The Bureau of Economic Analysis Conducts Far Reaching Survey of U.S. Direct Investments Abroad, Requiring U.S. Companies to Submit Reports with Respect to Foreign Affiliates

May 2015

The deadline for reports could be as early as May 29, 2015.

In a significant departure from past benchmark surveys conducted by the BEA, the new rule applies to each U.S. person which had a foreign affiliate during 2014, regardless of whether the BEA has contacted the U.S. person to solicit a response.

The BE-10 Benchmark Survey of U.S. Direct Investment Abroad solicits data concerning investments by U.S. persons in foreign affiliates. The requested data includes extensive financial and operating data for both the U.S. person and the foreign affiliate. The BEA estimates the time required for completion of the forms to average 144 hours per response. Private companies which are not accustomed to preparing and filing public reports under the federal securities laws may be particularly burdened.

The BEA rule requires each U.S. person which owned a foreign affiliate in 2014 to respond. Ownership of a "foreign affiliate" is defined as direct or indirect ownership or control of at least 10% of the voting stock of an incorporated foreign business enterprise, or an equivalent interest in an unincorporated foreign business enterprise, including a branch, at any time during the U.S. person's 2014 fiscal year. Note that ownership is defined as ownership of voting stock (or equivalent interests). A U.S. person holding more than 10% of the voting power of an offshore company is considered to have a foreign affiliate, even if the voting position does not include economic interests. The general partner of a limited partnership or the managing member of a limited liability company will be deemed to own 100% of the voting interests of a foreign affiliate.

The definition of "affiliate" significantly differs from the "control" definition which is customary in other U.S. regulatory frameworks, such as the federal securities laws. The BEA definition is narrower, in that it does not include foreign business enterprises controlling the U.S. person or under common control with the U.S. person. However, the 10% ownership threshold is significantly broader than the 25% threshold at which the Securities and Exchange Commission presumes control. Moreover, the BEA's 10% threshold is not a rebuttable presumption; it is a fixed rule. U.S. persons may therefore find themselves in the anomalous position of being obliged to report extensive financial and operating information concerning a foreign company which they do not in fact control.

The BEA rule also applies to each U.S. person whom the BEA contacts regarding the survey. Any such person who does not intend to file a report will be obliged to file a certification with the BEA indicating its basis for an exemption.

Generally, the deadline for filing the requisite reports under Rule BE-10 is May 29, 2015. For filers reporting with respect to 50 or more foreign affiliates, the deadline is June 30, 2015. Exempt U.S. persons are required to file their certifications by May 29, 2015.

Investment Managers and Private Equity Funds

The BEA has issued special compliance guidance for investment funds. The BEA has confirmed that private funds organized in the United States are subject to the reporting requirements, if they owned a foreign affiliate in 2014. The rule therefore applies to private equity funds which hold substantial voting positions in non-U.S. portfolio companies. The rule also applies to U.S.-based feeder funds with substantial voting positions in offshore master-feeder fund structures. Moreover, if the U.S. investment manager for the U.S. private fund has a voting interest in the U.S. fund in excess of 10% and the fund meets the filing requirements for the survey, the U.S. investment manager will also be required to report. However, ordinary investment management responsibilities would not be the basis for a filing requirement. The BEA acknowledges that many of the questions on the reporting forms are designed for operating companies, rather than funds. The BEA has clarified that funds should feel free to mark certain questions as "not applicable," provided that they give the reasons in the remarks section. The BEA has also confirmed that reported information will be kept confidential. This should be a relief to U.S. investment managers and private funds which have undertaken confidentiality obligations to offshore portfolio companies or investment funds.

For more information on this issue, please contact:

Irwin A. Kishner at + 1 212 592 1435 or [email protected]

Copyright © 2015 Herrick, Feinstein LLP. This alert is published by Herrick, Feinstein LLP for information purposes only.Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.