Among various federal filings U.S.-based private fund managers have to make, questionnaires generated by the little-known unit of the U.S. Department of Commerce, Bureau of Economic Analysis (“BEA”), have maintained a low profile.  This is likely to change this year with the renewed interest on the part of BEA as well as other federal agencies with jurisdiction over U.S. fund managers in disclosure and enforcement matters.

BEA is responsible for the administration of several annual surveys, which are mailed to the previously identified “U.S. Reporters.”  However, the U.S. law requires every entity subject to the provisions of the International Investment and Trade in Services Survey Act to self-report and make necessary filings with BEA even if they have not previously received initial requests to return completed surveys from BEA.  One of such annual surveys relates to the equity investments made by U.S. entities in foreign entities (while others relate to foreign investment in U.S. entities).

Many U.S. fund managers with non-U.S. master (or other) funds, foreign equity portfolio interests and certain other foreign holdings may be subject to this filing obligation.  Investment managers newly registered with the U.S. Securities and Exchange Commission (“SEC”) under the amended registration requirements of the 1940 Advisers Act will need to ramp up their compliance with all applicable U.S. filing requirements, including those imposed by BEA.  In particular, they will need to determine urgently whether or not they, as investment managers, or their U.S. feeder funds or special purpose vehicles may be required to file Form BE-11, the 2011 Annual Survey of U.S. Direct Investment Abroad.

To answer whether a filing of Form BE-11 is obligatory, a fund manager that is a U.S. person, would need to determine whether it owns, directly or indirectly, at least 10% of the voting securities of a “foreign affiliate” if such foreign affiliate meets certain thresholds.  These thresholds are based on the foreign affiliate’s assets, sales or net income being greater than $60 million (positive or negative) for majority or minority-owned foreign affiliates.  If the assets, sales or net income are greater than $25 million, but not greater than $60 million (positive or negative) for foreign affiliates established or acquired by the U.S. reporter in the most recent or current fiscal year, an exemption may apply.

One of the difficulties of making this determination lies in the nature of private investment funds as Form BE-11 as are all other annual surveys utilized by BEA seem to have been conceived with a view toward conventional operating companies with direct foreign investments rather than asset managers and other financial intermediaries.  The concept of sales, for example, translates only roughly into management fees.  Further, a variety of different foreign forms of business organization commonly used in investment fund structures, complicates the application of the definition of foreign ownership.  Generally, limited partnership interests are not considered “voting securities.”  Hence, a U.S. entity holding limited partnership interests in a foreign limited partnership (such as a Cayman master fund, for example) would not need to file Form BE-11.  However, a U.S. general partner of such foreign entity would be deemed to hold voting securities in that entity and will be required to file absent an exemption.  Those foreign master funds that are organized as corporations or stock companies with various classes of shares may present special problems in determining U.S. control of their voting securities.  The same approach would apply to foreign portfolio companies held by U.S. fund entities to the extent there is greater than 10% ownership of such companies’ voting securities.

Form BE-11 was due to be filed on May 31 of this year; however an extension request could be filed to apply for more time to make this filing.  BEA provides a ready-made Extension Request Form for this purpose.  Filers expecting to file fewer than 50 forms (each per foreign affiliate) may request an extension to June 29, 2012 while those expecting to file up to 100 forms may request an extension to July 31, 2012 and those expecting to file more than 100 forms may request an extension to August 31, 2012.  We understand that BEA’s policy is to grant extension requests which have been timely filed but BEA will consider late requests with an explanation for delay as well.  BEA also provides a form to declare exemption from the obligation to file Form BE-11 (Claim for Not Filing) in the event a U.S. entity received a request from BEA for a BE-11 survey but believes to qualify for an exemption from reporting.  Those fund managers who have never filed Form BE-11 with BEA and believe that they qualify as a “U.S. reporter” subject to the BEA reporting regime should contact their legal counsel for advice on how to proceed in order to avoid penalties and other enforcement actions on the part of the Commerce Department and/or the SEC.

In the past months, Form BE-11 and other BEA annual surveys have been highlighted to many fund managers, both registered under the 1940 Advisers Act and exempt, as a result of informal notification that the Department of Commerce may begin to enforce penalties against persons failing to make these filings.  It has been reported that so far BEA’s intent has not been punitive in that it is only asking U.S. reporters to file going forward and is not requiring them to file forms for prior years.  The foreign affiliates’ data collected is used by the U.S. government to monitor, among other matters, exports/imports and employment abroad by U.S. persons and is given limited confidential treatment (solely for statistical and analytical purposes).  However, BEA is legally empowered to impose fines and other penalties.  Moreover, with the increased interest in regulation of the alternative investments industry and expanded information sharing among federal agencies, compliance with BEA’s filing requirements should become a prerogative for all U.S. fund managers who fall into the definition of a U.S. reporter under the law.

Frenkel Sukhman LLP has been assisting its fund and other clients with filing BE-11 and other BEA surveys and reports and would be pleased to assist you with your BEA filing obligations, if any.