On October 20, 2016, the U.S. Commerce Department's Bureau of Economic Analysis (BEA) published a final rule to decrease the foreign investment reporting burden for certain private funds and to make various changes to the BE-13 survey of new foreign direct investment in the United States. Under the new rule, inbound investments by foreign persons in U.S. private funds will not have to be reported to the BEA if the foreign parent does not own 10% or more of the voting interest in any operating companies indirectly through the U.S. private fund. Rather, investments in U.S. private funds through which a foreign parent holds less than a 10% voting interest in an operating company would be considered "portfolio investments" reportable on the Treasury International Capital (TIC) reports instead. This rule does not affect the BEA reporting requirements for foreign investments in operating companies or investments through private funds that control operating companies if the reporting criteria are otherwise met. BEA's final rule will be effective on November 21, 2016.
We summarize below the main aspects of the final rule, as well as key takeaways.
Private Funds Reporting Change
BEA's final rule relates to its inbound investment surveys: the BE-605 Quarterly Survey of Foreign Investment in the United States. The BE-15 Annual Survey of Foreign Direct Investment in the United States, and the BE-13 Survey of New Foreign Direct Investment in the United States. Under current BEA rules and practice, investments by foreign entities with a 10% or greater voting interest in a U.S. private fund are considered "direct" foreign investments reportable in various BEA surveys. This is true regardless of whether the private funds' investments are only in holding companies or whether the funds do not take any voting interest in their investments. BEA considers general partners to hold 100% of the voting interest in limited partnerships and managing members to hold 100% of the voting interest in limited liability companies, while limited partners and non-managing members hold zero voting interest. Under current practice, reporting is required in BEA's "direct" investment surveys even though the investment scheme may actually be closer in substance to a "portfolio" investment, which is an investment of less than 10% voting interest and which is reportable on TIC forms instead.
BEA's new rule seeks to more clearly distinguish between direct and portfolio investments, and to remove from BEA reporting jurisdiction those investments in private funds that exhibit substantive characteristics of portfolio investments. Accordingly, BEA reporting is no longer required for foreign investment in a U.S. private fund unless the foreign parent holds 10% or more of the voting interest in an operating company indirectly through the U.S. private fund.
This rule would remove BEA reporting requirements (and potentially shift the reporting to the TIC reports) for foreign investment in U.S. private funds that only invest in other private funds or holding companies, or that only make investments with less than a 10% voting interest in an operating company. This change will primarily benefit U.S. hedge funds that only acquire less than a 10% voting interest in operating companies, and U.S. private equity funds that invest exclusively in other private funds or those that hold less than a 10% voting interest in operating companies (including limited partner interests). The change will not affect BEA reporting of investments, directly or indirectly, of 10% or more of the voting interest in any operating companies through a private fund.
BEA's final rule is substantively the same as the policy it proposed in April (on which we previously reported), with one clarification. That is, the 10% threshold applies to voting interest held by the foreign parent in an operating company through the U.S. private fund, rather than separate 10% thresholds applying at each stage.
BEA also proposed earlier this year that the same private fund reporting methodology would apply to its quarterly, annual, and benchmark outbound investment surveys (BE-10, BE-11, and BE-577) beginning in 2017. It has not published any rule or further guidance changing that plan.
BE-13 Survey Changes
BEA's final rule also makes certain changes to the BE-13 survey format and reporting requirements. Below is a summary of the changes:
- Forms BE-13A (acquisition of a U.S. business that remains a separate entity) and BE-13C (acquisition of a U.S. business that is merged with an affiliate) will be combined on Form BE-13A, and Form BE-13C will be discontinued.
- Form BE-13B (establishment of a new U.S. business) will no longer be required when the U.S. business is established to facilitate an acquisition within 30 days (which is reported on Form BE13A). We note that some reporters had already been taking this approach when a new entity is established as an acquisition vehicle as part of the single transaction close in time.
- Certain questions on acquisition/establishment costs and existing U.S. affiliates will be modified to simplify the forms and focus on the specific information required by BEA.
This final rule may potentially decrease the BEA reporting burden on certain private funds, especially hedge funds. While portfolio investments may need to be reported on TIC forms instead, many asset managers already file both BEA surveys and TIC forms. Since BEA's foreign investment surveys have broad application, many private funds will still have to file multiple BEA surveys. However, given the recent proliferation of BEA reporting requirements, it is worthwhile for private funds to consider whether this proposed reporting change may apply to their operations.