## _cr07202

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---

### Introduction
- Presents a factual update of regulatory developments in securities regulation and supervision since the completion of the 2001 FSAP.
- Material based heavily on background documents prepared by the Swiss authorities.
- Switzerland became a signatory of the IOSCO Multilateral Memorandum of Understanding (MOU) in 2004 after a thorough review process.
- The Swiss Federal Banking Commission (SFBC) has expressed commitment to seek authority to become a full signatory of the IOSCO Multilateral MOU.

### Institutional setting and market participants
- Total assets of investment funds reached US$674 billion (172 percent of GDP) in the third quarter of 2006.
- About one-half of the assets are invested in foreign funds, often established in Luxembourg by Swiss financial institutions.
- Securities and fund businesses are dominated by the large banks (UBS and Credit Suisse).
- Regulatory gaps and non-licensed segments:
  - Independent asset managers and investment advisors who do not manage funds in their name are not required to be licensed.
  - Securities intermediaries trading on their own account with gross turnover below ChF5 billion per year are not required to be licensed.
  - Intermediaries providing services to qualified investors only are not required to be licensed.
- Industry figures for 2005 on non-regulated sectors:
  - Approximately 2,600 independent asset managers.
  - 120 companies dedicated to private equity.
  - More than 150 hedge funds and funds of hedge funds (FoHF).
- Hedge fund industry structure and size:
  - Number of registered hedge funds increased from 39 in 2001 to 256 in 2006 (including 123 Swiss funds and 133 foreign funds).
  - Assets invested in the registered hedge funds reached US$9.4 billion in 2006.
  - Assets in all regulated Swiss funds were US$330 billion.
  - Industry estimates indicate more than 150 unregulated hedge funds and FoHF offered by Swiss financial companies, with an invested asset volume of about US$200 billion, against an estimated US$1,105 billion worldwide.
- Distribution rules:
  - Unregulated hedge funds cannot be offered directly to the broad public in Switzerland; distribution is restricted to qualified investors only.
  - Regulated hedge funds and FoHF may be sold directly to the public.
- Market infrastructure and activity:
  - In 2006, the SWX Swiss Exchange ranked tenth worldwide by market capitalization; Eurex ranked third worldwide in derivative transactions.
  - Swiss Market Index (SMI) performance: increased by 31 percent in 2005 and an additional 20 percent in 2006, despite a sharp drop of 13 percent around May-June 2006.
  - Market capitalization of the SWX Swiss Exchange was US$1.0 trillion at end-2006 (equivalent to 2.5 times GDP).
  - Trading volumes increased by 48 percent in 2006 to US$1.6 trillion (the third largest increase worldwide).
- Supervision and oversight:
  - Supervision and regulation of the securities market are entrusted to the SFBC.
  - Front-line supervision of securities dealers relies extensively on authorized private external auditors; the SFBC does not regularly perform on-site inspections of securities dealers.
  - The SWX Swiss Exchange operates as a self-regulatory organization (SRO) responsible for admitting participants, enforcing listing rules, supervising price formation, executing and settling transactions, and ensuring market transparency.

### Regulation of hedge funds (Box 1)
- FoHF availability and legal forms:
  - Since the mid-1990s, mutual funds have been allowed to register FoHF in Switzerland as a special investment category, making them available to private individuals with no investor qualifications.
  - FoHF also operate under the legal form of investment companies under the regulation of the SWX Swiss Exchange and are traded as equities.
- Supervisory focus and licensing:
  - Regulatory and supervisory framework focuses on investor protection and professional quality of fund management companies.
  - Licensing procedures for hedge funds and FoHF are generally stricter than those for traditional funds and include interviews with fund representatives and qualitative assessments of fund managers, risk management systems, reporting lines, internal risk controls, and other parties involved (custodian bank, external managers and advisers, prime brokers, administrators).
- External audit and reporting requirements:
  - External auditors are required to have professional expertise in alternative investments.
  - Special audits must be conducted by external auditors on a quarterly basis in the first two years after inception, focusing on the particular structure and risk-return characteristics of individual funds.
  - Hedge fund prospectuses must include a special warning clause approved by the SFBC and detailed information on investment policy, characteristics, and special risks.
  - Target funds are shown in annual and semi-annual reports of FoHFs, and investors must be given the possibility of exercising their right of redemption at least four times per year.
- Statutory restrictions:
  - FoHF are not allowed to carry out short sales.
  - FoHF may not invest in another FoHF.
  - FoHF cannot invest more than 30 percent of their assets in target funds managed by the same manager or management company.
  - Funds are not allowed to have a leverage of more than six at any time (practice now formally incorporated in the regulations).

### Recommendations of the 2001 FSAP and factual update (Principles 1–7 highlights)
- Recommended jurisdictional and structural changes:
  - Broaden SFBC jurisdiction to include all types of securities transactions and intermediaries, including primary markets and all asset managers.
  - Strengthen operational and budgetary independence of the supervisor, and increase regulatory powers.
  - Specify grounds for removal of SFBC/FINMA board members and grant full budgetary independence.
  - Increase SFBC involvement in on-site supervision and oversight of external auditors; increase staffing and resources proportionate to the size and importance of supervised entities.
- Developments and progress:
  - SFBC already authorizes and supervises issuing houses; issuing houses are subject to authorization and supervision by the SFBC with powers to restore proper conditions and remove irregularities.
  - Primary market in cases of public offerings for subsequent admission to listing is governed by self-regulation; prospectuses must follow listing rules enacted by the SWX Swiss Exchange and approved by the SFBC. Sanctions available include reprimands, financial fines, suspension from trading, and delisting.
  - The CISA, which entered into force in January 2007, imposed a licensing requirement on managers of Swiss collective capital investments, broadening SFBC jurisdiction over securities intermediaries (though some segments remain outside the scope of regulation).
  - In 2005 the SFBC offered independent Swiss asset managers of foreign eurocompatible investment funds the opportunity to obtain a license as securities dealers and place themselves under SFBC supervision.
- FINMA project and independence:
  - Draft FINMA Act envisages an umbrella statute to encompass supervision of banking, insurance, and securities markets.
  - Budgetary independence of the supervisor expected to be strengthened under FINMA: budget to be covered by fees charged to supervised institutions and independent from the Federal Budget (albeit still subject to approval of the Federal Council).
  - Staff of FINMA to be employed according to private law statutes; managerial structure to include a board of directors, a management board and an auditing unit.
  - Members of the FINMA board may be removed from office by the Federal Council; grounds for removal are not clearly specified in the regulations, raising caveats on operational independence.
  - Mission encouraged a review of the objectives of FINMA to eliminate potentially conflicting goals; concerns raised that draft provisions balancing public benefits and costs could give excessive weight to costs and limit FINMA’s capacity to conduct effective supervision.
- Additional supervisory developments:
  - SFBC enacted a new code of conduct for its members and staff covering incompatibilities, conflict-of-interest behavior, and confidentiality.
  - SFBC staffing increased to 167 persons (from 115 in 2001), with further hires expected before and after the launching of FINMA.

### Self-regulation and the role of SROs (IOSCO Principles 6 and 7)
- Findings:
  - Switzerland was found to be fully compliant with IOSCO Principles 6 and 7.
  - 2001 FSAP recommended more proactive and direct involvement of the SFBC in supervising the SWX Swiss Exchange in market surveillance and listing.
  - 2001 FSAP advocated explicit oversight of regulatory functions performed by professional associations such as the Swiss Bankers Association and the Swiss Funds Association.
  - Self-regulation has a long-standing tradition in Swiss financial markets and is well developed by international standards; Swiss authorities rely heavily on SROs to support market oversight and reduce SFBC workload.
- Reforms and developments:
  - Since 2002, SFBC adopted a more proactive approach toward SROs, formalizing and institutionalizing contacts and interaction.
  - A set of rules and codes of conduct for self-regulation were enacted by the SFBC in 2004 and adopted as a binding minimal standard for supervised institutions.
  - The draft FINMA Act contains a specific provision on self-regulation.
  - An issue paper was prepared and distributed to SROs in 2005 to stimulate joint discussion on integrating self-regulation and state regulation.
  - Current securities regulations require stock exchanges to have an organizational structure appropriate to their activities, and to submit their regulations and subsequent amendments to the SFBC for approval.

### Enforcement of securities regulations and audit oversight (Principles 8–10)
- Findings:
  - 2001 FSAP recommended increasing SFBC involvement in direct supervision, strengthening enforcement powers, and developing a quality assurance program for external auditors.
  - SFBC heavily relied on external auditors for frontline supervision; mission recommended more direct SFBC involvement in examinations and closer follow-up of external audit reports.
  - SFBC joins external audits in banks and securities dealers on a regular basis; direct on-site supervision remains mainly limited to the two large banks.
- Reforms and measures:
  - Since 2004, SFBC can appoint an investigator with ample powers to conduct on-site examinations and check the extent of financial difficulties in banks and securities dealers and compliance with regulations.
  - In 2002, a new SFBC unit was established to monitor audit companies, verify accreditation requirements, and manage quality reviews including inspections and random on-site checks.
  - An extensive reform of audit regulations produced three circulars entering into force in 2006 aimed at formalizing a risk-oriented auditing approach, improving transparency of external auditors' remit, facilitating timely reporting, and increasing auditor independence and monitoring:
    - First circular: procedures for annual audits of banks and securities dealers (solo and consolidated); divides audits into (i) accounting audit and (ii) supervisory audit; requires auditors to disclose risk assessment and proposed auditing strategy to the SFBC.
    - Second circular: form and content of audit reports; separation between accounting audit and supervisory audit; increased flexibility in reporting periods.
    - Third circular: provisions for recognizing, appointing, and changing audit companies and lead auditors; enhances independence and monitoring.
  - Results of quality reviews indicated need for further regulatory revisions; authorities plan to address these in the context of establishing a general Federal Audit Supervisory Authority planned for 2007.
- Remaining weaknesses and recommendations:
  - Less progress attained in SFBC sanctioning powers, particularly over unregulated institutions; SFBC has no sanctioning powers over unregulated institutions.
  - Criminal code provisions are too narrowly defined and difficult to apply, reducing enforcement effectiveness.
  - Recommendation: grant SFBC power to impose administrative sanctions on all financial intermediaries, regardless of registration status; expand criminal code definitions to accommodate insider trading and market abuse; handle regular cases via SFBC administrative sanctions and reserve criminal authorities for serious cases.
  - A draft circular on market abuse prepared by the SFBC in 2004 was opposed and is under revision; a joint working group led by the SFBC is preparing a revised circular and mandating an expert group for comprehensive criminal code reform to regulate insider trading and price manipulation.

### Cooperation with foreign supervisors (Principles 11–13)
- Findings:
  - 2001 FSAP noted legal restrictions on exchange of confidential information domestically and internationally; domestic legislation did not provide full freedom to exchange confidential client information between all supervisors.
- Developments:
  - SFBC signed a significant number of Memoranda of Understanding (MoU) and exchange letters with foreign regulators beginning in 1997, continuing after 2001 including China Securities Regulatory Commission (2003) and UK FSA (2004).
  - A law amendment easing restrictions on sharing confidential information with foreign supervisors for regulatory purposes was passed in 2005 and entered into force in 2006:
    - Authorized the SFBC to transmit non-public information on supervised institutions or their clients to foreign supervisors for enforcement of regulations on stock exchanges, securities trading or securities traders.
    - Authorized retransmission of such information to other authorities, courts or bodies for the same purpose without specific SFBC approval and authorized release in public proceedings publications if required by foreign country regulations.
    - Client information sharing continues to be subject to prior client notification and consent and can be challenged by the customer via administrative court appeal within a ten-day period.
    - In all appealed cases to date (eight decisions involving request of assistance from six foreign authorities), the Federal Supreme Court has confirmed the SFBC decision.
  - Switzerland admitted into Annex B of the IOSCO Multilateral Agreement in 2004; SFBC completed application and screening and has expressed commitment to seek authority to become a full signatory of the IOSCO MoU. The SWX Swiss Exchange is an associate member of IOSCO.

### Issuer disclosure and listed companies transparency (Principles 14–16)
- Findings and 2001 recommendations:
  - Room to improve protection of minority shareholders and comparability of financial information disclosed by issuers.
  - Primary market was not under SFBC jurisdiction; SWX powers over primary market limited to public offers for subsequent listing.
  - Recommendation: expand SFBC jurisdiction to cover public offers in the primary market; grant SFBC power to verify accuracy and completeness of investor disclosures, and power to delay or stop offers if investor protection jeopardized; strengthen accounting and auditing regulations and supervision/sanctioning of auditors and listed companies.
- Reforms:
  - New regulations improving transparency of listed companies entered into force in 2007:
    - Require disclosure in financial statements of allowances of current and former members of the board and directors and management and of their relatives and other close persons.
    - Require disclosure of remunerations of board members individually and the highest remuneration paid to a member of management.
    - Require disclosure of possible loans accorded to managers.
    - Require disclosure of shareholdings of board members, management, and their relatives and close persons.
  - New regulations on admission and supervision of auditors for all types of companies enacted in 2005; the Federal Accounting and Auditing Act, expected to enter into force in 2007, introduces admission and supervision rules for auditors applying to all company types and harmonizes Swiss accounting and auditing rules with EU directives.
  - Regulations require constitution of a new independent authority for supervision of auditors and auditing companies, entrusted with regulation, supervision, sanctioning powers, measures to restore proper conditions, and administrative and criminal assistance in international affairs.

### Collective investment schemes (Principles 17–20)
- Findings:
  - 2001 FSAP found regulatory framework for collective investment schemes compliant with IOSCO Principles but recommended more direct SFBC front-line supervision.
  - Regulations were in line with the EU UCITS Directive; fund management companies were generally separated from custodian banks, but often belonged to the same financial group.
  - Front-line supervision of fund management companies relied mainly on external auditors; mission advocated more direct SFBC supervision.
  - Licensing requirements for fund management companies were largely appropriate, including provisions on investment policy, price calculation, distribution of profits, managers’ compensation, fees and expenses; fit and proper criteria were praised.
- Reforms:
  - A new law governing collective investment schemes entered into force in 2007 (CISA broadened SFBC regulation scope for some independent asset managers and added a private equity category open only to qualified investors).
  - Licensed collective investment schemes remain under SFBC supervision except listed investment companies (supervised by SWX).
  - Unlicensed collective investment schemes are not subject to supervision and cannot be sold directly to the public.
  - The Ordinance on Collective Investment Schemes (CISO) entered into force in February 2007 replacing the Investment Fund Ordinance (IFO):
    - Accommodates wider use of derivatives for securities funds with overall exposure of 200 percent of net fund assets, fully in line with EU UCITS III Directive.
    - Extends and adapts rules on financial statements, accounting provisions, and sets main features of audits and audit reports; details to be governed by two circulars following the risk-oriented approach and subdivision between financial and regulatory audit.

### Market intermediaries (Principles 21–24)
- Findings and 2001 recommendations:
  - Recommended extending prudential regulation to all market intermediaries and improving customer protection.
  - Some securities dealers were outside prudential regulation scope (those providing services to qualified investors only, or those trading on their own account with a gross turnover below SWF5 billion per year); mission advocated prudential oversight over all market intermediaries.
  - Recommended supplementing Swiss conduct of business rules with SFBC instructions to strengthen customer suitability tests and conflict-of-interest disclosure.
- Authorities’ position and outcome:
  - Authorities opposed wide-ranging regulation, arguing prudential supervision warranted only where dealers could affect financial stability or serve clients needing protection.
  - Dealers trading on their own account or serving qualified investors seen not to require consumer protection or supervision.
  - Recommendation to widen prudential supervision was not implemented.
  - Authorities noted SESTA provides grounds to prevent conflicts of interest and transparency, reinforced by the Code of Conduct for Securities Dealers of the SBA, binding via SFBC-Circular 04/2 Self-Regulation as Minimal Standard.

### Secondary market and market manipulation (Principles 25–30)
- Findings:
  - 2001 FSAP found Switzerland fully compliant with IOSCO Principles 25–30 but saw room to improve SFBC supervisory role over the secondary market.
  - Reiterated concerns about reliance on external auditors for supervision and noted limitations on SFBC’s ability to exchange confidential client information with foreign regulators could affect supervision in other markets.
- Developments:
  - A working group headed by the SFBC began revising regulations on market manipulation and other unfair trading practices in early 2006:
    - Tasked with comparing Swiss market-abuse regulations with those of other financial centers and assessing possible adjustments.
    - Will consider new formulation and extension of scope of rules to strengthen Swiss regulations.

*Source: IMF Country Report content unit _cr07202 - 20.      Switzerland was found to be fully compliant with IOSCO Principles 6 and 7, but*

### 1. Regulation of Hedge Funds in Switzerland ...........................................................................6

### 1. Regulation of Hedge Funds in Switzerland

### Introduction
- This note presents a factual update of regulatory developments in securities regulation and supervision since the completion of the 2001 FSAP.  
- The material is based heavily on background documents prepared by the Swiss authorities.  
- Switzerland became a signatory of the IOSCO Multilateral Memorandum of Understanding (MOU) in 2004 after a thorough review process. The Swiss Federal Banking Commission (SFBC) has expressed commitment to seek authority to become a full signatory of the IOSCO Multilateral MOU.

### Institutional setting and market participants
- Total assets of investment funds reached US$674 billion (172 percent of GDP) in the third quarter of 2006.
- About one-half of the assets are invested in foreign funds, often established in Luxembourg by Swiss financial institutions.
- The securities and fund businesses are dominated by the large banks (UBS and Credit Suisse).
- Regulatory gaps and non-licensed segments:
  - Independent asset managers and investment advisors who do not manage funds in their name are not required to be licensed.
  - Securities intermediaries trading on their own account with gross turnover below ChF5 billion per year are not required to be licensed.
  - Intermediaries providing services to qualified investors only are not required to be licensed.
- Industry figures for 2005 on non-regulated sectors:
  - Approximately 2,600 independent asset managers.
  - 120 companies dedicated to private equity.
  - More than 150 hedge funds and funds of hedge funds (FoHF).
- Hedge fund industry structure and size:
  - Number of registered hedge funds increased from 39 in 2001 to 256 in 2006 (including 123 Swiss funds and 133 foreign funds).
  - Assets invested in the registered hedge funds reached US$9.4 billion in 2006.
  - Assets in all regulated Swiss funds were US$330 billion.
  - Industry estimates indicate more than 150 unregulated hedge funds and FoHF offered by Swiss financial companies, with an invested asset volume of about US$200 billion, against an estimated US$1,105 billion worldwide.
- Distribution rules:
  - Unregulated hedge funds cannot be offered directly to the broad public in Switzerland; distribution is restricted to qualified investors only.
  - Regulated hedge funds and FoHF may be sold directly to the public.
- Market infrastructure and activity:
  - In 2006, the SWX Swiss Exchange ranked tenth worldwide by market capitalization; Eurex ranked third worldwide in derivative transactions.
  - Swiss Market Index (SMI) performance: increased by 31 percent in 2005 and an additional 20 percent in 2006, despite a sharp drop of 13 percent around May-June 2006.
  - Market capitalization of the SWX Swiss Exchange was US$1.0 trillion at end-2006 (equivalent to 2.5 times GDP).
  - Trading volumes increased by 48 percent in 2006 to US$1.6 trillion (the third largest increase worldwide).
- Supervision and oversight:
  - Supervision and regulation of the securities market are entrusted to the SFBC.
  - Front-line supervision of securities dealers relies extensively on authorized private external auditors; the SFBC does not regularly perform on-site inspections of securities dealers.
  - The SWX Swiss Exchange operates as a self-regulatory organization (SRO) responsible for admitting participants, enforcing listing rules, supervising price formation, executing and settling transactions, and ensuring market transparency.

### Regulation of hedge funds (Box 1)
- FoHF availability and legal forms:
  - Since the mid-1990s, mutual funds have been allowed to register FoHF in Switzerland as a special investment category, making them available to private individuals with no investor qualifications.
  - FoHF also operate under the legal form of investment companies under the regulation of the SWX Swiss Exchange and are traded as equities.
- Supervisory focus and licensing:
  - The regulatory and supervisory framework focuses on investor protection and professional quality of fund management companies.
  - Licensing procedures for hedge funds and FoHF are generally stricter than those for traditional funds and include interviews with fund representatives and qualitative assessments of fund managers, risk management systems, reporting lines, internal risk controls, and other parties involved (custodian bank, external managers and advisers, prime brokers, administrators).
- External audit and reporting requirements:
  - External auditors are required to have professional expertise in alternative investments.
  - Special audits must be conducted by external auditors on a quarterly basis in the first two years after inception, focusing on the particular structure and risk-return characteristics of individual funds.
  - Hedge fund prospectuses must include a special warning clause approved by the SFBC and detailed information on investment policy, characteristics, and special risks.
  - Target funds are shown in annual and semi-annual reports of FoHFs, and investors must be given the possibility of exercising their right of redemption at least four times per year.
- Statutory restrictions:
  - FoHF are not allowed to carry out short sales.
  - FoHF may not invest in another FoHF.
  - FoHF cannot invest more than 30 percent of their assets in target funds managed by the same manager or management company.
  - Funds are not allowed to have a leverage of more than six at any time (practice now formally incorporated in the regulations).

### Recommendations of the 2001 FSAP and factual update (Principles 1–7 highlights)
- Recommended jurisdictional and structural changes:
  - Broaden SFBC jurisdiction to include all types of securities transactions and intermediaries, including primary markets and all asset managers.
  - Strengthen operational and budgetary independence of the supervisor, and increase regulatory powers.
  - Specify grounds for removal of SFBC/F INMA board members and grant full budgetary independence.
  - Increase SFBC involvement in on-site supervision and oversight of external auditors; increase staffing and resources proportionate to the size and importance of supervised entities.
- Developments and progress:
  - SFBC already authorizes and supervises issuing houses; issuing houses are subject to authorization and supervision by the SFBC with powers to restore proper conditions and remove irregularities.
  - Primary market in cases of public offerings for subsequent admission to listing is governed by self-regulation; prospectuses must follow listing rules enacted by the SWX Swiss Exchange and approved by the SFBC. Sanctions available include reprimands, financial fines, suspension from trading, and delisting.
  - The CISA, which entered into force in January 2007, imposed a licensing requirement on managers of Swiss collective capital investments, broadening SFBC jurisdiction over securities intermediaries (though some segments remain outside the scope of regulation).
  - In 2005 the SFBC offered independent Swiss asset managers of foreign eurocompatible investment funds the opportunity to obtain a license as securities dealers and place themselves under SFBC supervision.
- FINMA project and independence:
  - The draft FINMA Act (under Congress consideration) envisages an umbrella statute to encompass supervision of banking, insurance, and securities markets; banks to meet Banking Act, securities dealers SESTA, insurances Act on the Supervision of Insurances, and collective investment schemes CISA.
  - Budgetary independence of the supervisor is expected to be strengthened under FINMA: budget to be covered by fees charged to supervised institutions and independent from the Federal Budget (albeit still subject to approval of the Federal Council).
  - Staff of FINMA to be employed according to private law statutes; managerial structure to include a board of directors, a management board and an auditing unit.
  - Members of the FINMA board may be removed from office by the Federal Council; grounds for removal are not clearly specified in the regulations, raising caveats on operational independence.
  - The mission encouraged a review of the objectives of FINMA to eliminate potentially conflicting goals; concerns were raised that draft provisions balancing public benefits and costs could give excessive weight to costs and limit FINMA’s capacity to conduct effective supervision.
- Additional supervisory developments:
  - SFBC enacted a new code of conduct for its members and staff covering incompatibilities, conflict-of-interest behavior, and confidentiality.
  - SFBC staffing increased to 167 persons (from 115 in 2001), with further hires expected before and after the launching of FINMA.

*Prepared by Francisco Vazquez (Monetary and Capital Markets Department).*

### 20.      Switzerland was found to be fully compliant with IOSCO Principles 6 and 7, but

### _cr07202 - 20.      Switzerland was found to be fully compliant with IOSCO Principles 6 and 7, but

### Self-regulation and the role of SROs
- Findings:
  - Switzerland was found to be fully compliant with IOSCO Principles 6 and 7.
  - The 2001 FSAP recommended more proactive and direct involvement of the SFBC in supervising the SWX Swiss Exchange in market surveillance and listing, with emphasis on end-user and investor protection and supervision of possible market abuse practices.
  - The 2001 FSAP advocated explicit oversight of regulatory functions performed by professional associations such as the Swiss Bankers Association and the Swiss Funds Association.
  - Self-regulation has a long-standing tradition in Swiss financial markets and is well developed by international standards; Swiss authorities rely heavily on SROs to support market oversight and reduce SFBC workload.
- Reforms and developments:
  - Since 2002, the SFBC adopted a more proactive approach toward SROs, formalizing and institutionalizing contacts and interaction; a continuous process of supervision of SRO self-regulatory obligations of the SWX Swiss Exchange has reportedly been established.
  - A set of rules and codes of conduct for self-regulation were enacted by the SFBC in 2004 and adopted as a binding minimal standard for supervised institutions.
  - The draft FINMA Act contains a specific provision on self-regulation.
  - An issue paper was prepared and distributed to SROs in 2005 to stimulate joint discussion on integrating self-regulation and state regulation and the need for supervisory involvement in SRO regulatory standard development.
  - Current securities regulations require stock exchanges to have an organizational structure appropriate to their activities, and to submit their regulations and subsequent amendments to the SFBC for approval.

### Principles 8–10: Enforcement of securities regulations and audit oversight
- Findings:
  - The 2001 FSAP recommended increasing SFBC involvement in direct supervision, strengthening enforcement powers, and developing a quality assurance program for external auditors.
  - The SFBC heavily relied on external auditors for frontline supervision; the mission recommended more direct SFBC involvement in examinations and closer follow-up of external audit reports.
  - The SFBC joins external audits in banks and securities dealers on a regular basis; direct on-site supervision remains mainly limited to the two large banks.
- Reforms and measures:
  - Since 2004, the SFBC can appoint an investigator with ample powers to conduct on-site examinations and check the extent of financial difficulties in banks and securities dealers and compliance with regulations.
  - In 2002, a new SFBC unit was established to monitor audit companies, verify accreditation requirements, and manage quality reviews including organization structure, independence, personnel qualifications and experience, processing systems and audit expenditures and fees; quality reviews include inspections and random on-site checks and uncovered serious deficiencies prompting immediate corrective action.
  - An extensive reform of audit regulations produced three circulars entering into force in 2006 aimed at formalizing a risk-oriented auditing approach, improving transparency of external auditors' remit, facilitating timely reporting, and increasing auditor independence and monitoring.
    - First circular: procedures for annual audits of banks and securities dealers (solo and consolidated); divides audits into (i) accounting audit and (ii) supervisory audit; requires auditors to disclose risk assessment and proposed auditing strategy to the SFBC.
    - Second circular: form and content of audit reports; separation between accounting audit and supervisory audit; increased flexibility in reporting periods.
    - Third circular: provisions for recognizing, appointing, and changing audit companies and lead auditors; enhances independence and monitoring.
  - Results of quality reviews indicated need for further regulatory revisions; authorities plan to address these in the context of establishing a general Federal Audit Supervisory Authority planned for 2007.
- Remaining weaknesses and recommendations:
  - Less progress attained in SFBC sanctioning powers, particularly over unregulated institutions; the SFBC has no sanctioning powers over unregulated institutions.
  - Criminal code provisions are too narrowly defined and difficult to apply, reducing enforcement effectiveness.
  - Recommendation: grant the SFBC power to impose administrative sanctions on all financial intermediaries, regardless of registration status; expand criminal code definitions to accommodate insider trading and market abuse; handle regular cases via SFBC administrative sanctions and reserve criminal authorities for serious cases.
  - A draft circular on market abuse prepared by the SFBC in 2004 was opposed and is under revision; a joint working group led by the SFBC is preparing a revised circular and mandating an expert group for comprehensive criminal code reform to regulate insider trading and price manipulation.

### Principles 11–13: Cooperation with foreign supervisors
- Findings:
  - The 2001 FSAP noted legal restrictions on exchange of confidential information domestically and internationally; domestic legislation did not provide full freedom to exchange confidential client information between all supervisors; Swiss law limited adequate cooperation with foreign regulators.
- Developments:
  - The SFBC signed a significant number of Memoranda of Understanding (MoU) and exchange letters with foreign regulators beginning in 1997, continuing after 2001 including China Securities Regulatory Commission (2003) and UK FSA (2004); a wide range of information has been exchanged on that basis.
  - A law amendment easing restrictions on sharing confidential information with foreign supervisors for regulatory purposes was passed in 2005 and entered into force in 2006:
    - Authorized the SFBC to transmit non-public information on supervised institutions or their clients to foreign supervisors for enforcement of regulations on stock exchanges, securities trading or securities traders.
    - Authorized retransmission of such information to other authorities, courts or bodies for the same purpose without specific SFBC approval and authorized release in public proceedings publications if required by foreign country regulations.
    - Client information sharing continues to be subject to prior client notification and consent and can be challenged by the customer via administrative court appeal within a ten-day period.
    - In all appealed cases to date (eight decisions involving request of assistance from six foreign authorities), the Federal Supreme Court has confirmed the SFBC decision.
  - Switzerland admitted into Annex B of the IOSCO Multilateral Agreement in 2004; SFBC completed application and screening and has expressed commitment to seek authority to become a full signatory of the IOSCO MoU. The SWX Swiss Exchange is an associate member of IOSCO.

### Principles 14–16: Issuer disclosure and listed companies transparency
- Findings and recommendations from 2001 FSAP:
  - Room to improve protection of minority shareholders and comparability of financial information disclosed by issuers.
  - The primary market was not under SFBC jurisdiction; SWX powers over primary market limited to public offers for subsequent listing.
  - Recommendation: expand SFBC jurisdiction to cover public offers in the primary market, grant SFBC power to verify accuracy and completeness of investor disclosures, and power to delay or stop offers if investor protection jeopardized; strengthen accounting and auditing regulations and supervision/sanctioning of auditors and listed companies.
- Reforms:
  - New regulations improving transparency of listed companies entered into force in 2007:
    - Require disclosure in financial statements of allowances of current and former members of the board and directors and management and of their relatives and other close persons.
    - Require disclosure of remunerations of board members individually and the highest remuneration paid to a member of management.
    - Require disclosure of possible loans accorded to managers.
    - Require disclosure of shareholdings of board members, management, and their relatives and close persons.
  - New regulations on admission and supervision of auditors for all types of companies enacted in 2005; the Federal Accounting and Auditing Act, expected to enter into force in 2007, introduces admission and supervision rules for auditors applying to all company types and harmonizes Swiss accounting and auditing rules with EU directives.
  - Regulations require constitution of a new independent authority for supervision of auditors and auditing companies, entrusted with regulation, supervision, sanctioning powers, measures to restore proper conditions, and administrative and criminal assistance in international affairs.

### Principles 17–20: Collective investment schemes
- Findings:
  - 2001 FSAP found the regulatory framework for collective investment schemes compliant with IOSCO Principles but recommended more direct SFBC front-line supervision.
  - Regulations were in line with the EU UCITS Directive; fund management companies were generally separated from custodian banks, but often belonged to the same financial group.
  - Front-line supervision of fund management companies relied mainly on external auditors; mission advocated more direct SFBC supervision.
  - Licensing requirements for fund management companies were largely appropriate, including provisions on investment policy, price calculation, distribution of profits, managers’ compensation, fees and expenses; fit and proper criteria were praised.
- Reforms:
  - A new law governing collective investment schemes entered into force in 2007 (CISA broadened SFBC regulation scope for some independent asset managers and added a private equity category open only to qualified investors).
  - Licensed collective investment schemes remain under SFBC supervision except listed investment companies (supervised by SWX).
  - Unlicensed collective investment schemes are not subject to supervision and cannot be sold directly to the public.
  - The Ordinance on Collective Investment Schemes (CISO) entered into force in February 2007 replacing the Investment Fund Ordinance (IFO):
    - Accommodates wider use of derivatives for securities funds with overall exposure of 200 percent of net fund assets, fully in line with EU UCITS III Directive.
    - Extends and adapts rules on financial statements, accounting provisions, and sets main features of audits and audit reports; details to be governed by two circulars following the risk-oriented approach and subdivision between financial and regulatory audit.

### Principles 21–24: Market intermediaries
- Findings and recommendations from 2001 FSAP:
  - Recommended extending prudential regulation to all market intermediaries and improving customer protection.
  - Some securities dealers were outside prudential regulation scope (those providing services to qualified investors only, or those trading on their own account with a gross turnover below SWF5 billion per year); mission advocated prudential oversight over all market intermediaries.
  - Recommended supplementing Swiss conduct of business rules with SFBC instructions to strengthen customer suitability tests and conflict-of-interest disclosure.
- Authorities’ position and outcome:
  - Authorities opposed wide-ranging regulation, arguing prudential supervision warranted only where dealers could affect financial stability or serve clients needing protection; dealers trading on their own account or serving qualified investors seen not to require consumer protection or supervision.
  - Recommendation to widen prudential supervision was not implemented.
  - Authorities noted SESTA provides grounds to prevent conflicts of interest and transparency, reinforced by the Code of Conduct for Securities Dealers of the SBA, binding via SFBC-Circular 04/2 Self-Regulation as Minimal Standard.

### Principles 25–30: Secondary market and market manipulation
- Findings:
  - The 2001 FSAP found Switzerland fully compliant with IOSCO Principles 25–30 but saw room to improve SFBC supervisory role over the secondary market.
  - Reiterated concerns about reliance on external auditors for supervision and noted limitations on SFBC’s ability to exchange confidential client information with foreign regulators could affect supervision in other markets.
- Developments:
  - A working group headed by the SFBC began revising regulations on market manipulation and other unfair trading practices in early 2006:
    - Tasked with comparing Swiss market-abuse regulations with those of other financial centers and assessing possible adjustments.
    - Will consider new formulation and extension of scope of rules to strengthen Swiss regulations.

*Source: IMF Country Report content unit _cr07202 - 20.      Switzerland was found to be fully compliant with IOSCO Principles 6 and 7, but*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07202.pdf_