Dr Dominik Oberholzer of Zurich-based Hess Dallafior Attorneys at law outlines the changes to Swiss law governing sales of foreign hedge funds to HNWIs.

The Swiss Federal Banking Commission (SFBC) is to amend the rules governing the distribution of participations in foreign funds including foreign hedge funds to High Net Worth Individuals (HNWI).

Whereas no special rules applied to this class of investors until now and the sale of foreign funds was, thus, restricted, the sale of foreign funds including foreign hedge funds to HNWIs will be partly deregulated as of April 1, 2006.

Whereas all funds established pursuant to Swiss law need to be authorized by the SFBC irrelevant of whether their participations are distributed on a private or on a public basis, special rules apply to funds established in another jurisdiction (so-called foreign funds). Foreign funds only have to be licensed by the SFBC if their participations are distributed in Switzerland on a commercial basis (art. 45 para. 1 Swiss Investment Funds Act).

Pursuant to art. 1a of the Swiss Funds Ordinance (SFO), any distribution is deemed to be on a commercial basis if made by "public solicitation".

On May 28, 2003 the SFBC issued a Circular clarifying the term "public solicitation": In a nutshell, any means of advertisement, whether direct or indirect, is considered to be a "solicitation" which in turn is "public" if (i) it is addressed to more than 20 persons per business year and per product and (ii) the contacted persons are neither institutional investors with a professional fund management nor have a "qualified relationship" with the distributor of the foreign fund at issue.

A relationship is considered to be qualified if (i) it is based on a written agreement for valuable consideration and (ii) satisfies the standards set by the Directives of the Swiss Bankers Association for asset management transactions. Unlike in other jurisdictions, an existing client relationship alone is, thus, not deemed to be "qualified" provided that the two conditions set forth above are not satisfied.

Based on these rules, the sale of foreign hedge funds in Switzerland has proven to be difficult: Foreign hedge funds could hardly be licensed by the SFBC because of non-compliance with the Swiss Investment Funds Act and the sale of unlicensed foreign funds faced too many qualitative and quantitative restrictions.

However, this will be changed soon: The SFBC announced that the rules defining the "qualified relationship" as described above will be deregulated effective April 1, 2006 with regard to "High Net Worth Individuals" (HNWIs).

From this date on, the two conditions described two paragraphs above can be disregarded and banks and securities dealers - but not other asset managers or fund distributors, even if duly licensed by the SFBC - will be free to distribute participations in foreign funds, including hedge funds, which are not licensed by the SFBC to HNWI in Switzerland under the following two conditions:

  1. the bank or securities dealer has a written, general advisory agreement with the HNWI which is entered into for an unlimited period of time;
  2. the HNWI must prove to own directly or indirectly (e.g. via trust structures) funds exceeding CHF 5 millions.

These two conditions need to be met cumulatively and the bank or securities dealer has to verify on a regular basis whether they are still satisfied.

It follows from the above that HNWIs do still not qualify as such as institutional investors in Switzerland, they rather fall under a special, harder regime. In this respect, the requirement to own CHF 5 millions in order to qualify as HNWI seems to be high, in particular compared to other jurisdictions.

For further information, please contact Dr. Dominik Oberholzer at oberholzer@hdlegal.ch

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