This memorandum is intended to alert you to the impending deadline of June 30, 2014 for filing the annual Report of Foreign Bank and Financial Accounts (“FBAR”) on FinCEN Form 114, formerly known as Form TD F 90-22.1, with the U.S. Treasury Department.

There have been significant changes to the FBAR filing process in the past year, namely the release of FinCEN Form 114 and the requirement to file the form electronically.

A U.S. person generally is required to file Form 114 with the U.S. Treasury Department to report the existence of a financial interest in, or signature authority over, financial accounts located outside the United States that had an aggregate value of more than $10,000 at any time during a calendar year (each, a “Foreign Account”).

Under these rules, as more fully described below, employees of investment managers that have signature authority over Foreign Accounts of private investment funds and domestic private investment funds that are treated as owning Foreign Accounts (whether directly or indirectly) may be required to file Form 114.

Below is a summary of the main elements of the FBAR rules that may be of interest to managers of private investment funds.

Who Has to File the Form?

Any U.S. citizen, resident, or entity formed in the United States¹ that had a “financial interest” in, or “signature or other authority” over, a “financial account” in a foreign country during the 2013 calendar year.

A U.S. person has a “financial interest” in a Foreign Account if: (1) such U.S. person is the record owner or has legal title to the account, irrespective of whether the account is held for such person’s own benefit or for the benefit of others; or (2) the record owner or title holder is (a) a person acting as an agent, nominee, attorney or in some other capacity on behalf of the U.S. person with respect to the account, (b) a corporation in which the U.S. person owns (directly or indirectly) more than 50% of the voting power or value, (c) a partnership in which the U.S. person owns (directly or indirectly) more than 50% of the capital or profits interest, (d) a grantor trust of the U.S. person, (e) a trust in which the U.S. person either has a present beneficial interest² in more than 50% of the assets or from which such U.S. person receives more than 50% of the current income, or (f) any entity (other than a corporation, partnership or trust) in which the U.S. person owns (directly or indirectly) more than 50% of the voting power, value of the equity interest or assets, or profits interest.

A U.S. person has “signature or other authority” over a Foreign Account if the U.S. person (alone or in conjunction with another person) is able to control the disposition of assets in the account by direct communication (in writing or otherwise) to the institution holding the account. Only an individual can have signature or other authority over a Foreign Account. Therefore, while the principals and employees of an investment adviser may be required to report that they have signature or other authority over a foreign financial account of an investment fund, the investment adviser itself would not have such obligation.

A “financial account” includes a bank, securities or brokerage account. It also includes (i) a commodity futures or options account, (ii) an insurance policy with a cash value (such as a whole life insurance policy), (iii) an annuity policy with a cash value and (iv) shares in a mutual fund or similar pooled fund that issues shares available to the general public and having a regular net asset value determination and regular redemptions. A “financial account” does not include shares in a private investment fund because the fund’s shares are not available to the general public.

Are There any Exceptions to Filing?

There are some limited exemptions to the reporting obligation. For example, an officer or employee of certain entities need not file Form 114 to report signature or other authority over a Foreign Account so long as the officer or employee has no financial interest in the Foreign Account. Such entities include: (1) certain banks; (2) financial institutions (excluding investment advisers) registered with and subject to examination by the SEC or the CFTC; (3) investment advisers registered with and subject to examination by the SEC and providing services to an investment company registered under the Investment Company Act of 1940, but only with respect to the Foreign Accounts of the registered investment company; and (4) entities with a class of equity securities listed on any U.S. national securities exchange.

Is There a Simplified Reporting Regime for Entities with Multiple Financial Accounts?

There is a simplified reporting regime for United States persons having a financial interest in 25 or more foreign financial accounts or signature or other authority over 25 or more such accounts. This reporting need only include the number of foreign financial accounts and certain other basic information. Detailed reporting is required if requested by the Treasury Department.

When Does the Filing Have to be Made?

There are several different deadlines:

1. June 30, 2014 for U.S. persons having a financial interest in a foreign financial account during the 2013 calendar year.
2. June 30, 2015 for officers and employees of investment advisers registered with the Securities and Exchange Commission (a “RIA”) who have signature or other authority over (but no financial interest in) the foreign financial accounts of persons that are not investment companies registered under the Investment Company Act of 1940 (the “1940 Act”) during the 2013 calendar year (or any earlier calendar year).³ For example, an employee of a RIA that has signature authority (but no financial interest) in a bank account of a private investment fund would qualify for this extension.
3. June 30, 2015 for officers or employees of certain regulated entities (i.e., banks; financial institutions registered with the SEC or CFTC; RIAs; listed companies) (a “Regulated Entity”) having signature or other authority over (but no financial interest in) the foreign financial accounts of an entity more than 50% percent owned (directly or indirectly) by the Regulated Entity (a “Controlled Entity”).⁴ This deadline also applies to officers or employees of a Controlled Entity having signature or other authority over (but no financial interest in) the foreign financial accounts of the Regulated Entity, the Controlled Entity or another Controlled Entity of the Regulated Entity.
4. June 30, 2014 for all other U.S. persons (including U.S. persons who are officers or employees of investment advisers that are not registered with the SEC) having “signature authority” or “other authority” over a foreign financial account during the 2013 calendar year.

It is important to note that, unlike in the case of an income tax return, there is no process for obtaining extensions of the above deadlines.

How is the form filed?

Form 114 must be filed electronically through FinCEN BSA E-filing system at http://bsaefiling.fincen.treas.gov/main.html. Given the high volume of FBAR filings around June 30, you are encouraged to register and file your FBAR forms early.

Under a new procedure, an employer may file Form 114 on behalf of its employees if it receives a power of attorney on FinCEN Form 114a from the employee. Form 114a is available on the FinCEN website at: http://www.fincen.gov/forms/files/FBARE-FileAuth114aRecordSP.pdf.

What are the Consequences for Failing to File the Form?

There are civil and criminal penalties for failing to file the Form.

Are there any Other Filing Requirements with Respect to a Foreign Account?

In addition to the FBAR filing obligation, there are two other filing obligations of which you should be aware:

1. U.S. individuals (including U.S. citizens and resident aliens) who own specified foreign financial assets (including a foreign financial account) with a value in excess of certain specified thresholds may be required to file Form 8938 (Statement of Specified Foreign Financial Assets) with the IRS on an annual basis. Form 8938 is filed with a U.S. individual’s federal income tax return.
2. Taxpayers are required to answer certain questions related to foreign financial accounts on U.S. federal income tax and information returns (e.g., Part III of Schedule B of Form 1040; the “Other Information” section of Form 1041; Schedule B of Form 1065; Schedule N of Form 1120).

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If you have any questions regarding this memorandum, please contact Jim Cofer at (212) 574-1688, Jon Brose at (212) 574-1615, Ron Cima at (212) 574-1471, Dan Murphy at (212) 574-1210 or Peter Pront at (212) 574-1221.

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¹ It should be noted that the U.S. tax characterization of an entity is irrelevant for determining whether or not it is a U.S. person for purposes of the FBAR filing requirement. For example, a Delaware limited liability company which is treated as a disregarded entity for U.S. federal income tax purposes must file Form 114 if it is has a financial interest in a Foreign Account.

² A beneficiary of a discretionary trust or the owner of a remainder trust interest will not be treated as having a “present beneficial interest.”

³ Such officers and employees are exempt from FBAR filing obligations only with respect to the foreign financial accounts of 1940 Act registered investment companies managed by the RIA.

⁴ Such officers and employees are exempt from FBAR filing obligations with respect to the foreign financial accounts of the Regulated Entity, except that officers and employees of a RIA are only exempt with respect to the foreign financial accounts of 1940 Act registered investment companies managed by the RIA.