Certain Fund Managers May Be Required To File TIC Form SHC By March 4, 2022

Fund managers may be required to file Treasury International Capital (“TIC”) Form SHC, Report of U.S. Ownership of Foreign Securities, Including Selected Money Market Instruments (“Form SHC”), for 2021 by March 4, 2022, based on the fair value of foreign assets owned by U.S. persons determined as of December 31, 2021. For 2021 and other benchmark years, Form SHC is mandatory for U.S. persons that meet a $200 million threshold for reporting.

The U.S. Department of Treasury (“Treasury”) uses Form SHC to gather data on ownership of foreign securities by U.S. persons in order to formulate international economic and financial policies. Treasury requires Form SHC to be filed by U.S. persons that meet the reporting threshold every five years (benchmark years). 2021 was a benchmark year. For non-benchmark years, TIC Form SHCA is only required to be filed by certain fund managers which are selected and notified by the Federal Reserve Bank of New York (the “FRBNY”).

In the hedge fund context, Form SHC seeks to capture information regarding two types of holdings: (1) foreign securities held by U.S. funds, and (2) interests in offshore master funds held by U.S. feeder funds. This newsletter briefly discusses Form SHC as it applies to fund managers and hedge funds. Both U.S. funds managed by U.S. managers as well as U.S. funds managed by non-U.S. managers may be required to file Form SHC.

Fund managers should now consider whether they are required to file Form SHC so that they have sufficient time to gather information and file before the March 4, 2022, deadline.

Threshold

Form SHC generally applies to U.S. persons who have (1) at least $200 million of directly held foreign reportable securities (aggregated over all U.S. accounts), or (2) at least $200 million of foreign reportable securities held at a U.S.-resident custodian, in each case, as of December 31, 2021. The threshold amount is determined on a gross basis.

Timing

The filing deadline for Form SHC is March 4, 2022.  Form SHC is required to be filed with the FRBNY.

Who is Required to File

U.S.-resident end-investors and U.S.-resident custodians may be required to file Form SHC. Generally, a fund manager is responsible for filing Form SHC based on the holdings of all the U.S. funds and accounts that it manages.

A U.S. manager is considered a U.S.-resident end-investor and is generally required to file Form SHC if: (1) it received a letter from the FRBNY notifying the manager that it is required to file Form SHC, or (2) the U.S. funds and accounts that it manages on behalf of U.S. persons own $200 million or more of foreign reportable securities.

A U.S. fund managed by a non-U.S. manager is also required to file Form SHC if the U.S. fund owns $200 million or more of foreign reportable securities.

U.S.-resident end-investors. “U.S.-resident end-investors” are U.S. residents that invest in “foreign securities for their own portfolios or invest on behalf of others” and generally include U.S. fund managers and U.S. funds. A U.S. fund manager generally reports foreign reportable securities owned by the manager and the U.S. funds that it manages.

U.S.-resident custodians. “U.S.-resident custodians” are U.S. residents that manage, as custodians, the safekeeping of foreign securities for themselves and other U.S. persons. U.S.-resident custodians generally include banks or prime brokers where securities are held. A U.S. manager may also be deemed to be a U.S.-resident custodian where securities are held in the manager’s name, rather than a fund’s name (i.e., because of how the U.S. securities are held, the U.S. manager is the only party that knows that non-U.S. securities are owned by U.S. persons). A U.S.-resident custodian must report foreign reportable securities held for U.S. residents if the custodian meets the $200 million threshold. U.S.-resident custodians should report both the foreign portfolio securities held in safekeeping for other U.S. residents and their own foreign portfolio securities.

Foreign Reportable Securities

Foreign reportable securities are securities issued by entities organized under the laws of a foreign country and securities issued by international or regional organizations (e.g., the World Bank). Reportable securities generally include foreign equity securities, partnership interests, short-term debt securities, long-term debt securities, asset-backed securities, and negotiable money market instruments. Derivatives (such as futures, forwards, swaps, options and warrants), loans, loan participations, bank deposits, and certain other securities are not foreign reportable securities. Repurchase agreements and reverse repurchase agreements are generally disregarded and the seller under the repurchase agreement is treated as owning the security. The trading market and denomination of a security has no effect on whether a security is foreign. For example, ADRs would be considered foreign.

A U.S. feeder fund’s investment in a foreign master fund is a reportable security without regard to the securities owned by the master fund.

Direct Investments. If a U.S. person owns 10% or more of the voting interests in a foreign entity, the ownership is considered a “direct investment” that is excluded from the TIC reporting rules (and thus not reportable on Form SHC) and is not included in determining whether the $200 million threshold is met. Direct investments may be required to be reported to the Bureau of Economic Analysis (“BEA”) if certain reporting requirements are met.

A general partner interest in a foreign limited partnership (or ownership of management shares in a foreign corporation) is considered to be a direct investment similarly excluded from reporting unless the private fund rule discussed below applies.

Private Fund Rule. If a foreign entity does not own, directly or indirectly, an operating company (a business entity that is not a private fund or a holding company) in which the U.S. owner of the foreign entity, directly or indirectly, owns at least 10% of the voting interest through the private fund, then such foreign entity is not a direct investment and the U.S. owner may be required to report the ownership on Form SHC. For example, a domestic general partner’s interest in an offshore master would generally be a foreign reportable security.

How to File Form SHC

Form SHC may be filed electronically using the Federal Reserve Reporting Central System or by mail. Certain U.S. persons may be required to submit the data electronically.

Confidentiality

The data on Form SHC is confidential. However, aggregated data may be published by Treasury.

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If you have any questions regarding this client alert, please contact your primary Kleinberg Kaplan attorney or a member of our Tax Department listed to the right.