FINMA for the First Time Approves Side Pockets for Segregating Illiquid Assets of an Investment Fund

On 23 April 2024, FINMA for the first time authorized a Swiss investment fund to create side pockets. The side pockets serve to park the fund's illiquid Russian assets. Koller Law represented the three large pension funds Stiftung Auffangeinrichtung BVG, comPlan and APK Aargauische Pensionskasse, which had requested the creation of side pockets, vis-à-vis the fund management company.

This regulatory approval of side pockets can be regarded as the first application of Art. 110a CISO. This provision was created alongside the introduction of the Limited Qualified Investor Fund (L-QIF, see our post of March 22, 2024) and contains an explicit legal basis for the segregation of individual illiquid assets of a Swiss collective investment scheme to protect investor interests.

However, even without this new legal basis, FINMA would have approved the segregation of assets into corresponding unit classes, as side pockets were already recognized as a liquidity management tool - especially in an international context - and the demands for their introduction were given particular urgency due to the illiquidity of Russian assets as a result of the sanctions.

The conditions under which FINMA approved the segregation of the sanctioned and therefore illiquid Russian assets are representative in nature and provide guidance for fund management companies in similar situations as to when and how side pockets can be created or must be created based on investor protection considerations, respectively.

To read our detailed post in German, please click here.

For further information please do not hesitate to contact us.