Distributing Foreign Funds to Swiss Investors

      Podcast transcription:

      Good morning, everyone. Thank you for joining us. A warm welcome to our clients, counterparties, and friends of DMS. Thank you very much for taking the time out of your day to join us. We’re going to be talking today about distributing foreign funds to Swiss investors. I’m a managing director at DMS North America based in New York. And I’m joined by my colleagues Luis Pedro and Matteo Risoldi in the DMS Swiss office. If you’re not familiar with DMS, just a quick high-level summary. DMS is a global governance risk and compliance provider. We’ve been providing governance risk and compliance services to our clients for 20 years out of 8 financial centers around the world. We currently serve assets in excess of $400 billion across the traditional asset classes and alternative asset classes. Today, we’re going to be talking about the distribution of foreign funds to Swiss investors. And so, without too much further ado, I will pass it over to my colleague, Matteo.

      Why Should You Distribute Funds into the Swiss Market?

      Thank you, Matthew. Good morning, everyone. This is Matteo Risoldi from Oligo Swiss Fund Services. We’re a Swiss company who recently joined the DMS group to extend the reach of their services for distributing funds into Switzerland, Swiss markets. And why should you distribute funds into the Swiss market? Well, first of all, Swiss is a very small nation, but it has very large capitals inside. A quite large part of the population has a relatively high fortune. And there’s also a high number of institutional investors. This is quite attractive for foreign funds. There’s an ever-growing number of funds that are distributed into Switzerland, whether to professional or private investors. This also thank you to a relatively light regulatory framework when compared to the rest of Europe. As I remember, Switzerland is not part of the European Union, so it’s not subject to the same kind of regulation. So, it’s definitely an attractive market.

      What Types of Funds Can Be Marketed in Switzerland?

      Okay. What type of funds can be marketed in Switzerland? Well, that’s basically all types of funds. Depending on the type of funds, there are some restrictions such as the type of investors that you can distribute to. But there’s no particular restriction on the domiciliation of the fund or the domiciliation of the fund manager, the type of the fund. There are all types of products that are currently distributed to Swiss investors. They are quite knowledgeable, I might add, and they know all types of products, whether they are ETFs, UCITS, or alternative funds.

      What Types of Investors Can You Market to in Switzerland?

      Who can we offer our funds to in Switzerland? What are the types of investors that we can market to? So, the classification of investors is quite simple. There’s private investors and professional investors. And depending on the type of fund that you have, you can distribute your fund to either or to both of them:

      • If you have a UCITS funds, you can distribute to both private and professional investors.
      • If you have an alternative fund, you can only distribute to professional investors.

      Although the regulatory requirements that we will be subject to will be a little bit simplified because you will not have to get formal approval by the authorities.

      What Do You Need to Do to Offer Foreign Funds to Swiss Investors?

      What do we need to do to offer foreign funds to investors in Switzerland? Well, as I said before, the regulatory regime is quite light if compared to the European one. And the set of requirements that you have to satisfy changes according to what type of investor you’re marketing to. There’s been a change in the Swiss regulatory framework recently, at the beginning of 2020, and we are currently in a transition period between the old framework and the new framework.

      Changes to Swiss Regulatory Framework

      In January 2020, the new framework came into force, but for the first two years until the end of 2021, we’re still in a transition period where some of the old provisions still apply. So, the type of obligations that have been introduced by the new framework are both operational and organizational.

      For the organizational changes, which include:

      • New rules of conduct
      • Organizational measures
      • And a reclassification of the firm’s own investors

      It is currently recommended by most Swiss law firms to wait a little bit before getting fully compliant as the problem is still, let’s say, under study. The changes are very recent, the circulars have not been sent out yet by the authorities. There might be a couple of aspects which are…they’re not very, very clear. It is advisable, in any way, to get the assistance of a Swiss legal expert to get fully compliant with the new measures.

      From the operational point of view, not a lot has changed between the old and the new set of requirements, but there are some differences between the current transition period and the time that will come after that.

      So, for the time being, what we’re looking at is the current situation and the type of obligation that we have. So, as I said before, you have different requirements changing according to what type of investor you’re talking to. If you look at the right column that says non-qualified investor, this is the name that in Switzerland you use to say, basically, the private investors. This is the set of investors that have, let’s say, that entail more requirements because in order to market the fund to them, you will have to appoint a Swiss representative, a Swiss paying agent, get an authorization from FINMA, which is the Swiss supervisory authority, publish your fund documents on an electronic platform authorized by FINMA, and, finally, register your client’s advisors and be affiliated to an ombudsman.

      So, this looks like a whole lot of things to do. But luckily, these kinds of requirements have existed for a number of years now. And firms like DMS and Oligo are very well-versed in solving all these problems on behalf of the client. So, we offer a package which encompasses all of these services, you know, solving all of these types of requirements. And we have very clear and structured processes that can get you there quickly and efficiently. If you’re talking to professional investors…

      Types of Qualified Investors

      When you talk to professional investors, which in Switzerland are called qualified investor, you’re then on the left-hand side of the table. So, there’s two types of qualified investors: regulated and unregulated.

      Unregulated Qualified Investors

      The unregulated, high net worth individuals, pension funds, wealth managers, family offices and companies with professional treasury management, they have a subset of the obligations that you would have for public distribution. So, you just need the representative, the paying agent, registering the client advisors, in some cases, not all, and be affiliated to an Ombudsman. Again, DMS, Oligo offers a package, which includes solving all of these problems for the client, including also analyzing the particular situation of the client to understand whether, for example, they actually need to reduce the client advisors or if they are exempt from this obligation, which is kind of if you want a kind of advice that if you get them from a lawyer, would entail additional costs. We throw that into the whole Swiss package for you.

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      Regulated Qualified Investors

      And you’re talking to regulated qualified investors on the leftmost column, which are banks, securities dealers, regulated companies, or insurance institutions. There’s very little obligation, just the client advisor and the Ombudsman. But there’s a catch to that. It is actually a recommendable thing to do to appoint a Swiss representative and paying agent even if you’re talking to this kind of institutional investors or regulated qualified investors. Why? Because you have a high level of regulatory guidance and governance when it comes to the Swiss market. There’s changes every probably one year or two in regulation. Some are minor changes; some are major changes like this year. And you always want to have the best governance possible, which is something that DMS, Oligo, can provide to you.

      In addition to that, if you have a UCITS product and you’re talking to this kind of investors, particularly where you’re talking about banks, they will require your funds to be fully approved as if it were offered to private investors, even if you’re talking just to banks. Why? Because they will know that in that case, your fund will check all the due diligence boxes because it’s been already analyzed and approved by FINMA, the regulator, and thus they will only enter into negotiations with a fund, with a UCITS fund in particular, if they’re approved for public distribution. So, it’s always better to have the best level of institutional setup with all the appointed service providers in order to talk to all types of investors, even during this transition period.

      Today’s Regulatory Framework

      Now, this is what it looks like today with the new regulatory framework. You see that it’s very similar. You still have two types or macro types of investors, only they’re called now private and professional investors instead of non-qualified and qualified investors. For the rest, you still have three columns with three sets of requirements, which are the same as before. The thing that changed a little bit is that some of the types of investors moved from one column to another. For example, high net worth individuals are now private investors by default. You’ll see them in the rightmost gray column. But they can opt out of the private investor category and be considered professional investors. And you see them in the center column at the top.

      Also, pension funds are now considered institutional investors and have moved now to the leftmost column. But out of that, everything still looks pretty much the same. You still need to get FINMA approval for public distribution, you still need a Swiss representative in most cases, and institutional investors, including pension funds, still will require your funds, if it’s a UCITS product, to be authorized for public distribution in order to be more acceptable for their due diligence criteria. Again, DMS, Oligo, for each of these different cases, can offer you a full package, which includes taking care of the requirements for you, gathering all the necessary documents, and doing all the filings if it’s necessary, and doing all the analysis for assessing your particular situation and seeing what obligations apply to you. As well as a constant regulatory watch over new changes that may be introduced in the future with new laws and circulars.

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      Can I Rely on Reverse Solicitation to Talk to Swiss Investors?

      Now, something that comes up a lot is, can I rely on reverse solicitation to talk to Swiss investors? I have heard that if you have reverse solicitation, you don’t need anything in terms of authorization, representative, paying agent. Now, this is a tricky question to answer. The technical answer, the technically correct answer is, yes, you can. The actual answer that I would say is correct is it really depends. It depends on what? It depends on the actual situation that you find yourself in.

      Reverse solicitation in Switzerland is very narrowly defined. It’s difficult to demonstrate that you’re in a case of reverse solicitation. FINMA has made it very clear that they will not accept a simple, let’s say, email or a letter from the client saying, “I certify that this is a reverse inquiry that was initiated by me.” And it’s very risky in the end.

      The risk, when I say risky, is not the risk of the regulator coming after you and saying you marketed your funds on a reverse solicitation basis without the grounds for doing so. The risk here is actually giving the investor undue leverage whereas if your relationship with the investor should go sour at some point because the investment is not going the way the investor wanted or they’re not willing to respect the fund terms anymore, they can say, “You actually distributed the funds to me without due representation and without following all the obligations that the law mandates. And now I am in the position to sue you to the authorities unless you give to my requests.” Now, I have to say, to be clear, that in Switzerland, distribution of a fund without proper authorization is an actual crime. So, there’s jail sentences for that in addition to very hefty fines. So, it’s something that I would not recommend relying on the reverse solicitation, especially given the fact that the Swiss regulatory regime is relatively simple to satisfy and the costs, if you look at it, are not very, very high.

      How Are the Cayman Islands Perceived as a Fund Domiciliation Amongst Swiss Investors?

      Now, another question that comes up a lot from our clients or potential clients is, how are the Cayman Islands perceived as a fund domiciliation amongst Swiss investors? Now, there’s been a lot of talking about Cayman Islands in the news with the banning from the European Union, so it’s a legitimate question. So first of all, let me repeat something I said before, which is that Switzerland is not in the European Union. It’s in Europe but not in the Union. So, the ban that has been made by the European Union is not something that concerns Switzerland.

      Now, from the investor point of view, what I said before is, you can only talk to private investors if you are a UCITS. So, by definition, if you have a Cayman fund, you can only talk to professional investors. And professional investors in Switzerland are quite sophisticated. They read, especially the press. They know what’s going on. And they’re quite likely aware of what happened with the Cayman Islands and the European Union. They know the reasons for the ban, and they know that it will likely go away soon.

      In addition to that, Cayman Islands are a very common domiciliation for funds markets in Switzerland. As a matter of fact, more than a third of the funds that DMS, Oligo today represent are domiciliated in the Cayman Islands, whether managed by a U.S. manager, or a European manager, or an ASEAN manager, or anywhere else in the world. So, it’s something that the investors are used to. They see it a lot. They buy it a lot, and it’s nothing exotic or strange for Swiss investors. So, there’s no particular prejudice or problem towards Cayman Islands as a domiciliation for a fund where you’re talking to a Swiss investor. You will not get a surprise reaction or any kind of particular dots [SP].

      Audience Q&A

      Thank you, Matteo. That was very informative. And I hope that was of use to the audience. We’ve received a few questions from the audience. So maybe I might run through those very quickly as a Q&A.

      The first question: “Please, could you go through the details of the two new requirements? Who needs to affiliate with the Ombudsman and who needs to be registered with the client of registered advisors? And how can Oligo help with this?”

      Sure. Thanks for the question. It’s a very good one, actually, because these two requirements are brand new. They’ve been in the law now for a few months, but they’re actually enforced only for a few days now because only a few days ago has FINMA licensed the actual service providers that can offer these services, the Ombudsman and the register of client advisors. So, the Ombudsman is something that already exists for banks and insurance. And it’s something that should allow the investor to go through an extrajudicial procedure like an arbitration to solve any problem they have with a fund provider. And that’s why everybody, all the firms that provide financial services in Switzerland, including, of course, offering investment funds, need to affiliate with an Ombudsman. Affiliation is not overly complicated. It’s typically a matter of providing basic data about the firm that we have already for our clients as Oligo, DMS. And it allows you to satisfy this requirement and be ready for anything that might pop up, although you will probably not need to use it if you do your things properly.

      Now, the register of client advisors is a little bit different in that not everybody is subject to this obligation. So first of all, if you are a Swiss fund provider, you don’t need to do that. But if you’re a foreign fund provider, you only need to do it either if you’re talking to private investors, so if you have a UCITS fund and you’re talking to private investors, you need to do this, or if you’re talking to professional investors but you don’t have any kind of supervisory regulation in the fund providers’ domiciliation. Whereby by fund provider, I typically mean either the manager or the distributor, so the entity that is talking to investors. Registering to the register of client advisors is basically a mean for the Swiss investor to be able to know who am I talking to, what are the competencies are they actually able to advise me on a financial product. And it will sort of be like a search engine that will list the persons that work for financial service providers, and without their certifications and competencies and background, if they are properly insured and whether they are fit to advise on a financial product. Now, analyzing whether you are subject to this obligation or not is part of the service we offer at DMS, Oligo. And we can easily assess it for you included in our service offering at no additional cost. It’s all in the package that we offer to our clients as a Swiss representative.

      Thank you, Matteo. That’s very helpful.

      The second question from the audience: “I already have a Swiss representative and paying agent. What does it take to change that representative to Oligo?”

      That’s a good question. Thanks. It’s very simple, as a matter of fact. So, it depends on whether you’re, again, only talking to professional investors or if you’re authorized for full public distribution. If you’re only talking to professional investors, it’s extremely simple. You have to send a letter to your current representative, and we provide a template for that, to terminate your presentation agreement according to the terms that you have in your representation contract. It’s typically 90 days but could be less depending on who you are working currently with.

      At the same time, in that same time frame, we will do an onboarding of your fund, which consists, you know, quick due diligence on your products, on your manager, and on the directors. And once that’s done, we sign a new representation agreement between you and Oligo. And basically, you can go on with your business as always. You just need to change the wording a little bit in your fund documents to mention Oligo as a representative instead of the old representative.

      If it’s a fund instead that is talking to private investors, so it’s fully authorized by FINMA, the process is mostly the same, but we have to notify the change to FINMA. So, we have to ask for their pre-approval, then we make the change as we discussed moments ago. And then we do an official filing with FINMA of the change. They don’t need to approve the change; they just need to be informed about it. And again, at the end, you will just need to update a little bit your fund documents in the Swiss wording part that mentions the name and address of the Swiss representative. It’s a change that takes a few days. Materially, it can vary in length depending on your termination clause for your old Swiss representatives. But it’s very, very simple to do. And we take care of everything.

      Thank you, Matteo. And the final question from the audience,

      “What does the Swiss representative do and how do I get value from it? What would you say the value add is of Oligo compared to other Swiss representative providers?”

      That’s a very good question. Thanks. It’s actually all the reason that we’re doing this presentation is understanding what are these requirements in the Swiss law? So why do you need to have a Swiss representative? What is it that we do? So, a Swiss representative is, as the word says, it represents your funds towards the Swiss investors. So, it’s like if you had a foothold here in Switzerland. We do share a part of your responsibility towards investors. So that’s why to get a client, we always start with a very thorough due diligence process. We assess that all the documents or the funds are fit for offer to Swiss investors, and that manager is duly licensed, the directors are clean and also competent to perform their duties in a diligent way. Basically, we’re performing all the tasks that a regulator does, only that the Swiss regulator delegates all those tasks to the representative in Switzerland. It’s a lighter way of checking without having necessarily to go through the regulator, unless you need to talk to private investors.

      The value that you get from a Swiss representative is that not only we take care of everything that is connected with authorizing your funds for distribution in Switzerland to professional private investors, but also that you get constant information and watch over the regulatory framework and its evolution in Switzerland, guidance towards what is needed, guidance towards how to best approach investors, help with distribution, in the case of Oligo, also capital introduction events, webinars where you present your funds to the Swiss investors, private or professional alike, and of course, the whole palette of guidance, governance, and services from the whole DMS group, whatever you need, whether it’s in Switzerland or elsewhere in the world.

      Thank you, Matteo. I think that’s the summary of the questions in the audience today. Thank you for answering those.

      Luis, over to you.


      I would like to thank Allison and Matthew for hosting this presentation. And for Matteo for this great overview on the Swiss regulation for fund distribution, and how Oligo, that is now part of the DMS group, can support you. I would like to wrap it up in very few and simple points by saying that, if you have a Swiss representative, Oligo and DMS can now provide you all with the necessary support for the transition period to assess and implement the new FINMA rules, and to navigate during the transition period. We provide tailor-made solutions based on your specific setup. We can also help you on your analysis, whether you need a Swiss representative and paying agent, or you don’t need one anymore.

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      Overall, Oligo and DMS will provide you with the most comprehensive solution for the highest level of governance, not only in Switzerland but all around the world, and we are here to help you. Changing to Oligo as your Swiss representative is a straightforward process and should allow you on cost-saving and to get the best governance in Switzerland for your firm, your funds, and eventually the other entities that distribute your funds. Please reach out to us should you have any questions, any comments regarding regulation, regarding the landscape of the Swiss market in terms of the strategies that usually work in Switzerland, regarding the type of investors. We are here to help you and to give you as much support as we can going forward. Thank you all for listening.

      Thank you, Luis. Thanks to everyone that’s joined today’s webinar. We will furnish you with a copy of today’s presentation. So please do feel free to reach out to any of the presenters for any further information. Have a great day.