• Recent Developments under Swiss Law: Retrocessions Paid to External Asset Managers
  • August 17, 2006 | Author: Florence Thiébaud
  • Law Firm: LT - Lenz Thiébaud - Geneva Office
  • Introduction


    In Switzerland, external asset managers frequently work with large banks where their clients have deposited their assets. The external managers receive a special compensation - so-called retrocessions - for the transactions effected with their clients' money. The payment of such retrocessions has been highly debated among Swiss Scholars; a recent decision rendered by the Swiss Supreme Court has however clarified this issue.


    1. Definition of the external asset manager


    The term "external asset manager" has been defined by the Swiss banking industry as the private asset manager of a client who deposits assets with a bank and simultaneously retains an external third party for the management of his deposited assets.


    This triangular's structure allows the client to maintain on the one hand personal contacts with his asset manager, and on the other hand to benefit from the large structure of a bank.


    2. The potential conflict of interests the external asset manager could face


    The external asset manager might face a potential conflict of interests because his client is in most cases only interested in a sound and safe investment of his money. The asset manager however might be inclined to execute as many transactions as possible in order to increase his retrocessions.


    This can in certain cases result in excessive transactions effected by the external asset manager on behalf of his clients the so-called "churning" which is a breach of the rules of ethics for asset managers.


    3.         3. Practice of the Supreme Court regarding retrocessions received by external asset managers


    In a decision rendered in the Fifties, the Swiss Supreme Court held that rebates, retrocessions and other commissions must be refunded to the client by the external asset manager who received them.


    In other words, an external asset manager who has received a compensation in direct or indirect relation to the management of assets must deliver them entirely to his clients.


    In the aforementioned decision, the Supreme Court also held that the client and his external asset manager are free to agree on a distribution of the retrocessions which is different from the one provided for by law. For example, they might agree that the asset manager is entitled to part or all of the retrocessions.


    However, if the client and the asset manager have not specifically agreed on how the retrocessions are distributed, the Supreme Court ruled that they must be entirely paid to the client pursuant to article 400 paragraph 1 of the Swiss Code of Obligations.


    4. Leading case 4C 432/2005


    In a recent decision, the Swiss Supreme Court had to analyze the question to what extent an external asset manager must remit retrocessions to his clients.


    In the case at hand, the external asset manager was retained by a foundation to enter into retro agreements with various banks. The asset manager was entitled to receive retrocessions for each transaction he concluded, and an additional finder's fee was due to him for each transfer of assets to another bank.


    Further to its previous decision referred to under 3. supra, the Swiss Supreme Court confirmed that the asset manager had a duty to fully disclose to his clients the retrocessions, finder's fees, commissions and rebates he received. The Court also affirmed that he had to remit these fees to the client. The Court explained that pursuant to Art. 400 paragraph 2 of the Swiss Code of Obligations, an external asset manager must - upon request - at any moment be able to submit a proper accounting of the performance of his obligations. He must also deliver everything that has come into his possession in the course of the performance of his mandate, whatever the basis.


    This duty to deliver does not only include assets which the external asset manager has received directly from the client to perform his obligations under the mandate, but it also applies to indirect advantages which he has received from third parties in the course of the execution of his mandate. These indirect advantages may for example consist in kickbacks, finder's fees, rebates and commissions.


    5. May a client validly renounce to the remittance of the retrocessions?


    The question whether the client of an asset manager can validly renounce to the remittance of the retrocessions was in the past highly debated among Scholars.


    In its aforementioned leading case, the Swiss Supreme Court ruled that in order for the client to validly renounce to the retrocessions which are due to him, he must be informed exhaustively and truthfully of the existence of such retrocessions. In addition, his intent to renounce must be clear and unambiguous.


    The Supreme Court further requested that the client must know the exact amount he renounces to if the asset manager keeps all or part of the retrocessions.


    It is interesting to see that the Supreme Court justifies this requirement with the potential conflict of interests which the asset manager faces and which is described under 2. hereinabove.


    Finally, the Swiss Supreme Court held that the mere fact that it might be customary for an external asset manager to receive retrocessions does not automatically mean that the client has tacitly renounced to receiving his part of the retrocessions.




    The decision referred to under 4. has finally shed some light on a highly controversial issue. This clarification is certainly in the interest of all the parties concerned, and is a step towards achieving one of the main goals of the Swiss banking legislation, namely the protection of the investor.




    Provided for information only


    This note is intended as an outline guide only. It is not intended to be exhaustive and reliance should not be placed upon it without seeking more detailed advice in the light of your own circumstances.