FINMA Circular 2009/1 Guidelines on asset management
(Status 1 September 2009)
1. What is a “professional organisation” for the purpose of Art. 6 sect. 2 lett. b CISO (Swiss Collective Investment Schemes Ordinance)? (margin no. 1)
The guidelines apply to professional organisations whose members are active in asset management, which principally means associations of independent asset managers.
FINMA also includes under “professional organisations” self-regulating organisations for the purpose of the Swiss Anti-Money Laundering Act. If they intend to adopt and have their rules of conduct recognised by FINMA, they must where necessary adapt their statutes and regulations and have them approved by the authority. Where necessary, they may do so at the same time as asking FINMA to recognise their rules of conduct.
Professional organisations that submit their rules of conduct to FINMA must demonstrate the desire and ability to enforce them, in particular by adapting their rules of conduct to conform to the Circular. They must also have sufficient grounding and recognition in the asset management sphere. FINMA reserves the right to refuse to recognise rules of conduct where it does not deem the organisation in question to be sufficiently serious.
2. As an asset manager, does this Circular affect me? (margin no. 5)
The Circular is aimed at professional asset management organisations and is therefore not directly applicable to asset managers as such. However, it does have indirect consequences for asset managers.
a) What does that mean exactly?
Those engaged in individual asset management that are subject to prudential supervision must comply with one of the minimum standards for this area recognised by FINMA. These standards are listed in margin no. 7 (including footnote) of the Appendix to FINMA-Circular 2008/10 Self-regulation as a minimum standard. The audit company must be told which standard is applicable. In respect of the management of collective investment schemes, standards for fund management companies, SICAVs, asset managers of collective investment schemes and representatives of foreign funds have so far been recognised.
“Independent” asset managers (that are not subject to prudential supervision) may voluntarily undertake to comply with a professional organisation’s rules of conduct that are recognised by FINMA. Where they provide collective investment schemes in the course of their asset management activities or by any other means, in some instances they are in fact required to comply with such rules of conduct as of 30 September 2009 in line with FINMA-Circular 2008/8 Public advertising – collective investment schemes.
b) What are the requirements of FINMA-Circular 2008/8 Public advertising – collective investment schemes in this context?
Following on from Art. 3 and 10 CISA and Art. 3 and 6 CISO, the Circular stipulates that no public advertising is deemed to take place if a subscription order is issued for the account of a client on the basis of a written asset management agreement, where this agreement has been concluded with an independent asset manager pursuant to Art. 6 sect. 2 CISO or if the client is a high net worth individual (margin nos. 6, 10 ss. and 13 ss. of the Circular). For non-high net worth individuals – and independent asset managers – one requirement is that an asset management agreement compliant with one of the minimum standards recognised by FINMA must be in place (margin no. 12 of the Circular).
c) What does this mean for “independent” asset managers?
If an asset management client is not a high net worth individual (or other qualified investor), a written asset management agreement compliant with a recognised minimum standard must be in place. Otherwise, prohibited public advertising is deemed to take place. See question 15 for information on the transitional periods.
d) My professional organisation wants to compel me to comply with their minimum standard, even though all my clients are high net worth individuals. Why is this?
Professional organisations themselves decide whether to make compliance with their minimum standards compulsory for all members or only for asset managers that are required to comply in line with FINMA-Circular 2008/08 Public advertising – collective investment schemes.
e) I am not yet a member of a professional organisation. What do I need to do with regard to FINMA-Circular 2008/8 Public advertising – collective investment schemes?
Where necessary, asset managers must undertake to comply with a minimum standard recognised by FINMA and adapt their agreements to prevent any prohibited public advertising from taking place. To this end, such asset managers must contact a professional organisation whose rules of conduct are recognised by FINMA. They can choose from the following:
- “Code de déontologie relatif à l'exercice de la profession de gérant de fortune indépendant” issued by the Association Romande des Intermédiaires Financiers (ARIF);
- “Code suisse de conduite relatif à l'exercice de la profession de gérant de fortune indépendant” / “Codice deontologico svizzero per l'esercizio della gestione indipendente di patrimoni” / “Schweizerische Standesregeln für die Ausübung der unabhängigen Vermögensverwaltung” issued by the Swiss Association of Asset Managers (SAAM);
- “Norme di comportamento nell'ambito della gestione patrimoniale (NCGP)” issued by the Organismo di Autodisciplina dei Fiduciari del Cantone Ticino (OAD FCT);
- “Règlement relatif aux règles-cadres pour la gestion de fortune” issued by the OAR-G Organisme d'autorégulation fondé par le GSCGI et GPCGFG;
- “Règles d’Ethique Professionnelle” issued by the Swiss Association of Independent Financial Advisors (SAIFA);
- “Standesregeln” issued by the PolyReg Allg. Selbstregulierungs-Verein;
- “Verhaltensregeln in Sachen Ausübung der Vermögensverwaltung” issued by the VQF Verein zur Qualitätssicherung von Finanzdienstleistungen.
f) What is the situation with regard to structured products?
Offering and distributing structured products is still permitted under the (current) provisions of Art. 5 CISA and Art. 4 CISO (cf. “Structured products” FAQ).
3. Can a client also become “qualified” for the purpose of Art. 6 sect. 2 lett. b CISO on the basis of an advisory agreement? (margin no. 8)
As is clearly stated in Art. 6 sect. 2 CISO, this Circular does not cover advisory agreements. It is not permitted to conclude on this basis that a client can be considered “qualified” for the purpose of the said article.
a) What does this mean for investment advisors?
Pure investment advisors are not affected by the Circular. However, they must refrain from any public advertising of collective investment schemes when advising clients. Pursuant to margin no. 6 of FINMA-Circular 2008/8 Public advertising – collective investment schemes, advertising is not deemed to take place if a client issues a subscription order for units of collective investment schemes on his/her own initiative or independently requests information on a specific collective investment scheme.
b) What is the situation if an investment advisor also occasionally makes investments him/herself on the basis of a special power of attorney?
Such powers of attorney are based on an underlying contract. As such, these contracts constitute (in some cases partial) asset management agreements, and the provisions of collective investment scheme legislation set out above must therefore be adhered to when investing in collective investment schemes (see question 2).
4. Can an asset management agreement contain other elements beyond those mentioned in margin no. 9 of the Circular? (margin no. 9)
Yes, that is the minimum standard required by FINMA. Other elements can of course be included in an asset management agreement, such as matters arising under civil law, e.g. the parties to the contract or matters which a professional organisation wishes to regulate.
5. Notwithstanding the need to conclude the asset management agreement in writing, is it possible to issue verbal instructions? (margin no. 9)
Yes, while the agreement must be concluded in writing, there is nothing to stop professional organisations allowing the subsequent giving of verbal instructions by clients.
6. What is meant by the “guarantee of irreproachable activity on the part of the asset manager”? (margin no. 10)
Such a guarantee is required by Art. 14 of the Swiss Anti-Money Laundering Act and is also laid down in other supervisory laws. The obligation under margin no. 10 in principle goes no further than that. See question 15b for information on the implications of breaching the minimum standards recognised by FINMA.
7. Which kinds of products can asset managers work with? (margin no. 15)
Asset managers must work with financial products whose risks they understand and must adapt their way of working as required to be able to verify that these conform to the strategy agreed with the client.
8. What happens if the investments made no longer meet the objectives or investment restrictions due to strong market movements? (margin no. 16) / What happens if the investment objectives or restrictions no longer match the client’s risk profile? (margin no. 17)
Asset managers must make provision for the effective monitoring of the investment strategy. Shortterm deviations between the investment strategy and the investment objectives defined with the client due to market movements are permitted. If such a discrepancy persists, it must be discussed with the client to the extent possible. In any event, asset managers must act in the best interests of their clients. Asset managers must alert clients and report in writing should specific instructions issued by a client not conform to his/hernvestment objective or the investment restrictions. The same applies if the investment objectives or restrictions no longer match the client’s risk profile.
9. In what way must clients be informed of the existence of the rules of conduct? (margin no. 22)
Asset managers must provide their clients with a copy of the rules of conduct or make them aware in some other way of the existence of these rules. They can also provide a web link where clients can consult the rules of conduct by which the former are bound.
10. What standards are used within the industry for the presentation of accounts? (margin no. 26)
FINMA recognises standards such as GIPS (Global Investment Performance Standards).
11. How should asset managers account without prompting for inducements received from third parties? (margin no. 28-30)
Asset management agreements must define the ultimate destination of all inducements that asset managers may receive in the course of their management activities, whether intrinsically linked to the mandate or arising from services from which these third parties benefit directly or indirectly. While the restitution of the latter may not necessarily be required, it can at times be difficult in practice to distinguish them from those intrinsically linked to the mandate.
Asset managers must without prompting provide their clients with information enabling the latter to distinguish between the size of inducements received by product or inducement type. In particular, a distinction can be drawn between different categories of collective investments and structured products. The principle of keeping clients informed also applies to inducements not directly attributable to a specific product type, such as those linked only to the value of custody holdings. Clients can be provided with information in standardised formats, for example by means of fact sheets. It is for the professional organisations to decide for themselves how the product types are to be broken down.
12. What must asset managers do where clients require greater information? (margin no. 31)
Where clients request more information on their portfolios, asset managers must, as far as possible, disclose the total amount of inducements actually received from third parties in the course of managing their assets. In the long term, asset managers are expected to put in place a structure enabling them to calculate for each of their clients the inducements received from banks, arising in particular from custody fees relating to their clients’ assets, as well as those received from securities brokers arising from the brokerage fees generated in executing client orders. Professional organisations, or where necessary the asset managers themselves, shall organise the details of account presentation, particularly in respect of duration and the starting point for reporting.
Whereas Article 26 of the MiFID Implementing Directive provides that the information must be disclosed without prompting before the investment service is provided, the chosen solution is more nuanced. Clients receive without prompting only size ranges or calculation parameters. Following the receipt by an asset manager of third-party inducements, clients may request additional information on their actual scale. Asset managers must put in place a reasonable structure to enable them to respond to additional enquiries from their clients to the extent that the inducements received from third parties can be attributed to individuals.
13. Can the controlling of and discipline in relation to rules of conduct be outsourced? (margin no. 32)
Professional organisations must put in place a system for the controlling of and discipline in relation to establishments not supervised by FINMA. They may also delegate the controlling and discipline to third parties, such as self-regulatory bodies for the purpose of the Swiss Anti-Money Laundering Act. Such delegation is to be desired where an organisation lacks an adequate structure to carry out the controlling and discipline itself.
14. What form of monitoring will FINMA regard as adequate? (margin no. 32)
FINMA will generally regard as adequate a system of monitoring that checks the conformity of agreements – including those with high net worth individuals – and of the information provided to clients with the rules of conduct and that involves mandatory intervention in the event of negative reports.
Self-regulatory organisations for the purpose of the Swiss Anti-Money Laundering Act (AMLA) can implement audits in accordance with AMLA in line with their provisions. If a system of monitoring is to cover more than that set out above, FINMA may, for example, request that audit experts pursuant to Art. 4 ASA (Audit Supervision Act) with appropriate experience be brought in.
a) Is it not adequate to only check agreements with non-high net worth individuals?
Subordination to monitoring and monitoring itself cannot be separated. Although it would be conceiv-able to restrict subordination (and monitoring) to contractual relationships with non-high net worth individuals, asset managers themselves would then not be considered qualified investors. Under Art. 6 CISO, asset managers must comply with a minimum standard recognised by FINMA in respect of all their contractual relationships in order to themselves be considered qualified investors (see also margin no. 12 of FINMA-Circular 2008/8 Public advertising – collective investment schemes.
b) How will FINMA monitor the control systems and controls of professional organisations?
FINMA will communicate this in autumn 2009.
15. How quickly must asset managers adapt to the rules of conduct by which they are bound? (margin no. 33)
The rules of conduct of professional organisations may include transitional provisions enabling their members to adapt to the rules of conduct within a reasonable timeframe. 31 December 2010 is considered to be a reasonable deadline for the adaptation of existing asset management agreements. However, the deadline of 30 September 2009 in margin no. 35 of FINMA-Circular 2008/8 Public advertising - collective investment schemes should be noted.
a) What does that mean exactly?
Where necessary (cf. question 2), by 30 September 2009 “independent” asset managers must comply with a minimum standard recognised by FINMA in order to satisfy the requirements of Art. 6 sect. 2 CISO, as set out in margin nos. 6, 12 and 35 of FINMA-Circular 2008/8 Public advertising – collective investment schemes. Relevant minimum standards may stipulate a deadline of 31 December 2010 for the adaptation of existing agreements. New asset management agreements must be structured in line with the provisions of the chosen minimum standard from the outset.
b) What are the implications of breaching the minimum standards recognised by FINMA?
Depending on the breach, for those subject to prudential supervision it can affect the guarantee of irreproachable business activity. In line with Art. 14 AMLA this also applies to “independent” asset managers (cf. question 6). In the latter case it may also give rise to prohibited public advertising of collective investment schemes (cf. question 2c), which is punishable by law pursuant to Art. 148 sect. 1 lett. d CISA.
16. Whom can I contact if I have additional questions?
policy@finma.ch or phone +41 31 327 94 40