The Department of the Treasury has proposed a new form (“Form SLT”) which will require periodic reporting to the Federal Reserve by: (1) U.S.-resident1 custodians2 of U.S. securities held for foreign residents3, (2) U.S.-resident issuers of U.S. securities issued to foreign residents, and (3) U.S.-resident end-investors4 of investments in foreign securities5. The reporting requirement will, however, only be triggered if the reporting party has over $1 billion of reportable securities6 to report across categories 1 – 3 above, in the aggregate. If the proposal is passed in its current form, the reporting requirements will impact, among others, private investment funds, pension plans and individual investors. Form SLT will require reporting based on aggregate dollar exposure within each country and type of security.
Who must report?
(1) U.S. Resident Custodians
U.S.-resident custodians must report all U.S. securities that they hold in custody for the account of foreign residents and all foreign securities that they hold in custody for the account of U.S. residents.
(2) U.S. Resident Issuers
All U.S.-resident issuers must report all securities issued directly to foreign residents by the U.S.-resident issuer and its U.S. affiliates, subsidiaries and/or branches. Such securities include (i) registered securities owned by foreign residents for which neither a U.S.-resident custodian nor a U.S.-resident central depository is used, (ii) book-entry securities that are held at a foreign-resident central securities depository, (iii) bearer securities, and (iv) shares or other units or other equity interests issued directly to or placed with foreign residents. This proposed requirement will be most relevant to a private investment fund structured as a “mini-master” structure with a U.S.-based master fund issuing shares to foreign feeder funds7, as well as issuances by U.S. private investment funds directly to foreign investors.
(3) U.S. Resident End-Investors
U.S.-resident end-investors must report all investments in foreign securities for their own portfolios or for the portfolios of their clients that are not held by U.S.-resident custodians. This proposed requirement will have the greatest relevance to our U.S. clients who are private investment funds8, pension plans or individuals who own foreign securities.
Reporting Periods and Submission
If the proposed Form SLT is adopted, reporting obligations will begin for any reporting party holding at least $1 billion in reportable securities on June 30, 2011. Reports made in 2011 will be required to be filed on a quarterly basis and must be filed no later than the 23rd calendar day after the last day of the quarter. Beginning on January 1, 2012, reporting obligations will be on a monthly basis with reports due no later than the 23rd calendar day of the month following the applicable month end.
The proposal provides that reports may be submitted either electronically, using the Federal Reserve System’s Internet Electronic Submission System (IESUB), or by mail or fax to the Federal Reserve Bank of New York. Other than banking institutions, reporting parties, including investment managers, private investment funds and pension plans, generally will file their reports with the Federal Reserve Bank of New York, regardless of their location.
Confidentiality
The proposal provides that data reported on the Form SLT will be treated as confidential and disclosed only to the Department of Treasury, the Board of Governors of the Federal Reserve System and the Federal Reserve Banks, acting as fiscal agents of the Treasury. The data from respondents will not be published or otherwise publicly disclosed. However, aggregate data derived from reports on Form SLT may be published or otherwise publicly disclosed only in a manner that will not reveal the amounts reported by any individual respondent.
If you have any questions concerning the foregoing, please contact your primary attorney in Seward & Kissel’s Investment Management Group.
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1 A U.S. resident is any individual domiciled in the U.S., any corporation or other entity incorporated or otherwise legally established in the U.S., or any pension legally organized in the U.S.
2 A custodian is a bank or other entity that manages or administers the custody or safekeeping of securities or other assets for institutional or private investors. The Federal Reserve’s presentation on Form SLT indicated that an investment manager holding client securities in an omnibus account would be effectively acting as a custodian for purposes of the Form SLT reporting requirements.
3 A foreign resident is any individual, corporation, or other entity legally established outside the U.S., regardless of the actual center of economic activity of the entity. Individuals, including U.S. citizens, residing outside of the U.S. are foreign residents. Any corporation or other entity legally established outside of the U.S., including affiliates of U.S. entities that are located abroad, are foreign residents.
4 An end-investor is an entity that acquires or relinquishes securities for its own account (for trading, investment or any other purposes) or invests on behalf of others. An end-investor includes private funds and pension fund managers.
5 Foreign securities are securities issued by foreign-resident entities and depository receipts issued by U.S.-resident entities that have underlying foreign securities.
6 Generally, securities would include equity, debt, 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 ownership stake represents a greater than 10% voting interest, it would be considered a “direct investment” that is not reportable under Form SLT.
7 While a mini-master structure with a U.S. master fund is not very common in hedge funds, it is often seen in private equity funds.
8 In the case of a U.S. feeder investing in an offshore master fund, it appears that the U.S. feeder would not have to report its ownership in the offshore master fund, if its investment is considered a “direct investment” as discussed in footnote 6 above.
