Swiss Collective Investment Schemes Act (CISA) Key elements September 2012 100 Women in Hedge Funds and Paris New York Commission of the Paris Bar Cross-Border Hedge Fund Regulation Alexandre Col Member of the Executive Committee 14 November 2012
Legal notice Limitation of liability Banque Privée Edmond de Rothschild S.A. may not be liable for direct or indirect loss or damage arising from the use of or any consideration given to data or information published in this document. The text above has been prepared as follows: The text mentioned is taken from the amended version of the CISA, submitted to the vote in the Assemblée Fédérale, September 28, 2012. This text is the result of interpretation by Banque Privée Edmond de Rothschild S.A. In no event may Banque Privée Edmond de Rothschild S.A. be held liable for loss or damage caused by the use of this text. 2
Contents Part I Introduction 1. Asset management choices p. 5 2. Investment funds: if the Swiss finance p. 6 industry has a future, it will depend on funds 3. Consequences of the AIFMD p. 9 Part II Structure of the Swiss market 1. What does and does not remain p. 11 in Switzerland 2. Investment funds Legal structure p. 12 Comparison between the EU (Lux) and Switzerland 3. Funds legal structure: p. 13 1-0 to Europe 4. Swiss FPC p. 14 5. Externally managed Swiss SICAV p. 15 Part III CISA Timeline p. 17 Theme 1: Distributors p. 18 Overview for foreign-registered funds p. 19 Overview for Swiss-registered funds p. 21 Theme 2: Representative p. 23 Theme 3: Right to information p. 25 Theme 4: Other p. 26 3
Part I: Introduction
1. Asset Management choices Distributor Custodian bank? Asset manager CH? EU? Portfolio? Fund Sponsor Auditor Regulator? Investor CH? EU? Administrator Legal counsel 5
2. Investment funds: if the Swiss finance industry has a future, it will depend on funds* Failing to develop asset management would be to turn down a fantastic opportunity to continue applying Swiss management expertise to a large portion of the world's financial assets, and would create a risk of our investment fund managers leaving for the EU. If we cannot develop our asset management business optimally among foreign clients who currently hold assets in Switzerland, Swiss asset managers will inevitably go where the largest number of clients are, and also where their funds are incorporated, i.e. the EU. In addition, while asset management expertise is dependent on its client base, the reverse is also true: if investment fund managers leave Switzerland, Swiss managers of private client portfolios will suffer from their departure. As regards its international activities, the Swiss finance industry has two major functions: private banking and asset management. 6
2. (cont.)» No asset management group anywhere in the world has been able to grow without basing its activity on a particular investment vehicle: the fund.» Three targets: - Encouraging the creation of Swiss funds (SICAV model) - Creating a regulatory framework allowing Swiss and foreign funds to be run by asset management teams located both in Switzerland and abroad - Maintaining a "liberal" financial market in which both Swiss and foreign funds are offered to investors» Taking another point of view - that of private banking and the multi-manager form of asset management (funds of funds) - the only way for Switzerland to keep its international clients is to offer them a service they cannot find elsewhere. 7
2. (cont.) Foreign clients hold assets in Switzerland for four main reasons: economic stability, political stability, banking confidentiality and high-quality asset management. The sophisticated asset management practised by the Swiss private banking industry requires access to the full range of products available in the various major financial markets. Regardless of developments in Swiss-registered funds, the available pool of those funds will be too small. Switzerland must be open to the international market. We must be able to offer foreign clients a private banking service that involves the world's best managers, and therefore their funds. 8
3. Consequences of the AIFMD» Management of a European CIU by Swiss asset managers Fund managers supervised in Switzerland» But Europe-registered alternative investment funds (AIFM directive) managed only by delegation» Danger: some managers may leave Switzerland» Positive element: European passport 9
Part II: Structure of the Swiss market
1. What does and does not remain in Switzerland Administration Auditor FUND Custodian bank Representative Asset manager Distributor VIRTUALLY LOST THREATENED? AIFMD 11
2. Investment funds: Legal structure» the CISO will be very important Comparison between the EU (Lux) and Switzerland EU UCITS AIFMD 2 acts CH CISA 1 act EU UCITS PART II SIF 3 products CH FUND OTHER FUNDS 2 products 12
3. Funds' legal structure: 1-0 to Europe Funds SICAV Contractual investment fund (FPC)» Dominant structure» Legal personality The failure to develop the SICAV - a modern investment vehicle - in Switzerland threatens our asset management business. The FPC (contractual investment fund), which has characterised the Swiss market until now, is an obsolete structure. Every effort should be made to develop Swiss-registered SICAVs, and for this to happen, the CISA first needs extensive amendment. 13
4. Swiss FPC» Model used historically in Switzerland» No legal personality» The management company owns buildings (for example) and carries out top-level supervision: - A change in management company implies a change in ownership and therefore fees and taxes» Fiduciary relationship: the investor holds a claim over the Management Company» As a result, investors have few means of expression or rights 14
5. Externally managed Swiss SICAV Distributor Auditors QIs NQIs Investorshareholders Companyshareholders Board of Directors Externally managed SICAV Administrator Asset manager Custodian bank Portfolio 15
Part III: CISA
Timeline July 2011 October 2011 March 2012 September 2012 November 2012 February 2013 2012 2013 17
Theme 1: Distributors Title 1: General provisions Art. 3 Distribution? To Qualified Investors x Financial intermediaries x Insurances v Pension schemes v Corporate Treasuries v HNW (opting in) x Discretionary mandate (opting out) To Non-qualified Investors v Other x Execution only x Advisory mandate 18
Overview for foreign-registered funds (1/2) Investor Distribution? Place of fulfilement FINMA approbation Representative Distributor In Switzerland Sec. 120 al 4 No approbation of the fund Sec. 120 al. 4 Representative Sec. 120 al. 4 and 120 al. 2 let. d Distributor supervised in Switzerland or where domiciled Sec. 19 al. 1bis Financial Intermediary only Sec. 19 al. 1bis Distribution Sec. 3 al. 1 From Switzerland Sec. 2 al. 1 let. b a contrario No approbation of the fund Sec. 120 al. 4 Representative Sec. 123 al.1 Distributor not under scope Sec. 2 al. 1 let e a contrario Qualified Investor Sec. 10 No distribution Sec. 3 al. 1 in fine Sec. 3 al. 2 In Switzerland No approbation of the fund Sec. 120 al. 4 No representative Sec. 120 al. 4 a contrario No distributor because no distribution Foreign Fund From Switzerland 19
Overview for foreign-registered funds (2/2) Investor Distribution? Place of fulfilement FINMA approbation Representative Distributor Foreign Fund Non Qualified Investor Sec. 10 Distribution Sec. 3 al. 1 In Switzerland Sec. 120 al. 1 From Switzerland Sec. 120 al. 1 Approbation of the fund Sec. 120 al. 1 and al. 2 Approbation of the fund Sec. 120 al. 1 and al. 2 Representative Sec. 120 al. 2 let. d Representative Sec. 120 al. 2 let. d Distributor subject to authorization Sec. 2 al. 1 let. d and Sec. 13 al. 1 Distributor subject to authorization Sec. 2 al. 1 let. e and 13 al. 1 No distribution Sec. 3 al. 2 In Switzerland No approbation of the fund Art. 120 al. 4 No representative Sec. 120 al. 2 let. d a contrario No distributor because no distribution From Switzerland 20
Overview for Swiss-registered funds Legal criteria applicable to the fund by the FINMA Distribution? Status of the investor Qualified Investor V Distribution Sec. 3 al. 1 Non Qualified Investor X SICAV Sec. 36 and following Fund Sec. 53 and following Qualified Investor Sec. 10 Qualified Investor V No distribution Sec. 3 al. 2 Non Qualified Investor V? Swiss Fund OR OR Distribution Sec. 3 al. 1 Qualified Investor V FPC Sec. 25 and following Other Fund Sec. 68 and following Non Qualified Investor Sec. 10 Non Qualified Investor V No distribution Sec. 3 al. 2 Qualified Investor V Non Qualified Investor V 21
Theme 1: Distributors Title 1: General provisions Chapter 4: Code of conduct Art. 24: Other rules of conduct Distributors record in writing the needs of the client, which they have listed, along with the reasons behind the recommendation to buy a fund. 22
Theme 2: Representative Title 4: Foreign collective investment schemes Chapter 1: Definition and approval Art. 120: Obligations regarding distribution to NQIs 1. Approval is granted where: a. A representative and a payment service have been designated for units distributed in Switzerland. 2. The representative and the payment service may only terminate their mandate with prior approval from FINMA. 23
Theme 2: Representative Title 4: Foreign collective investment schemes Chapter 2: Representatives of foreign collective investment schemes Art. 123: Appointment 1. Foreign funds can only be distributed in/from Switzerland if the fund management company or investment scheme company has first appointed a representative. 2. The fund management company and the investment scheme company undertake to provide the representative with the information the latter may require for the performance of its tasks. Art. 124: Duties 1. The representative shall represent the foreign collective investment scheme with regard to investors and FINMA. The representative's powers of representation may not be restricted. 2. The representative shall observe the statutory obligations regarding reporting, publication and providing information, as well as the codes of conduct of industry bodies that meet FINMA's minimum standards. Its identity must be disclosed in all publications. 24
Theme 3: Right to information Title 1: General provisions Chapter 4: Code of conduct Art. 20: Principles Duty to provide information: they ensure the provision of transparent financial statements and provide appropriate information about the collective investment schemes for which they are responsible for administration and management, the safekeeping of assets or distribution. They inform all investors about the fees and costs charged directly or indirectly to them, and about how they are used. They provide exhaustive, realistic and comprehensible information to all investors about remuneration relating to the distribution of collective investment schemes in the form of commissions, brokerage fees or other pecuniary benefits. FINMA may specify minimum standards in the form of the codes of conduct of industry bodies. Title 2: Open-ended collective investment schemes Chapter 4: General provisions Section 3: Position of investors Art. 84: Right to information If investors express an interest in more detailed information on the specific business transactions effected by the fund management company or the SICAV, such as the exercising of membership and creditors' rights, or on risk management, they must be given such information at any time. 25
Theme 4: Other Title 1: General provisions Chapter 3: Authorisation and approval Section 2: Asset managers of Swiss collective investment schemes Art. 18b (new): Delegation of duties The asset manager of collective investment schemes may delegate certain duties to ensure appropriate management.» What about the advisor to the manager / fund? Title 2: Open-ended collective investment schemes Chapter 2: SICAV Section 3: Organisation Art. 51: Board of Directors The administration of a SICAV may only be delegated to an authorized fund management company in accordance with articles 28 et seq. Administration / Management 26
Theme 4: Other Title 2: Open-ended collective investment schemes Chapter 4: General provisions Section 5: Open-ended collective investment schemes with subfunds Art. 94: SICAV with subfunds Each subfund is liable only for its own liabilities. In contracts with third parties, a SICAV must disclose the fact that liability is restricted to a single subfund. If the restriction is not disclosed, the SICAV shall be liable with its entire assets, subject to Articles 55 and 100(1) of the Code of Obligations (exception of). 27
Alexandre Col Member of the Executive Committee, Head of the Investment Fund Department» Licence in Economics (business in administration), Ecole des hautes études commerciales, University of Lausanne» Licence in Political Science, University of Lausanne» Licence in Economics, Ecole des hautes études commerciales, University of Lausanne» M. Sc. In Political Science, University of Lausanne» Graduate studies in Economics (economics relations), Institut d études politiques, Paris» Listener Sociology Dept. (Pierre Bourdieu), Collège de France» Chairman of the Regulatory Circle of the Alternative Investment Council (AIC) of the Swiss Fund Association (SFA), Zurich» Member of the Committee of Experts of the Swiss Fund Association s Alternative Investments Council (AIC), Zurich.» Member of the Alternative Investment Management Association Limited (AIMA), London» Representative for Switzerland at the Regional Advisory Committee of the Alternative Investment Management Association (AIMA), London» Member of the European Fund and Asset Management Association (EFAMA), Brussels» Member of the Swiss Council of Hedge Funds (TCF), Zurich» Member of the Roundtables on CISO, FFD, Bern Banque Privée Edmond de Rothschild S.A. 18, rue de Hesse - CH-1204 Genève Investment Fund Department acol@bper.ch www.edmond-de-rothschild.ch 28
Legal notice Limitation of liability Banque Privée Edmond de Rothschild S.A. may not be liable for direct or indirect loss or damage arising from the use of or any consideration given to data or information published in this document. The text above has been prepared as follows: The text mentioned is taken from the amended version of the CISA, submitted to the vote in the Assemblée Fédérale, September 28, 2012. This text is the result of interpretation by Banque Privée Edmond de Rothschild S.A. In no event may Banque Privée Edmond de Rothschild S.A. be held liable for loss or damage caused by the use of this text. 29