In August 2014, the U.S. Department of the Treasury (Treasury) and the Federal Reserve Bank of New York (FRBNY) will conduct a benchmark survey of foreign holdings of U.S. issuers’ securities on Treasury International Capital (TIC) Form SHL (TIC SHL). U.S. asset managers that advise investment funds with foreign investors may be required to file TIC SHL. This DechertOnPoint provides an overview of the TIC SHL reporting requirements and explains how they may apply to investment managers.1

Overview of TIC SHL

TIC Form SHL is a mandatory benchmark study commissioned by the Treasury and administered by the FRBNY every five years.2 The survey reviews holdings of U.S. securities—including short- and long-term securities and selected money markets instruments—by foreign residents.3 The survey is part of a series of TIC and related forms that are used to calculate U.S. balance of payment data, to formulate U.S. international financial and monetary policies and to generate International Monetary Fund statistics.

TIC SHL consists of two parts. Schedule 1 consists mainly of basic identifying information and a summary of the data, if any, reported on Schedule 2. Schedule 2, which is significantly more burdensome, requires detailed security-by-security reporting of foreign holdings of the reporter’s securities.

Who Must Report

Reporting obligations are triggered in two ways. First, all U.S.-resident entities that are contacted by the FRBNY are required to file at least Schedule 1 and must file Schedule 2 if they exceed the reporting threshold, discussed below. Second, any entity that exceeds the exemption level, regardless of whether or not it is contacted by the FRBNY, must submit both Schedule 1 and Schedule 2. The reporting threshold is met if the total value of reportable U.S. securities owned by foreign residents equals $100 million or more as of the close of business on June 30, 2014. For purposes of determining whether the threshold has been met, asset managers and other reporters must consolidate all U.S.-resident parts of their organization (including all U.S.-resident branches and subsidiaries), as well as any U.S. investment funds they manage.4

What to Report

Investment managers report on behalf of their own organization (i.e., the adviser or its parent entity’s shares held by foreign residents) as well as the U.S. investment funds they manage. The TIC SHL instructions define funds broadly to include “all investment vehicles that pool investors’ money and invest the pooled money in one or more of a variety of assets,” and include open- and closed-end funds, money market funds, REITS, investment trusts, index-linked funds, ETFs, hedge funds and common trust funds.5 Any shares or similar units issued by the funds (including limited partnership interests) held by non-U.S. residents are within the scope of TIC SHL. In addition, managers that organize offshore feeder funds to U.S. master funds must report the securities held by the offshore feeder fund, even though the onshore and offshore funds may be affiliated with one another.

Reporting Dates

If required to file TIC SHL, an entity must submit the report by August 29, 2014, the last business day of August. The report should encompass holdings as of June 30, 2014, the last business day of June.

Penalties for Failure to Report

TIC SHL is authorized and required by an Act of Congress. There is potential civil and criminal liability for failure to file timely and accurate reports for any U.S. person or group subject to the reporting requirements. Any group that fails to provide timely and accurate data may be subject to a civil penalty between $2,500 and $25,000, or injunctive relief ordering compliance, or both. Any U.S. person or group that willfully fails to submit any of the information required in the report on TIC SHL may be subject to a fine up to $10,000, and, if an individual, may be subject to imprisonment for up to one year, or both. In addition, the requirement subjects officers, directors, employees and agents of any entity with filing obligations who knowingly participate in such willful violation to the same penalties.

Conclusion

Although completing TIC SHL is a potentially burdensome exercise, entities that already file other TIC and related forms (in particular, TIC Form SLT) may be able to rely on existing reporting systems within their organizations. Investment managers are expected to make reasonable efforts to determine the extent to which fund shares are held by foreign investors. In doing so, they should be mindful that the relevant data may be held by a third party, such as a transfer agent, and should work with such vendors to compile the reports. However, to the extent that shares are held through omnibus accounts administered by U.S. broker-dealers that serve both U.S. and foreign investors, investment managers need not look through to determine the investors’ residency and may instead rely on the broker-dealers maintaining the accounts, which should report such holdings on their own TIC SHL filings.