Simplified Authorization Procedure for Cross-Border Marketing of Swiss Securities Funds and German UCITS

by Dechert LLP
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At the beginning of this year – to the (pleasant) surprise of market participants – an agreement came into force to implement a simplification in the marketing of Swiss securities funds (Effektenfonds) in Germany, and German UCITS in Switzerland. While agreement had been reached in principle in August 2013, the speed of implementation was unexpected, but welcome.

The simplification in the marketing process is achieved by the mutual recognition of both Swiss securities funds and German UCITS as being compliant with the UCITS framework, and by applying the UCITS marketing passport procedure to these fund types. This leads to an easier and faster notification procedure, in particular compared to the extensive authorization procedure for Swiss AIFs (such as a Swiss securities fund) to be authorized for distribution in Germany.

Background

The Agreement between the Swiss Confederation and the Federal Republic of Germany on Cooperation in the Areas of Taxes and Financial Markets (Agreement), negotiated and signed in 2011, included consensus between the two countries regarding a protocol (Protocol) to regulate the UCITS compliance of German UCITS and Swiss securities funds. The Protocol was to have been implemented pursuant to an agreement between the Swiss Financial Market Supervisory Authority (FINMA) and the German Federal Financial Supervisory Authority (BaFin) (Implementation Agreement) and had been intended to enter into force on signing of the Agreement. However, the German Federal Council withheld its consent for the Agreement in November 2012, due to politically contentious tax regulations contained therein. Since no agreement could be reached in the Mediation Committee (Vermittlungsausschuss), the Agreement was not then implemented.

Nevertheless, the Swiss Confederation and the Federal Republic of Germany recognized a significant practical need for increased cross-border cooperation in the financial sector and, in a July/August 2013 exchange of letters, agreed that those parts of the Protocol aiming to improve certain cross-border activities in the financial sector should ultimately be considered – and applied – separately from the politically more contentious tax issues (which were the principal cause of delay of the implementation of the Protocol).1 BaFin and FINMA were tasked with determining the necessary technical measures to include in the Implementation Agreement.

According to a FINMA communication dated January 6, 20142 (FINMA Communication) and a BaFin publication dated January 16, 2014,3 the two regulators concluded the Implementation Agreement, which provided for a regulator-to-regulator electronic notification procedure and information exchange, as well as cooperation between FINMA and BaFin, on December 20, 2013. The Implementation Agreement entered into force on January 1, 2014 and was published by BaFin on January 16, 2014.4 Since negotiations regarding the Implementation Agreement were not publicly disclosed, the FINMA Communication came as a surprise.

Implementation Agreement and Guidance

The Implementation Agreement stipulates that German UCITS5 and Swiss securities funds6 are considered as equivalent. This classification is the starting point – and a prerequisite – for the simplification of marketing Swiss securities funds (whether in contractual or corporate form) in Germany on the one hand, and German UCITS in Switzerland on the other hand. The Implementation Agreement also provides for a simpler and faster notification procedure instead of the previously required authorization procedure.

The notification procedure agreed to by FINMA and BaFin is based on the UCITS Directive and corresponding European Commission implementing regulation.7 As part of the notification procedure, a Swiss fund management company may commence marketing activities in Germany for a Swiss securities fund after FINMA has received the complete notification, forwarded it to BaFin and informed the applicant accordingly (which must be effected within 10 days after receipt of the complete notification). This represents a significant time reduction compared to the potentially six-month authorization procedure that previously had to be undertaken with BaFin in accordance with § 320 KAGB.

FINMA and BaFin have the discretion to impose additional national marketing requirements with respect to the above notification procedures, which aim to ensure that the specific requirements of the CISA and the KAGB, respectively, are applicable when marketing German UCITS in Switzerland and when marketing Swiss securities funds in Germany.

Alongside the FINMA Communication, FINMA published an accompanying Guidance for the Marketing of Shares of Swiss Securities Funds in Germany (Notification Procedure) (FINMA Guidance) in order to simplify drafting of any notifications to be made. Two points worth noting are that:

  • a Swiss securities fund seeking authorization to be marketed in Germany via the simplified notification procedure is not permitted to delegate asset management to a custodian bank or to other companies whose interests may conflict with those of the fund management company or investors in the fund in question (Art. 31 Para. 5 CISA); and
  • the simplified notification procedure is available in Switzerland only if FINMA has confirmed that all provisions in the collective investment contract/investment regulations of the Swiss securities fund in question are in conformity with the applicable law (this confirmation previously was carried out as a matter of course, but has only been made on request since March 1, 2013, and it is therefore worth confirming whether this check needs to be built into the fund’s marketing timetable).

Legal Basis for Implementation Agreement in Germany and Special Precautions during Marketing

The legal basis for conclusion of the Implementation Agreement in Germany is set out in Art. 296 KAGB, according to which, BaFin can agree with competent authorities from third countries – in this case FINMA – that the regulations applicable to EU UCITS in relation to the notification procedure also apply to foreign AIFs, provided certain conditions are met.

However, Swiss funds using the simplified procedures should note that they are still considered to be (non-EU) AIFs for the purposes of the AIFM Directive, and must therefore observe certain restrictions when marketing fund units (which restrictions go beyond those to be observed when marketing UCITS), such as providing pre-sale disclosure to potential investors, and ongoing disclosure requirements.

Much of the information required to be communicated to investors in Germany is likely already included in the fund prospectuses produced in accordance with Swiss law. This information would include, for example:

    • a description of the investment strategy and objectives of the fund;
    • a description of the nature of the assets in which the fund may invest;
    • the techniques that it may employ and all associated risks;
    • any investment restrictions;
    • the circumstances in which the fund may use leverage;
    • the type and origin of permitted leverage and associated risks;
    • other restrictions on the use of leverage and agreements on collateral arrangements and the rehypothecation of collateral; and
    • the maximum amount of leverage that the fund management company may use on behalf of the fund.

The prospectus is also likely to provide information regarding the identity of the fund management company, the custodian of the fund, the auditor and any other service providers, as well as an explanation of their obligations and the rights of investors. Further, a description of the procedures by which the fund can change its investment strategy, its investment policy, or both, will routinely be included, so that these AIFM Directive content requirements should not require additions to be made to the prospectus.

Other required representations are unlikely to be included, however, such as:

  • a description of the most important legal implications of the contractual relationship entered into with investors in order to make the investment (covering issues such as competent courts, applicable law and recognition and enforcement of judgments in Switzerland);
  • a description of how the fund management company meets the requirements for additional equity capital to cover its professional liability risks;
  • a description of how the fund management company ensures fair treatment of investors, as well as an explanation of any possible preferential treatment (including the type of investors who receive such preferential treatment);
  • where applicable, any legal or economic links between the investors and the fund or the fund management company; and
  • details of the fund management company’s liquidity risk management function, including withdrawal rights under normal and exceptional conditions, and existing redemption arrangements with investors.

The fund management company is also obliged, for each of the securities funds it markets in Germany, to regularly inform investors of the following:

  • the percentage of the fund’s assets that are subject to special arrangements arising from their illiquid nature;
  • any changes to the way that the liquidity of the fund is managed; and
  • the current risk profile of the fund and the systems employed by the fund management company to manage risk.

Fund management companies that employ leverage by using derivatives (to the extent use of these is permitted for securities funds) must regularly disclose the following for each of these funds:

  • any changes to the maximum extent to which the fund management company can use leverage on behalf of the fund, as well as any rights to rehypothecate collateral or guarantees provided in connection with the leverage; and
  • the total amount of leverage of the fund in question.

Applicability to Other Fund Types

The Implementation Agreement is not applicable to fund types other than Swiss securities funds and German UCITS. The usual market access options and associated marketing authorization procedures therefore continue to apply to these other fund types. Briefly, the following regime applies:

  • For Swiss funds that are not securities funds, or which do not meet the requirements in the FINMA Guidance despite their status as securities funds, the authorization procedure in Germany is based on Art. 320 KAGB (if intending to sell to private investors), or on Art. 330 KAGB (if intending to sell only to professional and, where applicable, to semi-professional investors in Germany). Since both of these authorization procedures are more complex and time consuming than the UCITS passport procedure, choosing a Swiss securities fund may be favorable for suitable fund strategies that are also to be marketed in Germany.
  • For German funds that are not UCITS and which are intended to be marketed to so-called non-qualified investors in Switzerland, the authorization procedure in accordance with Art. 120 et seq. CISA continues to apply.
Footnotes

1. The exchange of letters is available here. 

2. See, FINMA Communication 55 (2014).

3. See, BaFin interpretation decision.

4. The Implementation Agreement and an attachment to the Implementation Agreement, published by BaFin, are available here.

5. German UCITS refers to those funds established pursuant to Art. 1 Para. 2 and Art. 192 et seq. of the German investment code (KAGB).

6. Swiss securities funds (Effektenfonds) refers to those funds established pursuant to Art. 53 et seq. of the Swiss Collective Investment Schemes Act (CISA).

7. Commission Regulation (EU) No. 584/2010 of July 1, 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards the form and content of the standard notification letter and UCITS attestation, the use of electronic communication between competent authorities for the purpose of notification, and procedures for on-the-spot verifications and investigations and the exchange of information between competent authorities.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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