Background on the U.S. Department of Commerce, Bureau of Economic Analysis (“BEA”).

The BEA collects data on U.S. direct investment abroad, among other mandates. Its tools include Form BEA-11 (“BEA-11”) for U.S. persons that have ownership interests in foreign affiliates. Historically, these filings received almost no attention. Enforcement of the filing requirements was rare, but is expected to increase following the BEA’s announcement in May of 2012 that it would be more vigilant.  [Note: Enforcement penalties include civil and criminal fines and even imprisonment for failure to file.]

BEA-11 is due annually by May 31 for those who meet a two-pronged test. The filing is confidential and requires data points on employees, assets, expenses, share/interest structure and other financial information (much of it, such as imports and exports will be inapplicable to most fund managers).

Do I have to file?

The filing requirement is most likely to apply to larger U.S. fund managers (the term “Manager” includes U.S. managers, their principals, and any affiliated U.S. entities) that have full master-feeder structures, offshore blocker entities or other special purpose vehicles. The following events trigger a filing:

• Meeting the below test, regardless of whether a Manager has been contacted by the BEA; or
• If a Manager receives a letter from the BEA, it must either file if it meets the test, or submit a Claim of Not Filing (“Claim”). NB: A Claim is only required if the Manager is contacted by the BEA. Because the Claim contains much of the same information as required on BEA-11, we would not recommend filing it preemptively.

The First Prong – Reporting Thresholds:

Reporting is not required with respect to offshore affiliates where:

• none of the following (each, an “Exemption Item”) exceeded $60 million for the offshore affiliate’s most recent fiscal year: (a) total assets, (b) sales or gross operating revenues excluding sales taxes and (c) net income (or loss) after provision for foreign income taxes; OR
• the U.S. person’s interest in the offshore affiliate was acquired or established in the most recent fiscal year, and none of the Exemption Items exceeded $25 million for the affiliate’s most recent fiscal year.

The $60 million and $25 million thresholds are referred to as “Reporting Thresholds.”

The Second Prong – Ownership Level:

Filing is required of U.S. persons that own or control, directly or indirectly, 10 percent or more of an offshore affiliate’s voting securities (or equivalent). Consider the following examples (see note below):

• Offshore Limited Partnerships (“LPs”): generally, LP interests in a master fund are structured as non-voting. Accordingly, its feeders would not be U.S. reporters. In contrast, the fund’s general partner would be considered to own 100 percent of its voting securities, and would be a U.S. reporter.
• Offshore Companies: voting rights will vary depending on the share class in question. A company that has one class of shares, all with voting rights, may provide enough dilution such that a Manager owns less than 10% of total shares. On the other hand, it is common to issue one class of voting shares to the Manager, and another class of non-voting shares to outside investors (similar to the structure of a LP). In such a case, the Manager would be a U.S. reporter.

[Note: While these examples will be helpful in identifying potential reporters within your structure, we recommend reviewing your offshore entities’ constituent documents to determine the nature of any voting interests and related provisions.]

Putting It All Together:

Remember that both prongs must be met to trigger the filing. We suggest starting your analysis by determining the amount of your AUM attributable to offshore affiliates (“Offshore AUM”); if it is less than the $60 million Exemption Item for total assets, it is likely that the offshore affiliates would be under the Exemption Items for income and revenue (i.e., performance gains or other income, if any) as well. If your Offshore AUM exceeds $60 million, proceed to the rest of the analysis to determine whether a filing is required.

Disclosure and Reporting Requirements Continue to Evolve.

Post-crisis, we have seen an increase in disclosure and reporting requirements, particularly for larger fund managers. BEA reporting highlights the fact that regulators other than the SEC collect data and can penalize those who do not file. We encourage you to stay in touch with your outside counsel, compliance consultants and other service providers who can keep you apprised of regulatory developments.

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Cole-Frieman & Mallon LLP is a boutique hedge fund law firm focused on providing hiqh quality counsel for the investment management industry.  Bart Mallon can be reached directly at 415-868-5345.