U.S. Fund Managers to File BEA Form BE-11 for Foreign Funds and Portfolio Holdings

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.

New Reporting Requirements for Newly-Registered and Exempt Investment Advisers

As a result of the implementation of new registration requirements adopted by the U.S. Securities and Exchange Commission (SEC) implementing certain provisions of The Private Fund Investment Advisers Registration Act of 2010 (“Title IV”) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), some 3,000 advisers were required to register with the SEC in early 2012.  Those of these newly registered investment advisers are now subject to a wide range of reporting obligations, including on Form PF, the rules (the “Rules”) for which were newly adopted by the SEC in late 2011 to help monitor systemic risk in the U.S. financial system.  The Rules, however, apply not only to those financial institutions that are “too big to fail” but also to much smaller private fund advisors which have never been subject to SEC registration or this level of regulatory oversight and which now have to provide much greater disclosure to the regulators.  Moreover, the new private fund adviser exemption under the Rules, while exempting some advisers from registration with the SEC (often at the cost of state registration), no longer completely frees such exempt advisers, regardless of the size of their AUM, from reporting requirements, preventing them from “flying under the radar” as far as public disclosure of their investment operations is concerned.

The key innovation and, for many, a serious hurdle, in the new reporting requirements for all SEC-registered investment advisers is Form PF.  With respect to newly registered advisers, many of which managed relatively small funds, in particular, the Rules will require so-called “smaller” investment advisers (managing between $150 million and $1.5 billion in AUM) to report extensive information to the SEC on Form PF about the private funds they advise.  Form PF is designed to supplement Form ADV, which was also revised in 2011 to include substantial information about private funds advised by reporting advisers.  Although Form PF has been significantly streamlined from the original version as it appeared in the SEC Proposing Release,  it continues to represent an arduous task for smaller advisers without organizational resources to manage the new reporting process.

The information requested on Form PF is quite detailed and extensive and may require advisers to alter their compliance policies and procedures and, possibly, even to revise their recordkeeping systems.  It calls for disclosure about the management company, the assets under management and fund performance.  As adopted, however, Form PF generally permits advisers to rely on existing systems to provide information, a notable difference compared to the requirements proposed earlier.  In particular, Form PF removed the proposed requirement that submitting officials of the adviser certify, under penalty of perjury, the information contained therein.  An adviser is not required to update information that was provided in good faith at the time of submitting Form PF even if such information was subsequently revised for recordkeeping, risk management, or investor reporting purposes.  Although reporting advisers may only have to submit Form PF to the SEC on a quarterly or annual basis, much of the required information may need to be gathered monthly.

Smaller advisers are only required to complete Section 1 of Form PF, which calls for the provision of general identifying information, assets under management, size, leverage and performance information for each private fund and also basic information on hedge funds. Advisers must also provide information about related persons and their large trader identification numbers. With respect to each private fund, advisers must provide gross and net assets, derivative positions, borrowings, concentration of equity holders, investments in private funds and parallel managed accounts, performance information (with the same frequency with which the advisers already calculate performance), beneficial ownership, assets and liabilities, investment strategies (including use of high-frequency strategies) and counterparty exposures.  Although information submitted on Form PF is nonpublic and not subject to Freedom of Information Act requests, it is not completely confidential.  The SEC may use the information in enforcement actions and it may be accessed by various federal departments and agencies.

Advisers potentially subject to Form PF reporting have some time to review their structures and determine their status and subsequent reporting requirements (advisers to smaller funds with less than $1.5 billion in assets will make the first Form PF filings on April 30, 2013 assuming calendar fiscal year).  Nonetheless, because of the substantial reporting requirements, advisers should begin reviewing Form PF now to ensure that their internal systems are appropriately designed to capture necessary information before their applicable deadline looms close.  The advisers solely to private funds with less than $150 million in AUM, venture capital funds and family offices, among others, will not be required to file Form PF, provided that such advisers satisfy the definitional requirements under the Rules.  

Advisers to funds that qualify as venture capital funds under the definition contained in Rule 203(I)-1, and are therefore excluded from the definition of “investment adviser,” do not have any obligations to file Form PF.  Qualifying for this exemption has been made somewhat easier in the Rules as compared with the original SEC proposal largely due to the use of a 20% basket for non-qualifying investments and abandoned requirement for management involvement in portfolio companies.  Still, venture capital fund advisers would need to determine whether the funds they manage meet the new requirements under the Rules or under the grandfathering provisions of the Rules.  Similarly, advisers that qualify as “family offices” under Section 202(a)(11)(G) and the recently adopted Rule 202(a)(11)(G)-1 do not have any obligations with respect to Form PF.  Although not every “family office” would automatically qualify under this rule, advisers should carefully consider its requirements and, if necessary, take steps to alter their structure or operations to qualify for the Section 202(a)(11)(G) exception or for other Section 202(a)(11) exceptions in order to avoid Form PF filing obligations.  Foreign SEC-registered advisers with minimal U.S. assets under management may be able to reorganize those U.S. assets into a separate fund that is offered only to U.S. investors, which could avoid Form PF filing requirements (if it has less than $150 million of U.S. assets under management) regardless of the total AUM of such advisers.

It should be noted that, apart from Form PF, the SEC has imposed certain reporting requirements applicable even to the investment advisers exempt from registration under the Rules, such as those advisers with less than $25 million in AUM.  For example, exempt advisers, must comply with the reporting requirements by filing reports with the SEC through completing specific items on Part IA of Form ADV (but not Part II) and filing amendments to Form ADV.   These reports are publicly available on the SEC website.  The value of assets under management is to be calculated by reference to Form ADV and is generally equal to the fair market value of the assets of the qualifying private funds, plus the amount of uncalled capital commitments.  In a change from the quarterly calculation originally proposed, advisers are required to determine the value of assets that they manage on an annual basis.  Recordkeeping obligations of exempt investment advisers are yet to be specifically addressed by the SEC.

Beyond Confidentiality: the private equity bidders’ experience with Yahoo!

A lesson from the recently reported Yahoo! sale process: carefully review and negotiate your NDAs!  As Yahoo! illustrates, confidentiality agreements can reach well beyond mere confidentiality and can affect not only the process but the potential outcome of a sale.

Confidentiality agreements, as we all know, are the life blood of private equity and, generally, M&A transactions.  In a typical NDA, the recipient agrees to keep information confidential and to limit its use to the transaction under consideration.  However, not infrequently, the disclosing party will include additional restrictions on the recipient which go well beyond confidentiality.  Common examples include non-circumvention (e.g., with respect to a particular target or subject), non-solicitation of employees, and no contact with the acquisition target (or borrower, if the transaction involves debt) as well as its customers, suppliers, vendors, etc.

These restrictive provisions are designed to protect the legitimate business interests of the target company by preventing, for instance, damaging rumors and employee and customer defections.  They may also serve to protect the interests of the broker or introducing party with respect to a particular opportunity. Occasionally, however, the disclosing party may seek to include in the NDA a provision which is primarily designed to influence the sale process.  As has been widely reported, Yahoo! included just such a provision—no “cross talk” as it has been described—into the NDAs circulated to potential private equity bidders.  

As reported, this no cross-talk provision precludes the potential bidders from speaking to each other regarding the potential transaction (presumably, whether or not confidential information is disclosed in the course of such conversations).  What is Yahoo!’s possible motivation for including such a provision in the NDA?  It is, almost certainly, a business consideration – the desire to influence the bidding process and, indeed, the likely outcome of the sale.  Given Yahoo!’s market capitalization of $20 billion, if the bidders are not able to discuss potential co-investment agreements, it makes it much less likely that any private equity bidder would be able to make an offer for 100% of the equity.  Not surprisingly, many potential private equity bidders balked at this restriction.  The one private equity sponsor who has reportedly agreed to this restriction in the NDA is TPG Capital which, as reported, is specifically interested in a minority stake.

From our perspective, as buy-side counsel, we strongly encourage our private equity and hedge fund clients to review and negotiate all NDAs, whether in M&A, private equity, distressed debt, real estate or other contexts.  As this case amply illustrates, the restrictions contained in many confidentiality agreements go well beyond confidentiality and may significantly impact one’s ability to evaluate and consummate a potential transaction (and, indeed, influence what kind of transaction or bidder is likely to succeed).