On 1 March 2024, the revised Collective Investment Schemes Act (CISA) and its implementing ordinance (CISO) came into effect. The key element of the revised CISA is to allow under Swiss law the long awaited possibility to launch, under certain conditions, collective investment schemes for qualified investors in the form of a so-called Limited Qualified Investor Fund (L-QIF). This, by definition, implies that they are operated without approval, authorisation and product supervision of the Swiss Financial Market Supervisory Authority (FINMA).

By François Rayroux (Reference: CapLaw-2024-37)

1) Introduction

The very purpose of a L-QIF is to offer both fund promoters and qualified investors a significant flexibility, not only in terms of investment policy and restrictions, but also in terms of market timing. As a counterpart, investors must not only be “qualified” as defined in art. 10(3ter) CISA, but also accept that the product will not and cannot be supervised by FINMA. It is therefore only suitable for such qualified investors, accepting the additional risks linked to the absence of a prudential product supervision by FINMA, or not being bound by applicable investment restrictions, imposing an investment in supervised funds. 

The L-QIF in its final form should answer the practical needs of quite different financial sectors in Switzerland. Those sectors are not necessarily correlated. The first experiences seem to show that several sectors, not necessarily used to or acquainted with collective investment schemes, are interested in the L-QIF. These various sectors need to be distinguished: 

– First, the Swiss private wealth and institutional asset management industries, which in some instances converge to develop vehicles, mainly for pooling purposes or for less liquid or non-traditional strategies or features, for their mostly sophisticated private or quasi-institutional investors, such as family offices or philanthropic foundations, as well as many significant institutional investors, mainly pension funds and insurance companies. This may allow also to repatriate certain fund structures into Switzerland, which due to certain strict requirements applicable under CISA to regulated funds, namely in case of illiquid investments such as private equity, were as a matter of practice launched in other jurisdictions. 

– Second, the L-QiF is here to offer an interface in the form of a Swiss collective investment vehicle between investors and other industry sectors, such as capital markets, i.e. venture capital and private equity structures. Indeed, practice shows that there is not only an investor’s interest to invest in these new sectors, but also a strong need for capital and hence investments in Switzerland’s strong and innovative industry with many start-ups. Therefore, the L-QIF may also widely serve a national economic purpose. This holds in particular true as Switzerland differs from other more specialised fund jurisdictions, such as Luxembourg and Ireland, as there is in Switzerland an important need for capital from potential private and institutional investors, coupled with important investment needs form local private and institutional investors. 

This industry is developing around existing technology groups as well as sophisticated universities, such as the ETH and the EPFL, leading to growing investment opportunities, in particular in the field of technologies, venture capital, private equity and digital investments, whether linked to the blockchain or the tokenisation of investments (see Federal Council, Dispatch on the Revision of the Modification of the Swiss Collective Investment Schemes Act (Limited Qualified Investor Fund: L-QIF), 9 August 2020, p. 6 (cit. Dispatch of the Federal Council 2020); Lars Fischer, Tokenization of Private Equity Funds in Switzerland, IMPULSE/Nr. 87, 2023, p. 49-63). 

The LQIF has therefore an important potential to satisfy also wider national interests as there is an evident interest of the country as a whole to create structures to support the development of domestic industries as well as start-ups and, hence, to limit the risks of too early transfers of technologies developed in Switzerland abroad at a too early stage due to a lack of sufficient domestic financing vehicles as is often seen today in practice with the sale of innovative start-ups to foreign controlled purchasers. 

In the course of the legislative process, certain voices were heard, stating that this new vehicle would be a “blackbox” and only serve the interests of a few, as well as expose the economy as a whole to risks due to the deregulation and the distortion of competition and have a particularly negative impact on the real estate market (Sarah Jungo, Exkurs: Limited Qualified Investors Fund, in: Rayroux/Imbach, Asset Management im neuen regulatorischen Umfeld, Basel 2021, § 684 et seq. (cit. Sarah Jungo, L-QIF); Federal Finance Department, Report on the L-QIF Consultation Process, August 19, 2020, p. 4; SDA/ATS Press Release, Swiss Parliament, December 9, 2021). 

Other voices were also heard criticizing certain proposed features of the new law, such as contemplated restrictions on so-called “family funds”, which would have also affected the business potential of L-QIFs. Those proposed restrictions could be widely cleared in the final version of the CISO in fruitful, constructive and open discussions with the Swiss Federal Finance Department to the satisfaction of most market participants (see Federal Finance Department, Report on the Consultation on the CISO L-QIF Amendments, 31 January 2024, p. 5 ff (cit. FFD CISO L-QIF Report) and for the critics in the consultation process Sandro Abegglen, Yannick Wettstein, Draft Implementing Provisions on the Limited Qualfied Investor Fund (L-QIF): A Missed Opportunity for Improving the Competitiveness of the Swiss Fund market, CapLaw-2023-14; Janine Müller, L-QIF als SICAV: Aufwind oder Todesstoss für die letzte “grosse Innovation”?, GesKR 2022, p. 235 et seq.).

The L-QIF is a collective investment scheme under Art. 7 CISA, in all respects analogous to other FINMA regulated funds, except for the absence of FINMA authorisation, approval or supervision as well as a substantial deregulation The L-QIF structure will therefore not cure the competitive disadvantages affecting the international distribution of Swiss funds generally. Switzerland is obviously not a typical incorporation jurisdiction for funds to be distributed internationally, mainly for withholding tax reasons and also due to a lack of EU “passporting” for Swiss funds (Sarah Jungo, L-QIF, § 684). It has however a strong presence of very large Swiss institutional funds, mainly as pooling vehicles for pension funds and insurance companies. The L-QIF is evidently likely to enhance the competitivity of Switzerland where the international distribution is not of a primary essence for the choice of a fund structure (See generally Diana Imbach Haumüller, The limited qualified investor fund (L-QIF) – an Innovation for the Swiss Fund and Asset Management Industry, CapLaw-2020-73). 

In parallel, several other key changes have been introduced in the CISA/CISO, which may or may not have an impact on L-QIFs, such as more flexible rules for Swiss and foreign Exchange Traded Funds (ETFs) In Art.106 and Art.127b CISO, stricter rules for the management of the liquidity of investments funds in line with international standards (Art. 78a CISA and Art. 108a CISO), the launch of so-called side pockets in case of illiquid assets (Art. 110a CISO) and notably revised rules for the creation of funds targeting only a limited number of investors (Art. 5 CISO), with an impact also on “family funds” (Art. 110a CISO). These other punctual changes In CISA and the CISO cannot be further addressed within the limited scope of this article which focuses on L-QIFs.

The purpose of this article is not to repeat the considerations and analysis which have already been provided in details, namely in CapLaw, by recognized experts on the L-QIF, in particular during the legislative process, but much more for a practical assessment of the L-QIF in practice now that the revised CISA is in force since 1 March 2024 (see for further information to avoid undue repetitions Sarah Jungo, L-QIF, § 684 et seq; Diana Imbach Haumüller, The Limited Qualified Investor Fund (L-QIF) – an innovation for the Swiss fund and asset management industry, CapLaw-2020-73; Sandro Abegglen, Luca Bianchi, New Limited Qualifed Investor Fund (L-QIF) – Innovation and deregulation as Growth Catalyst for the Fund and Asset Management industry in Switzerland, CapLaw-2019-41).

2) Key features of the L-QIF

2.1) Concept: Not an “unregulated”, but a “deregulated” collective investment scheme

The L-QIF is defined in Art. 118a CISA as a collective investment scheme governed by Swiss law pursuant to Art. 7 CISA which is offered exclusively to qualified investors and, as a key difference to other collective investment schemes under CISA, with no product authorisation, approval or supervision by FINMA. The absence of FINMA supervision is therefore seen as a key element of the L-QIF and is, as such, not only a right or flexibility, but also an obligation or duty which must be transparently disclosed and declared at registration with the Federal Finance Department and thereafter towards the investors (see below paragraph 2.2.a for further details). 

The absence of any product supervision by FINMA being one of the essential elements of a L-QIF (Art. 118a CISA), the prerequisite for a L-QIF to exist is the express declaration to the Federal Finance Department not to be subject to any authorisation or approval requirement of FINMA. This express declaration requires by law that the supervised financial institution in charge of the administration and management of a L-QIF completes and files the formal registration with the Federal Finance Department not later than 14 days after formally taking over the management (Art. 126a(2) and Art. 126g(1) CISO). The formal declaration process includes information on the name, investment strategy, legal form, date as of which the management has been started, contact person of the institutions in charge of the management, name of the auditor, etc. (see www.sif.admin.ch).

This implies in the first instance that L-QIFs are treated as any other Swiss collective investment scheme under the CISA. The L-QIF is sometimes incorrectly referred to as an “unregulated” fund structure, but any L-QIF remains subject to the provisions of CISA and CISO, unless those are expressly disapplied pursuant to the lists set out in Art. 118d CISA and Art. 126f CISO. Also, Art. 126b CISO expressly declares the key rules of the FINMA recognized self-regulation of the Asset Management Association Switzerland AMAS to be applicable (Art. 126b(3) CISO), such as the AMAS Code of Conduct and the guidelines on the Total Expense Ratio (TER). As such, a L-QIF is widely “deregulated”, mostly as to the FINMA authorisation, approval and supervision, but not “unregulated”.

The eligible legal form for L-QIFs pursuant to Art. 118c CISA is alternatively the one of a contractual fund (FCP) under Art. 25 et seq CISA, or of an investment company with variable capital (SICAV) under Art. 36 et seq CISA, or the one of a limited partnership for collective investments (LP) pursuant to Art. 98 CISA. As a rule, the generally applicable provisions under the CISA for each of these forms apply to L-QIFs, namely as to the governance and the administration of a L-QIF. The CISA and the CISO specify those requirements with additional provisions, tailored to the needs of a L-QIF.

The key legal elements of a L-QIF are identical to those of any other collective investment scheme under Swiss law pursuant to Art. 7 CISA. An L-QIF must therefore at all times meet the characteristic elements of a collective investment scheme under Swiss law, which include the creation of pooled investments as a result of investors contributions, managed based on the principle of the “collectivity” by a third party (principle of the “Fremdverwaltung”) in line with the principle of the equal treatment of investors.

This implies that, on the one part, a L-QIF is as such not conceptually a “new” investment product, but rather a new category of collective investment schemes pursuant to Art. 7 CISA (except for the absence of FINMA authorisation, approval or supervision) and that, on the other part, there are, as to the structure, no material “free harbours” as to the structure of L-QIFs. There are, however, significant freedoms granted by the legislator as to the investment policy and drafting of investment restrictions, which clearly render this new fund category appealing.  

Based on the foregoing, the general limitations apply as to the number of investors and the management of L-QIFs as any other collective investment schemes, with a few exceptions. In the context of the requirement to have a “collectivity of investors” under Art. 7 CISA, a L-QIF is as a rule to be formed by at least two investors which are as a matter of fact economically separated (Art. 5(1) CISO). Exemptions apply for investors, which are part of the same Group (Art. 5(3) CISO). The general rules under Art. 7(3) CISA apply to create single investors L-QIFs, which may in practice be of relevance, mainly for institutional investors. Also, L-QIFs among investors with economical or family ties are subject to the generally applicable limitations in Art. 5 CISO (see below paragraph 2.3.d). 

The revised CISA seeks to reduce the risk of confusion of a L-QIF with FINMA supervised collective investment schemes. Therefore, L-QIFs cannot refer to the fact that they are “funds in transferable securities”, or “real estate funds”, of “other funds” for traditional or alternative investments, as this would imply a risk of confusion with the FINMA supervised CISA collective investment schemes (Art. 188e para. 3 CISA). L-QIFs must use on the first page of their fund documentation the term “limited qualified investors fund” or “L-QIF” and include a disclaimer to the effect that they are neither FINMA authorised or approved, as do L-QIFs in the form of a SICAV or LP in their business name (Art. 118e(1) and (2) CISA). 

2.2) Differences of L-QIFs as compared to FINMA supervised funds

In addition to the specific differences for single investors L-QIFs and the prohibition to sub-delegate the asset management to the single investor, other notable differences apply as compared to FINMA authorised or approved collective investment schemes under CISA, such as:

a) Absence of Product Supervision

The L-QIF being “regulated” under CISA, but being widely “deregulated”, in particular as regards investment restrictions, and exempt from any FINMA supervision, authorisation and approval, the regulatory burden to ensure compliance with all applicable laws is by law shifted to the financial institution which is in charge of the “management” and “administration” of the L-QIF (in German “Verwaltung”, covering both elements in French of the “administration et gestion”). This financial institution, whether acting as “sponsor” or as provider of “white label services” for L-QIFs, is under Art. 5(6) CISO subject to an express regulatory responsibility to ensure that at all times the key elements applicable to a L-QIF are fulfilled. 

This absence of direct prudential supervision over the L-QIF as an investment product, which is replaced by an “indirect” supervision as a result of the prudential supervision over the institution which under Art. 118a et seq. CISA is formally in charge of the “management” of the L-QIF, implies namely that those financial institutions:

– When acting as fund management company or as asset manager of collective investment schemes, must obtain from FINMA beforehand the approval to include in their governance, in the articles of association and internal regulations the possibility to manage L-QIFs, with a clear definition of the relevant types of L-QIFs and investments in order to satisfy FINMA’s general requirements of a fit and proper organisation under Art. 9 FINIA.

– Must assume the responsibility to monitor that the regulatory requirements applicable to a collective investment scheme under Art. 7 CISA are at all times met (Art. 5(6) CISO), including the specific requirements applicable to L-QIFs in the form of an FCP (Art. 118g CISA) or of a SICAV or an LP (Art. 118 h CISA).

– While the introduction of formal procedures within the institution is not anymore required in the final version of the CISO, implement appropriate processes within its internal control system (ICS) for the permanent supervision of the compliance with the key elements of Art. 7 CISA in relation to Art. 118a CISA and Art. 5(6) CISO (FFD CISO L-QIF Report, p. 13).

– Immediately notify FINMA, the custodian as well as the auditors in case the key requirements for a L-QIF are not any more met and, in case of other violations, inform also the investors and see to it that those obligations are complied with and, if not, liquidate the L-QIF (Art. 126h CISO).

The “indirect” prudential supervision by FINMA implies that L-QIFs in the form of FCPs and SICAVs must be administered and managed by a fund management company supervised by FINMA (Art. 118g CISA, Art. 118h CISA). For contractual funds, the set-up is in essence similar to the one of a FINMA approved contractual fund: It is up to the Fund Management Company, having title on the assets of the L-QIF, to assume the administration and asset management for the contractual structure in line with Art. 25(1) CISA, with of course a potential delegation of the asset management function to an eligible asset manager (Art. 118 g CISA).

Art. 118h obliges a L-QIF SICAV to delegate in all circumstances the administration, which includes the asset management decision, to one and the same fund management company. The concept of the “administration” is in the meantime well established in practice for FINMA approved SICAVs and will, as such, also apply to L-QIF SICAVs in line with Art. 50(2) CISO (Dispatch of the Federal Council 2020, p. 6914). The mandatory delegation of the “administration” of the L-QIF SICAV to one and the only fund management company precludes L-QIF SICAVs in the form of a so-called “self-managed SICAV”, which is provided for in practice under the CISA for FINMA supervised SICAVs (Art. 36(5) CISA), but as a matter of practice exceptional in Switzerland, is not possible.

The situation is more ambiguous for a L-QIF LP, where the administration must also be delegated to a fund management company, but with a less defined concept of the “administration”. A L-QIF LP must also delegate the administration and asset management to a licensed asset manager of collective investment schemes or any financial institution subject to a stronger FINMA supervision. In many cases, for example where the asset manager of collective investment schemes does not have the required substance, a delegation to a fund management company will be involved, with a possible on-delegation to an asset manager. While the administration includes the “Geschäftsführung” for the L-QIF LP, which needs to be delegated by the GP, the Dispatch of the Federal Council seems to imply that there are fewer tasks to be delegated as compared to the SICAV and, hence, potentially a greater flexibility which remains to be confirmed in practice (Dispatch of the Federal Council 2020, p. 6914 and 6915). 

No mandatory delegation applies in case the GP is supervised by FINMA as a bank, insurance company, securities house, Fund Management Company or manager of collective investment schemes (Art. 118h(4) CISA). Also, in this case, that GP can operate several L-QIF LPs, and not only one L_QIF LP as is generally the rule (Art. 98 para. 2 CISA). The delegation arrangements must be disclosed in the Articles of Association or in the fund contract.

This means in practice that, for the operation of a L-QIF:

– A Fund Management Company is always involved in case of a L-QIF FCP or SICAV, and also often in case of a LP, with the exceptional situation where the GP is entitled to perform the administration and asset management or directly delegates the asset management and administration to an asset manager of collective investment schemes (which however must have the appropriate organisation to perform both the administration and the asset management for the specific L-QIF in light of the given investment strategy).

– The mandatory delegation of the “administration” of a L-QIF imposes on the delegated “administrative agent”, with varying standards for SICAVs and L-QIF LPs, specific governance, organisation and process requirements with qualified personnel and sufficient know-how in light of the specific investment strategy pursued.

– Before launching a L-QIF and unless the relevant institutions have already launched L-QIFs with similar investment policies and features, each such institution must obtain from FINMA an approval for the implementation within its organisation of the relevant organisation, tailored to the specific type of L-QIF, in particular as regards compliance and risk management, including persons with a suitable know how, for the relevant investment strategy pursued by the L-QIF.

– The requirement to have a fit and proper organisation on the level of the entity in charge of the management of the L-QIF may have an impact on the time to market of the L-QIF. In many cases, the entity in charge of the “administration” will on-delegate the asset management to a delegated asset manager, which must be licensed as manager of collective investment schemes pursuant to Art. 24 FINIA or to a foreign asset manager of collective investment schemes subject to an adequate supervision in its home jurisdiction with whom FINMA has entered into a Memorandum of Understanding on the Exchange of Information if the other jurisdiction so requires (Art. 118(2)(b) CISA). 

– Finally, the Parliament has resolved that a direct or indirect delegation of the asset management function to an asset manager within the meaning of Art. 17 FINIA, which as such is prudentially supervised in line with international standards, but to a lesser extent as compared to a manager of collective investment schemes meeting EU MIFID or AIFMD standards, would not be sufficient to balance the absence of prudential FINMA supervision over L-QIFs and, hence, is not permitted (Dispatch of the Federal Council 2020, section. 4.1.2.2).

The obligations of the custodian under Art. 72 CISA, in particular as to the safekeeping of the assets in custody and its control function, where applicable, remain a minima unchanged as compared to a FINMA supervised fund, with potentially additional controls given the lack of direct supervision or in light of the relevant asset classes. The role of a custodian of a L-QIF FCP or SICAV is of essence. Custodians of L-QIFs will accordingly need to implement the necessary governance, substance and processes, with qualified personal, and seek a FINMA authorisation to evidence that it meets all required fit and proper requirements under Art. 72 CISA and Art. 102 CISO as well as Art. 53 FINIO (Dispatch of the Federal Council 2020, 6902, section 4.1.2.2).

b) Investment Policy and Restrictions

The investment policies and investment restrictions of L-QIFs are intended to be very liberal and include beyond traditional assets, infrastructure investments and usual alternative investments, any form of digital assets as well as venture capital and private equity investments. Ultimately, it will for the financial institution managing the L-QIF to adopt the appropriate governance and processes as well as personnel to cope with the general FINMA fit and proper requirements under the FinIA, including as to compliance, risk management and the new strict liquidity management provisions imposed under Art. 78a CISA and Art.108a CISO (FFD CISO L-QIF Report, p. 49)

The CISA investment restrictions for supervised collective investment schemes are widely disapplied (Art. 118 d CISA and Art. 126 f CISO and 126p CISO). It would have been contrary to the votes in Parliament, concerned that the L-QIF as a financial product would be a “blackbox”, not to provide any investment restrictions (See above Paragraph 1). For example, in case of open-ended L-QIFs, the redemption right cannot be limited for periods exceeding 5 years and, moreover, only where the underlying assets have a limited marketability or valuation (Art. 126m(1) CISO), which limits the possibility to launch open-ended L-QIFs (FCPs or SICAVs) for illiquid investment strategies, opening the door to L-QIF LPs for a wide number of illiquid strategies in alternative, private equity, venture capital or infrastructure investments (SDA/ATS News, 9 June 2021). Conversely, it is in our view not possible to launch a closed-ended L-QIF LP with highly liquid assets as this would be in contradiction with the very principles of Art. 7 CISA which applies also to L-QIFs. 

Also, selective stricter rules applicable to L-QIFs as compared to FINMA approved funds have been introduced to serve a macro-economic purpose: The general limitations as to the exposure of L-QIFs is intended from a macro-economic perspective to seek to control potential negative impacts in case of a crisis should L-QIFs be materially exposed to counterparties and proceed to e.g. margin calls against third party banks (FFD CISO L-QIF Report, p. 49). Therefore, express limitations by analogy to those applicable under Art. 100 para. 2 CISO for regulated FCPs and SICAVs, apply to L-QIFS on leverage (50 percent of the NAV), collaterization (100 percent of the NAV) and exposure (600 percent).  

Interestingly, this implies that a promotor, wishing to launch a fund with more flexible investment restrictions, could chose not to opt for a L-QIF, but rather to launch a FINMA authorised collective investment scheme (most likely for qualified investors), which could as a rule be derogated by FINMA if the L-QIF was a regulated fund (Art. 101 CISO). 

The competitive advantage of a L-QIF, also from an international perspective, is the very flexible possibility to invest in a variety of assets with very liberal investment restrictions. A L-QIF in the form of a FCP or of a SICAV must pursuant to Art. 126(2) CISO set out investment restrictions. There is no need to integrate typical investment restrictions, which would apply for FINMA supervised funds, unless there is an investor’s request to this effect. The investment restrictions are as indicated widely disapplied, but the fund documentations of a L-QIF must set out, as the case may be without many details, what investment restrictions are to be complied with by the L-QIF. A “silent fund documentation” is not admissible, but the CISA remains very open how to do so and in what details, in a manner which seems to be extremely liberal as compared to other jurisdictions, including Luxembourg (FFD CISO L-QIF Report, p. 7).

While the L-QIF itself will not be subject to FINMA’s prudential supervision and as a consequence FINMA has no authority to issue regulations which will apply to L-QIFs, certain provisions of the CISO-FINMA on specific technical details are expressly declared to be binding on L-QIFs (Art. 126p(3) and 4 CISO), such as for derivatives, securities lending or repo transactions as well as for accounting principles. This allows by contrast to earlier drafts of the CISO also for L-QIFs the use of the so-called Value-at-Risk method for derivatives, subject however to specific audit requirements (Art. 126z octies ( 3)( c) CISO). 

Master-feeder-structures are only permitted, where the L-QIF master-feeder-fund invests in other L-QIFs, but not in regulated CISA funds (art. 126s CISO) (FFD CISO L-QIF Report, p. 36). This limitation is justified in the eyes of the legislator by the concern to avoid circumventions of law. It will most likely render L-QIFs master feeder structures irrelevant in practice.  

“Side pockets”, while most likely being a key element for the management of the liquidity of Swiss collective investment schemes, will not be permitted for L-QIFs. Art. 110a CISO introduces, namely as a result of certain recent global events as well as past experiences during the 2008-2007 financial crisis, the possibility to create so-called “side pockets”. This will require that the Swiss fund regulations of FINMA supervised funds expressly provide in advance for the possibility to issue side pockets for illiquid investments and, once an illiquidity event occurs, that FINMA authorizes the issue of those side pockets with a corresponding publication to the attention of the investors. It is unfortunate that this flexibility, which serves investors protection, is not available for L-QIFs, but L-QIFs may at least provide in their documentation to apply a “gating” in case of important redemptions (Art. 126m CISO).

c) Application of other Swiss laws to L-QIFs

L-QIFs remain subject to the generally applicable Swiss law as well as, where applicable, also to laws of foreign jurisdictions in case of a distribution to investors outside Switzerland (noting that L-QIFs are obviously not eligible for a passporting within the EU by contrast to their EU counterparts, such as the RAIF).

The “distribution” of L-QIFs follows the general rules imposed under FinSA and CISA to any Swiss or foreign collective investment scheme, including as to the rules of conduct and of organisation pursuant to Art. 7 et seq. FinSA where a financial service is performed, in particular a “purchase and sale” pursuant to Art. 3(c)(1) FinSA. The same applies as regards an “offer” (Art. 3(g) FinSA) or an “advertisement” (Art. 68 FinSA) for a L-QIF, except for the obligation to issue a prospectus which is generally disapplied under Art. 50(1) FINSA. A key information document under FinSA is only required in the exceptional circumstances where a Private Client under FinSA is treated as qualified investor under Art. 10(3ter) CISA (i.e. in case the exemption for discretionary asset management agreements pursuant to Art. 58(2) FinSA does not apply), such as in case of a permanent advisory arrangement.  

Also, the provisions of the Anti-Money Laundering Act (AMLA) as well as, in respect of funds with real estate investments, the provisions regarding the acquisition of real estate by persons abroad (so-called “Lex Koller”), remain applicable as for any other Swiss fund. As regards the AMLA, the general rules applicable to the Fund Management Company and the custodian apply in case of an FCP and, in case a L-QIF SICAV or L-QIF LP delegate the administration and management to an eligible financial institution under Art. 118h(1), (2) and (4) CISA. In this case, that a delegated administrator and management is in charge of the AML obligations and the L-QIF SICAV and L-QIF LP itself are exempted from the AMLA (Art. 2(4)(e) AMLA). 

L-QIFs are treated from a Swiss federal, cantonal and communal direct or indirect tax perspective as any other collective investment scheme in Switzerland, including as to the “tax transparency” of the structure and the application of Swiss indirect taxes such as Swiss withholding taxes on dividends as well as VAT and issuance or transfer stamp duties (in respect to which however wide exemptions apply)(see namely Art. 10(2) FDTA, Art. 49(2) FDTA, Art. 71 FDTA, Art. 4(1)(c) WHTA, Art. 5(1)(b) WHTA etc.) 

d) Eligible Investors

Eligible investors must pursuant to Art. 188a CISA be qualified investors under Art.10(3) and (3ter) CISA. For the wealth management industry, this renders the L-QIF appealing, as “qualified investors” include also private clients covered by discretionary asset management agreements or advisory arrangement with eligible financial institutions. Similarly, Swiss law now expressly clarifies that the L-QIF is an eligible structure for institutional investors (see below paragraph 2.3.c). Restrictions apply for so-called “opting-out professional investors” within the meaning of Art. 5(2) FinSA, in respect to which we refer to paragraph 2.3.e below.

e) Audit requirements

The absence of prudential product supervision triggers additional audit requirements over L-QIFs. Those audit requirements are, as a matter of principle, tailored based on the audit requirements applicable to FINMA supervised collective investment schemes (Art. 118i CISA), but it is up to the Federal Council, due to the lack of competence of FINMA, to regulate the details and the object of the audit (Art. 118i(5) CISA). The provisions of Art. 118z sexies CISO therefore replace the corresponding provisions for FINMA supervised investment funds in the CISO-FINMA.

As a concept, L-QIFs are, by analogy to FINMA supervised funds, the object of financial audits in addition of an “additional audit”. As there is no FINMA supervision, this audit is not referred to as a “prudential audit”, as would apply for FINMA supervised collective investment schemes. As a matter of content and approach, the audit points are however similar to those which would be covered in a prudential audit, addressed to FINMA (see FFDA CIS-L-QIF Report, p. 40 et seq.).

The financial audit of a L-QIF covers the points applicable to any audit pursuant to Art. 89(1)(a)-(h) and Art. 90 CISA. The revised CISA and CISO do not expressly exempt L-QIFs from the establishment of a semi-annual audit report, but it would seem contradictory not to do so as FINMA supervised funds for qualified investors may request an exemption to this effect. The fact that semi-annual reports are not required for L-QIFs derives in our view from Art. 118I CISA, which only refers to the annual report and furthermore is based on Art. 126z quarter CISO, which also refers to the generally applicable accounting principles for the establishment of the accounts, which provides for strong arguments that an L-QIF shall be treated as any collective investment scheme reserved under the CISA exclusively for qualified investors. Otherwise, this would result in the awkward situation where an L-QIF would be subject stricter audit requirements as compared to FINMA supervised funds or collective investment schemes. 

The “additional audit”, which conceptually is the equivalent of a prudential audit, has the object to verify the continuing existence of all key elements of an audit (as defined in Art. 118a CISA) as well as the verification of the reporting of data pursuant to Art. 118f CISA (Art. 126z octies(1) CISO). The “additional audit” must be performed every two years, but in the first year after launch of the L-QIF, certain key documents must be covered by the audit, such as the fund documentation, the content of the fund regulations and the application of the valuation of derivatives (Art. 118z octies(2) and (3) CISO). After the time limit for compliance with the investment restrictions (Art. 126q(3) CISO), the “additional audit” must also verify the compliance with investment restrictions. This audit point will, as a rule, be performed two years after launch (Art. 126z octies(4) CISO).

The audit reports are edited in the form of an audit report on the annual accounts (Art. 118i(2) CISA) and, in addition, a short form report on the audit of the L-QIF and another short form report on the “additional audit”. The short form audit must confirm compliance with the legal and regulatory obligations. Should the audit firm note material divergences with the legal provisions or deficiencies, there must be an express notice of reservation in the prudential audit report of the institution in charge of the management of the L-QIF, which is to be notified to FINMA. 

A non-compliance with the key characteristics of a L-QIF, as set-out in Art. 118a(1) CISA, are always defined to be material and triggering a formal “notice of reservation”.

2.3) Possible L-QIF structures

a) Practical implications for the launch of a L-QIF

There are a number of practical implications resulting from the decision to launch a L-QIF as compared to a FINMA approved collective investment scheme. The first is that the “time to market” for a L-QIF is likely to be shorter than for a FINMA supervised fund, but that the same “time to market” has to take into account the prior authorisation by FINMA of the relevant financial institution to operate a L-QIF in the legal form and with the investment strategy which is specifically proposed in the case at hand.

Furthermore, the lack of FINMA authorisation, approval and supervision regime is expected to trigger in practice enhanced due diligence requirements by the financial institutions launching L-QIFs to meet the increased responsibility for ensuring the L-QIFs compliance with CISA as well as strict audit requirements (See paragraph 2.2. e above). Indeed, after the launch of a L-QIF, Art. 5(6) CISO expressly imposes an obligation to verify on an ongoing basis that the legal requirements applicable to a collective investment scheme under Art. 7 CISA are complied with. In this context, the Explanatory Report of the Federal Finance Department states that this includes an obligation to monitor that the requirement of a “collective investment” always be complied with for Swiss funds, including L-QIFs. This would seem to preclude collective investment schemes – whether in the form of a L-QIF or regulated fund – with only one investor, unless the specific conditions for a “single investor fund” are complied with. 

This will be formally verified in the context of the so-called “additional audit” (Art. 126z octies(1)(a) CISO) and violations will automatically lead to a formal notice of reservation in the institution’s Long Form Report addressed to FINMA pursuant to Art. 126z tredecies, para. 2 CISO). In practice, this will often imply a “pre-clearance” of the L-QIF documentation and structure before launch by the competent audit firm in order to limit the risks of such formal notices of reservation, at least for the “additional audit” which is required to be performed after launch.  

Finally, in essence, the costs for launching a L-QIF should therefore overall not be materially lower than the costs for operating a FINMA regulated fund (with the exception of the costs for the FINMA authorisation).

b) Transformations and Reorganisations

A potential for L-QIFs will certainly be the repatriation of e.g. private funds currently incorporated abroad as, for example in the field of private equity or infrastructure, no suitable form of FINMA approved collective investment schemes under CISA is available. A potential might also exist for currently FINMA supervised collective investment schemes to “opt out of the FINMA supervision and become a L-QIF. A L-QIF not being the object of any direct supervision from FINMA, it seems a logical consequence that L-QIFs cannot be reorganized or restructured into or with a FINMA supervised collective investment scheme (Art. 126e CISO). This being said, while formal restrictions and procedures apply, the transformation of a FINMA supervised collective investment scheme into a L-QIF is possible (Art. 118b CISA in relation to Art. 126c and 126d CISO). Similarly, the transformation of a L-QIF into a FINMA supervised collective investment scheme should be possible as soon as all regulatory requirements under CISA are met. This applies also for L-QIFs which initially were launched as supervised collective investment schemes and thereafter decided to again become subject to a direct FINMA supervision (FFD CISO Report p.26). Similarly, while, as a rule, the reorganisation of a L-QIF into a supervised collective investment scheme is not permitted, such a reorganisation or merger should be admissible once the transformation of the L-QIF in a FINMA supervised collective investment scheme has been completed.

c) Institutional investors

The L-QIF may be of key interest for major institutional investors, such as insurance companies or pension funds, for the purpose of the “pooling” of the assets. As such, L-QIFs can be launched specifically for pension funds or insurance companies or, if structured as a L-QIF FCP or L-QIF SICAV, as an umbrella with L-QIFs for several institutional investors, tailored to their individual needs, or by contrast to Investment Foundations (Anlagestiftungen) commingled (tax exempt) asset of pension funds with (taxed) tied asset of insurance companies. 

Of note, a L-QIF can be launched in the form of a so-called “single-investors fund”. Despite strong requests form the asset management industry to allow also for single investor L-QIFs the sub-delegation of the management to the single investor pursuant to Art. 7(4) CISA, has for what seems to be good reasons not being provided in case of L-QIFs, mainly for investor’s protection reasons towards Swiss pension funds and also considering that, to the extent the financial institution launching the vehicle has to be prudentially supervised, a sub-delegation to a non-supervised single investor fund would substantially weaken this alternative means to provide for an indirect protection of the interests of the investors, which is a key element of the l-QIF (Dispatch of the Federal Council 2020, p. 6984). 

Finally, it is of essence to note that the L-QIF as well as comparable international collective investment schemes, such as RAIFs, are admitted as eligible investments within the meaning of Art. 56(1) BVV2, which corresponds in several years to an interpretation in practice, but is key for investments by investment foundations in L-QIFs. While no amendment to the BVV2 was necessary, the relevant ordinance for investment foundations was specified in Art. 29(3)(p) and Art. 30(3), (3bis) and (3ter) ASV.

d) Private wealth structures

L-QIFs may be a suitable structure for a fund management company to launch flexible umbrella funds for a multi-family office or wealth managers in order to offer L-QIFs in line with the portfolio strategies applicable by each such wealth managers and/or client categories, typically in the form of an open-ended L-QIF, whether as a contractual fund or as a L-QIF SICAV. In this context, it is noteworthy to remind that the definition of “qualified investors” under Art. 10(3ter) CISA also includes private clients under FinSA, which have entered into a written advisory agreement or asset management agreement with an eligible institution. For those qualified investors, where for the rest all suitability requirements are met, a so-called “Base Information Sheet” under FinSA may be required case of an advisory agreement, but not in case of discretionary asset management agreements where an exemption applies (Art. 58(2) FinSA).

Following intense debates in the legislative process, the initially proposed restriction for so-called “family funds” has not been introduced in the final version of Art. 5 CISO. This means that members of the same family could meet as long as the characteristic elements of a collective investment scheme pursuant to Art. 7 CISA are at all time met, in particular the requirement of “collectivity” and of the “Fremdverwaltung” (see paragraph 2.1.a above). This would preclude L-QIFs, as for any other collective investment scheme in Switzerland, launched for a single undivided estate or by one single person for estate planning purposes only. Where the requirement of a “collectivity” of investors is met, a L-QIF may be open for persons with strong relationships, including family members (where for example the family members are clearly independent both, in terms of experience and decision making, for example to formulate subscription or redemption requests on their own without the collaboration of other investors). Similarly, investors of a LQIF, whatever its form, may not under the principle of the “Fremdverwaltung” pursuant to Art. 7 CISA exercise an influence on the management of the L-QIF. Finally, the equality of treatment required under Art. 7(1), last sentence, CISA among investors is of essence, potentially precluding a widely predominant influence of one single investor (See FFD CISO L-QIF Report, p. 5, 13 and 14; FINMA Communications 16 (2010), p. 4).

e) Real Estate L-QIFs

L-QIFs are likely to trigger a material interest among investors for real estate funds. For L-QIFs investing directly in real estate, private clients under FinSA covered by a discretionary asset management or advisory agreement, as well as opting-out professional investors pursuant to Art. 5(2) FinSA as well as private investment structures, even if professionally managed within the meaning of Art. 4(3)(i) FInSA, are expressly excluded as investors (Art. 118a(1)(b) CISA). This restriction is politically motivated and based on fears during the legislative process of circumvention of L-QIF real estate structures for mere tax reasons. It is generally considered that, without this restriction, the L-QIF project and the revised CISA would have not passed the votes in Parliament. (see e.g. Debates in the Swiss Parliament, Council of States, AB 2021 S 530/BO 2021 ES 530). 

Despite this limitation in terms of potential investors, L-QIFs as real estate funds may, for other institutional and professional investors, such as pension funds, provide for an alternative to other collective investment schemes structures. Indeed, the permitted leverage is up to 50% of the net asset value (Art. 126v CISO) and there are also more flexible rules in terms of risk diversification (Art. 126w CISO), acquisition of co-ownership (Art. 126u CISO) as well as the acquisition of real estate without authorisation to build or which are not yet equipped (Art. 126t(3) CISO). While specific provisions apply to transactions with so-called “close persons”, those are relatively flexible in nature in the final version of the CISO (Art. 126i CISO). Additional restrictions apply to L-QIFs with real estate investments, namely as regards diversification rules (e.g. minimum number of real estate to be defined), the limitation of leverage to finance the real estate portfolio (max. 50%) as well as transactions with so-called “close persons”.

f) Illiquid investments (Alternative assets, infrastructure, venture capital and private equity as well digital investments)

L-QIFs might be an appropriate form for alternative or infrastructure portfolios with illiquid investments if launched as L-QIF LPs, but not as open-ended structures (i.e. L-QIF as contractual fund or L-QIF SICAV) due to the restricted limitation of redemption rights introduced by the Parliament to limit the investor’s exposure for political reasons under Art. 126m para. 1 CISO (see e.g. Debates in the Swiss Parliament, Council of States, AB 2021 S 531/BO 2021 ES 531). For alternative or infrastructure investments, an L-QIF in the form of a LP might even in many cases be more appealing than a FINMA authorised LPs. 

FINMA supervised collective investment schemes may gain exposures to digital investments, but due to the current investment restrictions imposed by law under the CISA mostly through transferable securities or by reference to a digital index. By contrast to other unregulated listed products at SIX or BX, such as ETCs, the current Swiss legal framework would not allow to launch FINMA supervised collective investment schemes pursuant to Art. 7 CISA through direct investments in digital assets are in essence “transferable securities”. Therefore, the L-QIF is expected to open wide possibilities for L-QIFs, both in terms of structure, such as through the tokenisation of their shares or units, and investment policy, allowing investment in tokens, digital investments or more generally for any investment through the blockchain. 

Financial institutions assuming the administration and asset management for such l-QIFs with digital features or exposure will need to have the necessary governance, substance and processes to provide for the required risk management, compliance and, including for the custodian, AML framework for such digital investments. This being said, the L-QIF will certainly open material working hypothesis for the highly sophisticated Swiss digital industry (see Lars A. Fischer, Tokenization of private equity funds in Switzerland, Impulse zur praxisorientierten Rechtswirtschaft, Band/Nr. 87, p. 49-63; Thomas Jutzi, Damian Sieradzki, Geltungsbereich des Kollektivanlagerechts, Bern, 2022, p. 171; Report of the Federal Council “The legal basis for distributed ledger-technology and blockchain in Switzerland, Bern, 14 December 2018,
p. 132-138 ).

3) Conclusions

The introduction of the L-QIF as new non FINMA supervised collective investment schemes for qualified investors, which is not “unregulated” but widely “deregulated”, as well as of certain new key provisions in the CISO, certainly strengthens Switzerland as one of the leading asset management centres. The L-QIF as a typical asset management instrument already triggers a substantial interest among various actors beyond traditional asset managers to other actors of the Swiss capital markets industry, mainly for the launch of alternative investment strategies, in particular to finance venture capital investments, as well as of infrastructure funds, digital assets portfolios or funds with real estate investment, or as a pooling vehicle for institutional investors with additional flexibility as compared to regulated funds. The L-QIF may, for the financing of venture capital, serve a key role to help maintaining in Switzerland a certain number of key start-ups or companies, which are developing in Switzerland’s strong industry for innovative technologies and thereby serve national interests. First projects are already being considered by the industry, not only for institutional investors, but also as a vehicle for sophisticated private investors. 

In this context, it is in our view important to note that the efforts by the Federal Finance Department of the revised CISA and CISO to provide for a legal basis for the launch of this new category of collective investment schemes, has resulted in a well-balanced and efficient legal framework. The legislative process has been, in some instances, tainted with political interventions on all sides, which has caused challenges for the drafting of the new legislation in a manner, which would satisfy all involved parties. The end result is clearly in the interest of a Swiss financial market place as a whole.

François Rayroux (francois.rayroux@lenzstaehelin.com)