The Swiss authorities engaged in an ambitious enterprise when they included trustees in the (Draft) Financial Institutions Act. In effect, they undertook to comprehensively regulate and supervise an office centered around an institution not merely unknown under Swiss law, but also governed by underlying principles alien to its legal tradition. The implementation of this regulatory and supervisory framework requires a precise definition of the notion of trustee. The purpose of this article is to explore the definition of a trustee as currently outlined in the (Draft) Financial Institutions Act, reflect on which trust industry actors will require an authorization to carry out their activities in, within or from Switzerland following entry into force of the Act and present the upcoming applicable supervisory framework.

I. Introduction

Ten years2 after the Hague Trusts Convention3 entered into force on its soil, Switzerland is in the process of taking an important step towards professionalizing its trust industry.

The country is undertaking this task within the context of the in-depth reform of its financial market regulatory and supervisory framework4. The cornerstones of the process, the Financial Services Act5 and the Financial Institutions Act6, are to date still debated in Parliament. Publication of the final versions is expected to occur in 2018, with an entry into force still scheduled for 20197. The Financial Institutions Act will govern the requirements for acting as a financial institution8 on a professional basis whereas the Financial Services Act will govern the provision of financial services9. The Swiss authorities formed working groups consisting of experts from the affected industries. This summer, these working groups started drafting proposals for the implementing ordinances of the Acts. These ordinances should significantly clarify the structure and various requirements of the revised regulatory and supervisory framework.

Absent at the outset of the reform process, the trustee made a surprise appearance in the (Draft) Financial Institutions Act in November 201510. The inclusion of trustees in the Act had been requested and was welcomed by the interested industry11. It does, however, open the door to an entirely new set of challenges. How indeed could Switzerland comprehensively regulate and supervise an office centered on an institution not merely unknown under Swiss law, but also governed by underlying principles considered alien to those underlying its legal tradition12? After all, recognition of a trust's distinctive legal effects through ratification of the Hague Trusts Convention is one thing; the oversight of the office of trustee is another.

The first step towards the implementation of a regulatory and supervisory framework specific to trustees is a precise definition of the notion of trustee. This definition is of central importance, as it serves as a basis for determination of the material scope of application of the Financial Institutions Act and enables relevant stakeholders to identify which trust industry participants will effectively be subject to prudential regulation.

The purpose of this article is to explore the definition of trustee as currently outlined in the (Draft) Financial Institutions Act, reflect on which trust industry actors will require an authorization to carry out their activities in, within or from Switzerland upon enactment of the new regulation and present the upcoming applicable supervisory framework.

After highlighting the various components of the office of trustee (section II.), we shall examine when, to which extent, and under which conditions Swiss (section III.) and foreign (section IV.) trustees should fall to be regulated and when they would be exempted from the obligation to request an authorization (section V.). We shall then review the supervisory framework applicable to trustees (section VI.) before concluding (section VII.).

II. The Trustee under the (Draft) Act

1. Preliminary Considerations

By including trustees in the (Draft) Financial Institutions Act, the Swiss authorities engaged in an ambitious enterprise. The concept of trust is certainly famous for being elusive and undefinable. Alfred von Overbeck referred to it as «a somewhat troubling foreign institution»13. The authors of the Principles of European Trust Law stated that «reaction to hearing the word «trust» may well be one of caution and fear», further indicating that «the word is versatile and chameleon-like»14. David Hayton for his part compared it to an elephant (difficult to describe but easy to recognize)15.

Without the guidance and familiarity with the institution provided by a domestic trust law, the attempts of the Swiss authorities to define the activities carried out by trustees were bound to be perplexing. The diversity of Switzerland's trust industry, which embraces trusts governed by a variety of foreign laws, further reinforced the difficulty of the exercise.

Setting aside issues of definition, it should be noted that the notion of trust is broad and flexible16. The features of a trust may vary depending on its environment and its intended purpose, which themselves can be complex and shift over time. With this in mind, we will focus herein on Swiss financial market regulation and the objectives it pursues rather than attempt to define trusts and the functions fulfilled by trustees in abstracto. A closer look at these objectives will reveal the aspects of the office of trustee that are most relevant to the Swiss legislator.

In this respect, Swiss financial market regulation pursues two core objectives, client protection17 and market protection18, as well as two less tangible objectives relating to sustaining the reputation and competitiveness of Switzerland's financial center19 and ensuring financial stability20.

From a regulatory perspective, the trustee is perceived as an intermediary operating a vehicle for asset management21 (the trust) in Switzerland's financial market. The legislator's concern lies with ensuring that trustees meet certain professional standards. These standards aim at preventing them from causing harm to those to whom they are accountable, their counterparties, other financial market operators, or the financial markets themselves. By regulating and overseeing trustees' activities, the regulator is not only able to implement the objectives pursued by financial market regulation, but also to create a level playing field between trustees and other financial market intermediaries carrying out comparable (asset management) activities22.

The definition of trustee under the (Draft) Financial Institutions Act is outlined below.

2. Defining Elements of the Office of Trustee

The Swiss legislator elected to build its definition of the office of trustee on the basis of the latter's relationship with a trust as construed under the Hague Trusts Convention. The current version of the (Draft) Financial Institutions Act provides indeed that23:

A trustee is a person who on a professional basis manages or disposes of a separate fund for the benefit of a beneficiary or for a specified purpose based on the instrument creating a trust within the meaning of the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on Their Recognition.

The definition24 of a trust25 under the Hague Trusts Convention reads as follows26:

For the purposes of this Convention, the term «trust» refers to the legal relationships created – inter vivos or on death – by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose.

A trust has the following characteristics –

  1. the assets constitute a separate fund and are not a part of the trustee's own estate;
  2. title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee;
  3. the trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law.

The reservation by the settlor of certain rights and powers, and the fact that the trustee may himself have rights as a beneficiary, are not necessarily inconsistent with the existence of a trust.

Four defining elements of the office of trustee may be extracted from the combination of the above two provisions: (i) the management and disposal functions exercised by the trustee, (ii) the existence of a separate fund, (iii) the principle that either someone or a cause must benefit from the activity, and (iv) a minimum level of intensity at which the trustee must operate in order to fall within the scope of the Act. These elements are further analyzed below.

2.1 Management and Disposal

Trustees' asset management function, the fact that trustees manage or dispose27 of assets, lies at the heart of the definition set out in the (Draft) Financial Institutions Act. A trustee's tasks entail managing the separate fund, ensuring its value is maintained, and employing it in a restricted manner28. The trustee may also provide investment advice, carry out portfolio analysis and offer financial instruments29.

Under the Hague Trusts Convention, the terms «to manage and dispose» are construed as a reference to the fiduciary duties of the trustee; they express the trustee's power and duty to manage the assets and to dispose of them in accordance with the settlor's intent and the rules of law and equity30. Under Swiss law and regulation, these terms are not identical in meaning. An asset manager's powers and duties to manage and dispose of assets, as well as the manner in which they must be carried out, are rooted in the obligations he owes to his principal under agency law31. Regulatory guidelines further specify these obligations32.

In comparing both sources of duties, Luc Thévenoz stated that «[i]n Anglo-American law, these fiduciary duties differ from contractual duties by their intensity and the high degree of diligence and loyalty expected of the trustee. As Judge Benjamin Cardozo expressed it in a frequently quoted decision of the New York Court of Appeals in 1928: «Many forms of conduct permissible in a workday world for those acting at arm's length are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior»»33.

The regulation of trustees under the Financial Institutions Act will have no effect on the law governing the trust and its resulting relationships. There is indeed no doubt that trustees active on Swiss soil will remain bound by the fiduciary duties characteristic of common law trust relationships. The applicable substantive trust law is to be determined according to the provisions of the Hague Trusts Convention34.

2.2 Of a Separate Fund

The assets of the trust must be separate from those of the trustee35. The separation of trust assets is an essential element of a trust, without which its recognition would have no meaning36.

Specific provisions on the publicity of the separate nature of certain types of assets held in trust as well as provisions regarding debt collection proceedings have been included under Swiss law37.

2.3 For the Benefit of a Beneficiary or for a Specified Purpose

In English and American legal writings, the presence of a beneficiary or a specified purpose is considered as being essential in order that there be a trust38. The trustee acts here in the capacity of owner of the trust assets or as the person controlling the trust assets through, for instance, a nominee39. He must, however, carry out his activities for the benefit of a beneficiary or for a specified purpose40. The very essence of a trust lies indeed in the fiduciary relationship between the trustee and the beneficiaries41. The fact that the trustee has rights as a beneficiary is not necessarily inconsistent with the existence of a trust42.

At the level of the Hague Trusts Convention, the statement that the trustee is accountable expresses the idea that the beneficiaries have rights against the trustee which they may assert in a court of equity and also suggests the supervisory power of those courts43.

2.4 On a Professional Basis

Encompassed within the (Draft) Financial Institutions Act's definition of the trustee is the requirement that his activities be carried out on a professional basis (gewerbsmäßig, à titre professionel, a titolo professionale). This condition is typical of financial market regulation and has a recurring and widespread presence. It aims at ensuring that only those who carry out a regulated activity that meets a minimum standard of intensity, which thus qualifies it as a professional activity, fall under the scope of the regulation. Under Swiss financial market regulation, the grounds and thresholds of professional activity vary from one industry to the other, respectively from one activity to the other, on the basis of different functional and quantitative criteria44.

The Swiss Parliament's Council of States had elected to leave the determination of the professional basis criterion to the Federal Council, which would have specified it in the implementing ordinance to the Financial Institutions Act. The Commission for Economic Affairs and Taxes of the National Council has however amended the project to regulate this point directly in the Financial Institutions Act. This amendment provides that any financial institution carrying out a regulated activity does so on a professional basis from the moment the activity constitutes an independent economic activity that is designed to achieve regular revenues45. The Parliament's reconciliation of differences process will determine which solution will prevail.

On a similar note, although trustees are not at present subject to prudential regulation in Switzerland, they are, in their capacity as financial intermediaries, subject to anti-money laundering legislation46. The Anti-Money Laundering Ordinance provides that the professional basis criterion is met, and anti-money laundering provisions apply, once a trustee either (i) achieves a turnover exceeding CHF 50'000 per year, (ii) entertains business relationships with more than 20 co-contracting parties, (iii) has the power to dispose of third-party assets exceeding CHF 5 million, or (iv) executes transactions with a total volume of over CHF 2 million per year47. Upon entry into force of the Financial Institutions Act, these thresholds will no longer apply to trustees. Indeed, prudentially regulated financial intermediaries48 are deemed to act on a professional basis for anti-money laundering purposes once the thresholds specific to their activity are met, irrespective of the above thresholds, which apply only to non-prudentially regulated financial intermediaries49.

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Originally published by GesKR 3-2017, pp. 281-292.

Footnotes

1 Title inspired by that of Prof. Luc Thévenoz' landmark 2001 publication «Trusts in Switzerland: Ratification of The Hague Convention on Trusts and Codification of the Law of Fiduciary Transfers», which set the stage for ratification of the Hague Trusts Convention by Switzerland in 2007.

2 Switzerland ratified the Hague Trusts Convention on 26 April 2007; it entered into force the following 1 July 2007.

3 Full name: «The Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition», available on the website of The Hague Conference on Private International Law: https://www.hcch.net/en/instruments/conventions/full-text/?cid=59.

4 On 28 March 2012, the Swiss Federal Council gave a mandate to the Federal Department of Finance to prepare, in collaboration with the Federal Department of Justice and Police and the Financial Market Supervisory Authority («FINMA»), a preliminary draft for a trans-sectoral regulation of financial products and services and their distribution. The Swiss Federal Council's media release is available (in French) here: https://www.admin.ch/gov/fr/accueil/documentation/communiques/communiques-conseil-federal.msg-id-43953.html.

5 Referred to herein alternatively as the «Financial Services Act», «(Draft) Financial Services Act» or «D-FinSA».

6 Referred to herein alternatively as the «Financial Institutions Act», «(Draft) Financial Institutions Act», «D-FinIA» or the «Act». The latest versions of both the Financial Services Act and the Financial Institutions Act, as approved by the Commission for Economic Affairs and Taxes of the National Council on 15 August 2017, are available (in French) here: https://www.parlament.ch/centers/eparl/curia/2015/20150073/N2%20F.pdf.

7 The Acts were approved by the National Council on 13 September 2017, see here for additional information: https://www.parlament.ch/fr/services/news/Pages/2017/20170913183612507194158159041_bsf169.aspx. They are now returning to the Council of States.

8 Art. 1 para. 1 D-FinIA.

9 Art. 1 para. 2 D-FinSA.

10 The Federal Council presented the (Draft) Financial Institutions Act together with the (Draft) Financial Services Act and the Dispatch to the Parliament on 4 November 2015. See the Federal Council's media release available here: https://www.admin.ch/gov/en/start/documentation/media-releases.msg-id-59331.html.

11 Alongside ratification of the Hague Trusts Convention, highly regarded professionals within the Swiss trust industry joined forces to create the Swiss Association of Trust Companies («SATC»). The purpose of SATC is to engage in the furtherance and development of trustee activities in Switzerland, to ensure a high level of quality and integrity, and the adherence to professional and ethical standards in the trust business in Switzerland. It also saw itself as a trailblazer for future regulation of trust services or trust companies, an objective which it is now in the process of achieving. For more information, see SATC's website: http://www.satc.ch/.

12 See on this topic: Henry Hansmann and Ugo Mattei, «The Functions of Trust Law: A Comparative Legal and Economic Analysis», in New York University Law Review, Volume 73, Number 2, May 1998, pp. 438–445. For a more nuanced approach, see the Introduction to the Principles of European Trust Law, 1999, pp. 3–5.

13 Alfred von Overbeck, «Explanatory Report on the 1985 Hague Trusts Convention», in Proceedings of the Fifteenth Session, tome II: Trusts – applicable law and recognition, The Hague, 1984, p. 373 para. 14.

14 Commentary to the Principles of European Trust Law, 1999, p. 29.

15 David Hayton, «Trusts», in Vertouwd met de trust – Trust and Trust-like Arrangements, Serie Onderneming on Recht deel 5, W.E.J. Tjeenk Willink (Ed.), Deventer, 1996, p. 3.

16 Some legal scholars argue that its flexibility is what has contributed to its international development; see Henry Hansmann and Ugo Mattei, op. cit., pp. 470–471; David Hayton, «The Uses of Trusts in the Commercial Context», in Modern international developments in trust law, David Hayton (Ed.), Kluwer Law International, London, 1999, p. 145 and Luc Thévenoz, «Trusts: the rise of a global legal concept» in European private law: a handbook (volume II), Mauro Bussani and Franz Werro (Ed.), Stämpfli, Bern, 2014, p. 30.

17 See in particular Art. 5 of the Financial Market Supervision Act («FINMASA») (SC 956.1); Art. 1 para. 2 of the Stock Exchange Act («SESTA») (SC 954.1); Art. 1 of the Collective Investment Schemes Act («CISA») (SC 951.31); Art. 1 para. 2 and Art. 6b para. 2 of the Banking Act («BA») (SC 952.0); Art. 1 para. 2 of the Financial Market Infrastructure Act («FMIA») (SC 958.1) and Urs Zulauf and Mirjam Eggen, Swiss Financial Market Law, Dike, Bern, 2013, p. 6.

18 See Art. 1 para. 2 D-FinIA; Art. 5 FINMASA; Art. 1 CISA; Art. 1 para. 2 SESTA and Urs Zulauf and Mirjam Eggen, op. cit., p. 6.

19 See Art. 5 FINMASA and Urs Zulauf and Mirjam Eggen, op. cit., pp. 107–108.

20 See Art. 1 para. 2 FMIA and Peter Nobel, «Was heisst «Überregulierung»?», in Swiss Review of Business and Financial Market (SZW/RSDA), 2014, p. 591.

21 A comprehensive regulation of asset management activities carried out on a professional basis for the benefit of third parties is one of the main objectives pursued by the in-depth reform of Switzerland's financial market regulatory and supervisory framework. See Swiss Federal Council, Dispatch on the Financial Services Act (FinSA) and Financial Institutions Act (FinIA) (in French), 4 November 2015, most notably pp. 8103, 8115 and 8117.

22 The establishment of a level playing field between the various financial market participants is also one of the main objectives pursued by the in-depth reform. See Swiss Federal Council, Dispatch on FinSA and FinIA, most notably pp. 8102 and 8285–8286.

23 Art. 16 para. 2 D-FinIA.

24 In practice, The Hague Trusts Convention does not define the trust institution. Rather, it attempts to «[...] indicate the characteristics which an institution must show – whether this is a trust originating in a common law country or an analogous institution from another country – in order to fall under the Convention's coverage», see Alfred von Overbeck, op. cit., p. 378 para. 36 and pp. 375–376 para. 26–27.

25 The «non-definition» of the trust found in the Hague Trusts Convention was another opportunity to debate the meaning of the concept: for Maurizio Lupoi, the Hague Trusts Convention's trust is shapeless, whereas for Luc Thévenoz it is a demonstration that it has become a global legal concept. See Maurizio Lupoi, «The Shapeless Trust», in Trusts & Trustees, Volume 1, Issue 3, February 1995, pp. 15–18 and Luc Thévenoz, op. cit., pp. 3–39.

26 Art. 2 Hague Trusts Convention.

27 Both Art. 16 para. 2 D-FinIA as well as Art. 2 para. 2 let. c Hague Trusts Convention refer to the trustee's power and duty to manage or dispose of the assets of the separate fund; Art. 2 para. 2 let. c Hague Trusts Convention additionally refers to the trustee's power and duty to employ the assets. The description of the activities carried out by portfolio managers also encompass the terms «to dispose» of assets, see Art. 16 para. 1 D-FinIA, whereas the terms «to manage» assets are central to the descriptions of the activities carried out by managers of collective assets, see Art. 20 para. 1 D-FinIA, and fund management companies, see Art. 28 D-FinIA.

28 See Art. 18 para. 2 D-FinIA.

29 See Art. 18 para. 3 D-FinIA.

30 Alfred von Overbeck, op. cit., p. 380 para. 46.

31 See Art. 394 to 406 of the Swiss Code of Obligations («SCO») (SC 220).

32 For an overview of the content of asset management contracts and the obligations of asset managers under Swiss regulations, see FINMA Circular 2009/1, «Guidelines on asset management», in particular margin nos. 7.1-26.

33 Luc Thévenoz, Trusts in Switzerland: Ratification of the Hague Convention on Trusts and Codification of Fiduciary Transfers, Schulthess, Zurich, 2001, p. 189.

34 Art. 6 to 10 of the Hague Trusts Convention.

35 See Art. 2 para. 2 let. a and Art. 11 para. 3 Hague Trusts Convention; Art. I para (1), Art. III para. (2) and (3) and Art. V para. (3) of the Principles of European Trust Law; Alfred von Overbeck, op. cit., p. 379 para. 44; Geraint Thomas and Alastair Hudson, The Law of Trusts, 2nd edition, Oxford University Press, Oxford, 2010, section 1.05, p. 13 and David Hayton/Paul Matthews/ Charles Mitchell, Underhill and Hayton: Law relating to Trusts and Trustees, 17th edition, Butterworths, London, 2006, section 1.1 (1), p. 2.

36 Alfred von Overbeck, op. cit., p. 394 para. 108.

37 See Art. 149d SPILA and Art. 284a and 284b of the Debt Enforcement and Bankruptcy Act («DEBA») (SC 281.1). See also Swiss Federal Council, Dispatch on the Hague Trusts Convention, pp. 586–587, section 1.7.2.1.

38 Alfred von Overbeck, op. cit., p. 379 para. 39.

39 Art. 2 para. 1 and 2 let. b Hague Trusts Convention. See also Commentary to the Principles of European Trust Law, 1999, pp. 39–40.

40 Art. 16 para. 2 D-FinIA and Art. 2 para. 1 Hague Trusts Convention. See also Art. I para. (1) of the Principles of European Trust Law.

41 Alfred von Overbeck, op. cit., p. 379 para. 40.

42 Art. 2 para. 3 Hague Trusts Convention.

43 Alfred von Overbeck, op. cit., p. 380 para. 46.

44 For instance, one is deemed as carrying out a banking activity on a professional basis if one accepts, on an ongoing basis, more than twenty deposits from the public, or makes oneself available to accept deposits from the public, even if upon doing so fewer than twenty deposits result, see Art. 1 para. 2 and Art. 6a para. 3 BA, in combination with Art. 6 of the Banking Ordinance («BO») (SC 952.02). Within the context of securities dealing regulation, own-account dealers, issuing houses, derivative houses and market makers act on a professional basis from the moment their activities constitute a separate and independent economic activity that is designed to achieve regular revenues. Client dealers must additionally maintain accounts, either directly or indirectly, or act as custodians of securities for more than twenty customers, see Art. 3 para. 1 to 5 of the Securities and Stock Exchange Ordinance («SESTO») (SC 954.11) and FINMA Circular 2008/5, «Securities Dealers», margin nos. 12, 13 and 49. Art. 2 let. b of the Commercial Register Ordinance («CRO») (SC 221.411), which defines what constitutes a «business» from the commercial register's perspective, is also relevant within this context.

45 Art. 2a D-FinIA.

46 As persons who, on a professional basis, accept or hold on-deposit assets belonging to others or who assist in the investment or transfer of such assets, see Art. 2 para. 3 of the Anti-Money Laundering Act («AMLA») (SC 955.0)

47 Art. 7 para. 1 of the Anti-Money Laundering Ordinance («AMLO») (SC 955.01). See also FINMA Circular 2011/1, «The activity of financial intermediary under the AMLA», margin nos. 142–153.

48 The financial intermediaries subject to anti-money laundering legislation under Art. 2 para. 2 AMLA.

49 The financial intermediaries subject to anti-money laundering legislation under Art. 2 para. 3 AMLA.

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