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The BEA, along with the U.S. Department of the Treasury and the Federal Reserve Bank of New York, has finalized changes to the ways certain cross-border investments by or into private funds are reportable in the BEA’s surveys of direct investments and in the Treasury International Capital (the “TIC”) reports of portfolio investments.
Under the current paradigm, cross-border investments that equal more than 10% of an issuer’s voting interests are characterized as “direct investments” and are reportable on the BEA surveys, while investments below 10% are categorized as “portfolio investments” and are reportable on TIC reports. The new rule will treat cross-border investments in certain private funds as portfolio investments, even if such investments are above the 10% ownership threshold.
The BEA defines “direct investment” as the ownership or control of 10% or more of the voting securities of an incorporated business. The term “voting securities” is not independently defined by the BEA or in the Code of Federal Regulations; however, the term is used interchangeably with “voting interest.” “Voting interest” is defined as the percentage of ownership in the voting equity of the relevant entity. Essentially, ownership of 10% of a foreign entity that establishes a capacity to vote and influence corporate action appears to be the defining feature of what constitutes a foreign direct investment abroad.
The new framework will apply in two different situations: (1) where a U.S. entity holds a 10% or more voting interest (but not voting control) in a foreign private fund; and (2) where a foreign entity holds a 10% or more voting interest (but not voting control) in a U.S. private fund. In both cases, the investments in the private funds will now be reportable on TIC reports instead of BEA surveys. It is important to note that the new changes will not affect scenarios in which a U.S. or foreign private fund holds a 10% or more voting interest in an “operating company,” a business enterprise that is not a private fund or a holding company. 
Simply said — in the event (i) a U.S. private fund is owned 10 % or more by a foreign entity or person or (ii) a foreign private fund is owned 10% or more by a U.S. person or entity, and that entity does not have voting control (the ability to influence and change corporate action), there is no duty to report on the BEA surveys from the first quarter of 2017 onward. That entity or person only has to report their information on the Treasury Department’s TIC reporting system.
Investments in private funds that make direct investments (ownership of 10% or more and voting control) continue to be reported to BEA. If an investor owns 10% or more voting interest in an “operating company” through a private fund, all investment in and out of the private fund is reported to the BEA.
The BEA will implement the new changes beginning with surveys conducted in 2017 (e.g. quarterly surveys including BE-577, BE-605 and BE-13, and annual reports including BE-11 and BE-15). The BEA will make all attempts to notify potentially affected respondents in December 2016. Such notification shall include whether or not a BEA survey must be filed.
 The BEA has published information explaining the changes regarding cross-border investments, available at http://www.bea.gov/surveys/privatefunds/index.htm.
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© Norton Rose Fulbright LLP 2021