On January 1, 2021, the National Defense Authorization Act for Fiscal Year 2021 (the “Defense Bill”) was enacted into law. The Defense Bill includes the Corporate Transparency Act (the “CTA”), which creates a beneficial ownership registry within the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The CTA requires all covered corporations, limited liability companies and “other similar entities” that are formed within any U.S. State (including the District of Columbia, Puerto Rico and other U.S. Territories), Indian Tribe, or foreign entities that are registered to do business in the United States (collectively, “Reporting Companies”) to disclose certain information regarding their beneficial owners to FinCEN. The information to be disclosed includes (i) full legal name, (ii) date of birth, (iii) residential or business street address, and (iv) a unique identifying number from an acceptable identification document, including a state driver’s license, U.S. passport, or other U.S. state-issued identification document. If the beneficial owner does not hold any U.S.-issued identification documents, a non-U.S. passport number is required.
The express goal of the CTA’s registry is to “crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists, and criminals.” Given that goal, most institutional investors, registered investment advisors and other significant players in the investment arena are exempt from the disclosure obligations under the CTA.
The CTA will become effective on the date that the regulations are prescribed and issued by the U.S. Secretary of the Treasury, which is to be no later than one year after the enactment of the CTA. After the effective date of the implementing regulations, new Reporting Companies will be required to report beneficial ownership information at formation. Existing Reporting Companies will need to report such information within two years after the effective date of the regulations. Reporting Companies will need to update beneficial ownership information with FinCEN within one year of any change in the reported information.
Impact on Institutional Investors
Reporting Companies under the CTA include corporations and limited liability companies formed under the laws of a U.S. state or Indian Tribe or other similar entity that are “(i) created by the filing of a document with a U.S. state or Indian Tribe or (ii) formed under the law of a foreign country and registered to do business in the United States….” As noted above, the CTA targets “shell companies” and other entities with limited or no operations. As a result, it exempts or excludes numerous broad classes of entities. Among others, the exempt or excluded entities included are those that are (i) publicly traded, (ii) regulated, (iii) non-profits (including University endowments and foundations), (iv) government entities (including government plans), (v) partnerships, and (vi) trusts, as well as, in many cases, companies owned or controlled by those entities. In addition, the U.S. Secretary of the Treasury and Attorney General may jointly identify, by rule or otherwise, individual business concerns or classes of business concerns which are additionally exempt from the requirements of the CTA if the disclosure of beneficial ownership information with respect to such entities would not serve the public interest or assist law enforcement efforts to detect, prevent, or prosecute terrorism, money laundering, tax evasion, or other misconduct. These exclusions, in the aggregate, mean that the majority of large and/or institutional organizations in the U.S., including the majority of institutional investors, will not need to report their own beneficial ownership under the CTA.
Impact on Funds, Joint Ventures and Sponsors
The CTA expressly exempts from its beneficial owner reporting obligations registered investment companies, registered investment advisers, registered broker-dealers, and any pooled investment vehicle operated or advised by the foregoing. Pooled investment vehicles not operated or advised by any of the foregoing have no express exemptions under the CTA. Fund sponsors and registered entities will need to review future regulations promulgated under the CTA to determine their reporting obligations with respect to underlying holdings and joint ventures, and to confirm the meaning in practice of “operated or advised by.”
A more comprehensive list of exempt entities is included as Schedule 1.
Do Exempt Entities Have Filing Obligations?
Entities exempt from the beneficial ownership disclosure requirements under the CTA are still required to file a written certification with FinCEN, which must (i) identify the specific provision under which the entity is exempt; (ii) state that the entity meets the requirements for such exemption; and (iii) provide identification information for the applicant or for the officer, director, or similar agent making the certification on behalf of such entity.
How are Beneficial Owners Defined?
All beneficial owners of Reporting Companies will be required to report to FinCEN. A “beneficial owner” is defined under the CTA as any natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, (i) owns at least a 25% equity stake of the Reporting Company; (ii) exercises “substantial control” over the Reporting Company; or (iii) receives “substantial economic benefits” from the assets of a Reporting Company. The CTA leaves the terms “substantial control” and “substantial economic benefit” open-ended, but future implementing regulations and guidance are expected to address these terms with greater specificity. The CTA excludes from the definition of “beneficial owner” (i) a minor child (the information of the parent or guardian must be reported instead); (ii) an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual; (iii) an individual acting solely as an employee of a Reporting Company; (iv) an individual whose only interest in the Reporting Company is through inheritance; and (v) a creditor of a Reporting Company.
Beneficial ownership disclosure only relates to natural persons and it appears that pension plans, endowments and similar institutions will not be required to report on their direct ownership of Reporting Companies. It also appears that these institutions will not have to disclose information as to plan participants and beneficiaries. Information related to natural persons who are either control persons or 25% or more beneficial owners of family offices and certain other entities may need to be disclosed.
Who Has Access to the Information?
The beneficial ownership statements submitted to FinCEN will not be publicly available, and the CTA imposes penalties for the unlawful disclosure of collected information. However, the CTA does permit FinCEN to disclose beneficial ownership information, upon request, to (i) U.S. federal law enforcement agencies, (ii) U.S. federal law enforcement agencies requesting information on behalf of a non-U.S. law enforcement agency, or (iii) with the consent of the reporting company, a financial institution in order to meet customer due diligence requirements. FinCEN is also permitted to disclose beneficial ownership information to state, local, and tribal law enforcement agencies pursuant to a court order authorizing the agencies to seek the requested information.
Implications for Reporting Companies
U.S. companies, as well as foreign companies operating in the U.S., should review the CTA to determine whether they will be considered a Reporting Company. Companies required to report should note that willful failure to report, or the submission of a report containing false or fraudulent beneficial ownership information, is subject to a $500 per day penalty and/or a maximum $10,000 penalty and up to two years’ imprisonment. The CTA contains a safe harbor from civil or criminal liability for the submission of inaccurate information if the person “voluntarily and promptly” (and no later than 90 days after the submission of the original inaccurate report) submits a report containing corrected information.
For additional information, please contact: Robert Bodansky, Steven Richman, David Warburg, Trevor Tullius or Ryan Newbrough.
The CTA exempts the following from its beneficial ownership reporting requirement:
(a) an issuer:
- of a class of securities registered under section 12 of the Securities Exchange Act of 1934; or
- that is required to file supplementary and periodic information under section 15(d) of the Securities Exchange Act of 1934.
(b) an entity:
- established under the laws of the United States, an Indian Tribe, a State, or a political subdivision of a State, or under an interstate compact between two or more States; and
- that exercises governmental authority on behalf of the United States or any such Indian Tribe, State, or political subdivision;
(c) a bank, as defined in:
- section 3 of the Federal Deposit Insurance Act;
- section 2(a) of the Investment Company Act of 1940; or
- section 202(a) of the Investment Advisers Act of 1940;
(d) a Federal credit union or a State credit union (as those terms are defined in section 101 of the Federal Credit Union Act);
(e) a bank holding company (as defined in section 2 of the Bank Holding Company Act of 1956) or a savings and loan holding company (as defined in section 10(a) of the Home Owners’ Loan Ac);
(f) a broker or dealer (as those terms are defined in section 3 of the Securities Exchange Act of 1934) that is registered under section 15 of that Act;
(g) an exchange or clearing agency (as those terms are defined in section 3 of the Securities Exchange Act of 1934) that is registered under section 6 or 17A of that Act;
(h) certain other entities not described above that are registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934;
(i) an entity that:
- is an investment company (as defined in section 3 of the Investment Company Act of 1940) or an investment adviser (as defined in section 202 of the Investment Advisers Act of 1940); and
- is registered with the Securities and Exchange Commission under the Investment Company Act or the Investment Advisers Act of 1940;
(j) an investment adviser described in section 203(l) of the Investment Advisers Act of 1940 and that has filed Item 10, Schedule A, and Schedule B of Part 15 1A of Form ADV, or any successor, with the Securities and Exchange Commission;
(k) an insurance company (as defined in section 2 of the Investment Company Act of 1940);
(l) an entity that:
- is an insurance producer that is authorized by a State and subject to supervision by the insurance commissioner or a similar official or agency of a State; and
- has an operating presence at a physical office within the United States;
(m) a registered entity (as defined in section 1a of the Commodity Exchange Act);
(n) an entity that is:
- a futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor (as those terms are defined in section 1a of the Commodity Exchange Act); or
- a retail foreign exchange dealer, as described in section 20 2(c)(2)(B) of that Act; and registered with the Commodity Futures Trading Commission under the Commodity Exchange Act;
(o) a public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002;
(p) a financial market utility designated by the Financial Stability Oversight Council under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010;
(q) certain pooled investment vehicles advised by other exempt entities;
- organization that is described in section 501(c) of the Internal Revenue Code of 1986 (determined without regard to section 508(a) of such Code) and exempt from tax under section 501(a) of the Code, except that in the case of any such organization that loses an exemption from tax, such organization shall be considered to be continued to be exempt for the 180-day period beginning on the date of the loss of such tax-exempt status;
- political organization (a defined in section 527(e)(1) of the Code) that is exempt from tax under section 527(a) of the Code;
- trust described in paragraph (1) or (2) of section 4947(a) of the Code;
(s) operates exclusively to provide financial assistance to, or hold governance rights over, any entity described in the foregoing bullet point;
- is a United States person;
- is beneficially owned or controlled exclusively by one or more United States persons that are United States citizens or lawfully admitted for permanent residence; and
- derives at least a majority of its funding or revenue from one or more United States persons that are United States citizens or lawfully admitted for permanent residence;
(u) any corporation or limited liability company formed and owned by any entity described in the foregoing bullet points.
(v) any business concern that (i) employs more than 20 employees on a full-time basis in the United States; (ii) files income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales; and (iii) has an operating presence at a physical office within the United States.
(w) any entity or class of entities that the Secretary of the Treasury and the Attorney General have, by regulation, determined should be exempt from the requirements of beneficial ownership reporting because requiring beneficial ownership information from the entity or class of entities:
- would not serve the public interest; and
- would not assist law enforcement efforts to detect, prevent, or prosecute terrorism, money laundering, tax evasion, or other misconduct.