Fund managers may be required to file Treasury International Capital ("TIC") Form SHL, Report of Foreign-Residents' Holdings of U.S. Securities, Including Selected Money Market Instruments (SHL (2024)) by August 30, 2024, based on the fair value (determined as of June 28, 2024) of certain U.S. securities issued to foreign persons. This client alert focuses on the requirement to file Form SHL in the fund context and generally simplifies the approach to the preparation of the form by fund managers. Form SHL, like other TIC and Bureau of Economic Affairs ("BEA") forms, can be very complicated and needs to be prepared carefully.
Overview of Form SHL
Form SHL gathers data that is used by the U.S. Government in the formulation of international economic and financial policies. Form SHL must be filed every five years (benchmark years) as part of the TIC reporting survey of foreign holdings of U.S. securities. The last day of the most recent benchmark year is June 28, 2024. For non-benchmark years, the requirement to file TIC Form SHLA is limited to those fund managers that are notified by the Federal Reserve Bank of New York ("FRBNY") that they are required to file Form SHLA.
For benchmark years, Form SHL is mandatory for U.S. persons that meet the $200 million reportable U.S. securities threshold, which is discussed below. The threshold has been increased from the $100 million threshold used in the 2019 benchmark survey. A U.S. person that is contacted by the FRBNY regarding Form SHL is also required to file Form SHL regardless of whether they meet the $200 million threshold.
Reportable U.S. securities are, generally, securities issued by U.S. entities. Reportable U.S. securities include, but are not limited to, common stock, preferred stock, other equity interests (including shares or units of ownership in unincorporated business enterprises, such as limited partnerships and limited liability companies), and debt instruments. Derivative contracts (i.e., futures, forwards, swaps, options and warrants), direct investments (discussed below), and foreign securities (including American depository receipts) are not reportable U.S. securities.
Application to Fund Managers and Funds
Fund Managers. Generally, a U.S. fund manager is responsible for filing Form SHL based on the reportable U.S. securities owned by all the foreign funds that it manages and its foreign-owned management entities. Funds managed by a non-U.S. fund manager are viewed separately for purposes of the $200 million threshold.
Reportable U.S. Securities. In the fund context, Form SHL generally seeks to capture information regarding five types of holdings:
(1) interests in domestic funds held by foreign persons;
(2) interests in domestic funds held by foreign funds (e.g., a mini-master fund where a foreign feeder owns an interest in a domestic master fund);
(3) interests in U.S. blocker entities held by foreign funds if the foreign fund owns less than 10% of the voting interests of the blocker or owns non-voting interests. A blocker entity is, generally, a U.S. corporation (or any entity that is classified as a corporation for U.S. federal income tax purposes) used by the foreign fund to "block" certain income, such as effectively connected income;
(4) interests in U.S. limited liability companies which are disregarded for U.S. tax purposes and held by foreign funds (including foreign master funds); and
(5) interests in U.S. management entities owned by foreign persons (however, such an interest may be a direct investment that is not a reportable U.S. security, depending on the type of securities and percentage owned by foreign persons).
If the aggregate value of holdings in these five categories of interests for a U.S. manager, and funds managed by the U.S. manager, equals or exceeds $200 million as of June 28, 2024, the U.S. manager is required to file Form SHL by August 30, 2024.
Completing Form SHL. Form SHL includes two schedules.
Schedule 1: Schedule 1 reports information that identifies the reporting entity and summarizes the information reported on Schedule 2, including descriptions of how the "fair values" of reportable U.S. securities were determined. As noted above, U.S. persons notified by the FRBNY are required to file Form SHL, and complete Schedule 1, regardless of whether the U.S. persons meets the $200 million reporting threshold.
Schedule 2: Schedule 2 reports detailed information on reportable U.S. securities owned by foreign persons that meet the reporting threshold for Form SHL. A manager will report on a separate Schedule 2 details with respect to each reportable U.S. security held by a foreign person (including the security's issuer, type, value, and country of residence of the foreign holder). A separate Schedule 2 is required for each U.S. issuer, type of security, type of foreign securities holder, and for each country of residence of the foreign securities holder. A foreign fund is treated as a single owner, and is not "looked through" to each of its investors, which significantly simplifies the scope of Schedule 2 reporting in the fund context.
Direct Investments. Generally, a foreign entity's ownership of 10% or more of the voting interests of a U.S. entity is excluded from reporting on Form SHL. Instead, such investments may be required to be reported to the BEA. However, managers can generally assume that the direct investment exception is not applicable in the typical fund context, unless the fund owns 10% or more of an operating company.
Timing. The filing deadline for Form SHL is on or before August 30, 2024, based on the value of reportable U.S. securities as of June 28, 2024. Form SHL is required to be filed with the FRBNY. Extensions can be obtained, but it is generally preferable not to obtain them.
Confidentiality. The data on Form SHL is confidential. However, aggregated data may be published by the Treasury.
How to File Form SHL. Form SHL may be filed with the FRBNY electronically using the Federal Reserve Reporting Central System or may be filed by mail or facsimile. A filer needs to obtain a reporter identification number. A U.S. person that is required to submit one hundred or more Schedule 2s, which would rarely apply in the fund context, must submit Form SHL electronically.
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.