Some U.S.-resident investment managers or their parent companies have recently received notices from the Federal Reserve Bank of New York ("FRBNY") informing them that they are required to submit a Report of U.S. Ownership of Foreign Securities, Including Selected Money Market Instruments ("Form SHC" or the "Report") to the FRBNY by March 2, 2012.1 Those who have not received the FRBNY notice will nevertheless be required to consider whether they are required to file Form SHC, based on the applicable reporting thresholds. Form SHC is similar in some respects to the TIC Form SLT that many U.S. investment managers or their parent companies have recently filed with the FRBNY, but differs in other respects, including scope, format and timing.
This update is designed to provide a short overview of Form SHC and to highlight when U.S. investment managers and their parent companies may have to file the Report.
Overview of the Form SHC
As a general matter, Form SHC requires that certain entities submit consolidated filings on behalf of themselves and each of their U.S.-resident subsidiaries and their asset manage-ment clients if applicable thresholds are met, or if the entity is notified by the FRBNY that it is required to submit the Report.
Form SHC is one of a number of mandatory surveys that U.S. governmental agencies
conduct in order to study economic relation-ships of U.S. residents with foreign parties. It is required by the U.S. Department of the Treasury, which is being assisted by the FRBNY as fiscal agent. It is part of the various "TIC" reports administered by the FRBNY.
Specifically, it is a benchmark survey held every five years that collects data on U.S.-resident holdings of foreign portfolio securities, from any U.S.-resident custodian or end-investor, including an investment manager on its own behalf and on behalf of its clients. The largest Form SHC reporters will likely be asked by the FRBNY after the filing to submit follow-up filings annually on TIC Form SHCA.
Consolidation Rules
Form SHC is filed by U.S.-resident investor entities. A U.S. asset manager is generally considered a resident investor for purposes of the Report, and it needs to include not only its own portfolio investment holdings but also those of its U.S. clients, including its U.S. investment fund clients. In a corporate group, the ultimate U.S. parent is treated as the end-investor and must consolidate reportable securities held or managed by all U.S.-resident parts of its group, including all of its U.S.-resident branches, offices, and subsidiaries. For purposes of the Report, the term "U.S. Resident" includes any individual, corporation, or other entity incorporated or legally estab-lished in the United States, including branches, subsidiaries and affiliates of foreign entities located in the United States.
Reportable Securities
Most foreign equity and debt securities are considered reportable securities for purposes of Form SHC. The asset managers who recently considered whether it was necessary to file a TIC Form SLT must note that Form SHC only covers foreign securities held by U.S. parties, and that the universe of reportable securities is broader than the universe covered by TIC SLT. For example, Form SHC covers "short-term" debt securities and certain money market instruments, while TIC SLT does not. Various other concepts and definitions vary between the two forms (and other TIC forms).
Structure of Form SHC
Form SHC is divided into three schedules. Schedule 1 is used to collect certain identifying information about the reporter, including its name, its designated contact person or persons who can respond to FRBNY ques-tions raised by the data reported, and a summary of the data, if any, reported on the other schedules. Schedule 2 is used to report detailed information on foreign securities owned directly, or through securities deposi-tories, by U.S.-resident investors. Of particular relev-ance to asset managers, foreign securities held through U.S. custodians will usually be reported on Schedule 2 by the U.S. custodian and not the asset manager. But the asset manager may still be required to complete Schedule 3, which is used to report summary amounts for all foreign securities entrusted to the safekeeping of a U.S.-resident custodian.
Reporting on Schedules 1, 2 and 3 and Related Thresholds
Any U.S.-resident investment manager that is notified by the FRBNY that it is required to file Form SHC usually must file Schedule 1 regardless of whether the reporting thresholds (as discussed below) are met. However, if a U.S.-resident investment adviser that is not the ultimate U.S. parent receives a request to file Form SHC from the FRBNY, it should contact the FRBNY staff. In addition, subject to the consolidation rules discussed above, any U.S.-resident investor with holdings of foreign portfolio securities above the reporting thresholds of Schedule 2 and 3 must also file Schedule 1.
A U.S.-resident investor must file on Schedule 2 if, on a consolidated basis, the total fair value of foreign securities whose safekeeping it manages for itself and for other U.S. residents or whose safekeeping the investment manager has entrusted directly to foreign-resident custodians or U.S. or foreign-resident central securities depositories, is over the threshold amount of $100 million as of December 31, 2011. A U.S.-resident investor must report holdings that are entrusted to an unaffiliated U.S.-resident custodian on Schedule 3 of the Report if, on a consolidated basis, the total fair value of the foreign securities is over the threshold amount of $100 million as of December 31. These amounts are much lower than the $1 billion aggregate threshold of TIC SLT.
Reporting Dates and Data Submission
If required to file on Form SHC, an asset manager (or its ultimate U.S. parent) must submit the Report to the FRBNY by March 2, 2012, reflecting consolidated data as of December 31, 2011.
Form SHC has strict and technical rules regarding how to submit each Schedule of the Report to the FRBNY. For example, an investment manager required to file the Report must submit Schedule 1 on paper, unless it is submitting Schedule 2 or Schedule 3 electronically via the Federal Reserve System's Internet Electronic Submission ("IESUB") application. In that case, the U.S.-resident investment manager (or its ultimate U.S. parent) must also submit Schedule 1 using the IESUB application.
The reporter is required to submit Schedule 2 on paper or electronically (i.e., on diskette(s), CDs, or via the IESUB application), unless its Schedule 2 consists of more than 200 records, in which case it must be submitted electronically. The reporter is required to submit Schedule 3 on paper or via IESUB application.
Penalties for Failure to File
Form SHC 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 require-ments. Any group that fails to provide timely and accurate data may be subject to a civil penalty of between $2,500 and $25,000, or injunctive relief ordering such group to comply, or both. Any U.S. person or group that willfully fails to submit any of the information required in the Report may be subject to a fine of 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 to the same penal-ties, officers, directors, employees, and agents of any entity with filing obligations, who knowingly participate in such willful violation.
Importantly, the person who will sign the filing must certify that he/she is aware of the penalties and that he/she is sufficiently knowledgeable about the activities and functions of the group on behalf of whom the Report is filed and that he/she can knowingly and with reasonable confidence certify that the information provided is accurate and complete.
Conclusion
U.S. investment managers should consider whether they, or their ultimate U.S. parent, must file the Report. They will need to dedicate sufficient time to prepare and file the Report, which is extremely detailed and technical. Those who determine that they are below the TIC SLT thresholds should nevertheless consider whether reporting is required on Form SHC, as it has lower reporting thresholds.
Footnote
1. Form SHC and related instructions are available at: http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/shc2011in.pdf .
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.