe L-QIF is that it does notneed to be approved by theSwiss regulator and,therefore, can be establishedand offered on the market in amuch swifter and cheaperway.

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established externally, be it in Luxembourg oroff-shore jurisdictions such as Jersey orGuernsey. Assets under management of Swissfunds total around €900 billion, whereasassets under management of Luxembourgfunds stand at some €4 trillion. This is mainlydue to both the restricted, limited access ofSwiss funds to the European market and theSwiss withholding tax regime.

Furthermore, the legal and regulatoryframework, particularly in the area ofalternative or innovative fund products isoften more attractive in foreign jurisdictionsthan in Switzerland. For instance in recentyears many jurisdictions outside Switzerland

introduced fund structures which do not needto be approved by a regulator. These fundproducts include, for instance, the ReservedAlternative Investment Fund (RAIF) inLuxembourg, or the Notified AlternativeInvestment Fund (AIF) in Malta.

Since these structures do not needregulatory approval, they can be set up quicklyand marketed to potential investors withoutundue delay. Furthermore, they are far moreflexible in terms of investment products andtechniques, strategies or risk diversificationand so are particularly suitable andappropriate for alternative investments andinnovative strategies.

In accordance with fund regulation inSwitzerland, all Swiss collective investmentschemes structures must be approved byFINMA or, with regard to contractual fundstructures, the fund management company(Fondsleitungsgesellschaft) at least needs aFINMA license. Furthermore, asset managersof collective investment schemes, bothdepositories and fund distributors, alsorequire a FINMA license. Swiss fundregulation does not foresee any exemptionsfrom these approval or licensing requirements.

By introducing the L-QIF in Switzerland,this strict regime will be alleviated, improvingthe competitiveness of the Swiss fund market.The goal is that a more substantial portion ofthe fund value chain can be both kept andmaintained in Switzerland. However, it isimportant to remember that a new Swiss fundstructure does not solve the remaining Swisstax impediments.

Key elements of L-QIF

Legal entity forms

The L-QIF, strictly speaking, will not be anew type of legal entity. An L-QIF can beestablished in one of the following legalstructure forms already provided for by CISA:(i) contractual fund (vertraglicher Anlagefonds),(ii) SICAV, (iii) limited liability partnership(Kommanditgesellschaft für kollektive

Kapitalanlagen, KmGK), or (iv) SICAF. If oneof these collective investment scheme forms isestablished as an L-QIF then, firstly, it wouldonly be allowed to accept qualified investorsand, secondly, it would have to be run by afund management company or a fund assetmanagement company licensed by FINMA.If this is the case, then the fund as such couldbe qualified as L-QIF and would not needFINMA approval.

The CISA provision that applies to one ofthe four collective investment schemesstructures will coremain in force, with a fewexemptions,, such as the investmentregulations being more liberal. There will stillbe restrictions on possible investments andrisk diversification.

For transparency reasons, the company orfund name of an L-QIF needs to contain theaddition ‘Limited Qualified Investor Fund’.

Qualified investors

Investor protection is maintained byrestricting access to L-QIF to qualifiedinvestors only. These should be eithersufficiently sophisticated themselves or, if not,then at least be professionally advised and,furthermore, their financial situation shouldbe such that they could sustain a possible loss.Furthermore, in practice, it is expected thatthose investing in an L-QIF carry out a duediligence first before investing in a fund, thatthey may be involved in the negotiation ordetermination of the fund terms, and thatthey monitor and supervise the fund and itsperformance thoroughly.

In the following paragraphs, we will brieflydiscuss the term “qualified investor” in thesense of CISA. Since the L-QIF will not bethrough the legislative process in Switzerlandbefore the new Swiss Federal FinancialServices Act (FINSA) is in force we will reviewthe term against the background of this newlaw, expected to be in place January 1, 2020.

FINSA will introduce a new clientcategorisation, including three differentcategories: retail, professional andinstitutional. CISA, however, will notincorporate this client segmentation andinstead will keep its own terminology, with adichotomy between “qualified investors” asdefined in article 10 CISA and “non-qualifiedinvestors”. That said, the client segmentationpursuant to FINSA nevertheless plays a rolefor CISA because as of January 1 2020 CISAwill no longer contain its own list of qualifiedinvestors but instead, in article 10, paragraph

CORPORATE SWISS FUNDS

An L-QIF that needs neither approval norlicensing by FINMA can be launched directly

and swiftly

Jürg FrickPartner, HomburgerZurich, Switzerland

T: +41 43 222 15 16F: +41 43 222 15 00

E: juerg.frick@homburger.chW: www.homburger.ch

About the author

Jürg Frick is a partner in Homburger’sZurich office. He specialises inbanking and finance, fund regulation,restructuring and real estate. Hisclients include Swiss and foreignbanks, securities dealers, assetmanagers and listed companies, aswell as private equity and hedgefunds. He regularly advises onsyndicated bank financings, bondofferings, fund structuring and funddistributions, venture capitalinvestments, leveraged buyouttransactions, restructurings andinsolvency proceedings.

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3, CISA will state that “qualified investors” areprofessional clients as defined by FINSA.

Professional clients pursuant to FINSAinclude:(i) Swiss financial intermediaries as

defined in the Swiss Federal BankingAct, in the Swiss Federal FinancialInstitutions Act (FINIA), alsosupposed to enter into force on January1 2020, and by CISA, banks, securitiesdealers, fund management companiesor asset managers of collectiveinvestment schemes;

(ii) Swiss insurance companies pursuant tothe Swiss Federal Insurance Act (ISA);

(iii) foreign institutions that are subject toa prudential supervision in their homejurisdiction, which is equivalent to theone applied by FINMA to Swissfinancial intermediaries and Swissinsurance companies mentionedbefore;

(iv) central banks, (v) public entities, (vi) pension funds and other institutions

whose purpose is to serve occupationalpensions;

(vii) companies with their own professionaltreasury operations (professionaltreasury services are given when at leastone competent person with experiencein the financial sector is mainlyresponsible to manage on a regularbasis the financial assets of the relevantentity);

(viii) large companies: those that exceed atleast two of the following parameters,first, a total balance sheet of CHF 20million, second, turnover of CHF 40million, and, third, equity of CHF 2million; and

(ix) private investment structures withprofessional treasury operations set upfor high-net worth individuals.

Furthermore, high-net worth individualsthemselves and private investment structuresset up for them (but which do not haveprofessional treasury operations) may declarein writing that they wish to be treated asprofessional clients within the meaning of

FINSA, so-called “opting-out”. Finally, retail clients, under certain

conditions, may also be considered to bequalified investors in the sense of CISA. Thisis on the condition that they have appointeda financial intermediary, such as asset managerpursuant to FINIA, or a foreign financialintermediary subject to equivalent prudentialsupervision that provides portfoliomanagement or investment advice services tosuch retail clients within the scope ofpermanent portfolio management orinvestment advice relationship. Anothercondition is that a retail client has notdeclared in writing that they do not wish tobe treated as qualified investors, so-called“opting-in”. Any other investors is deemed tobe a non-qualified investor in the sense ofCISA.

It is envisaged that the L-QIF can be setup as single-investor fund; however, thedelegation of investment decision back to theinvestor will be excluded, except in caseswhere the single investor itself is licensed byFINMA as a fund management company.

Management of L-QIF

The lack of approval or licensing requirementwill be compensated for by restrictionsapplicable to the management of L-QIF,which needs to be undertaken specifically byFINMA-licensed financial institutions.FINMA ensures that these institutions disposeover an adequate organisation and have theknowledge and experience required to managean L-QIF. This means, for instance, that if infuture a contractual fund is established as anL-QIF, then it would not need to be approvedby FINMA. However, the respective fundmanagement company would still need to beFINMA-licensed.

With regard to SICAV, limited liabilitypartnerships and SICAF, the regime isdifferent. Here the requirement is thatinvestment management shall be delegated toa FINMA-licensed fund managementcompany. An exception is for limited liabilitypartnership, provided the general partner is a

FINMA-licensed bank or insurance company. In effect this means that an L-QIF is not

subject to direct FINMA supervision,however, the company managing the L-QIFwill continue to be subject to FINMAsupervision.

If the management of the L-QIF is notassumed by licensed institutions to be inaccordance with the new law, criminalsanctions, among others, could be imposed.

Depositary

If an L-QIF established as contractual funds,SICAF or SICAV still need to appoint adepositary bank. This bank will also be subjectto FINMA supervision and such a bank willassume important control functions.

Investment guidelines

The investment guidelines or regulations aremore liberal. The funds can either be open-end funds or closed-end funds. There are alsono regulatory requirements as to investmentpossibilities or risk diversification. Inparticular, an L-QIF can invest in traditionalasset classes such as securities, fund units, ormoney market instruments as alternative ormore exotic investment classes, such ascommodities, infrastructure projects, realestate, luxury goods, wine, art, classic cars, etc.

Alternative investments include those inany assets that are illiquid, for which noregular market demand exists, which arevolatile or hardly diversifiable, and their valueis difficult to determine. In any case, therespective investment strategy must bedisclosed in the fund documents.

Even though the investment guidelines areliberal, the L-QIF or the respective fundmanagement company is required to ensuresufficient liquidity in line with riskdiversification principles, investorexpectations as well as redemption rights. Thisrequirement is explicitly stated in the new law,however, this only reproduces establishedpractice and is based on internationalstandards such as the PolicyRecommendations to Address StructuralVulnerabilities form Asset ManagementActivities of the Financial Stability Board(FSB) or the Recommendations for LiquidityRisk Management for Collective InvestmentSchemes of Iosco. To achieve these liquiditygoals different means may be used: if an L-QIF primarily invests in long-term and

CORPORATE SWISS FUNDS

In combination with the very liberalinvestment regulation...a new category offunds can be established in Switzerland

3 6 | I F LR .COM | OCTOB E R / NOVEMB E R 2019

illiquid assets then the liquidity concern canbe addressed by restricting redemption rights,only allowing them in certain intervals or upto certain threshold amounts.

There is no need to comply with riskdiversification obligations, which means thatan L-QIF could invest up to 100% of itsfunds in one single issuer or company.

The financial indebtedness of an L-QIFincurred to achieve a certain leverage on thereturn on investment will be regulated. TheFederal Council will be entitled to issue anordinance further outlining certainpermissible investment techniques andinvestment restrictions.

Documentation and prospectus

Corporate documents, marketing materialrelated to the L-QIF or other documentsnecessary for the establishment or the L-QIFdo not need to be reviewed or approved byFINMA. Furthermore, for the distribution oroffering of an L-QIF no prospectus needs tobe prepared. However, on the first page of anymarketing material and in connection witheach marketing activity the fund needs to beclearly labelled as “L-QIF” and it needs to be

clearly stated that the L-QIF is neitherlicensed or approved nor supervised byFINMA.

Notification to FederalDepartment of Finance

The institution responsible for themanagement of an L-QIF needs to notify theFederal Department of Finance(Eidgenössisches Finanzdepartement, EFD) ofthe establishment and termination of an L-QIF. The notification of a termination needsto be made within two weeks of it beingended. The EFD keeps a publicly availableregister of all L-QIF and their managementcompanies.

Anti-money laundering regulation

L-QIF are exempt from the scope ofapplication of Swiss anti-money launderingregulation, provided the entity managing theL-QIF itself qualifies as a financialintermediary in the sense of these regulationsand, therefore, has become a member of aSwiss self-regulatory organisation and

complies with applicable anti-moneylaundering duties of care.

Timing

The consultation period for the draft bill endson October 17 2019. The revised draft andthe related dispatch (Botschaft) of the SwissFederal Council is expected to be publishedin Q1, 2020, with the earliest date forenactment of the new law on June 1 2021.

An L-QIF that needs neither approval norlicensing by FINMA can be launched directlyand swiftly. For the sake of investorprotection, it remains a prerequisite that theL-QIF is properly labelled and the relatedrisks are adequately disclosed, that investorsin an L-QIF are exclusively qualified investorsand that the company managing the fund islicensed by and subject to FINMAsupervision. In combination with the veryliberal investment regulation, which allowsinvestments in different kinds of alternativeasset classes or undiversified investments, anew category of funds can be established inSwitzerland, which was not possible earlier.

This initiative by the Swiss FederalCouncil is welcome because it strengthens theattractiveness of the Swiss financial marketand, in particular, its fund market. It alsoreduces entry barriers and improvescompetition.

If it is possible later to remedy certainSwiss withholding tax issues – and if the EUgrants Swiss funds liberal access to theEuropean market, then the potential of the L-QIF could be significant.

CORPORATE SWISS FUNDS

The potential of the L-QIF could besignificant