Effective for reports as of November 2022 (i.e., those reports due in December 2022) and afterwards, the U.S. Department of Treasury (Treasury) has implemented important and significant changes to the reporting requirements for the Treasury International Capital (TIC) Form SLT (TIC SLT). These changes will represent a significant expansion in the scope of data required to be reported by TIC SLT filers. Beginning with those reports, in addition to information regarding cross-border holdings of securities, TIC SLT filers also will report data on purchases and sales of those securities and month-over-month changes in their fair value. In conjunction with this expansion of TIC SLT, the Treasury announced that, in the near future, it will discontinue TIC Form S (TIC S), which currently collects data on aggregate purchases and sales of long-term U.S. and foreign securities.
Background on TIC SLT and TIC S
TIC SLT and TIC S are part of the TIC reporting system, which is required by federal statute and is designed to collect timely information on international portfolio capital movements. The data collected by the TIC reporting system is used to: calculate U.S. balance-of-payment data; formulate U.S. international financial and monetary policies; and generate International Monetary Fund statistics.1
TIC SLT currently captures monthly snapshot reporting of: U.S. residents’ ownership of foreign securities; and foreign residents’ ownership of U.S. securities. TIC S captures aggregate cross-border transaction in securities that occur over the course of each month. As a general matter, TIC SLT is filed by U.S. custodians and U.S. end-investors or issuers (e.g., investment advisers on behalf of funds and clients that own foreign securities or issue securities to foreign residents). TIC S principally is filed by U.S. broker-dealers that effect cross-border transactions in securities.
Overview of TIC SLT
TIC SLT, which first was introduced in 2011, currently requires snapshot reporting, as of the last business day of each month, of U.S. residents’ holdings of foreign securities and foreign residents’ holdings of U.S. securities. TIC SLT captures only holdings of long-term securities (e.g., equities or bonds) having an initial maturity of more than one year.2 For U.S. investment managers, the implications of TIC Form SLT are two-fold: their U.S. funds may be both (1) holders of foreign securities and (2) issuers of U.S. securities to foreign investors. Since a U.S. fund’s holdings of foreign securities typically will be held by a U.S. custodian, the reporting obligation for such holdings ordinarily will fall on that U.S. custodian. However, if the foreign securities are held by a non-U.S. custodian or no custodian at all (for example, in the case of certain private investments), then the fund’s U.S. investment manager is primarily responsible for reporting the securities.
With respect to a fund in its role as an issuer, it is not common that foreign investors will hold their fund interests with a U.S. custodian. Accordingly, it frequently may fall on the U.S. investment manager to report the holdings of the securities issued by its U.S. funds to foreign investors. U.S. investment managers are required to consolidate any of their own proprietary holdings with those of their U.S. clients, both for reporting purposes and for determining whether the applicable reporting threshold has been exceeded. The reporting threshold for TIC SLT is $1 billion.
The forthcoming changes do not impact the current requirements relating to the reporting of portfolio holdings or the calculation of the $1 billion reporting threshold. Instead, as discussed in detail below, the amendments to the form will require additional information regarding the data points already reported on TIC SLT. This also means that while current TIC SLT reporters will need to provide additional data on their filings, the changes generally would not impose new filing requirements on those that do not already file TIC SLT.
TIC SLT Changes: Collection of Transactions and Changes in Fair Value
Treasury has indicated that policymakers, economists and other users of TIC data often compare the holdings reported on TIC SLT with the net purchases and sales reported on TIC S, in order to understand the cause of month-over-month changes in cross-border holdings.3 By comparing these data points, TIC data users could estimate the extent to which changes in holdings were attributable either to purchases and sales, on the one hand, or to changes in the fair value of securities, on the other hand. Treasury observed that “[d]ifferent assessments between TIC data users often arise because each one has to create their own estimates of the ‘change in fair value’ despite lacking detailed information on the holdings of, and transactions in, the many securities in the TIC system.”4 In adopting the forthcoming changes to TIC SLT and eventual retirement of TIC S,5 Treasury has sought “to create, for the first time, a data collection of ‘changes in fair value’ for the TIC securities data,” by collecting data on holdings, purchases and sales, and changes in fair value all in a single form and collected from a single source.6 Treasury has indicated that it expects the changes in TIC SLT and the discontinuation of TIC S will result in an overall reduction in the time spent completing forms by TIC reporters.7
To effect these changes, beginning with the report including data as of November 30, 2022 (i.e., the report that will be due in December 2022), in addition to capturing cross-border holdings, TIC SLT also will gather information on: the value of purchases and/or sales of reportable securities that occurred during the prior month; and changes in the fair value of reportable securities that occurred during the prior month. These items will be reported in new columns adjacent to the holdings data currently reported on the TIC SLT form. These new data points will enable TIC data users to determine the cause of month-over-month changes in the amount of aggregate portfolio holdings reported.
Reporting Purchases and Sales of Securities
The amended TIC SLT requires reporting of transactions in long-term securities that occurred during the period between the current and prior TIC SLT reports (i.e., the TIC SLT submitted in December 2022 will report purchases and sales of securities that occurred between November 1, 2022 and November 30, 2022) (Reporting Period). “Transactions” are defined as “the transfer of assets whereby the seller surrenders control over those securities to the buyer for currency.”8 Reporting entities must report both purchases and sales from the perspective of the U.S. resident, and should report the gross amount that was transferred in order to execute the transaction. Purchases should reflect the cost of securities acquired, including brokerage charges, taxes and other expenses. Sales should reflect the proceeds, excluding brokerage commissions and other applicable charges. Transactions will be reported based on the cost of the securities at time-of-settlement, and will not be adjusted to reflect changes in value over the course of the reporting period (as that information will be captured in the “Changes in Fair Value” columns described below). Any transactions denominated in foreign currency should be converted to and reported in U.S. dollars.
Notably, the instructions to TIC SLT identify a number of reportable “transactions” that may not be considered purchases or sales in certain other contexts:
• The payment of principal to foreign holders of U.S. asset-backed securities will be reported as purchases;
• Redemptions of securities will be reported as purchases by the issuer; and
• New issuances of securities will be reported as sales.
Changes in Fair Value
The amended TIC SLT also introduces a new field requiring reporting of the changes in fair value of reportable securities during the calendar month occurring between a reporter’s current and immediately preceding TIC SLT filings (Reporting Period). Changes in fair value denominated in foreign currency should be converted to U.S. dollars using the exchange rate as of close of business on the last day of the Reporting Period. Fair value is measured according to U.S. GAAP, as defined in ASC 820.
Importantly, changes in fair value must be reported for securities acquired or sold during the Reporting Period. Thus, in the case of securities that were acquired during the Reporting Period, the difference in fair value between the time of purchase and the end of the Reporting Period should be reported. Likewise, in the case of securities that were sold during the Reporting Period, reporters should include the difference in the fair value between the end of the prior Reporting Period and the sale price.
Increases in fair value should be reported as positive numbers while decreases should be reported as negative numbers.
Reporting Dates
TIC SLT will continue to be filed on a monthly basis, with data covering the previous month due by the 23rd day of each month.
Penalties for Failure to Report
TIC SLT is authorized and required to be filed by an Act of Congress. There is potential civil and criminal liability for failure to file timely and accurate reports for any U.S. person or group subject to the reporting requirements. Any group that fails to provide timely and accurate data may be subject to a civil penalty of between $2,500 and $25,000, or injunctive relief ordering compliance, or both. Any U.S. person or group that willfully fails to submit any of the information required in the report on TIC SLT may be subject to a fine up to $10,000, and, if an individual, may be subject to imprisonment for up to one year, or both. In addition, the requirement subjects officers, directors, employees and agents of any entity with filing obligations who knowingly participate in such willful violation to the same penalties.
Conclusion
Treasury’s changes to TIC SLT will significantly impact the reporting obligations for entities required to file TIC SLT. Although preparing for these changes to TIC SLT is an initially burdensome exercise, investment managers might be able to rely on administrators, existing systems and processes used to gather information for other purposes (e.g., reporting of portfolio valuation, either within a firm’s own organization or through third-party service providers, such as administrators and broker-dealers).
Footnotes
1) For an overview of the TIC reporting system, please refer to Dechert OnPoint, Foreign Holdings and Transactions with Foreign Persons: Reporting Responsibilities for US Investment Managers and Other Financial Institutions.
2) Holdings of short-term securities (i.e., those with an initial maturity of one year or less) should be reported on the relevant TIC B Forms. For background regarding the TIC B Forms, please refer to Dechert OnPoint, TIC B Forms Are Amended to Explicitly Cover US Investment Managers.
3) Department of Treasury, Notice, Agency Information Collection Activities; Submission for OMB Review; Comment Request; Treasury International Capital, 86 Fed. Reg. 29628 (June 2, 2021).
4) Id.
5) To date, Treasury has not announced specific timing for the discontinuation of TIC S but has indicated that this form will remain in effect for a period of time following the expansion of TIC SLT.
6) Id.
7) Id. Because TIC S primarily is filed by broker-dealers, the changes to TIC SLT likely will result in an overall increase in the burden placed on investment managers.
8) See TIC SLT Instructions at Page 11.
