Inhalt

Regulatory challenges in the use of Actively Managed Certificates (AMCs)

AMCs are becoming increasingly popular among Swiss portfolio managers. For many portfolio managers, AMCs are flexible and cost-effective investment instruments that can be used to implement specific strategies for a large number of investors. From a regulatory perspective, however, the use of AMCs can pose numerous challenges, especially if they are based on a complex setup with issuers and SPVs (special purpose vehicles) domiciled abroad. What are the potential regulatory risks associated with the management of AMCs and what possible solutions are there?

 

Dr. Fabian Schmid
Partner – Regulatory & Compliance Financial Services,      
Grant Thornton AG
Philippe Weyermann
Manager – Regulatory & Compliance Financial Services,    
Grant Thornton AG

 

Differentiation from collective investment schemes

In economic terms, AMCs and investment funds can be very similar, but in legal terms there are clear differences. By definition, AMCs are structured products that have an underlying asset that is managed on a discretionary basis during the term based on a specific investment strategy. With AMCs, investors invest in financial instruments similar to bonds. There are no specially protected fund assets as a separate liability substrate. This means that investors are exposed to issuer risk.

In practice, however, the question of whether an AMC or a collective investment scheme exists is not always easy to answer, especially in more complex situations with foreign issuers and/or special purpose vehicles (SPV). However, if an AMC qualifies as a collective investment scheme, additional product-specific provisions of the Collective Investment Schemes Act (CISA) and the Financial Services Act (FinSA) would apply. In addition, depending on the structure of the product or the amount of assets under management, the responsible Swiss portfolio manager would be required to obtain authorisation as a manager of collective assets (Art. 24 FinIA), which would entail increased regulatory requirements. Every portfolio manager must therefore be aware of the regulatory categorisation of the AMCs they manage.

 

Special purpose vehicles as issuers

In addition to banks and investment firms, AMCs are also issued by special purpose vehicles (SPVs). These are usually set up specifically for the issue and are often domiciled abroad. As the only liabilities of the SPV, the bonds are covered 1:1 by the assets (actively managed by the portfolio manager), which eliminates the actual issuer risk. Sometimes an SPV can be wholly owned by a trust. In this case, the (end) investors of the AMC neither directly participate in the capital of the SPV nor can they exercise control over the SPV in any other way. They are also not necessarily beneficiaries of any trust. Such constellations lead to an increased need for clarification on the part of the portfolio manager regarding money laundering law (AMLA).

 

AML aspects - knowledge about investors?

A portfolio manager who manages an AMC has an AMLA-relevant business relationship with the issuer. Like its traditional clients, these AMC business relationships therefore also belong on the portfolio manager's "client list". However, the due diligence obligations under AMLA differ depending on the issuer's regulatory category.

If the AMC is issued by a bank or a securities firm, the portfolio manager can often even dispense with the identification of the contracting party if he documents in the dossier that the contracting party qualifies as a generally known legal entity. If, however, the issuer is an SPV, the portfolio manager has to identify this by means of a suitable identification document, take note of the SPV's power of attorney arrangements and check the identity of the persons establishing the business relationship.

The identification of the beneficial owner(s) of the assets may be waived if the issuer is a regulated financial intermediary domiciled in Switzerland or abroad and as long as the foreign supervision and regulation is deemed equivalent. The question of equivalence may sometimes be difficult to answer in individual cases. If, on the other hand, a financial service provider or an SPV that is not equivalently regulated acts as an issuer, the beneficial owner(s) of the assets must generally be identified. In particular, the question arises as to whether the beneficial owners must be identified in the same way as for collective investment schemes (Art. 66 AMLO-FINMA) if there are fewer than 20 investors. Depending on the specific structure and complexity of the setup, the implementation of this obligation can pose a challenge. It is of key importance that portfolio managers and their compliance officers have a precise understanding of the specific setup to ensure that the AML due diligence obligations can be fully and correctly fulfilled.

Even if formal identification and determination of the (end) investors could be dispensed with in a specific case, portfolio managers managing an AMC should always be aware of who the most important investors of the AMC are. Such an obligation arises on the one hand from the requirement to have an appropriate client profile/KYC. On the other hand, the requirements for effective management of legal and reputational risks also demand a basic knowledge of the AMC's investors. If, for example, the portfolio manager becomes aware that a sanctioned person is among the investors, he can hardly evade further obligations by claiming that he does not need to know these persons.

 

AMCs in the context of FinSA and FinIA

In the context of the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA), special regulatory challenges may also arise when managing AMCs. If a regulated financial intermediary acts as the issuer, the AMC can generally be segmented as an institutional client, which means that the other rules of conduct under FinSA do not apply. However, if the issuer is an SPV, the AMC is generally not categorised as an institutional client. Depending on the specific characteristics of the SPV and the existence of opting-out declarations, the FinSA rules of conduct are at least partially applicable in this case. When using AMCs, there are also high expectations in terms of cost transparency and suitable organisational precautions must be taken to avoid or at least reduce conflicts of interest. Double dipping must either be completely ruled out or the client must be provided with comprehensive information and a corresponding waiver.

Against the background of the organisational duties and the duty of guarantee of irreproachable business conduct under FinIA, FINMA and the supervisory organisations expect portfolio managers who use AMC to take specific measures in the area of risk management and compliance. The regulatory risks described above must be assessed in the institution's risk inventory and appropriate controls to mitigate these risks must be implemented in the internal control system.

 

 

Biographies

Fabian Schmid is the head of the Regulatory & Compliance Financial Services division at Grant Thornton Switzerland / Liechtenstein. He has over 15 years of professional experience in financial markets law. Together with his team, he supports the auditing of all regulatory matters and acts as consulting expert in the Regulatory & Compliance Financial Services division, particularly on topics of the Financial Institutions Act (FinIA), Financial Services Act (FinSA), CISA, AMLA and corporate governance. Compliance services for smaller and medium-sized banks and asset managers are a particular focus. In addition to setting up dedicated outsourcing services in the areas of ICS, compliance and risk management for asset managers, he has led various FINMA investigative mandates and special audit mandates in the banking sector in the past.

Philippe Weyermann is a Manager in the Regulatory & Compliance Financial Services division at Grant Thornton Switzerland/Liechtenstein in Zurich. He has several years of professional experience in Swiss financial market law. Prior to joining Grant Thornton Switzerland/Liechtenstein, he worked as a legal advisor at an auditing and consulting firm. Before that, he worked at a Swiss legal practice and a Swiss bank. His areas of responsibility essentially include advising financial intermediaries, especially in the areas of AMLA, the Financial Institutions Act (FinIA) and the Financial Services Act (FinSA), assuming the compliance function of asset managers and asset managers of collective assets, carrying out regulatory audits at various financial intermediaries, and supporting the implementation of internal audits at banks, FINMA investigation and auditor mandates at banks as well as licensing audits.