On April 5, 2021, the Financial Crimes Enforcement Network, an office of the US Treasury Department (“FinCEN” or “Treasury”), published an advance notice of the proposed regulation (“ANPRM”) (1) process of implementing regulations under the Corporate Transparency Act ("CTA"). (2) The CTA passed by Congress on December 31, 2020 under the National Defense Authorization Act requires certain companies incorporated or registered to do business in the United States (each a “Reporting Company”) reporting certain identifying information, such as B. beneficial owners of 25% or more and certain control persons, directly to FinCEN. (3) This information is to be stored in a non-public database, maintained by FinCEN and shared with law enforcement and federal regulatory authorities, among others. The reporting obligations discussed here will only take effect when FinCEN publishes the final regulations, which FinCEN must issue by January 1, 2022. The ANPRM is the first step in this regulatory process and asks for public comments on numerous issues relevant to the implementation of the CTA. Comments are due on May 5, 2021. In addition, FinCEN must issue implementing provisions within one year of issuing a final rule under the CTA in order to revise the existing CDD rule (Customer Due Diligence) (4) and adapt it to the CTA implementing provisions. (5)
This warning highlights certain aspects of the CTA and the ANPRM, including the impact of the CTA on mutual funds and their advisors.
Information to be reported
The CTA requires each reporting company to provide information about (1) its beneficial owners and controllers, (2) persons registering the reporting company or filing the application necessary for the reporting company to do business in the United States ("Applicant "), To be disclosed. and (3) other identifying information from the reporting company itself.
1. Beneficial owners and control persons
The CTA defines a "beneficial owner" as any person who, directly or indirectly, by any contract, arrangement, understanding, relationship or otherwise (i) owns or controls at least 25% of the ownership interests of the reporting company, or (ii) exercises significant control over the reporting company (each a “beneficial owner”). Reporting entities are required to report information on both types of beneficial owners. In this way, the definition of beneficial owner is similar to the definition in the CDD rule, which requires reporting under both the owner and control person pen. (6) The beneficial owner does not include any person who: (i) a nominee, agent, custodian or agent on behalf of any other person; (ii) an employee of any corporation, limited liability company, or similar enterprise, whose control or economic benefit from that enterprise is derived solely from the individual's employment status; (iii) the creditors of a company, unless the obligee owns at least 25% of the company or has material control over the company; (iv) a person whose sole interest is a "right of inheritance"; or (v) a minor child when reporting parent or guardian information. (7)
The CTA requires each reporting company to identify each of its beneficial owners by means of (i) full legal name, (ii) date of birth, (iii) current residential or commercial street address and (iv) a unique identification number from an acceptable identification document (8 ) The identification requirements in the CTA itself are slightly different from the requirements imposed by legal entity customers under the CDD rule, and it is likely that the CDD rule will at some point be changed to address the reporting requirements for each beneficial owner under the CTA conform to CTA. (9)
The ANPRM asks for a public statement as to whether the definition of beneficial owner “is sufficiently clear or whether there are aspects of this definition and specified exceptions that FinCEN should clarify by ordinance?” (10) Question 3 of the ANPRM is specifically asked whether the FinCEN “Define either or both of the terms“ ownership ”and“ control ”in relation to the ownership interests of a company. If so, should the definition “derive from or be based on an existing definition in another area such as securities law or tax law? "(11)
With regard to the control point of the term “beneficial owner”, the CTA neither defines “substantial control” nor does it describe whether it should be limited to voting rights control or operational control, or to what extent it deviates from the concept of control in the CDD rule, which the Control point defined as: "A single person with significant responsibility for the control, administration or management of a legal entity's client." (12) The ANPRM asks for an opinion on the extent to which the definition of a material control in the CTA Implementing Rules should " meet or be similar to the definition of the current CDD rule or the standards used to determine who is a beneficial owner under 17 CFR 240.13d – 3, enacted under the Securities Exchange Act of 1934. ”(13) Specifically, asks the ANPRM for a public statement on whether FinCEN has “substantial control” as “(1) that k a reporting entity may have more than one beneficial owner who is believed to have material control over the entity ”. or (2) … to enable a reporting entity to have more than one beneficial owner with "material control". "(14)
FinCEN also solicits comments to determine what steps reporting entities should take to confirm the accuracy of the beneficial owner information and what FinCEN should do to ensure that the reported beneficial owner information is accurate and complete. (15)
2. Applicant
Reporting Companies are required to disclose the same identifying information to applicants as they do to beneficial owners (i.e. name, date of birth, address and unique identification number). (16) The ANPRM asks whether the applicant's definition “is sufficiently clear in view of the current status of the law and current notification and registration practices” or whether FinCEN should expand the definition. (17) FinCEN also requests an opinion on whether a reporting company should be required to report information about applicants to FinCEN after the reporting company's first report. (18)
3. Information on the reporting company
Although not specifically mentioned in the CTA, FinCEN has requested an opinion on what information a reporting entity should report about itself, including its affiliates, parents and subsidiaries, and its relationship with its beneficial owners. (19) These questions suggest that the information that FinCEN may request from reporting companies is more comprehensive than information that relates only to the reporting company's beneficial owners and claimants.
The CTA also provides for reporting companies to be given an identifier to expedite filing. FinCEN must issue an identifier to a company or an individual at the request of this company or an individual, from which it can be seen that information on beneficial ownership has been previously reported to FinCEN (“FinCEN identifier”). (20) Reporting companies with a FinCEN identifier can instead provide FinCEN with information about beneficial ownership. The ANPRM asks for an opinion on several questions related to the process of issuing FinCEN identifiers and their form. (21)
Reporting Company
Subject to numerous exceptions intended to exclude many regulated entities and operations as discussed below, the CTA broadly defines a reporting company as follows:
Corporation, limited liability company, or similar entity established (i) by filing a document with a secretary of state or similar office under the law of any state or Indian tribe, or (ii) incorporated under the law of a foreign country and registered to do business in the United States by filing a document with a secretary of state or similar office under the laws of a state or Native American tribe. (22)
The CTA does not define the term “other similar entity”. The ANPRM contains several questions about which factors should be considered and which companies should be included or excluded from the "other similar companies" category. (23) In particular, FinCEN asks whether trusts and special purpose vehicles (“SPVs”) “formed by filing with a State Secretary or similar office” should be included in or excluded from other similar entities. (24) The CTA requires an official study to identify each state's procedures for collecting beneficial ownership information for partnerships, trusts. and other legal entities to determine what to include as “other similar entity”. Given the similarities between partnerships created by filing a document with a Secretary of State and limited liability companies, such partnerships may be included as “other similar entity”.
In addition, it is currently unclear whether statutory or non-statutory trusts are subject to the reporting requirements under the CTA. (25) However, we note that the CTA exempts charitable trusts and shared interest trusts from reporting requirements. (26)
Companies excluded from the definition of reporting company
The CTA provides 23 exceptions to the definition of the reporting company, many of which are intended to exclude companies that are already obliged to disclose information about beneficial ownership to the public or to federal supervisory authorities. These include (27):
- An investment company (28) registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940 (29) ("40 Act"). (30)
- An investment advisor (31) registered with the SEC under the Investment Advisers Act of 1940 (32) (the “Advisers Act”). (33)
- An investment advisor: & # 39; & # 39; (i) described in Section 203 (l) of the Advisors Act; and (ii) Item 10, Appendix A and Appendix B of Part 1A of Form ADV or a successor thereof has filed with the SEC (“an advisor who is on the exemption supported by venture capital ”). (34)
- Banks, (35)
- Federal or state credit unions. (36)
- Broker-dealer. (37)
- Futures commission dealers who feature brokers, swap dealers, large swap participants, commodity pool operators, and commodity trading advisors who are registered with the Commodities Futures Trading Commission.
- An insurance company within the meaning of Section 2 of the 40 Act.
- Any “pooled investment vehicle” sold by (i) a bank, (ii) federal or state credit union, (iii) SEC-registered brokers or dealers, (iv) SEC-registered investment advisers, or (v) advisers who relies on the risk capital exemption. (38) The CTA defines a "Pooled Vehicle ”means (i) any investment company within the meaning of Section 3 (a) of the 40 Act; (39) or (ii) any company that would (a) be an investment company for the purposes of this Section, except for the exclusion from this definition in Section 3 (c) paragraph (1) or (7) of the 40 Act, (40 ) and (b) is filed with the SEC by the relevant investment advisor in its form ADV (or successor form identified by its legal name).
- Any company that (i) has more than 20 full-time employees in the United States; (ii) filed a federal income tax return in the prior year in the United States showing gross income or sales totaling more than $ 5,000,000, including income or sales from (a) other companies owned by the company; and (b) other companies through which the Company operates; and (iii) has an operational presence in a physical office in the United States.
The CTA also contains a provision that allows the Treasury Department to exempt other types of companies from reporting requirements under certain circumstances. This determination can be useful in obtaining exemptions for other types of businesses. The CTA also provides for an abbreviated filing for beneficial owners of reporting entities that are themselves exempt from the reporting entity definition. If an entity exempt from the reporting entity definition is a beneficial owner of a reporting entity, the reporting entity need only provide the name of the exempt entity that is exempt from that exemption entity and does not need to provide any further information relating to report this exempt company (41)
The ANPRM contains several questions to further formulate the exemptions, asks whether there are categories of companies that are currently not exempted but should be exempted, and asks for an opinion on how exempted companies must demonstrate that they are in a of the exceptions, excepted categories fit. (42) In particular:
a. What information should FinCEN request from companies in order to qualify for these exemptions and what is the review process that should go through with this information?
b. Should there be different information requirements for operating companies and holding companies, for active companies and dormant companies, or are there other bases for differentiating between company types?
c. Should released bodies be required to submit regular reports to support the continued application of the relevant exemption (e.g. annually)? (43)
Exceptions to the definition of the relevant reporting company for mutual funds and investment advisers
Exceptions to the reporting company definition include most private investment funds and their advisors, which exempts most funds and advisers from reporting their beneficial ownership information to FinCEN. In particular, the CTA exempts from defining the reporting company: an investment fund; an investment advisor registered with the SEC; an advisor who relies on the risk capital exemption; and a pooled investment vehicle formed under the laws of the United States of America and operated or advised by a bank, credit union, broker-dealer, SEC-registered investment advisor, or venture capital exemption advisor . Each of these companies is not required to provide FinCEN with a beneficial ownership report.
Advisers who are not registered with the SEC, such as government-registered investment advisors and advisors who rely on the "Private Fund Adviser Exemption," available to advisors advising private funds only when the adviser has assets under management in the United States of less than $ 150 million is currently not exempt from the reporting company's definition. These advisors may need to report beneficial ownership information to FinCEN unless there is an exception. For example, an investment advisor who is not otherwise exempted may rely on the exemption available to a company that employs more than 20 full-time employees in the United States and has gross income or sales greater than $ 5 million in of the entity and maintains a physical office presence in the United States.
Likewise, funds advised by advisors who are not registered with the SEC or advisors who rely on the risk capital exemption cannot be exempted from the reporting company's definition. For example, a fund advised by an advisor who relies on the “Private Fund Advisor Exemption” may be available to advisors who only advise private funds if the advisor has US assets of less than 150 million . USD has been requested to submit a report to FinCEN with beneficial ownership information. In addition, pooled investment instruments managed by commodity trading advisors are currently not exempt from reporting requirements.
The CTA contains a modified reporting requirement for certain pooled investment vehicles not domiciled in the United States. The CTA requires that “(a) any company, limited liability company or other similar entity that is an exempt entity under subsection (a) (11) (B) (xviii) and that is incorporated under the laws of any other country , submit a written certificate to FinCEN containing identification information of a person who exercises significant control over the pooled investment vehicle. “As explained above, the CTA has not yet defined an" essential control ". The “Exempt Entity” described in subsection (a) (11) (B) (xviii) refers to a pooled investment vehicle that is exempt from the reporting company definition because it is operated by a bank, federal or state credit union operated or advised, SEC registered broker or dealer or SEC registered investment advisor or advisor who relies on the risk capital exemption.
In order to clarify the changed reporting process, the ANPRM asks for an opinion on the method with which the written certification is to be submitted, which information should be included, whether the submission is first made to foreign authorities and then forwarded to FinCEN or forwarded directly to FinCEN FinCEN and whether the certifications should be accessible to all or a subset of database users and whether they should be accessible on the same terms as the beneficial ownership information of all other reporting entities. (44) Because private investment fund managers often employ a large number of employees.For foreign and domestic funds and special-purpose vehicles, it is important that they understand the requirements of the CTA and the implementation rules of the FinCEN after their publication and that they include all applicable reporting requirements in their compliance functions.
Disclosure and Security of Registration Information
After reporting, information on beneficial ownership is stored in a confidential FinCEN database and kept for at least five years after the reporting company in question has ceased to exist. (45) Although the beneficial ownership register is not publicly available upon request, FinCEN will in certain circumstances be entitled to share information with (i) financial institutions (in connection with CDD requirements under applicable law with the consent of the reporting company), provided that the protocol, contract, arrangement, convention, or governmental request is complied with; (ii) federal law enforcement, intelligence and national security agencies; (iii) state, local, and tribal law enforcement agencies; (iv) foreign law enforcement agencies; and (v) functional and other federal regulators. (46)
As part of the ANPRM, FinCEN asks for a comment on the details of the registration. In particular, it asked, "How can FinCEN provide beneficial ownership information to financial institutions with CDD obligations in order to make that information most useful to those financial institutions?" (47)
The CTA provides certain cybersecurity protections for the database, including encryption. (48) FinCEN needs to identify and fix vulnerabilities in the event of a cybersecurity breach that results in significant unauthorized access to useful owner information. (49) The ANPRM requests comments on additional security and data protection measures to protect the information and to limit its use to authorized purposes. (50) FinCEN also asks whether the misuse of database information should be punished with penalties under the Bank Secrecy Act and the existing FinCEN regulations or whether other protective measures should be implemented. (51)
Report timing
The time requirements for submitting the report to FinCEN depend on whether the reporting company was incorporated before or after the date on which the implementing provisions of the CTA came into force.
- Any reporting company that was incorporated or registered prior to the effective date of the CTA Implementing Regulations must provide FinCEN with the necessary beneficial ownership information in good time and no later than two years after the CTA Implementing Regulations came into effect.
- Any reporting company incorporated after the effective date of the CTA Implementing Regulations must provide FinCEN with beneficial ownership information at the time of incorporation or registration.
Regardless of the date of establishment, all reporting companies must submit a report to FinCEN in good time and no later than one year after the date on which the required information on beneficial ownership changes, in which the information on the change is updated.
In relation to reporting entities and persons with FinCEN identifiers, the ANPRM contains questions about how the timely manner requirements can be met, including what should happen if beneficial owners or holders of FinCEN identifiers (i) are material Transfer control to another person, (ii) change their legal name or registered residential or commercial street address, (iii) die, or (iv) if a previously acceptable identification document expires. (52)
For reporting companies without FinCEN IDs, FinCEN asks “what is to be regarded as a“ timely method ”for updating a change in beneficial ownership” and whether the period should differ depending on the type of reporting company and which factors should be taken into account when determining the Time period and how long the reporting companies must update the beneficial owner information in the event of a change of ownership. (53)
Punish
The CTA prohibits penalties for failing to report or report inaccurate or incomplete information. Any person who (i) intentionally provides or attempts to supply false or fraudulent beneficial ownership information, including a false or fraudulent identifying photo or document; or (ii) willful failure to report, complete or update beneficial ownership information. (a) liable to the United States for a civil penalty of no more than $ 500 for each day the violation persists or has not been resolved; and (b) may face a fine of no more than $ 10,000, imprisonment not be documented for more than two years or both. (54)
However, there is a safe haven if a report containing inaccurate information is voluntarily corrected within 90 days, as long as the inaccurate report has not been submitted in order to evade reporting requirements, or if it is actually informed of its inaccuracy. (55) FinCEN asks for an opinion on how to implement the safe haven ask: “How should FinCEN regulations define the scope of this safe haven? Should the type of inaccuracy (e.g., a misspelled address versus omitting a beneficial owner entirely) be relevant to Safe Haven availability? "(56)
Conclusion
The CTA is an important step in disclosing beneficial ownership information, which is often used to hide money laundering and terrorist financing. While the ANPRM throws additional light on the FinCEN's understanding of the CTA, many content and technical details still need to be worked out before the implementing rules are enacted.