U.S. Treasury To Require Reports on Cross-Border Ownership of Long-Term Securities

U.S. Treasury To Require Reports on Cross-Border Ownership of Long-Term Securities

Fulbright Briefing
By:  Lionel G. Hest and Joseph A. Castelluccio

In response to the global financial crisis, financial regulators have expanded their surveillance of the global economy, in part through the collection of more frequent and detailed economic and financial data from market participants. As part of these efforts, beginning September 30, 2011 the U.S. Treasury Department will collect data from reporting persons with respect to foreign-resident holdings of long-term U.S. securities and U.S.-resident holdings of long-term foreign securities. Reporting persons include U.S.-resident custodians, U.S.-resident issuers of long-term U.S. securities and U.S.-resident end-investors in foreign securities, in each case with consolidated reportable holdings or issuances of long-term securities with a fair market value of at least $1 billion. These reporting persons -- which include U.S. investment advisers and foreign investment advisers that manage U.S.-resident funds -- will be required to file new Form SLT with a Federal Reserve Bank.

While Form SLT will be filed on a confidential basis, the reported information will be used to prepare the U.S. balance of payments accounts and the U.S. international investment position, and to formulate U.S. international financial and monetary policies.

Reporting Persons Required to File Form SLT

For purposes of Form SLT, "U.S.-resident custodians" includes banks and securities depositories that are formed, established or licensed in the U.S., including U.S. branches, affiliates or subsidiaries of foreign entities. "U.S.-resident issuers" includes U.S. funds that issue securities directly to foreign residents (e.g., U.S. limited partnerships that issue limited partnership interests to foreign residents and U.S.-based master funds that issue shares to foreign feeder funds). "U.S.-resident end-investors" includes financial and non-financial organizations, pension funds, foundations, insurance companies, mutual funds and other similarly pooled funds that own foreign securities (e.g., U.S.-based feeder funds that own shares of offshore-based master funds).

Calculation of the $1 Billion Reporting Threshold

In determining whether the $1 billion threshold has been reached, a U.S.-resident custodian must aggregate all U.S. securities it holds in custody for the accounts of foreign residents and all foreign securities it holds in custody for the accounts of U.S. residents or for its own account. A U.S.-resident issuer must aggregate all securities issued by it and owned by foreign residents for which neither a U.S.-resident custodian nor a U.S.-resident central depository is used, book entry securities held at a foreign resident central securities depository, bearer securities, and shares or other equity interests issued directly to or placed with foreign residents. A U.S.-resident end-investor must aggregate all investments in foreign securities for its own portfolio and the portfolios of its clients that are not held by U.S.-resident custodians.

If the fair market value of a reporting person's long-term U.S. and foreign securities is at least $1 billion as of the last day of any month, the reporting person must file Form SLT for that month and for every remaining month in the calendar year, even if the fair market value of the securities subsequently falls below the $1 billion threshold.

U.S.-resident entities must consolidate their subsidiaries, affiliates and other U.S.-resident parts of their organizations. The consolidated total must include long-term securities held for the reporting entity as well as those held for its customers. Investment advisers and managers will file one consolidated report of the holdings and issuances of all U.S.-resident parts of its own organization and of all U.S.-resident entities that they advise and/or manage.

Information Reportable on Form SLT

Reportable Long-Term Securities

  • U.S.-resident custodians must report U.S. securities held in custody on behalf of foreign residents and foreign securities held in custody on behalf of U.S. residents.
  • U.S.-resident issuers must report U.S. securities issued by them in foreign markets and held directly by foreign residents (i.e., not held by a U.S.-resident custodian).
  • U.S.-resident end-investors must report foreign securities they hold directly (i.e., not held by a U.S.-resident custodian).

Only "long-term" securities, or those with an original maturity of more than one year or no contractual maturity, are reportable on Form SLT. Long-term securities include common stock, preferred stock, restricted stock, limited partnership interests, interests in private equity and venture capital companies, convertible bonds, asset-backed securities, floating rate and zero-coupon notes and other long-term debt securities.

Certain types of securities are specifically excluded from the reporting requirement, including short-term securities (i.e., those with an original maturity of one year or less), derivatives, bank deposits, letters of credit, annuities and "direct investments".[1] A direct investment is the ownership by a U.S. resident of 10% or more of a foreign company's voting interests, or a foreign resident's ownership of 10% or more of a U.S. company's voting interests.

Information to be Included on Form SLT

A U.S.-resident end-investor holding foreign securities must disclose each foreign issuer's country of residence and the fair market value and types of foreign securities it holds.

For a foreign resident that holds U.S. securities, U.S.-resident custodians and U.S.-resident issuers must disclose the foreign resident's country of residence and the fair market value and types of U.S. securities it holds. The U.S.-resident custodian or issuer making the report must also disclose whether the foreign resident is a "foreign official institution," such as a national government, an international or regional organization or a sovereign wealth fund.

Implementation and Timing of Form SLT

Form SLT will first be required to be filed on a quarterly basis as of September 30, 2011 and December 31, 2011. Each such quarterly report will be due on the 23rd calendar day following the "as of" date. Thereafter, monthly reporting on Form SLT will be required. The data in each monthly report will be as of the last business day of the month in question, and will be due on the 23rd calendar day following such "as of" date. If the 23rd calendar day following any "as of" date falls on a weekend or holiday, the report will be due on the next business day.

A reporting entity that is a bank, depository institution, bank holding company or financial holding company will be required to file its reports with the Federal Reserve Bank of the District in which the reporting entity is located, unless otherwise instructed by its District Federal Reserve Bank. All other reporting entities, regardless of their location, will be required to file their reports with the Federal Reserve Bank of New York.

This article was prepared by Lionel G. Hest (lhest@fulbright.com or 212 318 3137) and Joseph A. Castelluccio (jcastelluccio@fulbright.com or 212 318 3278) from Fulbright's Private Equity/Venture Capital Practice Group.

[1] Direct investments are reportable to the U.S. Department of Commerce, Bureau of Economic Analysis.


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