I. Notification Duty

As of December 31, 2022, FINMA had granted licenses to 670 portfolio managers and trustees. Now that those portfolio managers and trustees have obtained their license, they must ensure compliance with statutory licensing requirements at all times. This includes the duty to report any change in the facts on which their FINMA license is based.

Portfolio managers and trustees are subject to ongoing supervision by a supervisory organization (SO). They therefore have to notify the SO of changes in circumstances that affect their FINMA license. However, in the case of a significant change they must obtain prior approval from FINMA.

In practice, portfolio managers and trustees are therefore confronted with the question of whether a matter is reportable or not, and if so, whether the report should be made to the SO only or also to FINMA in order to obtain the necessary approval. Consequently, portfolio managers and trustees must distinguish between three categories of changes:

• Changes not requiring notification
• Changes requiring notification
• Changes requiring prior approval

Therefore, for any change, a portfolio manager or a trustee must run a two-stage test: first it has to assess whether the relevant change affects its FINMA license or not. If the change affects a fact on which the license is based, it must determine in a second step whether it is a significant change that requires prior approval by FINMA or whether it is a change that merely has to be reported to the SO.

II. Does the Change Affect the FINMA License?

Facts that do not form the basis of the license are not subject to reporting requirements. Portfolio managers and trustees must therefore always ask themselves whether the change concerns a fact that is relevant to the fulfillment of the licensing requirements. If it is a fact that must be fulfilled at the time of authorization the fact affects the FINMA license and must therefore be reported. In other words, not every fact that has been mentioned in the license application is relevant for the fulfillment of the applicable regulatory requirements.

For example, the opening of a new client relationship that is within the factual and geographical scope of the business area defined in the organizational regulations does not constitute a change in circumstances that must be reported. However, if the new client relationship is outside the current scope of the business area as defined in the organizational regulations, a license amendment request must be sent to the SO and to FINMA before the opening of the new client relationship. The same applies should an existing client change his domicile and should the new domicile be outside the current business area.

The SO AOOS lists further examples of non-reportable changes on its website. In case of doubt, portfolio managers and trustees should contact their relevant SO.

III. Is the Change Significant?

Changes in facts that affect the FINMA license must be reported. It is important that portfolio managers and trustees make the notification and, if necessary, obtain the approval by FINMA in advance and not after the change has occurred. If the change is not significant, a report to the relevant SO is sufficient. In the other case, the portfolio manager or trustee has to obtain the approval of FINMA. The question of whether a change is significant or not is not easy to answer because the legislator and regulator has refrained from defining clearly when a change is significant.

A. Examples of Significant Changes

The main point of reference is a list of examples in the Financial Institutions Ordinance. According to this list significant changes include:

• Changes in organizational and partnership documents;
• Changes in the members of the body responsible for management or of the body responsible for governance, supervision, and control;
• Changes in minimum capital and capital adequacy, in particular falling short of minimum requirements;
• Facts which are likely to call into question the good reputation or the guarantee of irreproachable business conduct on the part of the financial institution or of the persons entrusted with management tasks as well as of owners of a qualified participation, specifically the opening of criminal proceedings;
• Facts which call into question prudent and sound business activity on the part of the financial institution owing to the influence of owners of a qualified participation.

This makes it clear that changes to facts that must be included in the articles of association (such as changes to the company’s registered office or share capital) always require the prior approval of FINMA and may only be submitted to the general meeting for resolution after FINMA’s approval. Furthermore, amendments to the organizational regulations may also only be put into effect after FINMA has approved the amendment. For portfolio managers and trustees, the question of whether or not the adaption or a change of other internal directives is significant and must therefore be approved in advance is challenging. The decisive factor is whether the content of the internal directive affects essential elements of the organization or the business activity.

Based on the list provided for in the Financial Institutions Ordinance, it is also clear that a license amendment request must be submitted in each case when a member of the board of directors or the executive board joins or leaves the company. Conversely, this also means that changes in the person responsible for risk management or internal control or for compliance need only be reported to the SO and are not subject to approval by FINMA. Other changes in personnel generally do not have to be reported at all.

The published guidelines of the SO AOOS provide further guidance by adding the following circumstances to the list of significant changes:

• New holder of a qualified participation in the portfolio manager or trustee;
• Termination / change of professional liability insurance;
• Delegation of essential tasks (including change of the delegatee, change of the person responsible for the delegated task at the delegatee and change of the person responsible for the task at the delegating portfolio manager/trustee);
• Foreign business (including the establishment, acquisition and discontinuation of subsidiaries and qualified participations in companies abroad; the discontinuation of business activity abroad, changes to the business activity abroad, the change of the audit company and of the supervisory authority);
• Change of the SO;
• Merger, demerger, conversion and transfer of assets and liabilities pursuant to the Swiss merger act;
• New qualified participations and mandates of persons entrusted with the ultimate direction or management of the company (including FINMA forms B2 and B3).

In practice, the SO thus interprets the term “significant” rather broadly. Since FINMA charges fees between CHF 200–4’000 for the assessment of the license amendment request, this rather broad interpretation of the SO leads to additional costs for portfolio managers and trustees.

In addition to those explicitly listed in the Financial Institutions Ordinance and on AOOS’s website, there are various other changes in circumstances that qualify as significant and are therefore subject to approval. Most notably, if a licensed portfolio manager or trustee decides to give up his activity, it needs to obtain prior approval.

B. License Amendment Process in Case of a Significant Change

Portfolio managers and trustees must go through a license amendment process if a change is of significance: The license amendment request must be sent to the SO first and a response obtained. The change request must first be submitted to the SO, as FINMA seeks the opinion of the SO when making its approval decision. The request should in particular include a description of the nature of the change, a statement regarding the reasons for the change and the relevant documents. Once the SO has provided its feedback, portfolio managers and trustees must submit the license amendment request to FINMA. The license amendment process is conducted on an electronic basis via FINMA’s survey and application platform (EHP).

C. Conclusion

For portfolio managers and trustees, there are considerable delimitation difficulties between significant changes and non-significant changes. As a result, portfolio managers and trustees should, to be on the safe side, submit a license amendment request in ambiguous cases – especially in view of the broad interpretation of the term “significant” by the SO.

IV. Consequences in Case of Violation

A breach of the duty to report changes in facts is likely to be noticed in particular during periodic audits by the appointed audit firm. The audit firm will state the breach in its audit report towards the SO. The SO will take the appropriate measures and, if necessary, even impose sanctions. It also cannot be ruled out that FINMA will take action. In case of a breach, portfolio managers and trustees should particularly expect that the breach could have an impact on the audit frequency in the sense that it will be audited more frequently.

It is therefore important that portfolio managers and trustees organize themselves in a way that allows them to always comply with the reporting requirements in the event of changes in facts. In case of uncertainties, portfolio managers and trustees should seek advice from auditing firms or specialized law firms. Our experts will be happy to advise you on these and all other questions in connection with the reporting requirements.