On 31 January 2024, the Swiss Federal Council released the final implementing provisions of the Collective Schemes Ordinances (CISO) relating to the Limited Qualified Investor Fund (L-QIF). The L-QIF is a new type of investment fund reserved to qualified investors under the Collective Investment Schemes Act (CISA). The L-QIF will be available on the market on 1 March 2024.
L-QIF basics
The L-QIF does not require approval or authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to be setup or launched and there is no prudential supervision conducted by FINMA over L-QIFs.
Despite the absence of prior approval/authorisation by FINMA, a L-QIF remains a regulated product subject to the relevant provisions of CISA and CISO unless otherwise provided for by CISA and CISO. In particular, certain minimal standards of the asset management industry remain applicable by analogy to L-QIFs, such as the Asset Management Association Switzerland (AMAS) Code of Conduct as well as the AMAS guidelines on real estate investment funds and other technical guidelines on money market funds, asset valuation and valuation errors, fund performance and on the Total Expense Ratio. Finally, certain technical provisions of CISO-FINMA are also declared applicable to L-QIFs (see below).
Available forms
The L-QIFs can be structured as Swiss contractual funds (SCFs), Swiss investment companies with variable capital (SICAVs), or Swiss limited partnerships for collective investment (Swiss LPs). Since the product will not need FINMA approval, a L-QIF must be managed by a supervised entity as described below.
Investment management
L-QIFs structured as SCFs can only be managed by a Swiss fund management company, which may, in turn, delegate the investment decisions to a manager of collective assets.
L-QIFs structured as SICAVs will be required to delegate both the administrative and investment decisions to a single fund management company, which may sub-delegate the portfolio management to a manager of collective assets.
L-QIFs structured as Swiss LPs must delegate their executive management, including investment decisions, to a manager of collective assets. There will be no such requirement, however, if the general partners of the Swiss LPs are banks, insurance companies, securities firms, fund management companies, or managers of collective assets.
Managers of collective assets, as defined in the Financial Institutions Act (FinIA), must be fully-fledged regulated investment managers under FinIA. De minimis collective asset managers are not considered and regulated as managers of collective assets but rather as individual portfolio managers.
On-going compliance, information duty and audit
The financial institutions in charge of the administration and management of the L-QIFs, such as the fund management company, are required to monitor the ongoing compliance with CISA. In case of breach of contractual (including for instance investment restrictions), statutory or regulatory provisions, such financial institutions must immediately inform the investors, the custodian (when required) and the auditors and ensure that the situation is remediated within a reasonable period of time.
The L-QIF will undergo two audits. One audit will focus on the traditional financial statements (based on annual accounts) review in accordance with Swiss standards applicable to collective investment schemes. The second additional audit will focus on compliance with requirements applicable to the L-QIFs. During the first audit year following the launch of a new L-QIF, the second additional audit must cover particular items detailed in the CISO. Otherwise, this additional audit must be conducted every two years contrary to the financial audit that will be conducted on an annual basis.
Data reporting
Financial institutions in charge of the administration and management of the L-QIFs are required to report specific data to the Federal Department of Finance (FDF). The data must enable the FDF to keep a publicly accessible register of all L-QIFs. In addition, the data is required so that the FDF or a mandated third party can collect data on the L-QIFs for statistical purposes.
Currently, data notification forms for new L-QIFs are already available on the website of the State Secretariat for International Finance both in French and German (https://www.sif.admin.ch/sif/fr/home/finanzmarktpolitik/l-qif.html). Forms for reporting changes to existing L-QIF data and for reporting the dissolution of a L-QIF will be made available in due course.
Investment restriction
The standard risk diversification rules and investment restrictions applicable to regulated vehicles do not apply to L-QIFs. This increased flexibility, however, will not exempt L-QIFs from defining in their documentation the applicable investment restrictions according to the specific limits imposed by CISO on leverage, collaterals and total exposure of net assets of L-QIFs.
In addition, specific provisions, restrictions and limitations apply to open-ended L-QIFs investing in real estate, such as rules on coownership, risk diversification, transactions with related parties and requirements for experts in charge of valuation. Specific rules also apply to L-QIFs structured as Swiss LPs (i.e. closed-end vehicles) in terms of transactions with related parties. Requirements for valuation experts will also apply to such L-QIFs. Furthermore, the partnership agreements of such Swiss LPs must expressly mention investment restrictions and authorised investment techniques.
Finally, the CISO-FINMA requirements applicable to securities lending, repo transactions, derivatives and security management will also apply by analogy. A L-QIF, however, will not be subject to the obligations of informing FINMA and obtaining FINMA approval. The L-QIF will also be able to use the model-based approach as a risk measurement method (i.e. value at risk, VaR). This method will not be examined by FINMA, but ex post by the auditor.
Custody
Custody is structured in line with requirements applicable to regulated vehicles and custodian banks must ensure the safekeeping of the assets in custody as well as monitoring in accordance with CISA as further specified in CISO.
Tax
L-QIFs do not benefit form a particular or derogatory regime and will be treated from a Swiss tax perspective, like other Swiss regulated collective investment schemes.
Notes on side pocketing
According to the commentary on L-QIF, specific approval of side pockets by FINMA remains required, in the absence of existing international standards or other points of comparison as well as empirical values. As a result, it will currently not be possible for a L-QIF to create side pockets. For regulated vehicles, side pocketing will be possible provided that the relevant vehicle documentation expressly provides in advance for the possibility to create side pockets, and, upon an illiquidity event, FINMA authorises the creation of the relevant side pocket while keeping the investors informed via a specific publication.
Outlook
The introduction of the L-QIF is the opportunity for the asset management industry to offer new innovative products and strategies. L-QIFs could be of interest for alternative, digital as well as real estate asset classes. The L-QIF is also the opportunity for institutional and sophisticated private investors to benefit from time-to-market strategies and new exposures allowing flexible pooling. The arrival of this new vehicle in Swiss law can only be welcomed even if market participants will ultimately decide of its fate and success.
For more information on L-QIFs and fund regulations in Switzerland, contact your CMS client partner or local CMS expert.
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