Alert December 27, 2011

Treasury Form SLT - Reporting of Long-Term Foreign Securities Held by U.S. Residents and Long-Term U.S. Securities Held by Foreign Residents

Treasury International Capital Form SLT (“Form SLT”) is a Treasury Department filing designed to gather information on long-term U.S. securities held by foreign residents and long-term foreign securities held by U.S. residents.  Form SLT is filed with the Federal Reserve in its capacity as the Treasury Department’s fiscal agent.  This article provides an overview of Form SLT reporting obligations with a focus on investment advisers that manage private funds and advise separate accounts.

Who Must Report

All U.S. persons who are U.S.-resident custodians, U.S.-resident issuers or U.S.-resident end-investors and who meet or exceed the reporting threshold (as described below under the heading “Minimum Threshold for Reporting”) must file Form SLT.  An “end‑investor” is an entity that acquires or relinquishes securities for its own account or invests on behalf of others.  This definition is broad enough to include investment managers, both of separate accounts and of pooled asset vehicles.  An “issuer” is a legal entity that has the power to issue and distribute a security.

Consolidation

For reports on Form SLT, reporting entities should consolidate all their subsidiaries.  Investment advisers and managers should file one consolidated report of the holdings and issuances of all U.S.-resident parts of their own organization and of all U.S.-resident entities that they advise/manage.

Minimum Threshold for Reporting

Persons are only required to complete and submit reports on Form SLT if their consolidated holdings of (i) U.S. reportable securities held by foreign residents and (ii) reportable foreign securities held by U.S. residents is greater than $1,000,000,000 as of any reporting date (as discussed below under the heading “Timing of Reports”).  The following examples illustrate how the threshold applies to a U.S.-based investment manager advising funds that use a non-U.S.-resident custodian (the use of a U.S.-resident custodian has implications for certain Form SLT filers that are discussed below under “Reporting Obligations among U.S. Issuers, End-Users and Custodians”):

Example 1: A U.S.-based investment manager advises two funds that are Delaware limited partnerships.  The first Delaware fund has $700M in investments ($100M in U.S. reportable securities and $600M in non-U.S. reportable securities, none of which are “direct investments” (which are excludable from the determination as discussed below under the heading “Securities to be Reported”)).  The second Delaware fund has $500M in investments (all of which are in non-U.S. reportable securities, and none of which are direct investments).  All of the partners in the funds are U.S. residents.  Under these circumstances, the investment manager will be required to report on Form SLT because in the aggregate it manages $1.1B of non-U.S. reportable securities held by U.S. residents. 

Example 2: A U.S.-based investment manager advises two funds that are Delaware limited partnerships.  The first Delaware fund has $700M in investments ($300M in U.S. reportable securities and $400M in non-U.S. reportable securities, none of which are direct investments).  The second Delaware fund has $500M in investments (all of which are in non-U.S. reportable securities, and none of which are direct investments).  All of the partners in the funds are U.S. residents.  Under these circumstances, the investment manager will not be required to report on Form SLT because although in the aggregate it manages $1.2B of securities, only the $900M of non-U.S. reportable securities held by U.S. residents counts toward (but falls short of) the threshold. 

Example 3: A U.S.-based investment manager advises two funds, one of which is a Delaware limited partnership while the other is a Cayman Islands limited partnership.  The Delaware fund has $1.4B in investments ($1.3B in U.S. reportable securities and $100M in non-U.S. reportable securities, none of which are direct investments) and the Cayman fund has $1.2M in investments ($800M in U.S. reportable securities and $400M in non-U.S. reportable securities, none of which are direct investments).  All of the partners in the Delaware fund are U.S. residents.  All of the partners of the Cayman Islands fund are non-U.S. residents.  Under these circumstances, the investment manager will not be required to report on Form SLT because only the $100M of non-U.S. reportable securities held by U.S. residents counts towards (but falls short of) the reporting threshold.

Timing of Reports

Starting in 2012, the reports on Form SLT must be filed monthly.  Data on a Form SLT report must be as of the last business day of the month, and the report on Form SLT must be submitted to the Federal Reserve no later than the 23rd calendar day of the month following the reporting date.  When it falls on a weekend or holiday, the reporting deadline is extended to the next business day.

The next report on Form SLT is as of December 30, 2011 and is due no later than January 23, 2012.

Significantly, once a reporting entity is required to submit a report on Form SLT in any calendar year, it also must submit a report for each remaining month in that calendar year, regardless of the consolidated total of reportable securities held as of any subsequent month-end.

Securities to be Reported

Reportable long-term securities, securities with an original maturity of more than one year or no contractual maturity, include: (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 funds; and (ii) U.S.-resident holdings of foreign securities, including foreign equities, foreign debt securities and foreign asset-backed securities.

Types of reportable long-term securities include, but are not limited to:

  • Equity Interests
  • Common stock
  • Preferred stock (participating and nonparticipating preference shares)
  • Restricted stock
  • Equity interests in funds, including limited partnership interests and equity interests in other entities that do not issue shares/stock
  • All other equity interests, including privately placed interests and interests in private equity companies and venture capital companies
  • Long-Term Debt Securities
  • Debt, registered and bearer, including bonds and notes, and bonds with multiple call options
  • Convertible bonds and debt with attached warrants
  • Zero-coupon debt and discount notes
  • Asset-backed securities (ABS)

The following instruments and other assets are specifically excluded from consideration for purposes of Form SLT:

  • Direct investments. “Direct Investments” are investments in which a resident of one country obtains a degree of influence over the management of a business enterprise in another country.  The criterion used to define direct investment is ownership of at least 10 percent of the voting securities of an incorporated business enterprise or the equivalent interest in an unincorporated business enterprise.  Data on cross-border Direct Investment are collected by the Bureau of Economic Analysis, U.S. Department of Commerce.
  • Short-term securities
  • Bankers’ acceptances and trade acceptances
  • Derivative contracts meeting the definition of a derivative under ASC 815 (formerly FAS 133)
  • Loans and loan participation certificates
  • Letters of credit
  • Precious metals, commodities and raw land
  • Bank deposits, including time deposits, short-term and long-term negotiable certificates of deposit, and demand deposits
  • Annuities, including variable rate annuities
  • Securities taken in as collateral and securities received in repurchase/resale agreements and security lending agreements

Valuation of Securities

All securities should be reported using settlement date accounting. Gross long positions should be reported, with no netting of short positions.

Each person completing the report on Form SLT must report the fair value of securities as of the last business day of the month. The fair value follows the definition of ASC 820 (formerly FAS 157).  Custodians should, at a minimum, report the fair value to the extent that it is available as part of the services provided to their customers, even if the price available is for a date prior to the last business day of the month.

If a security is not denominated in U.S. dollars, its foreign currency denominated fair value should be converted into U.S. dollars using the spot exchange rate as of close of business on the last business day of the month.

Reporting Obligations Among U.S. Issuers, End-Users and Custodians

U.S.-resident custodians, U.S.-resident issuers or U.S.-resident end-investors each have Form SLT reporting obligations.  However, U.S. issuers and U.S. end-investors do not need to report otherwise reportable securities if such securities are held by a U.S.-resident custodian in the name of the beneficial owner.  But, when securities are held by a U.S.-resident custodian in an omnibus account in the name of an investment manager, those securities must be reported by the investment manager because the custodian does not know and cannot report the identity of the beneficial owner of the securities.  This aspect of reporting Form SLT report is illustrated by the following examples involving an investment adviser’s funds and separate accounts:

Example 1: A U.S.-based investment manager advises two funds that are Delaware limited partnerships.  The securities owned by each fund are held by a U.S.-resident custodian in the name of the respective fund.  The first Delaware fund has $700M in investments ($100M in U.S. reportable securities and $600M in non-U.S. reportable securities, none of which are direct investments).  The second Delaware fund has $500M in investments (all of which are in non-U.S. reportable securities, and none of which are direct investments).  All of the partners in both funds are U.S. residents.  Under these circumstances, the investment manager is not required to report on Form SLT.  Even though the investment manager, in the aggregate, manages $1.1B of non-U.S. reportable securities held by U.S. residents, it is relieved of any Form SLT reporting obligation because the U.S.-resident custodian will report the holdings.

Example 2: A U.S.-based investment adviser manages separate accounts for 2 clients, one of which is a U.S. corporation while the other is a Cayman exempted company.  The securities holdings of the U.S. company’s separate account is held with a U.S.-resident custodian.  The securities holdings of the Cayman company’s separate account is held with a Cayman custodian.  In each case, the account is in the client’s name.  In its separate account, the U.S. company owns $600M of non-U.S. reportable securities.  In its separate account, the Cayman company owns $1.1B of U.S. reportable securities.  Under these circumstances, the investment adviser will not be required to report on Form SLT.  The U.S.-resident custodian will report the $600M of non-U.S. reportable securities held by the U.S. company, and the investment adviser has no reporting obligations relating to the $1.1B of U.S. reportable securities held by the Cayman company.

Example 3: A U.S.-based investment adviser manages separate accounts for a U.S. corporation.  The securities holdings of the separate account are held with a U.S.‑resident custodian, in an omnibus account in the name of the investment adviser.  In its separate account, the U.S. company owns $1.1B of non-U.S. reportable securities.  The investment manager will be required to report on Form SLT.  Because the holdings are held in an omnibus account, as opposed to being held in the name of the beneficial owner, the custodian does not know who the beneficial owner is and therefore cannot make the required filing.

Confidentiality

Data reported on Form SLT will be held in confidence by Treasury Department and the Federal Reserve. The data reported by individual respondents will not be published or otherwise publicly disclosed; however, aggregate data derived from reports on Form SLT may be published or otherwise publicly disclosed in a manner that will not reveal the amounts reported by any individual reporter.

Penalties for not Reporting

Failure to complete reports on Form SLT may result in a civil penalty of not less than $2,500 and not more than $25,000.  Willful failure to report can result in criminal prosecution and upon conviction a fine of not more than $10,000; and upon conviction of an individual, imprisonment for not more than one year, or both.  Any officer, director, employee, or agent of a corporation who knowingly participates in such willful failure to report may, upon conviction, be punished by a like fine, imprisonment, or both.