Certain Fund Managers May Be Required To File TIC Form SHL By August 30, 2019

Fund managers may be required to file Treasury International Capital (“TIC”) Form SHL, Report of Foreign-Residents’ Holdings of U.S. Securities, Including Selected Money Market Instruments (SHL (2019)) by August 30, 2019, based on the fair value of certain U.S. securities determined as of June 28, 2019, issued to foreign persons. This newsletter focuses on the application of Form SHL in the fund context and generally simplifies the approach to take in the fund context. Form SHL, as with other TIC and Bureau of Economic Affairs (“BEA”) forms, can be very complicated and needs to be prepared carefully.

Overview of Form SHLForm SHL gathers data that is generally used by the U.S. government in the formulation of international economic and financial policies. The Department of Treasury requires Form SHL to be filed every five years (benchmark years) as part of the TIC reporting survey of foreign holdings of U.S. securities. June 30, 2019, marked the end of the most recent benchmark year. For non-benchmark years, TIC Form SHLA is required to be filed only by fund managers that are notified by the Federal Reserve Bank of New York (“FRBNY”) that they are required to file Form SHLA.

For benchmark years, Form SHL is mandatory for U.S. persons that meet the $100 million U.S. reportable securities threshold, which is discussed below. A U.S. person that is contacted by the FRBNY regarding Form SHL is also required to file Form SHL even if they do not meet the $100 million threshold.
Reportable U.S. securities are, in general, securities issued by U.S. entities. Reportable U.S. securities include, but are not limited to, common stock, preferred stock, other equity interests (including shares or units of ownership in unincorporated business enterprises, such as limited partnerships and limited liability companies), and debt instruments.

Application to Fund Managers and FundsFund Managers. Generally, a U.S. fund manager is responsible for filing Form SHL based on the reportable U.S. securities of all the funds that it manages and its management entities. Funds managed by a non-U.S. fund manager are viewed separately for purposes of the $100 million threshold.

Reportable U.S. Securities. In the fund context, Form SHL generally seeks to capture information regarding five types of holdings:

 

• interests in domestic funds held by foreign investors;
• interests in domestic funds held by foreign funds (e.g., a mini-master fund where a foreign feeder is invested into a domestic master fund);
• interests (nonvoting) in U.S. blocker entities held by foreign funds (e.g., where a foreign fund invests in a U.S. corporation (or U.S. limited liability company which is classified as a corporation for U.S. federal income tax purposes) in order to block certain income such as effectively connected income);
• interests in U.S. limited liability companies which are disregarded for U.S. tax purposes and held by foreign funds or foreign master funds; and
• interests in U.S. management entities owned by non-U.S. persons (these might be excepted as direct investments depending on the type of securities and percentage owned by foreign persons).

 

 

If the total of these five categories of interests for a U.S. manager and funds managed by the U.S. manager equaled or exceeded $100 million as of June 28, 2019, the U.S. manager is required to file Form SHL by August 30, 2019. A foreign manager would look at each U.S. fund or other U.S. entity separately.

Completing Form SHL. Form SHL has two schedules.

Schedule 1: Schedule 1 reports information that identifies the reporting entity and summarizes the information reported on Schedule 2, including descriptions of how “fair value” of reportable U.S. securities were determined. U.S. persons notified by the FRBNY are required to file Form SHL, and complete Schedule 1, regardless of whether the U.S. persons meet the $100 million reporting threshold. U.S. persons notified by the FRBNY, who do not meet the $100 million reporting threshold, should report “exempt” on Schedule 1.

Schedule 2: Schedule 2 reports detailed information on U.S. reportable securities owned by foreign residents that meet the reporting threshold for Form SHL. A manager will report on a separate Schedule 2 details with respect to each U.S. reportable security held by a foreign resident (including the security’s issuer, type, value, and country of residence of the foreign holder). A separate Schedule 2 is required for each U.S. issuer, type of security, type of foreign investor, and per country of foreign investors in such securities. A foreign fund is not looked through to each of its investors so this simplifies the scope of Schedule 2 in the fund context.

Direct Investments. Investment in U.S. entities of 10% or more of their voting interests by a foreign entity are generally excluded from Form SHL. Instead, such investments may be required to be reported to the BEA. It appears, however, that managers can generally assume that direct investments are not applicable in the typical fund context.

Timing. The filing deadline for Form SHL is on or before August 30, 2019, based on the value of reportable U.S. securities issued as of June 28, 2019. Form SHL is required to be filed with the FRBNY. Extensions can be obtained but it is generally preferable not to obtain them.

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

How to File Form SHL. Form SHL may be filed with the FRBNY electronically using the Federal Reserve Reporting Central System or may be filed by mail or facsimile. U.S. persons that are required to submit 100 or more Schedule 2s, which would rarely apply in the fund context, are required to submit Form SHL electronically. A filer needs to obtain a reporter identification number.