As Switzerland is not an EU jurisdiction, it cannot be accessed with an EU marketing passport pursuant to the EU alternative investment fund managers directive. A Swiss capital raise therefore requires compliance with the local Swiss fund marketing rules. As can be expected from a jurisdiction with the financial industry as a cornerstone, the local fund marketing rules are generally efficient but come with some specificities. This article takes US Sponsors, in Q&A style, through the Swiss regulatory landscape of distributing non-Swiss funds in Switzerland. Although it is tailored to US sponsors, it is equally relevant for other non-Swiss sponsors.
At what moment in the fund-raising process does the Swiss regulatory framework become applicable?
In the EU, it is the pre-marketing phase that opens the regulatory gates. Switzerland does not use the concept of pre-marketing. The Swiss regulatory framework applies from the moment a financial service is conducted. It can generally be held that no financial service is provided before information is exchanged based on which a prospective investor can make an informed investment decision. Unfortunately, the Swiss regulator does not provide concrete guidance on what type of fund documents can be exchanged with prospective investors without triggering a financial service. It can generally be held that initial efforts directed to prospective investors to test their appetite in a new fund product, are not deemed to constitute marketing and are therefore out of scope of the regulations.
What determines the regulation applicable to the marketing effort?
In Switzerland, as in most other countries, the applicable set of marketing rules depends on the type of investors that are targeted. Efforts directed towards professional investors come with more relaxed rules than the ones for retail investors. This article does not deal with the rules applicable to retail investors (including high net worth individuals (HNWI)) since most US sponsors target one or more of the following two client categories: (a) institutional clients and (b) professional clients. This distinction determines the applicable regulatory marketing framework.
What is an institutional client?
Institutional clients are typically regulated financial intermediaries such as a bank, a securities firm, a fund management company, a manager of collective investment schemes, a portfolio manager or a trustee. As institutional clients are the most sophisticated class of investors, they require the least regulatory protection. How that protection looks is explained below.
What is a professional client?
Professional clients are less sophisticated investors than institutional clients. They include for example: occupational pension schemes with professional treasury operations, Swiss or foreign collective investment schemes or the management companies of such collective investment schemes, large companies and private investment structures with professional treasury operations created for HNWIs. Professional clients are the runners-up when it comes to sophistication and therefore require some additional regulatory protection. How this protection looks is explained below.
What is the difference in regulatory protection between professional and institutional clients?
US sponsors targeting professional clients are subject to code of conduct rules. These rules include duties to provide information to the clients and documentation duties as well as transparency and care obligations. Professional clients may expressly release US sponsors from applying some of these rules, which happens regularly. Although the code of conduct rules come with an additional administrative burden, this does not prevent US sponsors from offering products to professional clients.
What are the registration requirements in Switzerland for the sales team?
The regulatory requirements to conduct fund marketing do not apply to the product but to the individuals effectively conducting the marketing effort. The US individuals selling the fund are referred to as client advisors. The US sponsor is generally required to register its client advisors in a so called ‘client advisor register’. The registration process takes approximately one month once the relevant filings are in order and a compulsory legal training has been completed. The costs range between CHF 500.- and 840.- (excluding any additional costs for legal training etc.). The registration is valid for a period of two years and will need to be renewed after that. The US based sponsor should get insurance for its client advisors. A US policy does not generally qualify and therefore a second insurance policy may need to be taken out in Switzerland.
A specific exception for registration applies to ‘prudentially supervised’ client advisors of foreign financial service providers. However, in our experience, US sponsors generally do not qualify for this exception.
Are any further requirements imposed on the client advisor, e.g. an Ombudsman?
Other than the registration with the client advisor register, the US sponsor also needs to check whether an affiliation with a Swiss ombudsman is required. The idea is to settle disputes regarding legal claims between the client and the US sponsor in mediation proceedings. The affiliation is not required if the US sponsor distributes fund units exclusively to institutional or professional clients. Given that most US sponsors target either institutional clients or professional clients (excluding HNWIs), an affiliation with a Swiss ombudsman is not required in these cases.
And what requirements need to be complied with during the marketing process?
Once the client advisors of the US sponsor have been registered with the client advisor register, they may start offering products to prospective Swiss investors. The US sponsor will need to comply with certain basic and ongoing duties. Getting an understanding of these duties is part of a compulsory legal training required for registration in the client advisor register. So all registered client advisors will have acquired a basic knowledge of the Swiss distribution regulations. Typically, it takes around 5 hours to complete the training and there is an option to take the classes online or in person. The fees for the training are not included in the client advisor registration fees and will have to be paid separately.
Is reverse solicitation possible in Switzerland?
If a Swiss client contacts a foreign sponsor requesting to acquire units of a foreign fund at its own initiative i.e. without any previous advertising or contact by the fund or distributor; this generally falls out of the Swiss regulations scope. This means that the requirements detailed above will not need to be complied with.
If reverse solicitation is relied upon, it is important for evidential purposes that a reverse solicitation declaration letter is signed. A fine of up to CHF 500,000.- can be imposed for unauthorised offering of financial instruments. In addition, the reputational risks for the foreign sponsor should not be ignored.
If you have any questions on fund marketing in Switzerland by US sponsors, please do not hesitate to reach out to Judith Raijmakers or Frank van Kuijk.