FIDLEG SOLUTION - News 3/2018

Impact of MiFID II on Swiss Investment Managers of a UCITS or an AIF

INTRODUCTION

This issue of the MiFID II series of FIDLEG SOLUTION – News 3/2018 discusses the impact of the MiFID II rules on the investment management of a UCITS or an AIF (Alternative Investment Fund) by a Swiss Asset Manager.

GENERAL RULES: MANAGEMENT OF UCITS AND/OR AIFs ARE OUT OF MIFID II SCOPE

As discussed in our previous issue of the MiFID II series of FIDLEG SOLUTION - News 1/2018: A Swiss Asset Manager without any EU place of business is not generally within scope of MiFID II. As of today, the new third country rules of MiFID II do not change this, because current national rules in the EU member states are generally preserved – except for EU member states requiring a branch in their country for providing cross-border services from Switzerland.

In addition, fund managers, EU or non-EU, that provide services only to regulated funds, such as undertakings for collective investments in transferable securities (“UCITS”) or alternative investment funds regulated under the Alternative Investment Fund Managers Directive (“AIFMD”), are not generally within the direct scope of MiFID II. This exemption can be found in art. 2(1)(i) MiFID II which reads as follows:

“This Directive shall not apply to: (…) (i) collective investment undertakings and pension funds whether coordinated at Union level or not and the depositories and managers of such undertakings; (…).”

Against this background, one can state that a Swiss Asset Manager managing a UCITS or an EU-AIF is exempted from the MiFID II rules with regard to the UCITS or AIF. However, a Swiss Asset Manager that also provides managed account services to particular clients in the EU (i.e. top-up services) will be directly subject to the applicable MiFID II rules and provisions.

BUT UNCERTAINTY REMAINS ON THE APPLICICABILITY OF CERTRAIN MiFID II RULES

So forget about MiFID II when managing a UCITS or an EU-AIF, and focus on the UCITS-D and AIFMD only? The clear answer is: No! As clear as the wording of art. 2(1)(i) MiFID II (see above) seems to be, as diverse are its interpretations.

Several jurisdictions seem to interpret the term “manager” in art. 2(1)(i) MiFID II as only relating to the management company of a fund but not to a delegated portfolio management company such as a Swiss Asset Manager. The rationale behind this interpretation seems to be that the delegated portfolio management company is not the “manager” of a fund. This means that the exemption in art. 2(1)(i) MiFID II can literally not apply and hence the delegated investment management company does not provide investment management services to a collective investment scheme (be it a UCITS or an AIF) but it rather provides its services to the management company. These services shall be caught by art. 4(1)(1) MiFID II. This reading is explicitly confirmed by the Financial Conduct Authority (“FCA”) in the United Kingdom (for more information read here; Q43). Many other regulators have not given an opinion on this question yet and it seems that also the European Securities and Markets Authority (“ESMA”) ESMA has so far not made the final call yet.

The disadvantageous outcome of this interpretation is that the delegated investment manager has to respect rules which the delegating entity would not have to respect.

Given this strict, but clear reading of art. 2(1)(i) MiFID II by the FCA, it goes without saying that the cautious reading of MiFID II follows this interpretation, at least for as long as clear guidance to the contrary has been issued.

Additionally, the ESMA has already indicated that some of the requirements of MiFID II may also be incorporated in a recast of AIFMD. This would certainly be consistent with the AIFMD's approach to protect even professional investors by imposing additional requirements and regulations on fund managers. The extent to which non-EU AIFMs would be subject to these rules remains uncertain for now. It seems likely that EU member states’ national private placement rules would require compliance whenever such investments are marketed to EU investors.

FUTURE TRENDS IN THE EU MARKET

Due to this regulatory uncertainty, UCITS (and their EU Management Companies) as well as AIF (and their EU AIFMs) might expect the Swiss Asset Manager to comply with MiFID II rules on inducement and unbundling or best execution as a matter of a cautious approach or market practice in the future – notwithstanding that Swiss Asset Managers of EU funds would not otherwise be required to comply with these new rules.

Some EU fund service providers might want to apply the same standards globally, while others may apply different compliance policies to different parts of their group. A Swiss Asset Manager affected by these changes, whether directly or indirectly, may have to revisit its trading activities as well as other operating and compliance policies.

REVERSE SOLICITATION AS A WAY OUT?

This unfavourable reading of article art. 2(1)(i) MiFID II made several Swiss Asset Managers to look for other ways to get out of the burdensome MiFID II rules in their dealings with the management companies of the funds. One idea was to question whether the reverse solicitation exemption could apply. This exemption is set forth in art. 42 MiFID II and has been discussed in the last issue of the MiFID II series of FIDLEG SOLUTION - News 2/2018.

That relying on reverse solicitation is always risky. This has been extensively discussed in FIDLEG SOLUTION - News 2/2018. However, at least when the Swiss Asset Manager has been selected by the UCITS or AIF management company at its own initiative, it could be worthwhile considering the applicability of art. 42 MiFID II. However, in the typical case where the Swiss Asset Manager is the sponsor of the UCITS or AIF and has, thus, selected the management company, art. 42 MiFID II does not seem to be applicable at all.

DON’T FORGET: SWISS LAW, UCITS-D AND AIFMD

In addition to the MiFID II rules, the Swiss rules applicable to Swiss Asset Managers managing a UCITS or an AIF and the rules in the UCITS-D and the AIFMD on Non-EU asset managers are applicable too and should not be forgotten by Swiss Asset Managers. The key rules are as follows:

  • Swiss law requires that a Swiss entity managing a foreign collective investment scheme is licensed by FINMA if either of the following requirements are satisfied: (i) either if the foreign collective investment scheme is open for non-qualified investors, or (ii) if the assets of the foreign collective investment scheme(s) reach the de minimis threshold of CHF 100 mio and CHF 500 mio (for unleveraged funds with a lock-up period of at least 5 years), respectively (art. 2 para 2 letter h CISA).
  • UCITS-D requires that any entity managing a UCITS is licensed by its home regulator (i.e. FINMA for Swiss Asset Managers).
  • AIFMD requires that any entity managing an EU-AIF is licensed by its home regulator (i.e. FINMA for Swiss Asset Managers). Swiss Asset Managers managing a Non-EU AIF need to be licensed by FINMA if their non-EU AIF shall be distributed in the European Union.
THERE IS MORE TO COME…

The next issue of the MiFID II series of FIDLEG SOLUTION – News 4/2018 shall discuss the new rules of MiFID II on the use of EU distributors by Swiss Asset Managers for the distribution of their funds in the European Union.

Your FIDLEG SOLUTION Team
www.fidlegsolution.ch


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