Final CTA Regs Set Timeline for Compliance

​Final regulations published on September 30, 2022 (the “final Regulations”) by the Financial Crimes Enforcement Network (“FinCEN”) of the Department of Treasury under the Corporate Transparency Act (“CTA”) grant business owners a reprieve, but not a pardon, with respect to their looming beneficial-ownership reporting obligations.

What You Need to Know:

• FinCEN has adopted final CTA Regulations
• CTA goes into effect in 2024 but preparation starts now
• Who exercises “substantial control” will be an issue

The good news is that under the final Regulations, entities that are now in existence or are formed before the end of 2023 will have until the end of 2024 to file their initial reports with FinCEN, while entities that are formed after the end of 2023 will have thirty days after the date of their formation to file.

The bad news is that, even though the Treasury has stated that it does not consider it to be unduly burdensome for individuals to produce or for reporting companies to collect and submit to FinCEN what the Treasury calls “ready accessible” information, the final Regulations belie this; and, as the numerous provisions highlighted in this Alert demonstrate, the CTA, in many respects, remains complicated and difficult to interpret and will likely prove to be a challenge for many businesses.

The CTA was enacted as part of the National Defense Authorization Act for Fiscal Year 2021. (31 U.S.C. 5336) In addition to requiring “reporting companies” to submit certain information regarding themselves to FinCEN, the CTA requires “reporting companies” to submit to FinCEN, for each Beneficial Owner of a reporting company and for each individual who files an application to form a domestic entity that is a reporting company or register a foreign entity that is a reporting company to do business in the U.S. (a “Company Applicant”), four pieces of information – the individual’s full legal name, date of birth, current residential or business street address, and a unique identifying number from an acceptable identification document (such as a passport) or the individual’s “FinCEN identifier.”

A beneficial owner is an “individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise” either “exercises substantial control over the entity” or “owns or controls not less than 25 percent of the ownership interests of the entity.”

A domestic “reporting company” is a corporation, limited liability company, or “other entity” created by filing a document with the Secretary of State or any similar office under the law of a State or Indian tribe. Any entity that offers limited liability to its owners by virtue of a State or tribal law will be required to report. Foreign “reporting companies,” entities that are formed under foreign jurisdictions that are registered to do business within the U.S., also will be subject to the CTA’s reporting requirements. Both the CTA and the final Regulations exempt 23 types of entities, however, including subsidiaries of exempt entities, investment company or investment advisors; venture capital fund advisers; public companies, tax-exempt entities, entities assisting tax-exempt entities, and “large operating companies,” which are entities that (1) employ more than 20 full-time employees in the U.S.; (2) have an operating presence at a physical office in the U.S.; and (3) file a federal income tax return or information return reporting more than $5 million in gross receipts or sales in the U.S. Also exempt are what the statute and the final Regulations define as “inactive” entities.

FinCEN published a Notice of Proposed Rule Making with respect to the CTA (the “proposed Regulations”) in December of 2021 and received over 240 comments in response. Many comments expressed support for both the CTA and the proposed Regulations. Others, despite acknowledging the need for the CTA, expressed general opposition, arguing that the proposed Regulations were too broad, too complex, and too difficult and costly to understand and comply with. Still others expressed concern that the proposed Regulations would impose numerous and costly reporting requirements on small businesses and would create privacy and security concerns with respect to personally identifiable information.

The final Regulations (31 CFR 1010.380) and the extensive comments to the final Regulations answer numerous questions raised with respect to the proposed Regulations. However, they still leave many questions unanswered.

A summary of selected provisions that were changed or clarified in the final Regulations, including challenges that some of them pose, follow:

1. The final Regulations go into effect on January 1, 2024. This means that all reporting companies that are formed or registered on or after that date or that lose their exempt status after that date will have 30 days after they are formed or registered or lose their exempt status to file their initial reports.
2.  Reporting companies that exist on January 1, 2024 will have until January 1, 2025 to file their initial reports.
3. Reporting companies will have only 30 days to file updated reports and corrected reports (subject to a safe harbor set forth in the Regulations and discussed below). This 30-day requirement, which was roundly criticized by many commenters, is likely to present a significant challenge for all but the most sophisticated and knowledgeable reporting companies.
4.  In response to criticism raised by numerous commenters, reporting companies that already are in existence on January 1, 2024, will not be required to submit “Company Applicant Information.” This would have required existing reporting companies to report of the names of attorneys and paralegals who participated in the organization process no matter how long ago the enterprise was formed. Under the final Regulations, only information concerning “Beneficial Owners” will have to be reported by existing companies on their initial reports.
5. The final Regulations specify that if a Beneficial Owner dies, an updated report must be filed identifying any new Beneficial Owner or Owners within 30 days of settlement of the estate of the deceased Beneficial Owner. The final Regulations also clarify that an updated report must be filed only if the deceased individual was a Beneficial Owner “by virtue of a property interest or other rights subject to transfer at upon death,” and not solely because the deceased Beneficial Owner controlled 25 percent of the reporting company’s ownership interests. Thus, the death of a senior officer (who under the Regulations would be deemed to have control) but who was not the owner of equity interests would apparently not require the filing of an updated report.
6. The final Regulations clarify that in the case of a reporting company that has previously reported information with respect to a parent or legal guardian of a minor child instead of information concerning the minor child himself or herself, the reporting company must submit an updated report when the minor child attains the age of maturity.  
7. Although the time within which updated reports must be filed is 30 days after the occurrence of the event requiring an updated or corrected report, the final Regulations provide a safe harbor if the reporting company files a corrected report within 90 days after becoming aware of or having reason to know that a correction is needed. However, very significantly, and despite the concern of many commenters, the final Regulations do not adopt a good-faith or other similar standard regarding requirements to update or correct reports.
8. Under the final Regulations, each report or application required to be submitted must be filed with FinCEN in the form and manner that FinCEN prescribes in the forms and instructions for such report or application, and each person filing such report or application must certify that the report or application is true, correct, and complete, even though much of the information that is being reported will have to be derived by a reporting company from Beneficial Owners and Company Applicants and will not be within the personal knowledge of the reporting company or its officers themselves.
9. The final Regulations clarify that a reporting company must report both the legal name used to establish the entity and all trade names of the reporting company, whether or not registered.
10. With regard to the address of the reporting company, the final Regulations require that a reporting company with a principal place of business in the United States must provide the street address of that principal place of business. This is problematic—the term “principal place of business” has different meanings under various State laws, if it has any meaning at all. Additionally, more and more companies today have a virtual existence, with no one physical place of business. The address of the registered agent of a company or of another third party will not be considered sufficient under the final Regulations.
11. The final Regulations clarify that a business address must be provided for a Company Applicant who forms or registers an entity in the course of such Company Applicant’s business. The address need not be an address in the United States.
12. The final Regulations clarify that an individual who indirectly holds 25 percent or more of the ownership interests of the reporting company through one or more exempt entities (entities that are not reporting companies) would be considered to be a Beneficial Owner of the reporting company. However, to avoid having to disclose information about the exempt entity itself, a reporting company may, instead, provide information only about the individuals who are the indirect Beneficial Owners of the reporting company.
13. The definition of “beneficial owner” of a “reporting company” includes any individual who, directly or indirectly, exercises “substantial control” over such “reporting company.” The final Regulations largely follow the proposed Regulations, in that a senior officer of a reporting company will be deemed to possess “control.” However, for this purpose, the roles of corporate secretary and corporate treasurer will not be considered to be senior officer roles, but the role of General Counsel will be considered to be a senior officer role.
14. Also with regard to “substantial control,” a person will be deemed to have “substantial control” if the person is able to “direct, determine, or have substantially influence over important decisions made by the reporting company.” A person with “substantial influence” will be considered to possess substantial control. Despite providing specific examples of “control,” the Regulations state that the list of examples is not to be deemed to be an exclusive list, so there are no loopholes.
15. The final Regulations add new language underscoring that the trustee of a trust or a person having similar authority under a similar arrangement can be deemed to exercise substantial control over a reporting company.
16. Comments to the final Regulations reaffirm that convertible instruments will be deemed to be ownership interests even though they may not be immediately convertible.
17. The final Regulations add a new catchall provision to the definition of “ownership interest” to include “any other instrument, contract, arrangement, understanding, relationship, or other mechanism used to establish ownership.” Again, there are no loopholes.
18. Options, contingent interests, profits interests, and similar interests are treated as though exercised and are added to the calculation of an individual’s total ownership interests, even if the value of the interests are indeterminate or negligible at the time of reporting.
19. Reporting companies must report “real parties in interest” who exercise control indirectly, but not those individuals who merely act on another individual’s behalf in the capacity of a nominee, intermediary, custodian, or agent.
20. The comments to the final Regulations clarify that individuals who may in the future come to own an ownership interest in an entity through a right of inheritance are not deemed to have an ownership interest until the inheritance occurs.
21. The final Regulations specify that the term “Company Applicant” means both the individual who directly files the document to create or register the reporting company and the individual who is primarily responsible for directing or controlling such filing (if more than one individual is involved in the filing).
22. The comments to the final Regulations state that where an attorney is primarily responsible for overseeing the preparation and filing of incorporation documents and a paralegal directly files the document with a state office, the reporting company would report two Company Applicants – the attorney and the paralegal. However, additional individuals who are indirectly involved in the filing would not have to be reported. If the reporting company files its own documents, the reporting company would report the name of the person who prepares the document and the person who files it as Company Applicants.

This is only a brief summary of changes and clarifications made by the final Regulations. As one can see, the application of many of the terms set forth in the Act itself and in the final Regulations are far from clear, despite the Treasury's belief that the provision of any information required to be reported should not be difficult for reporting companies.