Message and second draft of the amendment to the Collective Investment Schemes Act
On 19 August 2020, the Federal Council adopted the dispatch on the amendment of the Collective Investment Schemes Act (CISA) and, following the preliminary draft of June 2019, presented the second draft of the amendments to the law, which incorporates the results of the consultation process that lasted until 17 October 2019.
The main topic of the upcoming revision of the CISA is the introduction of the so-called „Limited Qualified Investor Fund“ or L-QIF for short.
The L-QIF will be treated like a collective investment scheme for tax purposes, but will not be subject to FINMA approval and will benefit from further exemptions and simplifications. It can thus be set up considerably faster and more cost-effectively than previous Swiss fund products. Providers of private market strategies, e.g. private equity, venture capital, real estate and infrastructure as well as private debt, will also benefit from this in particular.
The total revision of the CISA in 2006 introduced the limited partnership for collective capital investments („KmGK“) and the investment company with fixed capital („SICAF“). These collective capital investments were intended to provide the financial industry with appropriate structures for private equity and venture capital investments. Unfortunately, these expectations could not be fulfilled. To date, only around 21 KmGKs and no SICAFs have been set up. Although the KmGK is treated in a fiscally transparent manner, it is not the first choice in international competition due to the lack of distribution possibilities in the EU. In addition, Swiss collective investment schemes are less attractive than foreign competing products for many foreign investors because of the withholding tax problem.
But also for Swiss investors, the KmGK proves to be less attractive compared to foreign funds. In particular, the approval and authorisation process for a KmGK is relatively long, the associated costs are high and the „time to market“ is thus fundamentally above the usual international norm. In addition, the competitiveness of the KmGK has been further restricted after various EU member states introduced fund types – such as the Luxembourg-domiciled „Reserved Alternative Investment Fund“ (RAIF) – which no longer require approval by the supervisory authorities.
The new bill aims to strengthen Switzerland’s competitiveness as a product location. Like comparable foreign products, the L-QIF is to be exempt from authorisation and approval requirements. This means that these products can be launched quickly and cheaply. The L-QIF is also attractive because it can be both open and closed and can be launched in (almost) all common legal forms provided for in the CISA.
Moreover, the law does not stipulate any requirements with regard to the possible investments or the distribution of risk. It merely requires that these be disclosed in the fund documents. This makes the L-QIF excellently suited for alternative investments and innovative fund strategies.
What all types of L-QIF have in common is that they are open exclusively to qualified investors. Collective investment schemes aimed at the general public will therefore remain subject to authorisation and prudential supervision by FINMA in Switzerland.
Innovations in the second draft
The second draft law is analysed below and compared with the preliminary draft submitted for consultation. The following points seem to us to be particularly worth mentioning:
Single-investor funds (CISA 7/4)
In the case of collective investment schemes supervised by FINMA that are set up for a single investor (so-called single-investor funds), it is possible to delegate investment decisions to the single investor. In such cases, FINMA has the authority on a case-by-case basis to exempt the single investor acting as investment manager from the obligation to be authorised or to be subject to recognised supervision (Art. 7 para. 4 CISA and Draft CISA). This possibility does not exist for the L-QIF, as it is not audited or supervised by FINMA. Accordingly, Art. 7 para. 4 second sentence CISA is declared inapplicable with regard to the L-QIF (Art. 118d let. b Draft CISA). Thus, in the case of single-investor L-QIF, investment decisions can de facto only be delegated back to the single investor if the latter is supervised.
In this respect, stricter rules apply to L-QIF than to supervised single-investor funds, for which FINMA has made use of its exceptional powers. This was criticised by various parties in the consultation (cf. results report on the consultation), and proposals were submitted as to how the shortcoming could be remedied in the law or in the ordinance. However, none of these proposals found their way into the second draft.
Definition of qualified investors (Draft CISA 10/3ter)
Private clients who have a long-term asset management or investment advisory relationship with an insurance institution pursuant to the Insurance Supervision Act (ISA) are now also to be considered qualified investors. As before, the provider of these services may also be a financial intermediary under the Banking Act, CISA or Financial Institutions Act (FINIG) or a foreign financial intermediary with equivalent prudential supervision. In our opinion, this addition is intended to close a loophole.
Liquidity (Draft-CCIA 78a and 79)
Pursuant to Art. 78a Draft CISA, the fund management company or SICAV must ensure that the liquidity of the collective investment scheme is appropriate to the investments, the investment policy (this element is new in the second draft), the risk distribution, the investor base and the redemption frequency. This provision, which was already contained in the preliminary draft, anchors the requirement of liquidity risk management in the law for the first time and will apply to all open-ended collective investment schemes, i.e. also to L-QIF of the open-ended type. A new paragraph 2 was added in the second draft, which gives the Federal Council the authority to further specify this obligation.
The current provision of Art. 79 para. 2 CISA, according to which the right of investors to redeem units at any time may be suspended for a maximum of five years, was retained unchanged. Due to its systematic embedding in the CISA, this provision also applies to all open-ended collective investment schemes, i.e. also to L-QIF of the open-ended type. For L-QIFs in particular, however, a more flexible regulation would have been desirable, especially since a closed-ended L-QIF can only be set up in the form of a limited partnership for collective investment (KmGK) and is thus not available for all asset classes.
Articles of association of the KmGK (E-KAG 102/2 + 102a)
Irrespective of the L-QIF issue, it is now specified in the provisions on KmGK that the articles of association require the consent and signature of all shareholders upon formation (Art. 102 para. 2 Draft-CCIA) and in principle upon amendment (Art. 102a para. 1 Draft-CCIA). Only where the partnership agreement can be amended by majority resolution is the signature of the general partner sufficient (art. 102a para. 3 Draft-CCIA). However, the amendment by majority resolution must be provided for in the partnership agreement and the resolution must be publicly certified (Art. 102a para. 2 Draft-CISA). These newly added amendments are intended to bring about uniform application by the commercial registry offices.
Legal form of the L-QIF (E-KAG 118c)
The L-QIF can have the legal form of the contractual fund, the SICAV (both open) or the KmGK (closed). The legal form of the SICAF, which was still envisaged in the preliminary draft, was deleted. The reason for this is that a SICAF (investment company), in which only qualified investors or shareholders may participate and whose shares are registered, is expressly not subject to the CISA (Art. 2 para. 3 CISA). Since there are only registered shares in Switzerland after the abolition of bearer shares, de facto no more SICAFs can be issued that are only aimed at qualified investors.
Such investment companies according to Art. 2 para. 3 CISA are therefore no longer collective investment schemes and are, in our opinion, not treated as such for tax purposes.
Designation of the L-QIF (Draft CISA 118e/3)
A new paragraph 3 to Art. 118e Draft CISA clarifies that the designations „securities fund“, „other fund for traditional investments“, „other fund for alternative investments“ and „real estate fund“ may not be used for an L-QIF, as these designations are based on certain investment regulations that do not apply to the L-QIF (Art. 118d let. a Draft CISA).
It should continue to apply that L-QIF must be identified as such in the context of their naming and, if applicable, the legal form (SICAV, KmGK) must be indicated (Art. 118e para. 1 + 2 Draft-CISA).
In view of this, in our opinion at least a designation such as „real estate LQIF“ or „L-QIF for alternative investments“ or similar should be permissible if it pursues a corresponding investment policy. Since a violation of the provisions on the designation of an L-QIF is now also to be punishable (the penal provision of Art. 149 para. 1 let. g Draft CISA has been supplemented accordingly), a specification at ordinance level would be desirable.
Administration of L-QIF-KmGK (Draft-CCIA 118h)
In Art. 118h Draft-CCIA, the new para. 2 was added, according to which an L-QIF-KmGK must transfer the management to an administrator of collective assets (VKV) according to Art. 24ff. FINIG). This provision is unfortunate, as it suggests that the delegation to an AMC is mandatory and represents the only possible form of delegation in this case. Only a glance at the dispatch clarifies that the management of an L-QIF-KmGK can also be delegated to a fund management company, an investment firm or a bank.
The newly inserted paragraph 4 to Art. 118h Draft ISA then specifies that the L-QIF-KmGK does not have to transfer the management if the general partner is a bank, an insurance company according to ISA, a securities house, a fund management company or an ICA.
Audit, accounting, valuation and accountability of the L-QIF (E-CISA 118i)
The article formerly „audit firm“, now „audit, accounting, valuation and reporting“ has been almost completely rewritten. According to the dispatch, however, the audit regime for the L-QIF should essentially follow that for supervised collective investment schemes. In particular, paragraph 6 is new, which grants the Federal Council the right to regulate the details of the audit and, above all, to issue additional provisions on accounting, valuation, accountability and publication obligations. The draft of the revised Collective Investment Schemes Ordinance (CISO) can be awaited with anticipation.
Contributions in kind / distributions in kind (Draft CISA 118l)
Article 118l of the Draft-CCIA „Exceptions to the obligation to make deposits and payments in cash“, which governs contributions in kind and distributions in kind in the case of L-QIF, has been slightly amended: Contributions and distributions in kind are permitted if they are provided for in the fund contract or, in the case of the LQIF SICAV, in the investment regulations (preliminary draft: articles of association). This corresponds to the current practice with the supervised SICAVs (cf. § 17 number 8 of the SFAMA Model Investment Regulations).
Investments and investment techniques (E-C-CIA 118n)
This article has not undergone any material change compared to the preliminary draft. In particular, para. 3, which grants the Federal Council the competence (or actually even gives it the mandate) to regulate the investment techniques and investment restrictions in the CISO, which is still to be amended, has also been left in place. Admittedly, this is not about the permissible investments per se; these are still not regulated, and the foreword to the dispatch, as well as the explanatory report on the preliminary draft, explicitly states: „In particular, the law makes no stipulations with regard to the possible investments or the distribution of risk“. Nevertheless, when dealing with the ordinance, a watchful eye will have to be kept to ensure that no extraneous or dirigiste elements suddenly find their way into the regulation of investment techniques and investment restrictions, which could undo the fortunately very liberal approach of the L-QIF regulation.
Risk distribution (E-C-CISA 118o)
While the preliminary draft was limited to disclosing in the fund documents the maximum percentage of fund assets that may be invested with the same debtor or company (Art. 118o Draft-CCIA), Art. 118o Draft-CCIA now contains a more generally formulated obligation to describe the risk distribution of the L-QIF in the relevant fund documents (fund contract, investment regulations or articles of association). Due to the fact that there will be no legal risk distribution regulations for the L-QIF and no administrative practice in this regard, it is certainly appropriate to demand maximum transparency in the interest of investors.
Although the draft law does not contain any material investment limits (thus, in extremis, up to 100% of the assets of the L-QIF may be invested with the same issuer), this does not exempt the initiators of an L-QIF from defining and comprehensively explaining these limits in each individual case. A carte blanche for the portfolio managers in the sense that they do not have to adhere to any limits is therefore not permissible. The message here is very clear: „It must not simply be stated that the L-QIF is free in the distribution of risk“.
Special provisions for real estate investments (E-CISA 118p)
This article regulates the special features if an L-QIF invests (exclusively or in addition to other investments) in real estate investments: The obligation to appoint independent valuation experts and the prohibition of real estate transactions among related parties were taken over from the preliminary draft. The only new addition to paragraph 3 is that the Federal Council must regulate the exceptions to the ban on related-party transactions in the CISO. Such a regulation already exists today for the supervised real estate funds (Art. 32a CISO).
Amendment of other enactments
Both the Federal Direct Tax Act (DBG) and the Tax Harmonisation Act (StHG) now provide for the addition that L-QIF with direct real estate ownership are treated the same as other legal entities. This is intended to clarify that L-QIF with direct real estate ownership are also taxed as legal entities regardless of the legal form actually chosen, just like the supervised real estate funds with direct real estate ownership pursuant to Art. 58 CISA.
Financial Services Act (FIDLEG)
There is also a need for clarification in the FIDLEG, which only came into force at the beginning of this year. Art. 4 para. 3 let. e FIDLEG is to be amended to the effect that, in addition to public-law corporations, (public-law) institutions and (public-law) foundations, each with a professional treasury, are now also considered professional clients.
The adjustments made necessary by the introduction of the L-QIF in the FIDLEG, in particular the exemption of the L-QIF from the prospectus requirement, have not been changed compared to the preliminary draft.
What happens now?
With the publication of the Federal Council’s dispatch, the L-QIF bill is now ready to be dealt with in parliament. It is estimated that the business will first be dealt with by the Committees for Economic Affairs and Taxation of both chambers of parliament (WAK-N and WAK-S) from October 2020. The Federal Assembly is expected to address the L-QIF in the 2020 winter session (from 30 November). Since of the five parties participating in the consultation process, only the SP is opposed to the bill (cf. results report on the consultation process), we assume that parliament will approve the legislative amendment and thus the introduction of the L-QIF. Due to the relative complexity of the matter, a referendum is not to be expected, and thus entry into force at the beginning of 2022 seems realistic.
After the parliamentary treatment of the amendment to the law, work on the revised CISO will begin in 2021. Here, too, there will be a consultation process in which CAPSTONELAW will actively participate.
With the planned Swiss L-QIF, there is the possibility that fund products aimed exclusively at qualified investors, particularly in the area of illiquid or semi-liquid investment strategies such as private equity, venture capital, infrastructure, real estate and private debt, will increasingly be launched in Switzerland in the future. This should lead to an increased part of the value chain of fund services remaining in Switzerland in the future and thus sustainably strengthen Switzerland as a fund location.
However, the existing disadvantages of Swiss collective investment schemes in connection with the lack of harmonised access to the EU market and the Swiss withholding tax will not be eliminated by the introduction of the L-QIF.