Swiss funds are frequently not investors’ first choice, especially as regards alternative investments for professional investors, where time to market is often crucial. High time and cost pressure means that even Swiss clients often prefer foreign funds. With the L-QIF, Switzerland will have a real alternative designed to strengthen the competitiveness of its fund and asset management industry by increasing the number of collective investment schemes launched in the country. The way has been paved, and it will ultimately be up to the politicians and the Swiss fund and asset management industry itself to make good use of the L-QIF. So far, the outlook is promising. 

By Diana Imbach Haumüller (Reference: CapLaw-2020-73)

1) Background

a) Competitive disadvantage of Swiss funds

Switzerland is an important location for asset management and the distribution of collective investments. However, its position as a “production location” for collective investment schemes is not strong. Restricted distribution possibilities abroad on the one hand, namely due to the lack of recognition of Swiss securities funds under the UCITS Directive and the still pending decision on the AIFMD third-country passport, and the unfavorable Swiss withholding tax on the other hand, have a negative impact on the competitiveness of Swiss funds on an international level. Further, the considerable amount of time and expense involved in acquiring the necessary product approval results in even Swiss clients giving preference to foreign collective investment schemes over Swiss ones. Particularly when it comes to alternative and innovative fund products for qualified investors, today’s Swiss funds are often not competitive. This is an unsatisfactory situation, especially given the ample pool of outstanding expertise available within Switzerland’s fund and asset management industry. 

Against this background, the Asset Management Association Switzerland (formerly the Swiss Funds and Asset Management Association SFAMA) initiated the idea of the limited qualified investor fund (L-QIF). The core element of the proposal was to provide a flexible collective investment scheme under Swiss law which will not require FINMA approval and so can be set up much more quickly and cost-effectively. This product, which is to be available only to qualified investors as defined by the Collective Investment Schemes Act (CISA), should nevertheless guarantee the customary levels of quality and security. To this end, while L-QIFs themselves will not require approval, their asset manager or fund management company must be an institution supervised by FINMA. Indirect fund supervision such as this takes due account of qualified investors’ need for client protection, so it is important to point out that L-QIFs will not be unregulated as they will have to comply with the rules set out in the CISA.

Other fund locations already have such fund vehicles, a case in point being the Luxembourg RAIF (Reserved Alternative Investment Fund), which has already become established and is also used by institutional investors in Switzerland.

b) Development of the draft bill

The Federal Council took up the initiative and mandated the Federal Department of Finance (FDF) on 5 September 2018 to prepare a corresponding draft. Meanwhile, the idea of the L-QIF also found broad support in parliament. A motion to this effect by Ruedi Noser, member of the Council of States, was adopted by the Council of States on 24 September 2018 and subsequently by the National Council on 13 March 2019, with overwhelming majorities in both cases. Shortly after this, on 26 June 2019, the Federal Council opened the consultation process for an amendment to the CISA to create the L-QIF. The consultation draft met with broad approval, leading to the adoption of the dispatch on 19 August 2020, albeit with a slight delay due to the COVID-19 situation. Currently, it is expected that the Council of States will discuss the draft bill in its spring 2021 session, followed by the National Council in summer 2021. If this pace can be kept up, it seems realistic that the first L-QIF can be launched as early as 2022.

2) Structure, systematics, and key features

a) Principle

The L-QIF is not a new category of financial instruments but a collective investment scheme according to the CISA and thus generally subject to the provisions of the CISA. Only for the sake of clarity, this is again stated in Art. 118a para. 2 Draft-CISA (D-CISA). Any exceptions to this principle are explicitly stated in the Act itself, either in the new, L-QIF-specific title 3a. (Art. 118a et seqq. D-CISA), or in corresponding provisions in other articles throughout the Act, such as the provisions on licensing (Art. 13 para. 2^bis D-CISA) or approval (Art. 15 para. 3 D-CISA).

Art. 118d D-CISA comprises a comprehensive catalog of provisions which are not applicable to the L-QIF. This negative catalog contains (under letter a) the investment requirements which do not apply to the L-QIF and are replaced by specific provisions in the new title 3a as well as (under letter b) articles which do not fit from a conceptual point of view. The latter particularly include provisions granting FINMA the power to take decisions in individual cases or supervisory powers. One of the most prominent articles in this regard is Art. 10 para. 5 CISA, giving FINMA the power to fully or partially exempt collective investment schemes from certain provisions of the financial market acts, provided that they are exclusively open to qualified investors and that the protective purpose of the Act is not impaired. Since the L-QIF is neither approved nor authorized by FINMA and is also not supervised, such powers would be useless in the case of the L-QIF. Adequate substitutes for these regulations are therefore needed. 

Because the L-QIF is undoubtedly a collective investment scheme under the CISA, it must also be treated equally to other Swiss funds from a tax perspective. Like the explanatory report before it, the dispatch explicitly states that the tax treatment of the L-QIF will not differ from that of other Swiss funds, including single-investor funds. This is a clear statement and a key element for the success of the L-QIF in practice.

b) Key features of the L-QIF

The regulation of the L-QIF is based on its legal definition (Art. 118a para. 1 D-CISA), which comprises of four core elements with which all L-QIFs must comply:

1. Collective investment scheme according to the CISA 

2. Only open to qualified investors (let. a)

3. Managed according to the specific provisions for L-QIFs (let. b)

4. No product approval/licensing or supervision by FINMA (let. c)

If the fund fails to comply with one or more elements of this legal definition, FINMA approval is mandatory (Art. 15 CISA). The following explanations take up the most important features of these four core elements of the L-QIF.

3) Collective investment scheme according to the CISA

a) L-QIF: a Swiss fund

This is the first core element, stipulated in the introductory sentence of Art. 118a para. 1 D-CISA. Consequently, an L-QIF is necessarily a Swiss collective investment scheme within the meaning of Art. 7 CISA, i.e. in particular collective investment by the investors, third-party management, and the principle of equal treatment of the investors. 

b) Legal form and eligible assets

As a Swiss collective investment scheme, the L-QIF must be structured according to one of the legal forms provided for in the CISA. This has been clarified, albeit indirectly, by Art. 118c D-CISA, which states that the L-QIF must have either the legal form of a contractual investment fund, an investment company with variable capital (SICAV) or a limited partnership for collective investment (LP). Contrary to the consultation draft, an investment company with fixed capital (SICAF) is not an eligible legal form. In this respect, the dispatch points out that the structuring of an L-QIF as a SICAF is no longer an option, this being due in part to the recent abolition of bearer shares. It also seems appropriate to exclude the SICAF from the group of possible legal forms for the L-QIF in view of its very limited practical relevance.

As the aim of the bill is to promote innovation, the investment regulations regarding the L-QIF will be liberalized, particularly in view of the limited circle of investors. The law thus contains no restrictions regarding possible investments or the distribution of risk, making the concept of the L-QIF extremely flexible. However, transparency toward the investors is key, and these topics must be disclosed in the fund documents accordingly (Art. 118n and Art. 118o D-CISA). This means that “hybrid” L-QIFs investing in a combination of different asset classes, such as securities and real estate, are also permitted. Besides the better time to market, this flexibility makes the L-QIF extremely attractive. 

However, even though the L-QIF is very flexible it should be kept in mind that basic principles applicable to all collective investment schemes also apply to L-QIFs. Against this background, the draft establishes in Art. 78a D-CISA the general principle according to which the fund management company or the SICAV must ensure that the liquidity of the collective investment scheme is appropriate to the investments, investment policy, risk diversification, group of investors and redemption frequency. This principle is not new but will now be explicitly stated in the CISA which is also in line with international developments. 

As the investment regulations applying to the four fund categories of FINMA-approved open-ended collective investment schemes, i.e. securities funds, real estate funds or other funds for traditional and alternative investments are not applicable to the L-QIF, it is not possible to use the names of those categories for an L-QIF as this could mislead investors (Art. 118e para. 3 D-CISA). This means for instance that there will be no “real estate fund L-QIF”, even if a specific L-QIF would in fact apply the investment regulations for FINMA approved real estate funds. Finally, it has to be made transparent to investors that an L-QIF is not approved, licensed or supervised by FINMA (Art. 118e D-CISA). This is of course a matter of transparency for the investors. 

4) Only open to qualified investors

The second core element according to the legal definition concerns the limited circle of investors, with investments in L-QIFs reserved exclusively for qualified investors (Art. 118a para. 1 let. a D-CISA). Art. 10 CISA defines which investors are considered qualified in this sense. According to Art. 10 para. 3 CISA, all professional clients according to the Financial Services Act (FinSA) are considered qualified investors according to the CISA. These include both professional clients in the narrower sense and institutional clients according to Art. 4 para. 4, and Art. 5 paras 3 and 4 FinSA. In addition, according to Art. 10 para. 3^ter CISA, private clients within the scope of a long-term asset management or investment advisory agreement with a prudentially supervised financial intermediary pursuant to Art. 4 para. 3 lets a and c FinSA are qualified, unless they have declared that they do not wish to be considered as such. 

It is interesting to note that with regard to the segmentation of insurance companies’ clients, the draft contains some general adjustments. In particular, with the entry into force of the L-QIF regulation, asset management and advisory clients of FINMA-supervised insurance companies will also be considered as qualified investors according to Art. 10 CISA.

The draft does not differentiate between the different categories of qualified investors. This is amongst others for the following reasons appropriate: 

– Unlike private investors, professional investors are capable of understanding the investments and risks of complex financial instruments in detail. Furthermore, lengthy negotiations on the detailed design of collective investment schemes for such investors are often conducted in practice prior to the formal product approval process. Once an agreement has been reached on the conditions and the wording of the fund documents, investors should be able to invest as quickly as possible. Especially in the case of more complex funds, however, the corresponding approval process can easily take a few more months. If time to market is too long, this is a “deal breaker” for many investors, who will opt instead for a more readily available foreign structure.

– In addition, as professional investors are qualified investors according to Art. 10 CISA, the respective foreign collective investment schemes are not – unlike Swiss funds – subject to the approval of FINMA or even any foreign supervisory authority according to Swiss law. With the FinSA and the Financial Institutions Act (FinIA), which entered into force on 1 January 2020, this distortion of competition to the detriment of Swiss funds has become even more pronounced as the corresponding adjustment in Art. 120 para. 4 CISA limits the obligation of foreign collective investment schemes to appoint a FINMA-licensed representative and a paying agent in Switzerland for “per se” professional investors according to the FinSA. The L-QIF will contribute to a level playing field between Swiss and foreign funds.

– Finally, the L-QIF does not create additional risks for qualified investors. Many of these investors are investing in foreign funds or structured products that are also not FINMA approved and to which no product-specific supervisory rules apply. With the “indirect supervision” of the L-QIF a Swiss based, FINMA licensed manager is necessarily involved. This also strengthens the protection of these investors.

5) The concept of indirect supervision

a) Principle

The third core element of the L-QIF is its management according to the specific regulations for the L-QIF as stipulated in Art. 118g and Art. 118h D-CISA (Art. 118a para. 1 let. b D-CISA). In this context, the term “management” is used as a generic term for the activities addressed in Art. 118g and 118h D-CISA (operational management, administration, asset management, investment decisions) and not only for investment decisions. 

The aim of the L-QIF is to eliminate the dual supervision of product and institution. However, this is only possible if a financial intermediary approved and supervised by FINMA “assumes responsibility” for the collective investment scheme. This is often referred to as “indirect supervision” of the L-QIF, as only certain financial intermediaries supervised by FINMA can manage them in the sense mentioned above. These administrators or managers must comply with all supervisory obligations and are supervised by FINMA in this respect, since they are themselves licensees. Such supervisory obligations also include compliance with all legal obligations regarding the management of collective investment schemes, including L-QIFs. To ensure this, an appropriate organization (Art. 9 para. 1 FinIA) is required at all times, among other things. As this is a crucial part of the licensing process for financial intermediaries, it is also highly relevant in the supervision of a FINMA-licensed financial intermediary managing an L-QIF. If there is a severe breach of obligations relating to the management of an L-QIF, the managing financial intermediary will face supervisory measures. 

Against this background, all L-QIFs must also undergo an audit, conducted by the supervisory auditor of the FINMA licensed manager of the L-QIF (Art. 118i CISA). The respective regime should essentially correspond to that for approved collective investment schemes, but the details will only be provided in the implementing ordinance (Art. 118i para.6 D-CISA). 

In the case of collective investment schemes organized under company law, i.e. a SICAV or LP, the product and the licensee, i.e. the fund company, are identical. Therefore, SICAVs and LPs normally require a license (Art. 13 para. 2 lets b and c CISA), and the relevant fund documents must also be approved by FINMA (Art. 15 para. 1 CISA). In order to achieve a considerably shorter time to market, both the license and the product approval must be waived in the case of corporate legal forms of the L-QIF. This is provided for in Arts 13 and 15 D-CISA. Consequently, self-management is not permitted for SICAV L-QIFs as such a SICAV is not a FINMA licensed manager. A similar concept applies to L-QIFs in the legal form of an LP. 

b) Open-ended L-QIFs

i. Management by a fund management company

Open ended L-QIFs, i.e. contractual investment funds and SICAVs, must be managed by a fund management company. For contractual investment funds, this principle is stated in Art. 118g para. 1 D-CISA. With regard to SICAVs, this is ensured by requiring that the administration and investment decisions be delegated to one and the same fund management company (Art. 118h para. 1 D-CISA). As mentioned above, self-management is not possible for a SICAV L-QIF.

From a regulatory perspective, the fund management company is formally in charge of the L-QIF. It may delegate investment decisions in compliance with the relevant provisions of the FinIA (Art. 14 para. 1 and Art. 35 FinIA) in accordance with Art. 118g para. 2 D-CISA. The same also applies to any sub-delegation under Art. 118g para. 3 D-CISA. These principles apply mutatis mutandis to delegation by the fund management company of a SICAV (Art. 118h para. 3 D-CISA).

ii. Delegation

Investment decisions may be delegated to a manager of collective assets in accordance with Art. 2 para. 1 let. c FinIA (Art. 118g para. 2 let. a D-CISA). However, it was not the intention to limit the possibility of delegation to managers of collective assets only. For the sake of clarification, the dispatch therefore explicitly states that, in accordance with the authorization chain of Art. 6 FinIA, investment decisions may also be delegated to institutions that are exempt from the obligation to obtain a license as managers of collective assets due to stricter regulation. Delegation to a bank, a securities firm or a fund management company is therefore also permitted. The same applies to insurance undertakings under the Insurance Supervision Act, which are also exempted from obtaining a license as managers of collective assets under Art. 9 para. 2 of the Financial Institutions Ordinance. For L-QIFs, however, delegation of investment decisions to (simple) asset managers pursuant to Art. 17 FinIA is excluded. This also applies to any sub-delegation.

The dispatch also emphasizes that an L-QIF can be set up as a single-investor fund, and redelegation of the investment decisions to the single investor is possible (Art. 7 paras 3 and 4 sentence 1), provided that the single investor is subject to prudential supervision. However, in contrast to FINMA-approved collective investment schemes, no exception to the principle that the single investor must obtain a license is provided for which is particularly relevant for pension funds. This stands in contrast to the criticism voiced in the consultation. In practice, for FINMA approved collective investment schemes such redelegation is common practice for pension funds, provided that the necessary organization is in place and the (cantonal) pension fund supervisory authority agrees. The dispatch justifies the more restrictive position on L-QIFs by stating that such redelegation would contradict the principle that investment decisions for L-QIFs must be delegated to an institution supervised by FINMA. This reasoning is not entirely conclusive, since the management of an open-ended L-QIF, including investment decisions, must in any case be transferred to a fund management company as a first step. In the event of redelegation, the fund management company is obliged to supervise the delegate appropriately. The same applies, to so-called multi-investor funds, in which typically an investor from the group of companies makes the investment decisions.

The delegation of investment decisions by the fund management company to a foreign manager of collective assets is also permitted under certain circumstances (Art. 118g para. 2 let. b. D-CISA). This is possible if the foreign manager of collective assets is adequately regulated and supervised in its country of domicile (cipher. 1) and if there is an agreement between FINMA and the competent foreign supervisory authority on cooperation and the exchange of information, where such an agreement is required by foreign law (cipher. 2).

c) Closed-ended L-QIFs

In the case of an L-QIF in the legal form of an LP, Art. 118h para. 2 D-CISA stipulates that management must be delegated to an asset manager of collective assets licensed and supervised by FINMA. Based on the authorization chain in Art. 6 FinIA, delegation to a more strictly regulated financial intermediary is also possible. Regarding the sub-delegation it can be referred to what has been outlined under section b) above. After all, the management of the LP does not have to be delegated under para. 4 if the general partner holds at least a license as a manager of collective assets. 

During the consultation process, a similar regulation to the SICAV was proposed for the LP, according to which the management of an L-QIF in the legal form of an LP should have been delegated to a fund management company. However, it was pointed out that this provision does not make sense for an LP. In contrast to open-ended collective investment schemes, the management or administration in the case of a LP is limited to a minimum. The focus is primarily on keeping the fund accounts and certain administrative activities such as tax settlements. As closed-ended collective investment schemes generally do not issue or redeem units during their term, hardly any decisions are necessary, and the setting of issue and redemption prices or income distributions is not relevant. Consequently, the activities for which a fund management company is particularly qualified are hardly in demand with regard to the management of an LP. The revised version of Art. 118h D-CISA is therefore to be welcomed.

6) No approval, license or supervision

a) No approval or authorization of L-QIFs

The fourth and final core element of the L-QIF is the waiver of product approval or authorization on the part of the fund company. According to Art. 118a let. c D-CISA, an L-QIF needs neither approval nor authorization. Consequently, Art. 15 para. 3 D-CISA provides for an exemption from the obligation to obtain approval of the fund documents of the L-QIF and any amendments thereto. The same applies to the authorization requirement for the SICAV and the LP, in respect of which Art. 13 para. 2^bis D-CISA now provides for an exception for L-QIFs.

In order to ensure a similar level of transparency for L-QIFs, Art. 118f D-CISA requires the institution entrusted with the management of the L-QIF to notify the FDF of the assumption or abandonment of the management of an L-QIF. The FDF will maintain a publicly accessible directory of all L-QIFs and the institutions responsible for their management.

b) Change of status

It is also possible for a collective investment scheme designed as an L-QIF to obtain FINMA approval at a later date (opting-up). This seems to be in fact an interesting option in cases where qualified investors would like to invest and set up a fund quickly but are considering opening the fund for other investors at a later stage. With the L-QIF the fund could be launched relatively quickly. Once the fund is up and running, and has achieved a certain track record, the approval process would be potentially swifter, as many questions in the course of the approval process could be answered with practical experience. As the initial investors are already invested in the fund, there is also no time pressure regarding the approval process. However, in order to obtain FINMA approval, an L-QIF must comply fully with the regulation for approved collective investment schemes according to CISA, including the more restrictive investment regulations. 

On the other hand, it is also possible that a collective investment scheme that already has a FINMA license or approval may wish to become an L-QIF (opting-down). Art. 118b D-CISA provides for this possibility. In addition to compliance with the regulations concerning the limited circle of investors (Art. 118a para. 1 let. a D-CISA) and the specific administrative provisions for the L-QIF (Art. 118a para. 1 let. B D-CISA), the return of the FINMA approval or license is only permissible if it is ensured that the interests of existing investors are safeguarded. Further details on the question can be expected from the Federal Council on the basis of its power to issue ordinances in Art. 118b para. 2 D-CISA.

7) Conclusion

The L-QIF project gained momentum very quickly by Swiss standards and is an outstanding example of measured and purposeful deregulation. The concrete configuration of the draft law is well balanced, even if there is still some room for improvement here and there from the perspective of the financial industry, for example with regard to redelegation by single-investor funds. The draft will enable the Swiss fund and asset management industry to offer its clients increasingly competitive Swiss fund products. This will hopefully also have an impact on the range of innovative fund solutions on offer, e.g. in the areas of sustainability and fintech. This would also be an opportunity for the Swiss financial sector to position itself as a pioneer. 

The flexible and liberal design of the L-QIF does indeed hold great potential in practice. However, it is also clear that the L-QIF will remain a collective investment scheme under the CISA. On the one hand, this fact sets certain limits to the flexibility of the design. On the other, it also offers advantages, especially with regard to tax treatment. 

Finally, while its potential should not be overestimated, especially because of the limited possibilities for its use at international level and the unfavorable Swiss withholding tax, the L-QIF offers a great opportunity for the Swiss fund and asset management industry, and in particular for professional investors in Switzerland. 

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The content of this article is the personal opinion of the author. This opinion is not necessarily identical to the position of the Asset Management Association Switzerland.

Diana Imbach Haumüller (diana.imbach@am-switzerland.ch)