The March 3, 2017 deadline is approaching for the Quinquennial Report of U.S. Ownership of Foreign Securities, Including Selected Money Market Instruments ("TIC Form SHC"). The TIC Form SHC is a form used by the Department of the Treasury to survey ownership of foreign securities every five years. The data collected will be used by the U.S. government in the computation of the U.S. balance of payments and the U.S. investment position, and in the formulation of international economic and financial policies. TIC Form SHC is a mandatory report for any U.S.-resident1 custodian2 or U.S.-resident end-investor3 that (i) has been contacted by the Federal Reserve Bank of New York, or (ii) met the reporting threshold for TIC Form SHC Schedule 2 and/or Schedule 3 as of December 31, 2016 (each, an "SHC Reporter"). This memo will address the TIC Form SHC reporting thresholds, the different filing schedules, consolidation rules, common filing scenarios for investment managers, asset valuation, and the submission of reports.
The reporting threshold for Schedule 2 is $200 million in total fair value of all foreign4 securities5 owned or managed by the SHC Reporter and not held with a U.S.-resident custodian. The reporting threshold for Schedule 3 is $200 million in total fair value of foreign securities held with any one unaffiliated U.S.-resident custodian that is not a central securities depository. Each reporting threshold is evaluated independently of the other such that a U.S.-resident investor may be required to report on Schedule 2 but not on Schedule 3 or vice versa.
TIC Form SHC Schedules
Schedule 1 must be completed by (i) all SHC Reporters that meet or exceed the reporting threshold for Schedule 2 or Schedule 3, and (ii) all SHC Reporters contacted by the Federal Reserve Bank of New York.
Schedule 1 requires certain identifying information of the SHC Reporter that includes: the reporter ID, name and address of the SHC Reporter, reporting status (i.e., whether the SHC Reporter exceeds the threshold for filing a Schedule 2 and/or a Schedule 3, or whether the SHC Reporter is exempt), description of valuation techniques and summaries of any information reported on Schedules 2 and/or Schedules 3 (if any).
Schedule 2 requires details of the foreign securities owned or managed by the SHC Reporter and not held with a U.S.-resident custodian. Information collected on Schedule 2 includes the details of the issuer of each such foreign security, the type of security and the fair value of the security held. One or more Schedule 2s may be required for each SHC reporter.
Schedule 3 requires details from a U.S.-resident end-investor of each unaffiliated U.S.-resident custodian with which it holds foreign securities with a total fair value of $200 million or more. This threshold is calculated on a custodian-by-custodian basis. Therefore, a SHC Reporter with more than one U.S.-resident custodian may be required to complete more than one Schedule 3 for each U.S.-resident custodian that holds $200 million or more in foreign securities for the SHC Reporter. Schedule 3 requires a summary of foreign securities held by the U.S.-resident custodian and certain identifying details of the U.S.-resident custodian.
A U.S. resident investment manager that sponsors investment funds will be required to complete and file TIC Form SHC on behalf of all the U.S. funds it sponsors and report on an aggregate basis. A non-U.S. investment manager that sponsors investment funds generally will not be required to aggregate the value of the foreign securities owned by U.S. funds that it sponsors when determining if each fund meets the filing thresholds. Unless there is a U.S.-resident parent entity, each U.S. fund will be considered independently for purposes of determining if the fund has a reporting obligation.
Common Filing Scenarios
Contacted by the Federal Reserve Bank
A SHC Reporter will be required to complete Schedule 1 regardless of whether the SHC Reporter has met the reporting threshold for Schedule 2 or Schedule 3 if it is contacted by the Federal Reserve Bank. Any such SHC Reporter that does not meet such thresholds will report that it is exempt on Schedule 1. A SHC Reporter that is contacted by the Federal Reserve Bank that meets the threshold for Schedule 2 and/or Schedule 3, will also be required to file on such schedules, as described herein.
Master Feeder Structures
If a U.S.-resident investment manager sponsors one or more U.S. feeder funds that in the aggregate hold $200 million or more of one or more non-U.S. master funds' securities, in general, the U.S.-resident manager will be required to complete a Schedule 2 for each such master fund. A non-U.S. resident investment manager that sponsors investment funds will not need to aggregate the U.S. funds that it sponsors when determining if it meets the filing threshold, unless there is a U.S. parent entity.
U.S. Stand-Alone Fund with a Non-U.S. Resident Custodian
If a U.S.-resident investment manager sponsors a U.S. stand-alone fund that owns $200 million or more in foreign securities, not held with a U.S.-resident custodian, the U.S.-resident manager will be required to complete one or more Schedule 2s for each foreign issuer.
U.S. Stand-Alone Fund with a U.S.-Resident Custodian
A U.S.-resident investment manager that sponsors a stand-alone U.S. fund that holds all of its assets with a U.S.-resident custodian may still have a filing requirement for TIC Form SHC. Such U.S.-resident investment manager will have a reporting requirement if (i) it is contacted by the Federal Reserve Bank or (ii) it meets the threshold level for Schedule 3. That is, if any one unaffiliated U.S.-resident custodian holds $200 million or more in foreign securities for the U.S. fund, the SHC Reporter will be required to report on Schedule 3. If such SHC Reporter uses multiple custodians that each hold $200 million or more in foreign securities for the U.S. fund, the SHC Reporter will complete one Schedule 3 for each such custodian.
A SHC Reporter reporting for a combination of U.S. feeder funds and U.S. stand-alone funds may be required to file both Schedules 2 and 3, if it meets the threshold for each schedule.
Registered Investment Companies
A registered investment company ("RIC"), such as a mutual fund, will be required to complete TIC Form SHC in the same manner as a private fund. The reporter will be required to file and will complete TIC Form SHC if (i) it is contacted by the Federal Reserve Bank and/or (ii) it meets the reporting threshold for Schedule 2 and/or Schedule 3. For instance, if the RIC holds $200 million or more in foreign securities with a U.S.-resident custodian, the RIC will complete Schedule 3 for such U.S.-resident custodian.
All securities should be reported using settlement date accounting. Gross long positions should be reported. Any short positions should not be netted against long positions. The securities should be reported as of December 31, 2016 using fair value, as defined in ASC 820 (formerly FAS 157).
Submission of Reports
TIC Form SHC may be submitted either electronically, using the Federal Reserve Reporting Central System, or by mail to the Federal Reserve Bank of New York. If an SHC Reporter is submitting 100 or more Schedule 2s, then the SHC Reporter must file electronically using the Reporting Central System. Other than banking institutions, reporting parties, including investment managers, private investment funds and pension plans, are required to file their reports with the Federal Reserve Bank of New York, regardless of their location.
1 A U.S. resident is any individual domiciled in the U.S. or any corporation or other entity incorporated or otherwise legally established in the U.S.
2 A custodian is a bank or other entity that manages or administers the custody or safekeeping of stock certificates, debt securities or other assets for institutional or private investors.
3 An end-investor is an entity that invests in foreign securities for its own account (for trading, investment, or other purposes) or invests on behalf of others. An end-investor includes private funds and pension fund managers.
4 Foreign securities are all securities issued by entities that are established under the laws of a foreign country (i.e. any entity that is legally incorporated, otherwise legally organized or licensed (such as branches) in a foreign country) and all securities issued by international or regional organizations, such as the International Bank for Reconstruction and Development (IBRD or World Bank), and the Inter-American Development Bank (IADB), even if these organizations are physically located in the United States.
5 Generally, securities would include equity, debt (including short term debt such as certain money market instruments), restricted stock, limited partnership interests, zero coupon bonds, convertible securities, ABS and floating rate notes, and various other similar interests. They would not include derivatives, participations, bank deposits or annuities. Moreover, if the end investor is in a control relationship with the issuer or the ownership stake represents a greater than 10% voting interest, the security would be considered a "direct investment" that is not reportable under TIC Form SHC.
If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel's Investment Management Group.
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