SEC Proposed Modernizing and Enhancing Information Disclosed and Reported by RICs and RIAs
The Commissioners of the Securities and Exchange Commission (“SEC”) unanimously approved two (2) rules which would require enhanced disclosures and increased reporting by registered investment companies (“RICs”) and registered investment advisers (“RIAs”), as well as RIAs’ maintenance of additional performance-related records.
- Aggregate information related to the types of assets held in separately managed accounts (“SMAs”) and the SMAs’ use of borrowing and derivatives; and
- Additional information about an adviser’s advisory business, branch office operations and the use of social media.
- Back-up records of the calculations of performance information that is distributed to any person (current rules have this requirement with regard to information distributed to ten (10) or more persons); and
- Communications related to performance or rate of return of account and securities recommendations.
The SEC’s RIC Reporting Modernization Proposed Rule Release may be found here. The Proposed Rule Release covering Amendments to Form ADV and Investment Advisers Act Rules may be found here and the Appendices to that release may be found here.
On June 4, 2014, the Commodity Futures Trading Commission’s (“CFTC”) Division of Swap Dealer and Intermediary Oversight (the “Division”) published a no-action letter granting registration relief to certain foreign introducing brokers (“IBs”) and commodity trading advisors (“CTAs”). CFTC Letter No. 15-37 (the “Letter”) accorded no-action relief from IB and CTA registration requirements for market participants located outside the US in connection with activities involving swaps for customers that are international financial institutions (“IFI”). The Letter granted no-action relief to IBs from registration requirements under Section 4d(g) of the Commodity Exchange Act (the “CEA”). For CTAs, the Letter granted relief from registration under Section 4m of the CEA. As per the Letter, the Division will not recommend enforcement action against foreign located IBs and CTAs, acting solely on behalf of customers located outside the US, for failing to register in connection certain swaps transactions.
As a result of the granted relief, IFIs will be treated in a manner similar to the treatment afforded to IFIs in relation to foreign futures and options and swap dealing activities. Further, this relief is consistent with the CFTC’s stated purpose of promulgating the exemption from registration for IBs and CTAs under CFTC Regulation 3.10(c)(3).
The market participants also asked the Division to consider the unique attributes and status of IFIs in certain situations involving non-US clients and swap counterparties that may have offices within the US, most likely in New York City or Washington, DC (for example, the World Bank or the International Monetary Fund). The CFTC considered such issues and provided guidance in a 1991 Interpretive Letter to the World Bank and the Final Entities Definitions in 2012. Examples of defined qualifying IFIs include, but are not limited to: the International Monetary Fund; the World Bank; and other multinational member agencies promoting global economic development.
The extended deadlines for filing Form BE-10 (defined below) are quickly approaching. Every five (5) years the Bureau of Economic Analysis (the “Bureau”) collects economic data on the operations of US parent companies and their foreign affiliates. Pursuant to the International Investment and Trade in Services Survey Act (the “Survey Act”), all US companies that own foreign affiliates, that is, that had direct or indirect ownership of at least ten percent (10%) of the voting shares/stock, must file a Form BE-10 Benchmark Survey of US Direct Investment Abroad (“Form BE-10”). The first due date for submitting Form BE-10 was May 29th. The Bureau automatically granted a thirty (30) day extension to all first time filers. The filings are due on June 30th. A June 30th deadline was also granted to companies filing less than fifty (50) forms; July 31st for companies filing between fifty (50) and one hundred (100) forms; and August 31st if filing more than one hundred (100) forms. First time filers are also instructed to submit the Form BE-10 in paper form.
To ensure compliance with the Survey Act, filing BE-10 is mandatory and confidential. US companies are subject to penalties for failing to report economic data to the Bureau. Advanced written permission must be obtained before the Bureau can present information from filings that could be used to identify the filer. The data collected by the Bureau is only used for analytical and statistical purposes. The data is not used for taxation, investigation or regulations. Copies of the forms filed with the Bureau are immune from legal process.
Form BE-10 must be filed by all companies that own one (1) or more foreign affiliates. The form collects financial and operational data on US companies and their foreign affiliates. The financial information collected includes: assets; liabilities; total sales; and net income. The operational information collected includes: fiscal year end; ownership structure; products and services; and primary industry.
The following definitions should be used to help determine filing requirements and used as reference when completing BE-10:
- Majority-Owned Foreign Affiliate – affiliate of the US Reporter in which the US Report’s combined direct and indirect ownership interest in the affiliate is greater than fifty percent (>50%).
- Minority-Owned Foreign Affiliate – affiliate of the US Reporter in which the US Reporter’s combined direct and indirect ownership interest in the affiliate is between ten and fifty percent (>10% and <50%).
- US Company – US Reporter, which is required to file Form BE-10. Also referred to as US parent company.
- US Reporter – defined as any US person that had foreign affiliates during fiscal year 2014.
- US Person – defined as any individual or entity that resides in the US or is subject to US jurisdiction.
The Form BE10 consists of multiple sections: BE-10A; BE-10B; BE-10C; and BE-10D. Form BE-10A is filed for each US parent company. Forms B, C or D are required for each foreign affiliate. The information reported on Form BE-10A by the US Reporter will determine the filing requirements of Forms B, C or D.
The correct form (BE-10B, BE-10C or BE-10D) to file for each foreign affiliate is determined by two (2) key factors:
- Majority or minority ownership by US Reporter; and
- Size of foreign affiliate, which is based on the size of the assets, sales or net income (whichever is greater) of the foreign affiliate.
Form A provides financial and operational data regarding fully consolidated US domestic business for the US Reporter or US parent company. Information regarding foreign branches or foreign affiliates in not included on Form A. The amount of information reported on Form A is determined by the greater of the US Reporter’s assets, sales or net income (the “Reporting Threshold”). The entire Form A must be completed if the US Reporter’s Reporting Threshold is greater than three hundred million US dollars (>$3,000,000), positive or negative. If the US Reporter’s Reporting Threshold is less than three hundred million US dollars (<$3,000,000), positive or negative, then only items 1-42 and 97-114 are to be completed.
Each foreign affiliate that answers yes to both of the following questions is required to file Form B:
- Was the foreign affiliate majority owned by the US parent company; or
- Were assets, sales or net income (whichever was greater) more than eighty million US dollars (>$80,000,000), positive or negative?
- Majority-Owned Foreign Affiliate with assets, sales or net income (whichever is greater) between twenty-five million US dollars and eighty million US dollars (>$25,000,000 and <$80,000,000);
- Minority-Owned Foreign Affiliate with assets, sales or net income (whichever is greater) of more than twenty-five million US dollars ($25,000,000); or
- Foreign Affiliate with assets, sales or net income (whichever is greater) less than twenty-five million US dollars ($25,000,000) and owns another foreign affiliate that has filed a Form B or Form C.
Form D must be filed for foreign affiliates with assets, sales or net income (whichever is greater) less than twenty-five million US dollars (<$25,000,000). Foreign affiliates, as described in the previous sentence, which own another foreign affiliate that has filed a Form B or Form C are not required to file a Form D.
For further information about any of the topics covered, please feel free to contact the Ruddy Law Office, PLLC (www.ruddylaw.com) or 202-797-0762.