The Swiss financial regulator has tightened investor protection and rules governing how foreign funds are sold and distributed into the country on a private placement basis, requiring a number of changes.

The Swiss financial regulator has tightened investor
protection and rules governing how foreign funds are sold and distributed into
the country on a private placement basis, requiring a number of changes the
wealth management industry must heed, points out Laven
Partners, the consultancy.

In September, FINMA issued a new circular on the
Distribution of Collective Investment Schemes and it came into force on 1
October.

While authorisation is needed for distribution to
non-qualified investors, distribution to qualified investors does not require a
FINMA authorisation. But Laven said the definition of “qualified investor” has
been changed, which will have major consequences. For example, when
distributing a foreign fund in Switzerland,
it is crucial, Laven says, to check that the target investors meet the
qualified investor criteria. If not, the foreign fund and its
promoter/distributor, will be considered as carrying on unauthorised distribution
to non-qualified persons in Switzerland which entails substantial criminal
sanctions provided for under CISA.

The rules reduce the list of investors defined as qualified:
these include regulated financial institutions, high net worth individuals (as
defined in the law) and investors who have signed a discretionary asset
management mandate with a regulated financial institution.

As a result, non-regulated independent asset managers and
family offices shall not be considered as qualified investors as such. Instead
a look-through must be applied by the fund and its promoter/placing agent to
qualify the ultimate client, which must be done at the time of any relevant
promotion.

The general effect is that non-regulated independent asset
managers and family offices can invest in foreign funds restricted to qualified
investors (such as offshore hedge funds) only to the extent that their underlying
investors are qualified investors.

Such non-regulated independent asset managers and family
offices will have to confirm in writing that the information received will be
used for qualified investors only, Laven says.

New obligations

Although distribution of a foreign CIS to qualified
investors is not regulated by FINMA, it is nonetheless caught by new
obligations as well, the Laven note says.

A foreign CIS marketed in Switzerland (on a private placement
basis and to qualified investors only) will be required, from 1 March 2015, to
appoint a Swiss legal representative and a paying agent regardless of the type
of investors to which the CIS is marketed. This is a new requirement.

Signalling how the internet is changing regulatory
behaviour, the Laven note points out that “the use of websites or web forums
and chat rooms is strictly regulated by the Circular, which provides very
specific and detailed guidance on protection mechanisms to avoid distribution
to non-qualified investors. Marketing should generally be subject to access
restrictions and disclaimers”.