On 1 March 2017, a partial revision of the Ordinance of the Swiss Financial Market Supervisory Authority on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (FINMA Financial Market Infrastructure Ordinance, FMIO-FINMA) regarding disclosure of significant shareholdings entered into force. On 3 October 2017, the Disclosure Office of SIX Swiss Exchange (“DO”) published its annual report for 2016 (“DO Annual Report 2016”) which dealt with many of the questions that lead to the partial revision of the FMIO-FINMA.

This article provides an overview of the first experiences with the new disclosure law, in particular in relation to the reporting requirement for parties with the power to freely exercise voting rights and the reasoning that resulted in the partial revision together with some critical thoughts in this context (Section 1). This article also summarizes the practice of the DO regarding the scope of the term “beneficial owner” (Section 3). Furthermore, FINMA recently made some clarifying comments on the reporting system for collective investment schemes in art. 18 FMIO-FINMA, which will be taken up in Section 2.

By Andrea Rüttimann (Reference: CapLaw-2018-15)

1) Partial Revision of FMIO-FINMA

a) Original Regime under Art. 120 Para. 3 FMIA

With the entry into force of the Financial Market Infrastructure Act (FMIA) as at 1 January 2016, new provisions took effect concerning the duty to report voting rights. The biggest novelty was the introduction of a new reporting duty for the discretionary power to execute voting rights pursuant to art. 120 para. 3 FMIA. Art. 120 para. 3 FMIA comes into play, for example, when beneficial owners give their asset manager power of attorney to exercise the voting rights associated with a qualified participation at the general meeting of shareholders at the asset manager’s own discretion. Thus, a notification for the power to exercise the voting rights according to art. 120 para. 3 FMIA has a counterpart in a notification of a beneficial owner according to art. 120 para. 1 FMIA, unless each of such beneficial owners do not reach the reporting threshold.

The meaning of “discretion” must be analyzed in two steps (cf. FINMA Erläuterungsbericht zur Teilrevision der FinfraV-FINMA vom 22. August 2016 [FINMA Erläuterungsbericht], p. 5):

(1) in the first step towards the beneficial owner: there, discretion is given, if the beneficial owner has no influence on the exercise of the voting rights. In its Erläuterungsbericht, FINMA explains in this regard that “Konkret bedeutet dieses freie Ermessen, dass keine Weisungen des Aktionärs vorliegen dürfen und der Dritte selbst entscheiden kann, wie er die Stimmrechte ausüben will.” (FINMA Erläuterungsbericht zur Teilrevision der FinfraV-FINMA vom 22. August 2016, p. 4 et seq.); and

(2) in the second step within the group of companies or an otherwise controlled entity to which the discretionary power is granted (if no group of companies or a controlled entity is concerned at all, then the analysis ends with step (1)): there, discretion is given if the concerned party’s will is actually (tatsächlich) decisive when it comes to the exercise of the voting rights.

Most of the struggles with the new regulation came from this second step.

Art. 10 para. 2 FMIO-FINMA was introduced to further specify the duty of art. 120 para. 3 FMIA, in particular the second step of the analysis described above. The original intention of FINMA was for the notification duty to apply to any party authorized to actually decide on how voting rights are exercised. In the first FMIO-FINMA consultation in 2015, however, market participants were critical of the proposal and requested that, as is the principle for the beneficial owner, the notification duty should apply to the “last member in the chain” if the person exercising the voting rights is part of a group or is controlled regardless of the party that actually exercises the voting power. The version that finally came into force on 1 January 2016 took this into account and stated that in the context of art. 120 para. 3 FMIA anyone who controls a legal entity either directly or indirectly is deemed to have the discretionary power to exercise voting rights, and thus, is the person subject to the reporting obligation (i.e. within a group the “last member in the chain”).

To clarify, in relation to persons or legal entities not being controlled, the question with regard to scope is of no relevance since these persons/legal entities are always the person subject to the reporting obligation. The question only arises in circumstances where the party who has received the discretionary voting power is controlled and/or forms part of a group.

b) Difficulties implementing Art. 120 para. 3 FMIA

The above described rule was apparently not favorable for all group constellations and caused practical difficulties in the implementation for various affected parties after its entry into force on 1 January 2016. The Disclosure Office’s Annual Report for the year 2016 lists those questions that were brought by investors and resulted in a formal request for a DO recommendation:

In one case, the applicant was an international banking group active in the field of asset management that was ultimately controlled by an individual (cf. DO recommendation V-02-16, p. 82 et seqq. Annual Report 2016). The applicant requested a preliminary ruling, among other requests, with respect to the person subject to reporting obligation pursuant to art. 10 para. 2 FMIO-FINMA. Under the version of art. 10 para. 2 FMIO-FINMA valid at the time, the individual would have needed to be disclosed as a person subject to the reporting duty of voting rights. However, according to the applicant such disclosure would, inter alia, (i) lack a proper statutory basis, (ii) create potentially unsolvable operational issues and be difficult to reconcile with other regulatory requirements for closely-held asset managers and (iii) be misleading to investors (cf. DO recommendation V-02-16, p. 92 Annual Report 2016). The DO concluded that FINMA had pursuant to art. 123 FMIA been delegated the power to issue provisions on the scope of the notification duty and the provision of art. 10 para. 2 FMIO-FINMA, which does not contradict art. 120 para. 3 FMIA, thus had a sufficient legal basis. The DO also dismissed the second argument and considered it feasible, and moreover, the duty of the controlling shareholder to monitor the positions held. Thirdly, the DO held that like the case under art. 120 para. 1 FMIA, market participants would expect that the notifications show the ultimate controlling shareholder, while also taking into account the at the time undoubtful wording of art. 10 para. 2 FMIO-FINMA. The applicant raised the decision to FINMA; however, since art. 10 para. 2 FMIO-FINMA had been revised in the meantime, the respective request was groundless (cf. also remark of the DO, p. 83 Annual Report 2016 and FINMA Enforcement report of 27 March 2018, p. 23).

In a further case the applicant requested for easing provisions, respectively an exemption from the duty to notify under art. 120 para. 3 FMIA, on the basis that the person actually granted the discretionary voting power is subject to the reporting obligation (and not the “last member in the chain”) (cf. DO recommendation A-06-16, p. 81 et seq. Annual Report 2016). Since, at the time of the request was filed with the DO, it had already become apparent that FINMA would revise the provision of art. 10 para. 2 FMIO-FINMA, the request was suspended and finally withdrawn (since the applicant’s request was one of the alternatives under the final provision, cf. Section 1d below).

In another matter, an applicant was granted easing provisions with respect to the notification duty according to art. 18 para. 1 and para. 4 and art. 22 para. 3 FMIO-FINMA to the extent that the direct shareholders would not need to be disclosed as would be required under art. 11 lit. b FMIO-FINMA. The easing was mainly granted as a consequence of the special organization of the applicant as of one the world’s largest asset managers [author’s note: BlackRock, Inc.] with a high number of direct shareholders and frequent changes of shareholdings among them. The ordinary reporting duties would have led to numerous notifications which, in the end, would have had a potential negative effect on market transparency (cf. DO recommendation A-05-16, Annual Report, 2016, p. 58 et seqq.). For the filing of the discretionary power to exercise voting rights, which was likely granted to various members of the group at different levels, the version of art. 10 para. 2 FMIO-FINMA valid at the time was the “convenient” solution in the sense that only the top holding entity was the person subject to reporting obligations. For this applicant a reporting regime as first proposed by FINMA (cf. Section a) would have been fatal and would have likely led to a request for a new recommendation (cf. DO recommendation A-05-16, p. 49 et seqq. Annual Report 2016).

The provision in art. 120 para. 3 FMIA also raised other questions. For example, the DO had to determine whether certain contractual provisions result in a duty to report voting rights. The DO concluded that, depending on the circumstances, the duty to report arises only after other conditions are met. Under other circumstances, however, the contract empowered the entitled party to exercise voting rights at its discretion directly upon its conclusion and the duty to report in this case arises at the time of the conclusion of the contract (for more detailed description of the different constellations, cf. DO recommendation A-04-16, p. 62 et seqq. Annual Report 2016).

c) FINMA initiated Partial Revision

As a consequence of the accumulation of difficulties investors faced with the reporting system under art. 120 para. 3 FMIA, FINMA started a consultation and proposed an amendment to art. 10 para. 2 FMIO-FINMA with following scope: The person who is actually able to make a discretionary decision concerning the exercise of voting rights is subject to the notification duty (FINMA consultation proposal of 22 August 2016, FINMA Erläuterungsbericht, p. 4), which corresponded to the very original proposal of FINMA in 2015 (cf. Section 1a above). At the consultation for FINMA’s amended proposal, a vast majority of participants welcomed the change. However, some participants felt it made sense to offer an alternative option for fulfilling the notification duty on the top level for legal entities within a group, i.e. “the last member in the chain” (as it would have made sense for the applicant in the DO recommendation A-05-16, p. 49 et seqq. Annual Report 2016, cf. Section 1b above). The concern that was finally taken into account by FINMA.

d) Revised Provision

The final amended version of the provision has been in effect since 1 March 2017 and provides that:

• Primarily the person who actually decides how voting rights are exercised is the person subject to reporting requirement (FINMA describes this as originäre Meldepflicht). When a legal entity within a group has been granted formal right for execution, it has to be assessed in more detail if this entity or any other entity is actually holding the discretionary power (cf. step (2) above). In its Erläuterungsbericht, FINMA further explains that “Dabei gilt es zu beachten, dass nicht automatisch diejenige Person meldepflichtig ist, auf welche die Delegation bzw. die Stimmrechtsübertragung formell lautet. Entscheidend ist, wer tatsächlich bestimmt, wie die Stimmrechte ausgeübt werden.” (FINMA Erläuterungsbericht zur Teilrevision der FinfraV-FINMA vom 22. August 2016, p. 4 et seq.). Whether the party that has received the discretionary voting power actually uses the voting rights does not play a role (this is self-evident and also corresponds to the concept of the reporting duty in general).
• Alternatively, in cases where the reporting legal entity according to art. 120 para. 3 FMIA is controlled or forms part of a group, the reporting requirement can be met on a consolidated basis by a controlling entity or person for the legal entities controlled by them (konsolidierte Meldepflicht). A consolidated notification has to (i) have the indication as “consolidated notification” pursuant to art. 22 para. 2 lit. a cif. 2 FMIO-FINMA (this requirement is additional for consolidated notifications and on top on the requirement under art. 22 para. 2 lit. a cif. 1 under which it must be indicated which proportion of voting rights vested in the notification regarding the person with full discretionary powers over the exercise of the voting rights) and (ii) must necessarily be done by the top holding or controlling person, i.e. the last member in the chain. A consolidation on a lower, in between level is not permitted. Thus, in many cases, this alternative reporting system will lead to a notification under art. 120 para. 1 mixed with a notification under art. 120 para. 3 FMIA.

In the view of FINMA the new regime will not lead to confusion since, and this is also what the DO concludes, generally, the reporting duty under art. 120 para. 3 FMIA only comes into play if voting rights outside of controlled group have been transferred to a legal entity within a group. A transfer within the controlled group itself will always be a case of the reporting duty according to art. 120 para. 1 FMIA. When having transfers from outside the group (and own holdings within the group), only then, the two reporting duties of art. 120 para. 1 and 3 FMIA mix in the same notification. The DO thus has adapted Form II (Notification by a group; form provided by the DO for filing notifications at SIX Swiss Exchange) and added a section where the reporting subject must indicate whether it reports on consolidated basis (or not). Additionally and already in force since the regime of the FMIA as of 1 January 2016, Form II (as well as Form I for single shareholders) contains the function where it shows which part of the significant shareholdings is reported in the role as beneficial owner and which part is reported as discretionary voting power.

As a result of the above, not only art. 10 para. 2 FMIO-FINMA was amended, but also art. 22 para. 2 lit. a FMIO-FINMA now contains a new obligation in cif. 2 to indicate whether “the notification duty is exercised by the person with full discretionary powers to exercise voting rights or the person who directly or indirectly controls the person with full discretionary powers to exercise voting rights”.

On the transitory regime (Übergangsbestimmung), the revised FMIO-FINMA states for a transitional period of six months until 31 August 2017. Since the partial revision induces, as just described in the previous paragraphs, a new element of the reporting duty in art. 22 para. 2 lit.a cif. 2 FMIO-FINMA by indicating whether the voting rights are reported on a consolidated basis (or not), the notifications at the time needed to be reviewed and updated accordingly in line with the new regime until 31 August 2017.

e) Critical Thoughts

While the revision definitely shows FINMA’s intention (and also its flexibility) to react to difficulties market participants faced, the outcome has side effects. First, while FINMA is of the view that the new regime does not lead to uncertainties (cf. Bericht über die Anhörung vom 22. August bis 3. Oktober 2016 zur Teilrevision der FinfraV-FINMA vom 26. Januar 2017 [FINMA Anhörungsbericht], p. 9), the wording “anyone who has full discretionary powers to exercise voting rights” can be vague and leave investors with uncertainties and questions as to who the correct reporting subject is. This might in particular be true for investors not familiar with the high degree of fineness of the disclosure law, and even more true for foreign investors. But in administrative law, and in particular where administrative criminal sanctions are a consequence of violations, ambiguities are generally difficult (principle of legality).

Additionally, the new regime increases the complexity of the notifications, which has on one side the effect that violations of the provisions are more likely to happen, and on the other side generally the handling for all involved parties (investors, issuers, regulatory authorities) gets more complicated (cf. new indication obligation pursuant to art. 22 para. 2 lit. a cif. 2 FMIO-FINMA, cf. Section 1c). Moreover, it is also more complicated for market participants to understand the notifications published on the public platform of SIX Swiss Exchange and to follow the development of a specific shareholding position. On top, FINMA seems not only to provide a choice, but also the possibility to change between the two different reporting regimes (cf. FINMA Anhörungsbericht, p. 10 et seq. where FINMA describes how an investor can switch between the two different regimes of reporting duty).

2) Reporting Regime For Collective Investment Schemes (Art. 18 FMIO-FINMA)

In connection with the hearing on art. 10 para 2 FMIO-FINMA, some participants took the opportunity to bring forward other issues which in their view needed a revision as well, and in this context once more the “infamous” provision of art. 18 FMIO-FINMA gave reason to complain. FINMA made some generally clarifying comments. According to FINMA, art. 18 FMIO-FINMA sets a special regime for collective investment schemes only (FINMA Anhörungsbericht, p. 13). As a consequence, the person subject to reporting duty is defined under this special regime. For collective investment schemes approved for distribution in Switzerland the licence holder is the person subject to reporting duty, (without consolidation of its holdings with the holdings of the group for fund management companies that are dependent on a group) (art. 18 para. 2 lit. b FMIO-FINMA). With this rule a different subject, as in art. 10 and 11 FMIO-FINMA, is responsible for the reporting duty, since the license holder is not the economic beneficiary of the assets, i.e. not the beneficial owner. Furthermore art. 18 para. 9 FMIO-FINMA states that investors (as the economic beneficiaries) do not need to be disclosed (which is a necessity since they often do not even know). Foreign collective investment schemes not approved for sale or distribution are subject to the same provision, provided that they can provide proof of independence of their fund management company according to art. 18 para. 5 FMIO-FINMA.

For foreign collective investment schemes that are not approved for sale or distribution in Switzerland and are not independent, i.e. form part of a group, another regime comes into place; in this context, in its most recently issued Enforcement report 2017, FINMA reaffirms the pre-existing practice by the DO that the principles in line with art. 120 para. 1 FMIA apply (FINMA Enforcement report 2017, p. 23). As a consequence, the person or legal entity subject to reporting duty in a group is the “last member in the chain” (cf. also FINMA Anhörungsbericht, p. 14). The DO recommendation V-02-16 applying this principle (cf. above Section 1 b) was thus protected by FINMA, but the applicant was granted easing provisions (based on the alternative request of the applicant) also taking into account a declaration of independence by the controlling individual (FINMA Enforcement report 2017, p. 23; which however results in a somewhat inconsistent mix between disclosure as independent (para. 3) and non-independent (para. 4) foreign collective investment scheme).

In its recommendation A-05-16 (cf. also above Section 1b) the DO further confirmed, inter alia, that for collective investment schemes under art. 18 para. 4 FMIO-FINMA in line with the interpretation of art. 120 para. 1 FMIA resp. art. 11 lit. b FMIO-FINMA, it is the holder of the legal title of the assets that must be disclosed (and not the licensed holder, as the applicant claimed). With this decision, the DO also confirmed its practice in its recommendation of V-02-14 (cf. Annual Report 2014, p. 30). The DO further re-confirmed that the consolidation within a group for collective investment schemes falling under art. 18 para. 1 FMIO-FINMA is voluntary (art. 18 para. 2 lit. b FMIO-FINMA states that “There is no obligatory consolidation with the group for fund management companies within a group”).

3) Scope of the Definition of the Beneficial Owner under art. 10 para. 1 FMIO-FINMA

The entry into force of the FMIO-FINMA also legalized the already valid principle or definition of the beneficial owner (as it has been in practice since the decision of the Federal Supreme Court of 29 July 2013, court order 2C_98/2013). Pursuant to this practice, art. 10 para. 1 FMIO-FINMA states that a beneficial owner is (i) the party controlling the voting rights stemming from a shareholding and (ii) bearing the associated economic risk. In two recommendations the DO had to decide on questions that allowed for a more precise interpretation of the term “beneficial owner” and also confirmed that the two elements must be met cumulatively in order to be concerned by the reporting obligation.

One case concerned a foundation where the beneficiaries where neither directly controlling (contrary to the case in the decision of the Federal Administrative Court (FAC) of 20 July 2010, B-7126/2008 where the beneficiaries where considered to be the beneficial owners [as a group]) nor the controlling parties were the beneficiaries. As a result, a foundation where the control of the voting rights and the economic risk were separated, the foundation itself was the person subject to reporting obligation (DO recommendation V-01-16, p. 26 et seqq. Annual Report 2016).

In the second case the question was analysed in more detail in the context of a partnership limited by shares (Kommanditaktiengesellschaft, art. 764 et seqq. CO). The DO came to the conclusion that even though a majority shareholder was known (due to the special organisation of a partnership limited by shares), the partnership limited by shares was the person subject to reporting obligation, since the majority shareholder did not have controlling power over the voting rights in the sense of art. 120 para. 1 nor para. 3 FMIA (DO recommendation V-04-16, p. 36 et seqq. Annual Report 2016).

Thus, it seems that the provision in the FMIO-FINMA provides now for a more stable definition of the term “beneficial owner” and that this definition is also followed and implemented by the DO in a practical manner.

4) Outlook

For the year 2016, the DO mentioned that despite the legislative intentions to reduce unnecessary notifications, the number of disclosure notifications increased significantly (apparently, though, to some extent based on other special factors, i.e. shareholders who filed a multiple number of notifications, the reasons for which were not connected to the revised provisions). It will be interesting to follow whether the number of (insignificant) notifications will actually decrease (since this was the major goal of the new disclosure law). However, for 2017 the additional special factor based on the partial revision of the FMIO-FINMA, requiring consolidated notifications in line with art. 120 para. 3 FMIA to be amended the latest by 31 August 2017, needs to be taken into account.

Additionally, it is likely that not all questions around the reporting duty under art. 120 para. 3 FMIA are cleared up yet; see in this context also the considerations in the DO recommendation A-04-16 regarding securities held in custody for clients with and without an investment management mandate (Annual Report 2016, p. 62 et seqq.) raising some of the questions that might be further relevant for the everyday practice.

Andrea Rüttimann (andrea.ruettimann@nkf.ch)