Switzerland intends to increase its appeal as fund domicile by promoting innovative Swiss fund products. In September 2018, the Swiss Federal Council therefore instructed the Swiss Federal Department of Finance to draw up a legislative proposal for a new fund type that neither requires a license nor the approval by the Swiss Financial Market Supervisory Authority FINMA. In future, a Swiss fund may therefore be launched much faster and cheaper than is currently possible in Switzerland. With the proposed Limited Qualified Investor Fund (L-QIF), which shall be reserved solely for qualified investors, Switzerland follows the less stringent approach of some of the most attractive fund domiciles such as Luxembourg, Ireland and Malta.
In order to accommodate this fund, the range of Swiss funds in the Collective Investment Schemes Act of 23 June 2006 (“CISA”) needs to be expanded. The consultation period for these amendments opened on 26 June 2019 and will last until 17 October 2019.
In Switzerland, collective investment schemes may be set up as a contractual fund, investment company with variable capital (“SICAV”), investment company with fixed capital (“SICAF”), or in the form of a limited partnership for collective capital investments. Under the current CISA, all Swiss funds need to be authorized or approved by FINMA. The contractual fund is subject to approval by the regulator and must be managed by a licensed fund management company, while the latter three forms require a license and are subject to prudential supervision.
Elsewhere meanwhile, there are less stringent approaches, as demonstrated by some of Switzerland’s neighboring countries: Luxembourg is known for its unsupervised Reserved Alternative Investment Fund (RAIF), which served as inspiration for the L-QIF. Malta has the Notified Alternative Investment Fund (NAIF), which only undergoes an initial check for formalities before being listed on the regulator’s website within a 10-day period. Ireland introduced the Qualifying Investor Alternative Investment Fund (QIAI”), whose approval process takes only 24 hours (provided the documentation is complete). Finally, France’s Professional Specialized Investment Fund (PSF), while supervised, is merely subject to the duty of notification but does not require a license. While these fund types differ on key points, all have a relatively quick and cost-efficient setup, making them more attractive for the fund industry and in particular insurance companies and pension funds.
The variety of attractive European fund products explains why Switzerland needs to improve its regulatory framework in order to become a more attractive fund domicile. While fund promotors and investors may appreciate the reputability of a connection to the Swiss financial market and its regulator, the lack of more flexible investment vehicles often makes them opt for Luxembourg or Ireland as a more suitable domicile to set up their funds.
With the proposed L-QIF, Switzerland aims to join the ranks of the aforementioned investment market places, thus making it more competitive. Of course, the full effect of such a fund product requiring neither approval nor a license only unfolds if, at the same time, the relevant tax regime is adjusted accordingly.
The innovative feature of the L-QIF will be its exemption from FINMA licensing, FINMA approval and FINMA supervision. As a consequence, an L-QIF can be launched within a short time. This allows the initiator the best possible time-to-market, which also significantly improves the predictability and efficiency of the fund formation.
Furthermore, the proposed regulation for the L-QIF includes liberal investment rules and does not lay down the extent of risk diversification. Certain additional duties do apply, however, if an L-QIF undertakes real estate investments. As currently proposed, the L-QIF will also be exempt from the prospectus requirement set out in the upcoming Financial Services Act (“FinSA”).
To compensate these liberalizations, certain restrictions aim to ensure adequate investor protection: the L-QIF will only be open to qualified investors as defined by the CISA, i.e. market participants who are professionally qualified, receive professional advice or do not need special protection because of their financial situation. Furthermore, the L-QIF may only be managed by a regulated fund management company or asset manager of collective assets according to the Financial Institutions Act (“FinIA”), which shall enter into force (together with the FinSA) on 1 January 2020. The lack of supervision on product level is therefore compensated to some extent by the supervision of the financial institutions involved.
Certain additional duties will ensure the necessary transparency in the market, such as the duty to disclose the special nature of the L-QIF (i.e. no FINMA licensing, approval or supervision) as well as special risks in the fund documentation and any advertisement. Finally, fund-specific audits shall also apply for the L-QIF.
In terms of legal form, the L-QIF is flexible and offers a range of different structures. The L-QIF may be launched as a contractual fund, as limited partnership for collective capital investments, or as a fund with a legal personality (in the form of a SICAV or SICAF).
In summary, the L-QIF will be the fund product of choice for fund initiators looking for a first-rate alternative to offshore funds, seeking to combine high legal freedom with the protection of Switzerland’s highly reputable financial market and its regulator, with short time-to-market and a relatively quick and cost-efficient setup.
The consultation period on the amendments to the CISA incorporating the L-QIF regulation opened on 26 June 2019 and will last until 17 October 2019. It is expected that the new regulation enters into force on 1 January 2021. Therefore the first L-QIFs may be launched from date onwards.