The Limited Qualified Investor Fund - an Innovative New Fund Product
After Swiss financial market law has experienced numerous regulatory pushes in recent years, it is a welcome change to be able to report on a deregulation initiative in the area of asset management.
As is well known, Switzerland is an important location for the asset management and distribution of financial instruments, but not so much for their production. This is (besides restricted outbound market access of Swiss investment fund products and their managers and the withholding tax regime) mainly due to the Swiss legal framework providing for a product approval by FINMA which leads to internationally substandard time-to-market and relatively high setup costs.
In the endeavor to strengthen the competitiveness of Switzerland as a production location for investment funds and the Swiss financial center as such, the Collective Investment Schemes Act (“CISA”) since March 1, 2024 provides for a new interesting investment fund type, the Limited Qualified Investor Fund (“L-QIF”) with the following key features:
Legal structure
L-QIF are to be set up as open-ended investment funds ("IF") or investment companies with variable capital (“SICAV”) or as closed-ended structures in the form of a limited partnership for collective investment (“LP”), i.e. in a structure already provided for by the CISA; a set-up as a SICAF is not possible because SICAFs with qualified investors (and registered shares outstanding) are not subject to the CISA (Art. 2 para. 3 CISA).
Accordingly, the new Art. 118a - 118p CISA and the corresponding provisions in the Collective Investment Schemes Ordinance ("CISO") supplement the existing regulations of IFs, SICAVs and LPs.
No product approval
Unlike "normal" Swiss fund products, L-QIFs do not have to be authorized by FINMA (Art. 118a para. 1 let. d CISA). Consequently, neither the collective investment agreement of an IF, nor the articles and investment guidelines of a SICAV, nor the partnership agreement of an LP are to be submitted to FINMA for approval.
The abolishment of the product approval will substantially shorten the time-to-market and reduce set-up costs.
The revised law provides for detailed notification duties to the Federal Department of Finance in the context of taking-over or terminating the administration of an L-QIF. Besides that, the CISO introduces ongoing notification duties for statistical reasons.
The law assigns some additional controlling functions on the custodian bank of open-ended L-QIF (IF and SICAV).
Liberal investment and diversification rules
The investment regulations of the CISA do not apply to L-QIF (Art. 118d let. a CISA). The law does neither specify the scope of possible investments nor does it set any risk diversification limits, thereby permitting investments in all sorts of asset classes in a non-diversified fashion.
Further, there are no investment restrictions except for open-ended L-QIF (IF and SICAV) which may take out loans amounting to a maximum of 50% of the net fund assets, pledge a maximum of 100% of the net fund assets or assign them as security and enter into a total commitment of no more than 600% of the net fund assets (Art. 126p para. 1 CISO).
The eligible investments, the investment strategy, the risk diversification and the investment techniques pursued must be stated in the L-QIF’s governing documents (Art. 118n, 118o CISA; Art. 126p para. 3, 126z CISO).
The new law introduces specific risk disclosure obligations for L-QIF such as the duty to inform about specific risks involved in alternative investments. (Art. 118n para. 2 CISA).
Specific information and transparency rules apply for open-ended real estate L-QIF (Art. 126t CISO).
Administration and asset management
Since there is no product approval, an L-QIF in the form of an IF or SICAV must be administered by a fund management company (Fondsleitung) (Art. 118g para.1, 118h para. 1 CISA). An L-QIF structured as an LP may be (self-) administered by its general partner (Komplementär) qualifying as a bank, an insurer, a securities firm, a fund management company or a manager of collective assets (Art. 118h para. 4 CISA). If the general partner only fulfils the authorization requirements pursuant to Art. 14 CISA, the administration of an L-QIF structured as LP must be delegated to a manager of collective assets or a financial institution with a higher regulatory standard (Art. 118h para. 2 CISA).
The asset management of an L-QIF is carried out by its administrator but may also be delegated to a manager of collective assets (Art.118g para. 2 let. a, 118h para. 2 CISA). Since the activities of a manager of collective assets may also be carried out by financial institutions with a more comprehensive license (Art. 6 of the Financial Institutions Act ("FinIA")), a delegation may also occur to banks, securities firms or fund management companies. On the other hand, portfolio managers (Art. 19 para. 1 FinIA) are not authorized to manage L-QIF assets.
The asset management for an L-QIF may further be delegated to foreign managers of collective assets if they are adequately regulated and supervised at their domicile and if there is an agreement between FINMA and the relevant competent foreign supervisory authority on cooperation and the exchange of information, if such an agreement is required by foreign law (Art. 118g para. 2 let. b CISA).
Qualified investors only
As the name indicates, L-QIF are only open for qualified investors (Art. 118a para. 1 let. a CISA). This includes individual clients with portfolio management or investment advisory agreements with financial intermediaries or insurers in the sense of Art. 10 para. 3ter CISA as well as institutional and professional clients in the sense of the Financial Services Act. An exception however applies to high net-worth individuals and their private investment structures (with or without professional treasury operations) which may not invest in L-QIF making direct real estate investments (Art. 118a para. 1 let. b CISA).
To summarize, it can be said that the L-QIF is suitable for the implementation of alternative strategies, e.g. in the private markets, venture capital or real estate sectors. However, in view of the lack of harmonized EU market access for Swiss fund products and managers and the withholding tax, L-QIFs will only prevail over comparable European products (such as the RAIF) if Swiss investors are the main target group.
For further information and structuring discussions please do not hesitate to contact us.
