Alert November 29, 2011

Treasury International Capital Reports - An Overview for Private Fund Advisers

A range of institutions, including banks, bank holding companies, financial holding companies, mutual funds, broker-dealers and investment advisers, are subject to filing requirements relating to a series of surveys (the “TIC Reports”) of transactions and holdings in derivatives, short and long term securities, claims and liabilities as between U.S. entities and foreign entities that are part of the Treasury International Capital reporting system established by the Department of the Treasury with the assistance of the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York.  This article provides an overview of the TIC Reports that an investment adviser (whether or not registered as such with the SEC) may be required to submit because of positions that it holds or positions held by its clients that are privately-offered funds (“private funds”).  (An investment adviser may have additional reporting obligations with respect to other aspects of its business, e.g., if it is also a broker-dealer.)

Penalties for Failure to File.  Failure to submit a TIC Report can result in a civil penalty of up to $25,000 and injunctive relief, and willful failure to submit a TIC Report can result in a fine of $10,000 and imprisonment for up to one year.  Any officer, director, employee or agent who knowingly participates in willful failure to submit a TIC Report may be punished by a like fine or imprisonment.

Confidentiality – Use of Reported Data.  TIC Reports are filed on a confidential basis, and the data they contain is disclosed to the public only on an aggregate basis.  The Treasury uses data from TIC Reports to formulate international and financial policies and to determine the U.S. balance of payments and the U.S. international investment position.  The Department of the Treasury issues a monthly press release that summarizes, among other things, the status of securities holdings as between U.S. and foreign entities based on data from TIC Reports.

Who Must File and For How Long.  In general, a U.S.-resident entity that is not 50 percent or more owned by another U.S.-resident entity should file the relevant TIC Report for itself and all U.S.-resident subsidiaries that are 50% or more owned.  The staff of the Federal Reserve Bank of New York has stated informally with respect to Forms C, S, SLT, SHC/SHCA and SHL/SHLA that (a) to the extent filings are required of a private fund, typically they should be filed by the fund’s investment adviser, with the adviser filing one copy of each relevant TIC Report that contains the requested information for all applicable private funds, and (b) an investment adviser should aggregate its applicable private funds in determining whether the reporting threshold for a TIC Report has been met.  Under certain circumstances, an adviser should not report data in TIC Reports if doing so would duplicate data being provided by a broker-dealer or custodian that, for example, is a service provider to the adviser’s private funds.

Once the filing threshold for a TIC Report has been reached, a reporting entity is typically required to continue to file the report for a certain number of subsequent filing periods, whether or not the filing threshold is reached in those periods.  For example, once the reporting threshold for Form S, a monthly report, has been reached, the reporter must file Form S for each remaining month of the calendar year.

Types of Reports.  The six categories of TIC Reports that an adviser to private funds is most likely to need to file are summarized below.  (The forms themselves along with their instructions are available on a website maintained by The Federal Reserve Bank of New York.)

Form CQ-1

Quarterly report of financial liabilities to, and financial claims on, unaffiliated foreign residents.

  • Reporting Entities: financial companies that are not depository institutions, bank holding companies, financial holding companies, or broker-dealers; these include insurance companies, mutual funds, unit investment trusts and other pools of commingled assets. 
  • Timing: data as of the last business day of each calendar quarter should be submitted no later than 30 calendar days following the “as of” date.
  • Requested Information: financial liabilities and claims (i.e., those that impose an obligation to pay or provide the right to receive cash or another financial asset, except those between a purchaser and a seller of goods or services in the normal course of business). 
  • Reporting Thresholds: (a) for Form CQ-1, Part 1, when reportable liabilities exceed $50 million and (b) for Form CQ-1, Part 2, when reportable claims exceed $50 million. 

Form D

Quarterly report of (a) derivatives contracts with foreign residents or foreign exchanges (plus, if the reporting entity serves as a broker, the broker’s U.S. customer’s positions in foreign exchanges) and (b) positions of the reporting entity’s foreign customers on all U.S. exchanges. 

  • Reporting Entities: all U.S.-resident entities that have derivatives contracts with foreign residents that exceed the reporting threshold.
  • Timing: data as of the last business day of each calendar quarter should be submitted no later than 50 calendar days following the “as of” date. 
  • Requested Information: description of derivatives contracts by risk category and instrument type and by the country in which the direct counterparty to the derivative is a resident.  Contracts that are derivatives under Financial Accounting Standards Board Statement No. 133 are generally required to be reported on Form D.  Examples of derivatives that are reportable on Form D include forward rate agreements, forward foreign exchange agreements, forward commodity contracts, interest rate futures, equity index futures, currency futures, commodity futures, securities futures, options, interest rate swaps, credit derivatives and certain warrants.  Specifically excluded from reporting on Form D are spot foreign exchange contracts, short sales and life, property and casualty insurance contracts.
  • Reporting Thresholds: when (a) the total notional holdings of derivatives (worldwide, not just U.S.) for the reporter’s account exceeds $400 billion or (b) the total cash receipts and payments received and/or made by the reporter for the purchase, sale or final closeout of derivatives exceeds $400 million in a quarter.

Form S

Monthly report of transactions (broken down by country) in long-term securities (securities with an original maturity of greater than one year or no maturity) with foreign residents. 

  • Reporting Entities: brokers, dealers, security underwriters, issuers of securities, end investors, advisers and sub-advisers (on behalf of the funds that they advise including private funds, mutual funds and pension funds), custodians (including central securities depositories), paying agents and electronic trading platforms. 
  • Timing: data as of the last business day of each month should be submitted no later than fifteen calendar days following the “as of” date. 
  • Requested Information: purchases and sales of long-term securities (whether the securities are U.S. or foreign) between the reporting entity and a foreign entity.
  • Reporting Threshold: when either total reportable purchases or total reportable sales of long-term securities amount to $50 million or more during the reporting month.  

Form SLT

Monthly report of the dollar value (by country) of both foreign resident holdings of long‑term U.S. securities and U.S.-resident holdings of long-term foreign securities. 

  • Reporting Entities: U.S.-resident custodians (including U.S.-resident central securities depositories), U.S.-resident issuers and U.S.-resident end investors (including private fund advisers on behalf of their private funds). 
  • Timing:  data as of the last business day of each month should be submitted no later than twenty-three calendar days following the “as of” date. 
Form SLT was recently introduced and is still being phased in.  The first filing “as of” date was October 31, 2011.  The next filing “as of” date is December 31, 2011 after which the filing frequency will be monthly.
  • Requested Information: holdings of long-term portfolio securities including (i) securities issued by U.S. residents that are owned by foreign residents, including U.S. equities, U.S. debt securities, U.S. asset-backed securities, and U.S. equity interests in investment funds; and (ii) securities issued by foreign residents that are owned by U.S. residents, including foreign equities, foreign debt securities and foreign asset-backed securities.
  • Reporting Threshold: when the consolidated total of all reportable long-term U.S. and foreign securities has a total fair value equal to or more than $1 billion on the last business day of the reporting month. 

A future edition of the Financial Services Alert will discuss Form SLT in more detail.

Form SHC/SHCA

Conducted once every five years, Form SHC is a benchmark survey of holdings of foreign portfolio securities held by U.S. residents.  The survey encompasses foreign equities, short‑term debt securities (including selected money market instruments) and long-term debt securities.  Filed in years when the benchmark survey is not being conducted, Form SHCA is an annual report of foreign portfolio securities held by U.S. residents filed by the largest U.S.-resident custodians and end investors as identified by the Federal Reserve Bank of New York based on the previous benchmark survey. 

  • Reporting Entities: for Form SHC, U.S.-resident custodians and U.S.-resident end investors (including advisers on behalf of their private funds) that either (a) meet the reporting threshold for either Schedule 2 or Schedule 3 or (b) receive a notification from the Federal Reserve Bank of New York; for Form SHCA, only entities that are notified by the Federal Reserve Bank of New York that they have a reporting obligation.
  • Timing: Reports for the next SHC benchmark survey must provide data as of December 31, 2011 and must be submitted by March 2, 2012.  Reports for the SHCA annual survey must provide data as of December 31 and must be submitted no later than the first Friday of March of each year.
  • Requested Information: There are three schedules to Forms SHC and SHCA –
  • Reporting Thresholds - Form SHC:
  • Reporting Thresholds - Form SHCA: The only entities required to file Form SHCA (the annual survey) are those that receive a notice or copy of the form from the Federal Reserve Bank of New York. 

Form SHL/SHLA

Conducted once every five years, the SHL is a benchmark survey of U.S. securities owned by foreign residents.  Filed in years when the benchmark survey is not being conducted, Form SHLA is an annual report of U.S. securities owned by foreign residents that is filed by the largest U.S.-resident custodians and issuers as identified by the Federal Reserve Bank of New York based on the previous benchmark survey. 

  • Reporting Entities: for Form SHL, U.S.-resident custodians (including broker‑dealers), U.S.-resident central securities depositories, and U.S.-resident issuers (including advisers on behalf of their private funds) that either (a) meet the reporting threshold for Schedule 2 or (b) receive a notification from the Federal Reserve Bank of New York; for Form SHLA, only entities that are notified by the Federal Reserve Bank of New York that they have a reporting obligation.
  • Timing: Reports for the next SHL benchmark survey must provide data as of June 30, 2014 and must be submitted by August 31, 2014.  Reports for the SHCA annual survey must provide data as of the last business day of June and must be submitted no later than the last business day of August of each year.
  • Requested Information: There are two schedules to Forms SHL and SHLA –
  • Reporting Thresholds - Form SHL:
  • Reporting Thresholds - Form SHLA: The only entities required to file Form SHLA (the annual survey) are those that receive a notice or copy of the form from the Federal Reserve Bank of New York.

Exception for Direct Investments

Form S, Form SLT, Form SHL, Form SHLA, Form SHC and Form SHCA have a reporting exception for any holding that is a “direct investment.”  When a U.S. resident owns or controls 10 percent or more of the voting securities of a foreign entity, or when a foreign entity owns or controls 10 percent or more of the voting securities of a U.S.‑resident entity, that holding is a direct investment.  The Federal Reserve Bank of New York does not consider limited partner interests in a limited partnership to be voting securities for purposes of the direct investment reporting exception.  It does, however, consider a general partner interest in a limited partnership to be a direct investment.  Although excepted from the above-named TIC Reports, direct investments may, nevertheless, need to be reported to the Bureau of Economic Analysis.

Bureau of Economic Analysis Reports.  The Bureau of Economic Analysis (the “BEA”) in the Department of Commerce collects cross-border transaction and position data with respect to affiliated U.S. and foreign companies using Form BE‑577, “Direct Transactions of U.S. Reporter with Foreign Affiliate,” which is due quarterly.  The BEA also has an annual reporting form called “Annual Survey of U.S. Direct Investment Abroad” (the form number changes annually; in 2011 it was Form BE-11).  These BEA forms are filed by U.S. entities that have ownership interests of 10% or more in foreign companies.  The BEA maintains a website with the current forms and instructions.  The penalties for failure to file BEA reports are the same as those for failure to file TIC Reports.

This article provides only a high level overview of the TIC Reports its describes, which are detailed and can be complex in their application to private fund advisers.  Reporting obligations for private fund advisers, if any, may vary widely depending on their particular circumstances.