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What are the relevant statutes and which government authorities are responsible for investigating and enforcing them?
Securities enforcement under Swiss law is mainly covered by the financial market acts. The most important provisions of these statutes are generally relevant for both administrative and criminal enforcement.
Five different authorities have powers relevant to securities enforcement under those statutes. The Financial Market Supervisory Authority (FINMA) and the Swiss Takeover Board (TOB) are the two authorities with enforcement powers regarding administrative violations of the financial market acts relevant to securities enforcement.
FINMA is the central regulator in Switzerland with respect to supervision of the financial markets. FINMA’s extensive responsibilities include taking action in the event of violations of securities market laws, based on information received from trading venues – responsible for monitoring securities markets and disclosing information – or based on its own suspicions. Also relevant to securities enforcement is FINMA’s monitoring of licence holders’ compliance with financial market laws. In the event of a suspected breach, the Swiss regulator may take appropriate action. FINMA is also responsible for taking action against companies and individuals engaged in financial market activities without the required licence. The Swiss regulator does not proactively monitor compliance. Instead, it relies upon notifications by the auditors of the relevant regulated entities, as well as reports from individual investors, criminal prosecution authorities, foreign supervisory authorities or information published in the media in connection with unauthorised activities. FINMA’s activity and powers are mainly governed by the Financial Market Supervision Act (FINMASA).
The TOB monitors compliance with the statutory and regulatory provisions in the context of public takeovers. Upon becoming aware of violations of provisions on public takeovers, the TOB ensures that an orderly situation is restored and that irregularities are corrected. The enforcement authority of the TOB is limited to ordering administrative measures.
Should administrative violations also amount to criminal offences, FINMA and the TOB must report those violations to one of the three authorities sharing responsibility for prosecuting criminal violations of the financial market acts. The Federal Department of Finance (FDF) is primarily responsible for investigating violations of criminal provisions of the financial market acts. The FDF also has jurisdiction over the offences it has the power to prosecute, to the extent that no custodial sentence is ordered. In derogation to the general prosecution power of the FDF, the Federal Attorney General (the Federal AG) and the various State Attorneys General (the State AG) have the authority to prosecute some specific offences listed in the financial market acts. They also have the authority to prosecute general offences, which may also be relevant in relation to securities enforcement, particularly in cases of fraudulent schemes.
Below, we cover the most important statutes and provisions with respect to securities enforcement. Unless specified otherwise, FINMA is responsible for the administrative enforcement of those provisions and the FDF is responsible for criminal prosecution.
The Financial Market Infrastructure Act (FMIA) governs the organisation and operation of financial market infrastructures and the conduct of financial market participants in securities and derivatives trading. The FMIA has the purpose of ensuring the proper functioning and transparency of securities and derivatives markets as well as equal treatment of participants. It is a key statute for securities enforcement, as it includes, among other things, provisions related to insider trading, market and price manipulation and the disclosure of large shareholdings.
Insider trading covers the disclosure of insider information or the use of such insider information to acquire or dispose of (or to recommend to a third party to acquire or dispose of) securities or derivatives of such securities admitted to trading on a trading venue or, since August 2021, a trading facility based on distributed ledger technology (DLT) registered in Switzerland. Insider trading with the intent to make a profit may be subject to criminal prosecution as well as administrative enforcement. Primary insiders (with direct access to insider information due to position) face a custodial sentence not exceeding three years (five if a financial gain of more than 1 million Swiss francs is involved) or a monetary penalty. Secondary insiders (with access to insider information through a primary insider or through a criminal offence) face a custodial sentence not exceeding one year or a monetary penalty. Other insiders (who accessed the insider information by chance or through an undetermined source) may be subject to a fine. The Federal AG is responsible for the prosecution of insider trading.
Market manipulation relates to the undue influence of the price of securities admitted to trading on a trading venue or a DLT trading facility registered in Switzerland, either through the public dissemination of false or misleading information regarding the supply, demand or price of securities or through acquisitions and sales of such securities directly or indirectly for the benefit of the same person or persons connected for this purpose. Similar to insider trading, a violation may be criminal when market manipulation is carried out with the intent of making a profit. This criminal offence carries a custodial sentence not exceeding three years (five if a financial gain of more than 1 million Swiss francs is involved) or a monetary penalty. The Federal AG is responsible for the prosecution of insider trading.
Pursuant to the FMIA, anyone who crosses or reaches certain shareholding thresholds – either directly, indirectly or acting in concert with third parties – in a company listed in Switzerland is to notify both the company and the relevant exchange. The deadline for the disclosure is four trading days in a normal situation and one trading day in the context of a takeover. Failure to comply with the shareholder disclosure regime provided for in the FMIA and its ordinances is a criminal offence and may result in a fine of up to 10 million Swiss francs (for intentional breaches) and up to 100,000 Swiss francs (in case of negligence).
The FMIA also includes other provisions relevant to securities enforcement, in particular:
- obligations to keep a record of the orders and transactions carried out on a trading venue and to report all the information necessary for transparent securities trading;
- various duties regarding derivatives trading, such as specific clearing and reporting requirements, and the requirement for counterparties to mitigate operating risks;
- the duty to make a tender offer after having exceeded directly or indirectly, or by acting in concert with third parties, the threshold of 33.33 per cent of the voting rights in a listed target company; and
- various duties by the target company in a takeover context, such as the obligation of the target company to publish a report in which its board of directors takes a position on the offer.
A violation of those obligations may lead to both administrative and criminal enforcement, with fines ranging from 100,000 Swiss francs to 10 million Swiss francs.
The Banking Act (BA) governs the activity of banks. Relevant to securities enforcement, this statute prohibits the acceptance of deposits from the public without the proper licence. This is both an administrative offence and a criminal offence carrying a custodial sentence not exceeding three years or a monetary penalty (negligence is subject to a fine not exceeding 250,000 Swiss francs). The acceptance of public deposits is broadly construed by Swiss authorities and includes the issuance of bonds or other taking of capital without complying with the relevant financial market provisions (such as regarding the content of the prospectus). As evidenced by the statistics mentioned in the following section, this provision plays an important role in the context of securities enforcement in Switzerland.
The Financial Services Act (FinSA) seeks to protect clients of financial service providers and to establish comparable conditions for the provision of financial services by financial service providers, and thus contributes to enhancing the reputation and competitiveness of Switzerland’s financial centre. It lays out the requirements for honesty, diligence and transparency in the provision of financial services and governs the offering of financial instruments. This statute, in force since January 2020, has raised what used to be purely private law obligations to the rank of administrative and criminal duties. It will undoubtedly become key in terms of securities enforcement in the coming years.
Relevant FinSA provisions include the obligation to:
- provide true and complete information, without withholding any material facts, when providing information on financial services or in a prospectus;
- assess the appropriateness and suitability of financial products;
- disclose compensation paid to third parties;
- publish a prospectus or a key information document in various situations; and
- make a key information document available prior to subscription or conclusion of the relevant contract.
Violations are relevant from an administrative standpoint for licensed entities or their employees and amount to criminal violations for unlicensed entities and individuals. The criminal offences carry maximum fines of either 100,000 Swiss francs or 500,000 Swiss francs.
The Financial Institutions Act (FinIA), in force since January 2020, lays down the requirements applicable to the activities of financial institutions, such as portfolio managers, trustees, collective assets managers, fund management companies and securities firms. Its purpose is to protect investors and customers of financial institutions and to ensure the proper functioning of the financial markets. It contains several important provisions regarding the organisation and licensing of the relevant market actors.
The FinIA provides for securities firms’ obligations to keep records of orders and transactions for the purpose of traceability and to report on all information necessary for transparent securities trading. Violations of those obligations may lead to administrative and criminal enforcement, with fines not exceeding 500,000 Swiss francs for the latter.
The FinIA, the FMIA and the BA all include provisions related to professional confidentiality and banking secrecy. Those provisions prevent directors, officers, employees, agents or liquidators of a financial institution or bank to disclose confidential information, as well as the inducement of such disclosure or further dissemination. The obligations regarding securities enforcement are relevant for the disclosure of insider information related to over-the-counter products and private equities, as the FMIA obligations related to insider trading are limited to listed securities. The State AG are in charge of prosecuting criminal violations of those confidentiality duties. Perpetrators face a custodial sentence not exceeding three years (five if the culprit acts for financial gains) or a monetary penalty, and in the case of negligence a fine not exceeding 250,000 Swiss francs.
The Collective Investment Schemes Act sets out the organisational requirements and obligations of collective investment schemes. Of relevance to securities enforcement are the provisions related to the prohibition to establish a collective investment scheme without the proper approval or authorisation as well as the prohibition to offer to non-qualified investors unapproved domestic and foreign collective investment schemes. Perpetrators face a custodial sentence not exceeding three years or a monetary penalty (or a fine not exceeding 250,000 Swiss francs in case of negligence) in addition to administrative measures and sanctions.
Aside from the financial market acts, a few provisions of the Swiss Criminal Code are relevant for securities enforcement in the context of fraudulent activities, such as the offences of fraud, forgery or false statements about commercial business.
‘Fraud’ covers the inducement of an erroneous belief in another person by false pretences or concealment of the truth, with a view to securing an unlawful gain, causing that person to act to the prejudice of his or her or another’s financial interests. It carries a custodial sentence not exceeding five years (10 years in aggravated cases of minor importance) or a monetary penalty.
‘Forgery’ covers the production of false documents or the use of false documents to deceive, with a view to cause prejudice or to obtain an unlawful advantage. It carries a custodial sentence not exceeding five years (three in cases of minor importance) or a monetary penalty.
‘False statements about commercial business’ prevents directors, officers and owners of businesses from making or causing to be made false or incomplete public statements of substantial significance that could cause prejudice. It carries a custodial sentence not exceeding three years or a monetary penalty.
What conduct is most commonly the subject of securities enforcement?
Investigations conducted in Switzerland in connection with securities enforcement relate mostly to the offering of financial services by unauthorised persons, market surveillance and violations of the disclosure duty in connection with Swiss listed shareholdings.
Investigations into the offering of financial services by unauthorised persons represent about a third of all investigations conducted by FINMA and are the subject of between a quarter and a half of all administrative enforcement proceedings eventually opened. Most of those investigations relate to the offering of financial services without the proper licence and in particular the acceptance of public deposits without the proper banking licence. As mentioned above, this is due, in part, to the broad interpretation of this provision, which comes into play when companies issue bonds or otherwise raise capital without complying with the relevant financial market provisions (such as regarding the content of the prospectus). The surge of fintech companies has led to an increase of cases in recent years, such as in the context of fraudulent initial coin offerings. The unauthorised offering of financial services covers both fraudulent activities and negligent behaviour of financial services firms and individuals. Most of these administrative investigations target entities rather than individuals, but enforcement proceedings that are eventually opened are directed at both individuals and entities roughly evenly. In parallel, the State AG regularly prosecute fraudulent schemes related to securities offering. They generally do so based on criminal complaints filed by victims, rather than reporting by FINMA.
Market surveillance investigations relate mostly to potential insider trading and, to a lesser extent, to market manipulation. While investigations are quite frequent, they seldom lead to actual enforcement proceedings and are generally not reported to the Federal AG. These investigations mostly target individuals. FINMA actively collaborates with the Federal AG to investigate and reprehend criminal violations of insider dealing and price manipulation. In 2020, four cases related to potential insider dealing were notified by FINMA to the Federal AG.
Investigations into the potential violation of the rules of the disclosure of large shareholdings are frequent. These investigations are mostly directed at investors rather than financial services firms – hence, they are rarely followed by administrative enforcement proceedings. Instead, reporting of the case to the FDF for criminal enforcement against the relevant individuals is common. According to the FINMA’s statistics, the majority of cases relating to potential violations of financial market laws that were deferred to the FDF in recent years were targeting individuals.
In addition to these enforcement actions, FINMA takes actions against regulated entities for organisational failures and against individuals working for regulated entities and involved in fraud. FINMA’s statistics are not detailed enough when it comes to the kind of violations leading to enforcement proceedings to properly assess the part relating to securities enforcement rather than other domains such as money laundering or other regulatory failures.
What legal issues commonly arise in enforcement investigations?
Supervised entities and individuals have a duty to provide FINMA with all information relevant for their supervision. They have to cooperate with audits and investigations ordered by FINMA. In this context, supervised entities must inform FINMA of violations of supervisory law that they have uncovered and provide FINMA with internal investigation reports, potentially including minutes of employees’ declarations with incriminating data for both the entity and its employees. One issue that regularly arises in this context is whether the documents provided to FINMA may be seized and used by criminal authorities against these entities in view of the right not to self-incriminate, without violating the nemo tenetur principle. The Swiss Supreme Court has ruled that internal investigation reports voluntarily remitted to FINMA and enforcement reports could be seized and used in related criminal proceedings without violation of the right not to self-incriminate. That said, the Supreme Court left open the question of whether information obtained by FINMA specifically under the threat of sanction could indeed be used as admissible evidence. This is a very significant concern for regulated entities, which may be inclined in their relationship with FINMA to recognise errors of the past and remediate them, but in doing so expose themselves to having such admissions used against them (or their employees) in criminal proceedings.
Under the system of Swiss criminal law, any criminal investigation primarily aims to find and punish the individuals (e.g., the employees of a legal entity) who have breached the law. This principle applies in the context of securities laws as well. When investigating a suspected breach of securities laws, the authority entrusted with the responsibility to prosecute criminal violations of the financial market acts (the FDF, or the State or Federal AG) must first aim to find the individuals who have committed a breach, even if the breach is minor and has taken place in the context of a corporation. Recent case law has confirmed that the authority may only act against the legal entity in which a breach of law or fraud has occurred if the investigation has not established the identity of the responsible individuals, owing to a lack of proper organisation inside the said legal entity or because the investigation that would be necessary to identify an individual would be disproportionate in view of the relevant breach. Coordination of the defence strategy of the entity and the relevant individuals is thus a critical issue in securities enforcement, as an employee may be inclined to point to organisational deficiencies to escape personal liability.
It is important to note that Swiss attorney–client privilege does not protect in-house counsels, contrary to what applies in various other jurisdictions. This means that internal group communications between legal departments will not be privileged. While communications with external lawyers are generally privileged, in 2018 the Swiss Supreme Court introduced restrictions to this protection regarding investigations. It held that the attorney–client privilege of external lawyers could not be used to shield internal investigations that the supervised entities were legally compelled to do. As a result, the issue of privilege in connection with internal investigations is always delicate.
The issue of the calculation of proceeds related to violations of the financial market acts for confiscation purposes often raises questions. In a case in 2016, the Swiss Administrative Court held that FINMA had to calculate as precisely as possible the profits subject to disgorgement and could not simply make an overall estimate of the profits, and must also take into consideration factors unrelated to the breach under investigation. In relation to insider trading and according to case law from the past few years, the proceeds should generally be determined by taking the difference between the amount paid and received and the first market price after the release of the insider information (i.e., the closing price or the opening price of the next trading day). This calculation is thus based on a theoretical profit.
What remedies and sanctions are available to government authorities?
The remedies and sanctions available depend on the type of procedure, namely administrative or criminal enforcement.
In the context of administrative enforcement proceedings, FINMA has a vast array of instruments at its disposal pursuant to the FINMASA, as well as the specific provisions of the financial market acts. It may, in particular:
- order measures that it deems necessary to restore compliance with the law, such as amendments to internal procedures and practices and specific organisational measures;
- impose (temporary) restrictions on the activity;
- issue declaratory rulings, in case the investigation reveals past violations of supervisory provisions that no longer need remediation;
- confiscate profits generated through violations of the supervisory provisions;
- publish supervisory rulings;
- suspend voting rights;
- prohibit a person from acting in a management capacity for supervised entities;
- prohibit a person from trading financial instruments;
- prohibit a person from acting as client adviser; and
- revoke a licence, withdraw recognition or order the liquidation of the company, thus barring the supervised person or entity from carrying out its activity.
FINMA does not have the authority to sanction supervised entities or individuals through the payment of fines, beyond the disgorgement of illicit profits. If an administrative violation would also amount to a criminal violation subject to a fine, FINMA must report the case to the relevant criminal authorities.
Outside enforcement proceedings and in the context of its ordinary supervision, FINMA may order an audit of supervised entities. While not an enforcement remedy per se, FINMA will often order an audit of supervised entities at the end of enforcement proceedings to ensure the implementation of the measures ordered and their effectiveness. FINMA has wide discretion on the scope and length of the audit, which means that it can indirectly impose a significant financial burden on supervised entities despite the lack of authority to order the payment of fines.
The remedies and sanctions most commonly used by FINMA are the liquidation of the company (mostly for unlicensed financial firms), the implementation of remediation measures or restrictions and the appointment of an auditor to ensure correct implementation. FINMA often issues a press release when closing an enforcement procedure related to an issue covered by the press, especially in international matters.
Against individuals, the most common sanction is a ban on activities and the publication of the enforcement decision or its operative part.
As the administrative authority monitoring compliance of the provisions relating to a public takeover by market participants, the TOB has the power to ensure that an orderly situation is restored and that any irregularities are corrected. When investigating takeover-related cases (e.g., when there is suspicion of undisclosed agreements between the bidder and third parties) the TOB may request from persons and companies subject to a reporting obligation under the FMIA all information and documents it considers useful to fulfil its task. Furthermore, the TOB may instruct external auditors to conduct special audits and to submit a report. If there are sufficient indications that a person is not complying with its obligation to make a mandatory tender offer, the TOB may suspend the voting rights and related rights of the relevant person until the obligation to make an offer has been clarified and, when applicable, fulfilled. The TOB may also prohibit such person from acquiring further shares in the target company. The TOB is not authorised to conduct investigations at banks, securities dealers and other financial intermediaries that are not involved in a takeover; it requires the support of FINMA to do so.
The remedies and sanctions available to the FDF, the Federal AG and the State AG in the context of criminal enforcement depend on the relevant provisions as briefly listed in the first section of this chapter. Available sanctions include a custodial sentence, a monetary penalty (which consists of a number of daily penalty units with a set value, converted into a custodial sentence in case of inability to pay) or a fine. Criminal authorities may also order the forfeiture of assets acquired through the relevant violations or uphold a claim for compensation in respect of a sum of equivalent value if the assets are no longer available.
1 Shelby R du Pasquier is a partner and Téo Genecand and Vincent Huynh Dac are associates at Lenz & Staehelin.
2 See, for example, FINMA press release dated 10 September 2021 regarding financial market infrastructures based on DLT: https://www.finma.ch/en/news/2021/09/finma-issues-first-ever-approval-for-a-stock-exchange-and-a-central-securities-depository-for-the-trading-of-tokens/.
3 See, for example, FINMA press release dated 27 March 2019 regarding Envion AG: https://www.finma.ch/en/news/2019/03/20190327---mm---envion/.
4 Supreme Court, ATF 142 IV 207.
5 Supreme Court, 1B_59/2020.
6 Federal Criminal Court, SK.2018.47.
7 Supreme Court, 1B_85/2016; 1B_437/2018.
8 Federal Administrative Court, B-3930/2016.
9 Federal Criminal Court, SK.2018.26; Federal Administrative Court, B-4763/2017.