The Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) on September 29, 2022 issued a final rule (Final Rule)1 defining and implementing the beneficial ownership reporting requirements of Section 6403 of the Corporate Transparency Act (Act).2 The Act, enacted on January 1, 2021, as part of the Anti-Money Laundering Act of 2020 within the National Defense Authorization Act of 2021, requires FinCEN to promulgate regulations mandating “reporting companies” to disclose to FinCEN the name, date of birth, residential or business address and an identifying number of such reporting companies’ “beneficial owners” and “company applicants,” among other requirements.3
The Final Rule, which is the first of three rulemakings planned by FinCEN to implement the requirements of the Act, becomes effective January 1, 2024. Reporting companies created before January 1, 2024 must file an initial report by January 1, 2025. Reporting companies created after January 1, 2024 must file a report within 30 calendar days of the earlier of: the date the company receives actual notice of its creation; or the date on which the secretary of state or similar office provides public notice of the reporting company’s existence. Reporting companies have 30 days to report changes to their initial filing, and have 30 days to correct inaccurate information in a previous filing once the reporting company becomes aware, or has reason to know, of the inaccuracy of information in earlier reports.
Definition of “Reporting Company”
The Final Rule defines a “reporting company” as either a “domestic reporting company” or a “foreign reporting company.” A “domestic reporting company” is defined as a corporation, limited liability company or other entity created by the filing of a document with a secretary of state or any similar office under the laws of a state or tribe. The Final Rule defines a “foreign reporting company” as an entity that is a corporation, limited liability company or other entity which is formed under the laws of a foreign country and registered to do business in any state or tribal jurisdiction by the filing of a document with the secretary of state or any similar office under the laws of the tribe or state. The Final Rule does not separately define “other entity.”
With respect to domestic entities, the preamble to the Final Rule acknowledges the concerns of several commenters regarding the status of certain entities under state law (e.g., general partnerships, other types of trusts, sole proprietorships) and clarifies that if such entities are not created through the filing of a document through the secretary of state or similar office, then those entities would not be considered a “domestic reporting company” under the Act.
The Act specifically exempts 23 types of entities from the definition of “reporting company” and authorizes FinCEN to exempt additional types of entities. The Final Rule adopts the statutory language granting the 23 exemptions, with some clarifications. The exemptions include mostly types of regulated entities that already are required to report beneficial ownership information to the respective regulators, including:
- All SEC reporting issuers;
- Investment companies registered under the Investment Company Act of 1940;
- Investment advisers registered with the SEC under the Investment Advisers Act of 1940 and venture capital fund advisers (as described in Section 203(l) of the Advisers Act);
- “Pooled investment vehicles”4 advised by certain exempt entities;5
- Brokers or dealers in securities registered with the SEC pursuant to Section 15(a) of the Securities Exchange Act of 1934;
- Banks, credit unions and depository institution holding companies;
- Money-transmitting businesses;
- Governmental authorities;
- Securities exchanges, clearing agencies or other Exchange Act-registered entities;
- Insurance companies and state-licensed insurance producers;
- Commodity Exchange Act registered entities;
- Accounting firms, public utilities and financial market utilities;
- Large operating companies;6
- Tax-exempt entities and entities assisting tax-exempt entities;7 and
- Subsidiaries of certain exempt entities and inactive entities.
Although the Act provides FinCEN with the authority to add to the list of types of exempt entities, FinCEN declined to add any other type of entity to the list of exemptions.8
Notably, only federally registered investment advisers and exempt reporting advisers that rely on the venture capital fund adviser exemption from registration under the Advisers Act are exempted from reporting beneficial ownership information (BOI) reporting requirements. Investment advisers relying on the private fund adviser exemption and state-registered investment advisers are not exempted from reporting BOI.
Pooled Investment Vehicles
Private funds that rely on Section 3(c)(1) or 3(c)(7) of the Investment Company Act are exempt from reporting BOI under the pooled investment vehicle exemption, provided the private fund is advised by: a federally registered investment adviser; an exempt reporting adviser that relies on the venture capital fund adviser exemption; a bank; a credit union; or a broker-dealer. Private funds that are advised by an exempt reporting adviser that relies on the private fund adviser exemption from registration under the Advisers Act are not “pooled investment vehicles” under the Final Rule and therefore must report BOI.
The Final Rule includes a limited exemption for foreign pooled investment vehicles, whereby the only BOI required to be reported is that of the individual with the greatest authority over the strategic management of the fund. However, the Adopting Release clarified that a foreign fund is required to rely only on the limited foreign pooled investment vehicle exemption to the extent it is a foreign reporting company in the first place (i.e., it is registered to do business in a state or Tribal jurisdiction).9 Accordingly, the Final Rule will not reach most foreign investment funds.
Beneficial Ownership
Consistent with the Act and the initial rule proposal (Proposed Regulations), the Final Rule defines the term “beneficial owner” in terms of actual ownership (Actual Ownership Test) as well as substantial control (Substantial Control Test). An individual who satisfies one of these two tests with respect to a reporting company will be treated as a “beneficial owner” of such reporting company for purposes of the Act. The definition of “beneficial owner” excludes minors, nominees, employees (other than senior officers), inheritors and creditors.
- Substantial Control Test. An individual has substantial control over a reporting company if such individual:
- Serves as a senior officer of the reporting company;
- Has authority over the appointment or removal of any senior officer or a majority of the board of directors;
- Directs, determines or has substantial influence over, important decisions made by the reporting company; or
- Has any other form of substantial control over the reporting company
Acknowledging that an individual may exercise substantial control directly or indirectly, the Final Rule largely incorporates the indicia of control as set forth in the Proposed Regulations (e.g., board representation, majority voting rights), including the non-exhaustive list of examples10 in the Proposed Regulations with respect to the financial, structural or organizational matters of a reporting company that would be considered important for purposes of the Substantial Control Test.
- Actual Ownership Test. An individual who owns or controls at least 25% of the ownership interests of a reporting company is a “beneficial owner” of such reporting company.
a) Ownership Interest. The Final Rule adopts, in large part, the definition of “ownership interest” from the Proposed Regulations. “Ownership interests” include: equity interests; capital or profit interests; convertible interests; and known options (which are treated as exercised). The Final Rule adds a catch-all category to the definition of “ownership interest” to cover any other instrument, contract, arrangement, or relationship that establishes ownership. An ownership interest may be held jointly or through a nominee, intermediary, trust or any other similar arrangement.
b) Calculation of the Total Ownership Interests of the Reporting Company. This is the most significant addition to the Actual Ownership Test in the Final Rule. The Final Rule clarifies that: for reporting companies that issue capital and profit interests (including entities taxed as partnerships), an individual’s total capital and profit interests should be compared to the total outstanding capital and profit interests of the reporting company; and for corporations and entities taxed as corporations, a “vote or value” approach should be used. Under a catch-all provision, if such a calculation cannot be performed with reasonable certainty, an individual is deemed to hold 25% or more of the total ownership interests in the reporting company if such individual owns or controls 25% or more of any class or type of ownership interests. Ownership interests are calculated as they stand at the time of the calculation and on a fully diluted basis.
Further Reporting Requirement for Company Applicants
In addition to information about the reporting companies themselves and their beneficial owners, the Act requires a reporting company to report information about every “applicant,” defined as the individual who directly files a document that creates a domestic reporting company or who directly files a document that first registers a foreign reporting company in the United States (defined in the Final Rule as a “company applicant”). Significantly, the Final Rule includes in the definition of “company applicant” a person who is primarily responsible for directing or controlling the filing (for domestic or foreign reporting companies) if more than one individual is involved in the filing of the document. The Final Rule does not require reporting companies existing or registered at the time of the effective date of the Final Rule to identify and report on their company applicants, nor does Final Rule require reporting companies formed or registered after the effective date of the Final Rule to update information regarding company applicants.
Timing and Filing
The Final Rule will become effective on January 1, 2024. Reporting companies created before January 1, 2024, must file an initial report by January 1, 2025. Reporting companies created after January 1, 2024 must file a report by the earlier of: 30 calendar days of the date the reporting company receives actual notice of its creation; or the date on which the secretary of state or similar office provides public notice of the reporting company’s existence. Reporting companies have 30 days to report changes to their initial filing and 30 days to correct inaccurate information in a previous filing once the reporting company becomes aware, or has reason to know, of the inaccuracy of information in earlier reports.
Prior to the effective date, FinCEN will publish in the Federal Register for public comment the reporting forms that persons will use to comply with their obligations under the Final Rule.
FinCEN’s Next Steps
As noted above, the Final Rule is the first of three planned rulemakings to implement the requirements of the Act. As per the Final Rule’s Fact Sheet,11 in subsequent rulemakings FinCEN plans to: establish rules for who may access BOI, for what purposes, and what safeguards will be required to ensure that the information is secured and protected; and revise FinCEN’s customer due diligence rule following the promulgation of the BOI reporting final rule. When combined with the Final Rule, these additional rulemakings likely will require substantial compliance efforts by financial institutions.
Footnotes:
1) FinCEN Issues Final Rule for Beneficial Ownership Reporting to Support Law Enforcement Efforts, Counter Illicit Finance, and Increase Transparency (Adopting Release). Also see FinCEN fact sheet and Beneficial Ownership Information Reporting Requirements (final rule).
2) National Defense Authorization Act for Fiscal Year 2021, Pub. L. 116-283 (Jan. 1, 2021).
3) For further information, please refer to Dechert OnPoint, FinCEN Corporate Transparency Proposed Regulations: Beneficial Ownership Information Reporting Requirements and the Potential Impact on Financial Institutions.
4) A “pooled investment vehicle” is defined as a fund that would be an investment company under the Investment Company Act but for Sections 3(c)(1) or 3(c)(7).
5) The exempted entities include: banks; credit unions; broker-dealers in securities; SEC registered investment advisers; and venture capital fund advisers (all as defined in the Final Rule).
6) The exemption for large operating companies covers any entity that: employs more than 20 full-time employees in the United States; has an operating presence at a physical office within the United States; and filed a federal income tax return or information return in the United States for the previous year, demonstrating more than $5,000,000 in gross receipts or sales in the aggregate.
7) The Final Rule defines entities assisting tax-exempt entities as entities that “a) operate exclusively to provide financial assistance to, or hold governance rights over, any entity described in paragraph (c)(2)(xix) of [the Final Rule]; b) Is a United States person; c) 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 d) 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.”
8) The Act permits FinCEN to add to the list of types of exempt entities if the Secretary of the Treasury, with the written consent of the Attorney General and the Secretary of Homeland Security, makes a finding that BOI reporting by such entity or class of entities “would not serve the public interest” and “would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes.” 31 U.S.C. 5336(a)(11)(B)(xxiv). In deciding not to add additional exemptions with the adoption of the Final Rule, FinCEN cited to this process and the “high bar” of adding additional exemptions. FinCEN acknowledged the recommendations of several commenters to expand the list, but ultimately determined that “commenters generally did not provide enough information to support making those determinations at this time.”
9) The preamble to the Final Rule states “[w]ith regard to clarifying that only foreign pooled investment vehicles that are registered with states or Tribal jurisdictions may be required to report BOI, FinCEN believes that this point is inherent in the definition of reporting company. An entity formed under the laws of a foreign country is only a reporting company and required to report BOI if it is registered to do business in a state or Tribal jurisdiction.”
10) Examples include: the nature, scope and attributes of the business of the reporting company (including the sale, lease, mortgage or other transfer of any principal assets of the reporting company); the reorganization, dissolution or merger of the reporting company; major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget, of the reporting company; the selection or termination of business lines or ventures, or geographic focus, of the reporting company; compensation and incentive programs for senior officers; the entry into or termination, or the fulfillment or non-fulfillment of significant contracts; and amendments of any substantial governance documents of the reporting company (including the articles of incorporation or similar formation documents, bylaws and significant policies or procedures).
11) Supra note 1.
