Certain Fund Managers May Be Required To File TIC Form SHC By March 3, 2017

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 for 2016 by March 3, 2017, based on the fair value of foreign assets determined as of December 31, 2016.

Form SHC is a Treasury form which seeks to gather data on cross border ownership of securities by U.S. persons in order to compute balance of payments accounts and to formulate international economic and financial policies. The Department of Treasury requires Form SHC to be filed every five years (benchmark years) as part of the TIC reporting survey of foreign securities owned by U.S. persons. 2016 was a benchmark year. For non-benchmark years, TIC Form SHCA is required to be filed only by fund managers which are notified by the Federal Reserve Bank of New York (“FRBNY”) that they are required to file Form SHCA.

For benchmark years, such as 2016, Form SHC is mandatory for U.S. persons that meet the $200 million threshold for reporting. 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 legal update briefly discusses Form SHC as it applies to fund managers and hedge funds. Form SHC can apply to U.S. funds managed by U.S. managers as well as U.S. funds managed by non-U.S. managers.

A fund manager may be required to file Form SHC even if all its foreign securities are held with U.S.-resident custodians. Fund managers who were not contacted by the FRBNY should determine whether they are required to file Form SHC and, if so, how they should complete the Form. It may take a fair amount of time to complete Form SHC due to the level of detail and complexity, so fund managers should immediately consider whether they are required to file Form SHC in order to gather information and file Form SHC before the March 3, 2017, deadline.

Who the Form applies to. Form SHC applies to U.S.-resident end-investors and U.S.-resident custodians. 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 in two circumstances: (1) if it received a letter from the FRBNY notifying the manager to file Form SHC, or (2) if the U.S. funds that it manages (and generally accounts that it manages on behalf of U.S. persons) own, in the aggregate, $200 million or more of foreign reportable securities.

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

U.S.-resident end-investors. A “U.S.-resident end-investor” means a U.S. resident that invests in “foreign securities for its own portfolios or invest[s] on behalf of others” and generally includes U.S. fund managers and U.S. funds. U.S.-resident investors must report all investments in foreign securities for their own portfolios or the portfolios of their clients. 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. A “U.S.-resident custodian” means a U.S. resident that is a “bank or other entity that manages or administers the custody or safekeeping of securities … or other assets for institutional or private investors.” U.S.-resident custodians would generally include banks or prime brokers where securities are held. A U.S. manager may also be deemed to be a U.S. custodian where securities are held in the manager’s name, rather than in 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.

Form SHC has Three Schedules

Schedule 1: Schedule 1 reports information that identifies the reporting entity and summarizes the information reported on Schedules 2 and 3. U.S. Persons notified by the FRBNY are required to file Form SHC, and complete Schedule 1, regardless of whether the U.S. person meets either of the $200 million reporting thresholds under Schedules 2 and 3.

Schedule 2: Schedule 2 reports detailed information on foreign reportable securities owned by U.S.-resident end-investors that meet the reporting threshold for Form SHC and which are not held with a U.S.-resident custodian. Foreign reportable securities in safekeeping with a U.S.-resident Central Securities Depository are reportable on Schedule 2. A manager will report on Schedule 2 details with respect to each foreign reportable security held as a U.S. resident end-investor (including the security’s issuer, type, and value). Schedule 2 requires information on each foreign reportable security and more than one Schedule 2 may be required.

Schedule 3: Schedule 3 reports summary amounts for all foreign securities entrusted to the safekeeping of an unaffiliated U.S.-resident custodian (not including a U.S.-resident Central Securities Depository) which meets the $200 million reporting threshold. U.S. Persons must report on Schedule 3 if the total fair value of foreign reportable securities entrusted to at least one unaffiliated U.S. custodian is $200 million or more, aggregated over all accounts.

Foreign Reportable Securities. Foreign reportable securities are all securities issued by entities established 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 (original maturity of one year or less) debt securities, long-term debt securities, asset-backed securities (where the issuer is foreign), and negotiable money market instruments. A U.S. fund’s investment in a foreign fund is a reportable security. The foreign fund is not looked through to determine what securities it owns. Repurchase agreements and reverse repurchase agreements are generally disregarded for these purposes and the person who owned the security prior to the agreement is treated as owning the security. Where securities are traded and in what denominations they are issued are irrelevant. For example, ADRs would be considered foreign.

Derivatives (such as futures, forwards, swaps, options and warrants), loans, loan participations, bank deposits, and certain other securities are not foreign reportable securities. If a foreign equity position represents 10% or more of the foreign issuer’s voting equity then such security would be considered a direct investment and not a reportable security for Form SHC purposes. Interests held as a general partner in a foreign-resident limited partnership are considered to be direct investments and are not foreign reportable securities.

Threshold. Unless notified of a reporting responsibility to file Form SHC by the FRBNY (in which case a manager would be required to file at least Scheudle 1 of Form SHC regardless of foreign reportable securities under management), Form SHC only applies to U.S. persons (1) who have at least $200 million of foreign reportable securities (aggregated over all U.S. accounts) as of December 31 2016, held directly or (2) who have at least $200 million of foreign reportable securities held at a U.S.-resident custodian. The threshold amount is determined on a gross basis.

Timing. The filing deadline for Form SHC is March 3, 2017, based on the value of security holdings as of December 31, 2016. Form SHC is required to be filed with the FRBNY.

How to File Form SHC. Form SHC may be electronically using the Federal Reserve Reporting Central System or by mail. U.S. persons that have to submit 100 or more Schedule 2 records, must submit the data electronically.

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