Hardin Compliance Consulting LLC
May 12, 2015
At the end of April, many private fund managers considered many of their regulatory burdens met, including filing the annual amendment to Form ADV and Form PF, distributing copies of audited financial statements to investors, and finishing the annual review of their compliance program. This year, however, there is a new regulatory obligation from the U.S. Department of Commerce, through the Bureau of Economic Analysis (the “BEA”). The formal name is the Benchmark Survey of U.S. Direct Investment Abroad, a mandatory survey conducted once every five years by the BEA. A brief summary of certain key information is outlined below, however we recommend that you work with your Firm’s legal counsel to evaluate the requirements in order to ensure any reporting obligations are met.
In the past, only those contacted by the BEA were required to report. However, on November 20, 2014, the BEA enacted a rule that requires the filing of Form BE-10 by any U.S. person that had a “Foreign Affiliate” (defined below) during the 2014 fiscal year. For those U.S. persons reporting fewer than 50 Foreign Affiliates, the Form BE-10 must be filed by May 29, 2015. For those reporting 50 or more Foreign Affiliates, the due date is June 30, 2015. It also appears as though reporting may be required even if nothing is owned abroad. Instructions on how to file are available on the BEA website. The BEA has also provided video tutorials and an FAQ for private funds.
The purpose of Form BE-10 is to obtain data on the financial and operating characteristics of U.S. parent companies and their Foreign Affiliates, and to assess the impact of such investment on the U.S. and foreign economies. The information disclosed to the BEA is confidential, and is used for economic and statistical reporting purposes only.
Who has to file?
There is no “de minimis” exemption to this filing, so any U.S. investment adviser that manages funds with direct investments in foreign entities may be required to report. For example, a U.S. investment adviser that manages U.S. funds that own or control (directly or indirectly) 10% or more of the “voting securities” of a non-U.S. entity (“Foreign Affiliate”) is required to file. Additionally, a U.S. general partner, managing member, or similar entity that owns 10% or more of the “voting securities” of a foreign fund (including a U.S. person holding voting shares of a fund organized as a Cayman corporation) will also have to file[i]. Generally a registered investment company would be less likely to have to file unless the fund owns more than 10% of the voting securities of a foreign issuer.
U.S. entities are required to file Form BE-10A, with larger entities (in terms of assets, sales or net income) being required to provide more detailed information. Forms BE-10B, BE-10C or BE-10D may also be required to report on each of the foreign entities in which they have a direct investment (a “Foreign Affiliate”), depending on the size of the foreign affiliate and whether the U.S. entity holds a majority voting interest.
[i] Limited partners are not required to file, since the general partner of a limited partnership or managing member of a limited liability company is deemed to own 100% of the voting securities of the limited partnership or limited liability company.
What is disclosed?
The Form BE-10 requires the reporting entity to disclose information regarding its legal identity, sales and employment data, contract manufacturing services, financial and operating data, and export and import business, along with investments and transactions between the reporting entity and its Foreign Affiliates. Additionally, for any Form(s) BE-10B, BE-10C or BE-10D filed, the reporting entity must disclose similar information pertaining to its Foreign Affiliates.
What does “foreign” mean?
Whether an entity is foreign depends on the physical location of the business. But an entity that is incorporated outside the United States is also considered “foreign”, even if it conducts its business operations from, and is located in, the United States.
Any grace period?
The BEA will consider extension requests received before the original due date. The extension request form is available on the BEA website. The BEA has informally indicated that it does not intend to penalize entities that fail to file, but persistent failure may result in civil and criminal penalties.
The BEA can impose fines from $2,500 to $25,000 and seek injunctive relief. Willful violations may result in criminal penalties of up to $10,000 and imprisonment for up to one year.