SWITZERLAND: An Introduction to Investment Funds

Switzerland is one of Europe’s most significant asset management centres. The country’s fund landscape is shaped by a dual reality:

• Switzerland is highly competitive as a management and distribution hub; and
• it has historically been less prominent as a fund domicile. The main reason is that Swiss domiciled funds can hardly be distributed outside Switzerland.

Under Swiss law and supervisory practice, the term “investment funds” generally refers to collective investment schemes (CIS). In addition to CIS, Swiss law also allows direct mandates, exchange traded products (ETPs), and structured products including actively managed certificates.

A notable recent policy development is the introduction of the Limited Qualified Investor Fund (L-QIF), which entered into force on 1 March 2024. The L-QIF enables the creation of investment vehicles – primarily for alternative investments and real estate – without FINMA product approval, shifting responsibility to supervised administrators, custodians and asset managers.

Statutory Instruments

Swiss fund regulation is based on a coherent framework that distinguishes the regulation of products, the regulation of financial institutions and the regulation of financial services.

Regulation of products

Investment funds are governed by the Swiss Federal Collective Investment Schemes Act (CISA), the Swiss Federal Collective Investment Schemes Ordinance (CISO) and the FINMA Collective Investment Schemes Ordinance (CISO FINMA). These instruments regulate both Swiss-domiciled funds and the requirements for foreign funds wishing to be offered in Switzerland.

The Ordinance of FINMA on insolvency proceedings of financial institutions (InsO-FINMA) is applicable in case of insolvency proceedings over a Swiss financial institution.

Regulation of financial institutions

The institutions responsible investment funds are regulated in the Swiss Federal Act on Financial Institutions (FinIA), the Swiss Federal Ordinance on Financial Institutions (FinIO) and the Swiss Federal Ordinance of the Swiss Financial Market Supervisory Authority on Financial Institutions (FinIO-FINMA).

Regulated financial institutions include:

• the fund management company;
• the custodian bank; and
• the delegated asset manager, licensed either as an asset manager (for small CIS), or as a manager of collective assets.

Regulation of financial services

Financial services related to investment funds are governed by the Swiss Federal Act on Financial Services (FinSA) and the Swiss Federal Ordinance on Financial Services (FinSO).

These services include:

• distribution or offering of financial instruments including private placement;
• the management of financial instruments (i.e. asset or portfolio management); and
• investment advisory services.

Asset management services require a FINMA licence under FinIA, while pure distribution and advisory services only require registration in a register of advisers.

The FinSA/FinSO rules are investor-protection rules applicable at the point-of-sale, comparable to MiFID II.

Self-regulation

In addition to the above-mentioned statutory rules, Swiss fund practice is shaped by self-regulation. FINMA has recognised certain revised self-regulatory standards of the Asset Management Association Switzerland (AMAS) as minimum standards and thereby declared some them “generally applicable”.

The most important “generally applicable” self-regulation is the Code of Conduct dated 5 August and 23 September 2021.

Swiss and Non-Swiss Funds

Swiss domiciled funds: main forms and governance

Swiss domiciled CIS require product approval and ongoing supervision (unless subject to the L-QIF regime). The most common structure is the contractual investment fund, based on a fund contract between investors, the fund management company and the custodian.

Less common are the SICAV and the Swiss Limited Partnership. The SICAF is theoretically possible but not used in practice.

Swiss funds may invest in all kinds of asset classes such as equities, bonds, real estate, commodities, private equity, private debt or other alternatives. Depending on the eligible assets, the strategy and risk levels, they are classified into:

• securities funds comparable to UCITS funds;
• other funds for traditional investments which can incur a higher level of leverage and can also invest in precious metals and to a small extent in non-listed securities;
• other funds for alternative investments which can incur an even higher level of risk and can also invest in all other types of assets. Due to the high level of leverage, the other funds for alternative investments can be used for hedge funds; and
• real estate funds which can invest directly in real estate.

Swiss funds under the L-QIF regime

The L-QIF is a Swiss collective investment category designed for qualified investors that removes the need for FINMA product authorisation and approval, enabling faster launches – in analogy to the RAIF under Luxembourg law. Even though product-level FINMA approval is not required, the L-QIF remains embedded in the CISA/CISO framework except where specific provisions are disapplied, and it must be managed by appropriately licensed institutions.

Even though the use of the L-QIF is not limited to a specific asset class, it is usually used for less liquid or “non-traditional” strategies (often associated with private markets or real estate).

The investment company: a Swiss peculiarity

Under CISA, a stock corporation which is used for collective investment purposes does not trigger any licensing or supervisory requirements provided that its shareholders are qualified investors or the shares are listed on a Swiss stock exchange. This makes this form very attractive for any kind of investments, and private equity, etc, as it can be set up within days. The only regulatory requirement is that it affiliates with a self-regulatory organisation for the combat against money laundering and terrorist financing.

A downside of the investment company is that it is not tax transparent. Therefore, it is crucial to incorporate and manage it in a suitable Canton with a low level of income tax.

Foreign funds offered in Switzerland

Switzerland is a major market for the distribution of foreign funds alongside Swiss-domiciled products, and Swiss investors can choose from a wide range of foreign collective investment schemes in addition to Swiss funds. In the Swiss regime, whether and how a foreign fund may be offered depends heavily on client segmentation.

• The non-qualified investors’ market is limited to UCITS funds which have a Swiss representative and a Swiss paying agent appointed and which are registered by FINMA.
• In contrast, the distribution of foreign funds to qualified investors (including pension funds, family offices, etc), is extremely liberal: it does not require any registration with FINMA or other authority, but the offering to HNWI and their investment structures requires the appointment of a Swiss representative and a Swiss paying agent. This applies irrespective of how the investment fund is structured, whether it is supervised and where it is located.

This very liberal approach makes the Swiss market very interesting for the offering of all kinds of alternative funds.

Licensing of Service Providers

Regulated service providers

A Swiss investment fund requires the following service providers which need to be licensed and supervised.

• The fund management company needs to be set up as a Swiss stock corporation.
• The custodian bank needs to be a Swiss regulated bank. The custodian can be a Swiss entity or the branch of a non-Swiss bank.
• The fund management can delegate the asset management. This can be either as an asset manager pursuant to Article 17 ss. FinIA (for small CIS) or as a manager of collective assets pursuant to Article 24 FinIA. The delegation of the portfolio management to non-Swiss asset managers is possible provided that they are under an equivalent supervision.
• If the investment fund is structured as a SICAV, this entity also needs to be licensed.

The licensing and supervising authority

The licensing and supervisory authority for all these entities is the Swiss Financial Market Supervisory Authority FINMA. In addition to the financial auditors, all financial institutions must appoint regulatory auditors. These run a regular regulatory audit and report their findings to FINMA. FINMA, however, hardly ever performs any direct supervisory activities.

The supervision of the asset manager is carried out by FINMA in co-operation with an independent supervisory organisation, which in turn is supervised by FINMA.

Trends

In recent years, the Swiss market for investment funds has been in a growth phase. The number of Swiss funds has increased despite limited distribution possibilities abroad, and the number of foreign funds registered in Switzerland has also risen.

Exchange traded funds (ETFs) play an increasingly important role, both Swiss domiciled and foreign.

The L-QIF has proven attractive but remains relatively new, with fewer vehicles compared with Luxembourg and Ireland.

Switzerland has also become an appealing hub for setting up asset managers – particularly in the Geneva and Zurich/Zug regions – partly due to deteriorating tax regimes in other countries such as the United Kingdom.