Reporting changes – Latest developments and risks

Managing directors or board members of asset managers will remember forms B1, B2 and B3. They filled out these documents and enclosed them with their application during the FINMA licensing procedure. However, signing them once is often not enough. For example, the declaration of secondary mandates must be reviewed annually to ensure that it is up to date and, if changes have been made in the meantime, resubmitted no later than 60 days after the end of the financial year. Incorrectly completing these forms carries regulatory and criminal risks.

Anael Rosalen Senior Manager – Regulatory & Compliance Financial Services, Grant Thornton

Valentine Resta Manager – Regulatory & Compliance Financial Services,           Grant Thornton

Purpose and content of forms B1, B2 and B3

As part of the authorisation process and ongoing supervision, FINMA and the supervisory organisations (SOs) require a wide range of information about the persons responsible of an asset manager. This information is crucial for supervision: it forms the basis for assessing whether a person personally and professionally guarantees the proper business conduct of an institution (“fit and proper persons”).

• Form B1 must include, among other things, all civil, criminal and administrative penalty, sanction, supervisory, disciplinary, debt enforcement and bankruptcy proceedings pending in Switzerland or abroad or concluded within the last 10 years against the fit and proper person personally. The same now also applies to legal entities in which the person held a relevant position. For some time now, fit and proper persons have also been required to declare any termination of previous employment relationships at the instigation of the employer due to misconduct under labour law. Further details can be found in the footnotes.
• Form B2 is used to identify potential conflicts of interest on the part of fit and proper persons due to qualified holdings in other companies operating in the financial sector. As a rule, holdings of 10% or more are subject to declaration. It is irrelevant whether the holding relates to capital or voting rights. The form does not specify when a company is considered to be "active in the financial sector" and when it is not.
• Form B3 serves the purpose of disclosing all mandates and activities outside the applying institution. Specifically, it asks about "other mandates and secondary occupations" and about natural or legal persons with whom the fit and proper person has an employment relationship. However, the form does not contain a precise definition of what exactly is meant by a "mandate" or "secondary occupation". Some time ago, an addendum was added to the form stating that changes in mandates must be reported to FINMA within 60 days of the end of the financial year using a new form. However, changes relating to mandates in the financial sector must be reported immediately. The 60-day period was introduced to enable the once-a-year reporting of mandates and activities, thereby simplifying the process, which is generally to be welcomed.

Legal basis and developments in practice

The obligation to submit these declarations arises for asset managers primarily from Art. 7 FINIA (licensing requirements), Art. 11 FINIA (specific guarantee requirements) and the general supervisory cooperation obligations under Art. 29 FINMASA. Violations of the latter cooperation obligations are punishable under Art. 45 FINMASA. Accordingly, anyone who intentionally provides false information to FINMA, an audit firm, a supervisory organisation, a self-regulatory organisation or an agent may be punished with imprisonment of up to three years or a fine. Anyone who acts negligently may be punished with a fine of up to CHF 250,000. 

Forms B1 to B3 have been amended and expanded several times in recent years. Some of the changes concern detailed wording, while others involve additions to the content, such as regarding the obligation to disclose mandates or the definition of relevant proceedings in Form B1. According to current practice, any change to the declarations initially made in Forms B1 – B3 is generally considered a reportable change of fact.

Uncertainties in Form B3 – What counts as a mandate?

Form B3 lists, among other things, all "other mandates and secondary occupations". In practice, however, there is sometimes uncertainty as to what this means in the strict sense. Does it only include formal positions or functions in operational legal entities that are entered in the commercial register (e.g. board of directors, executive body, authorised signatory)? Or must voluntary activities also be declared? But if activities such as the latter are also included, the question arises as to where the line should ultimately be drawn between insignificant (possibly also informal) private secondary activities and activities relevant to the guarantee of irreproachable business conduct. This lack of clarity creates a certain degree of legal uncertainty and corresponding risks for fit and proper persons and institutions. In case of doubt, it is advisable to provide all the information in question.

Risks associated with incomplete or incorrect information

In view of the supervisory authority's specific expectations regarding the reporting of changes in circumstances, there is a risk that charges will be brought if fit and proper persons list private secondary activities (e.g. board membership in a leisure club) on renewed forms that they did not declare in their initial application for authorisation. This could result in a penalty notice from the public prosecutor's office for violation of Art. 45 para. 2 FINMASA (negligent provision of false information), combined with a fine.

The situation can be particularly challenging for board members from professional groups such as trustees or lawyers, who regularly hold numerous additional mandates, especially for professional reasons. In this case, it is necessary to clarify the extent to which detailed disclosure does not lead to violations of other professional confidentiality obligations or data protection requirements. 

It would be helpful to further clarify the legal requirements for the disclosure of mandates and secondary occupations and to create a clear distinction between activities that are subject to reporting requirements and those that are not. This would reduce the risk of unnecessary proceedings and the associated damage to reputation.

Recent developments show that the disclosure and reporting requirements in connection with forms B1–B3 for banks and other financial institutions have become increasingly specific. The questions that remain unanswered, particularly with regard to form B3, lead to an increased legal risk for fit and proper persons and institutions. Since even negligent errors can have criminal consequences, it is advisable in practice to regularly check that declarations are up to date and to take a broad approach to disclosure in terms of content. At the same time, further clarification of the requirements by legislators and supervisory authorities would be helpful in order to improve legal certainty.

Biographies

Anael Rosalen works as a Senior Manager in Regulatory & Compliance Financial Services for Grant Thornton Switzerland in Zurich. Anael Rosalen has extensive of professional experience as a legal advisor in the field of financial markets law. Prior to joining Grant Thornton AG, he worked for a larger accounting firm. His responsibilities include advising and assisting asset managers in the context of FINIG licensing, assuming the compliance function of asset managers, supporting the compliance function of various banks, advising various financial intermediaries on all financial market law issues, assisting in the conduct of internal audits, FINMA investigation mandates and licensing audits, as well as project management and conducting regulatory audits of asset managers and trustees. Anael Rosalen has a Bachelor’s degree in Law with Economics, as well as a Master’s degree in Law from the University of St. Gallen (HSG).

Valentine Resta is a Manager in the Regulatory & Compliance Financial Services department at Grant Thornton Switzerland/Liechtenstein in Zurich. Valentine Resta has several years of professional experience in Swiss financial market law. Before and during her studies, she worked at a Swiss law firm as well as at a Swiss major bank and a private bank. Her main responsibilities include advising financial intermediaries, in particular on AMLA, FinIA and FinSA matters; assuming the compliance function for portfolio managers and managers of collective assets; conducting regulatory audits at various financial intermediaries; supporting internal audit activities; and assisting in FINMA enforcement and audit mandates. Valentine Resta also specializes in the field of «Sustainable Finance / ESG». Valentine Resta holds a Master of Law (MLaw) from the University of Lucerne.