Asian family offices seeking to attain geographic diversification in their investments will likely consider investing in the United States. Most family offices will be aware they need to consider the tax ramifications of investing in the US and we will explore these in greater detail in a separate article. However, many family offices are not sufficiently familiar with the ownership reporting obligations that come with investing in US publicly-traded securities, private operating companies, real estate and other assets. These reporting obligations do not give rise to financial obligations, but can lead to unexpected and unwelcome disclosure of family wealth holding structures if they are not anticipated in advance.
We have found that many Asia-based family offices are surprised to learn the mere ownership of, or significant trading in, US publicly-traded equity securities can give rise to reporting obligations – even when the family has no other connections to the US.
The first of these reporting obligations applies to any individual or entity that acquires direct or indirect “beneficial ownership” of more than 5% of a class of publicly-traded equity securities of a single issuer. As a general matter, individuals or entities that have the power to vote or sell the securities are deemed to have beneficial ownership, whether or not they have any economic interest in the securities. When this type of reporting is triggered the beneficial owner must file a Schedule 13D or 13G with the US Securities and Exchange Commission (SEC) within 10 calendar days after acquiring such shares. Additional reporting obligations may apply to the direct or indirect beneficial owners of more than 10% of a single issuer’s equity securities. These reports, which are filed on Forms 3, 4 or 5, also require the disclosure of individuals or entities with an economic interest in the relevant securities, even if they do not have the power to vote or sell the shares.
The second of these reporting obligations, which apply to “institutional investment managers,” have proven especially vexing to family offices. Most family offices assume the rules do not apply to them because they are not institutional investment managers. However, the SEC has defined an institutional investment manager as any person, other than a natural person, investing in or buying and selling securities for its own account, and any person exercising investment discretion with respect to the account of any other person. The SEC has specifically stated that family offices investing the assets of family members are, and trustees may be, institutional investment managers.
Individuals and entities that fall within the definition of an institutional investment manager and that, individually or together with affiliated entities that are under common control, exercise investment discretion over at least $100m of so-called Section 13(f) securities must report their holdings to the SEC on a regular basis. Section 13(f) securities generally include equity securities that trade on an exchange, certain equity options and warrants, shares of closed-end investment companies, including ETFs, and certain convertible debt securities. The shares of open-end investment companies (i.e., mutual funds) are not Section 13(f) securities.
Finally, “large traders” who exercise investment discretion over accounts that engage in sizable transactions of U.S. exchange traded securities on a particular day or over the course of a particular month are required to report such transactions to the SEC. Filing obligations are triggered when a group of affiliated entities under common control purchase or sell either (a) 2 million shares or $20m during any calendar day, or (b) 20 million shares or $200m during any calendar month. Large trader reports are not available to the public, but many family offices are none-the-less concerned with providing such information to governmental agencies.
Ownership reporting obligations for US investments are not limited to publicly-traded securities. Under a little-known US statute called the International Investment and Trade in Services Survey Act, the US Department of Commerce Bureau of Economic Analysis (BEA) is required to collect data on foreign investment in US entities. The Act applies to all categories of assets, including real property, although there is an exception for real property held exclusively for personal use.
An Asian family office that owns, directly or indirectly, at least 10% of the voting interests of a US company must report to the BEA. Reporting obligations are triggered by varying thresholds of assets, revenues or net income or loss. If the US company has assets, revenues or net income or loss of at least $60m, a quarterly ownership report is required. If the US company has assets, revenues or net income or loss of at least $40m, an annual ownership report is required. For US companies not meeting these thresholds, a “benchmark” report is required every five years.
Although the obligation to report under the Act has existed since the 1970’s, enforcement has been light. However, the BEA is beginning to take a more aggressive approach with respect to enforcement and the BEA has the ability to assess penalties for failure to file required reports. Each of these reporting obligations comes with a complex set of rules specifying the exact information that must be included in the reports. These rules are problematic for many family offices because they can require a description of complex holding structures set up for tax, asset protection and other essentially private purposes Because many of the reports themselves are readily accessible to the public, in some cases on searchable websites maintained by the SEC, such disclosures give rise to significant privacy concerns.
In order to comply with these ownership reporting obligations and at the same time protect your privacy to the fullest extent possible, it is essential that you consult with advisers that are familiar with the application of these rules to private wealth holding structures. In some cases, it may be possible to structure the reporting entities in a way that limits disclosure. Even in cases where disclosure is required, some reports can be submitted subject to a request for confidential treatment. Knowing when the ownership reporting obligations arise and planning in advance to protect the privacy of the family should be a goal of every Asian family office.
David Guin is a partner based in Withers Bergman’s New York Office. He works closely with the Withers’ Wealth Planning practice in Asia.