- Corporate CLO issuers, regardless of whether they are organized onshore or offshore, should generally be exempt from Corporate Transparency Act reporting requirements, although onshore CLO co-issuers will likely be subject to reporting.
- CMBS, RMBS, and other asset-backed securitization issuers that are common law trusts, as well as offshore issuers of CRE CLOs, should be exempt from reporting requirements under the Corporate Transparency Act.
- Onshore CRE CLO issuers or co-issuers may be subject to Corporate Transparency Act reporting requirements.
- ABS issuers that are statutory trusts or LLCs may be subject to Corporate Transparency Act reporting requirements if they are not wholly-owned by an entity that is itself exempt or if the exemption for “financial market utilities” is inapplicable.
Introduction
Beginning on January 1, 2024, corporations, limited liability companies and other similar entities formed or registered to do business in the U.S. or otherwise deemed “reporting companies” will be required to report certain information relating to their beneficial owners, officers and controlling persons to the Financial Crimes Enforcement Network (“FinCEN”) pursuant to the Corporate Transparency Act (the “CTA”). Dechert has written about the CTA1 . The definition of a “reporting company” under the CTA is wide-ranging, encompassing various forms of business organizations, including domestic entities formed by filing a certificate of formation with a secretary of state’s office – such as an LLC, LP or LLP – as well as most foreign entities that are registered to do business within a state. The CTA does identify 23 entity types that are exempt from this definition. The term “beneficial owner” means those individuals who, directly or indirectly (i) exercise substantial control over a reporting company (which includes most senior officers of the entity) or (ii) own or control at least 25% of the reporting company’s “ownership interest.” “Ownership interest” includes equity, stock or similar instruments, including capital or profit interests, partnership interests, convertible instruments, warrants, or other options, rights or privileges to acquire equity, capital, or other interests in a reporting company (including put rights, call rights, options, and other contractual rights).
Existing entities formed prior to January 1, 2024, that are subject to the CTA have until January 1, 2025, to file an initial Beneficial Ownership Information (“BOI”) report with FinCEN. On the other hand, companies created or registered after January 1, 2024 will have just 30 calendar days to file an initial BOI report. In addition, FinCEN recently proposed an amendment to the CTA that would extend that deadline to 90 days for entities formed in 2024. The 30-day window to file begins on the earlier of the date the reporting company receives actual notice of its creation and the date on which the secretary of state or similar office provides public notice of the reporting company’s existence. One strategy that may make sense: go ahead and form in 2023 the entities that you anticipate needing in the near future, to enjoy a one-year initial reporting window.
What the CTA Means for Asset-Backed Securitizations
The CTA reporting requirements could be particularly burdensome for securitizations. FinCEN notes that there is no limit on the number of beneficial owners a reporting company must disclose. Entities must provide beneficial ownership information for each individual that triggers either prong of the definition above, including changes of ownership or control. Given the frequent use of special purpose vehicles (“SPVs”) in securitizations, this could be challenging – and in some cases, practically impossible.
Securitizations typically consist of one or more SPVs, which are generally passive entities and can be structured in virtually any legal business form, including some typical examples: limited liability companies, limited partnerships, corporations and trusts. At the onset of securitization transactions, an SPV purchases a pool of assets, either directly or indirectly, from an entity that originates or obtains the underlying pool of assets to be securitized. The SPV then facilitates the securitization by holding the pool of assets to be securitized, receiving cash flows from that pool of assets and issuing asset-backed securities whose payments are backed by that asset pool’s cash flows. SPVs must register with the Securities Exchange Commissions (“SEC”) as an investment company as they hold assets that are deemed to be securities under section 3(a) of the Investment Company Act of 1940 (the “1940 Act”) unless they meet the criteria for one or more exemptions (some of which are described below).
Typically, SPVs do not conduct business, nor do they have a need for employees or management structures. As such, SPVs may not have senior officials, such as a president or chief operating officer, rendering it difficult to identify a single individual that exercises substantial control over the SPV. Also, identifying individual beneficial owners may be complicated by the many different parties that could have beneficial ownership interests in the SPV, including various sponsors of and investors in the securitization. Further, any given securitization may utilize hundreds of SPVs, all formed concurrently and all of which could potentially be subject to the reporting obligations under the CTA.
To avoid the heavy compliance obligations of the CTA, an entity must qualify under one or more of the 23 exemptions provided by the CTA. This OnPoint summarizes the potential applicability of certain CTA exemptions to various asset-backed securitization vehicles, including the exemptions for common law trusts, “pooled investment vehicles” and wholly-owned subsidiaries of certain exempt entities.
CTA Exemptions Applicable to Securitizations
Corporate CLOs
Issuers of corporate CLOs, broadly syndicated CLOs, private credit CLOs and other similar structures should not need to report under the CTA by virtue of either (i) not being a “reporting company” in the case of offshore vehicles or (ii) qualifying for the “pooled investment vehicles” exemption under the CTA in the case of onshore vehicles. These CLO issuers are most frequently set up as offshore vehicles (typically in the Cayman Islands, Jersey or Bermuda) and structured to not be engaged in a U.S. trade or business for tax reasons. For entities formed outside of the United States, the CTA requires a filing with a state or Indian Tribe to be registered to do business in such jurisdiction in order to fall under the definition of “reporting company.” Offshore CLO issuers make no such filings and therefore are not “reporting companies.” The only limited filing offshore CLO issuers typically make in the United States is a UCC filing to perfect the security interest granted under the CLO Indenture. We don’t view such filings as causing the offshore CLO issuer to be “registered to do business” in the United States under the CTA.
Some CLO issuers (particularly in middle market and private credit loan securitizations) are set up onshore in Delaware and, as such, would normally fall under the “reporting company” definition if an exemption does not otherwise apply. However, we expect those onshore CLO issuers to rely on the exemption for “pooled investment vehicles.” This exemption is applicable to registered investment companies and entities that rely on Section 3(c)(1) or Section 3(c)(7) under the 1940 Act for exemption from registration and that are advised by either a registered investment adviser or certain other entities like registered broker-dealers or banks. Most CLO issuers rely on Section 3(c)(7) and are advised by registered investment advisers (the collateral manager), so we expect the “pooled investment vehicles” exemption to apply to these entities. As a result, we do not expect the CTA reporting requirements to apply to CLO issuers in most cases. The small minority of onshore CLO issuers that rely on Rule 3a-7 under the Investment Company Act to be exempt from registration as an “investment company” would instead have to rely on another exemption or take the position that they are relying on Section 3(c)(7) in order to avoid CTA reporting. If these vehicles are owned by a “securities reporting issuer” (like a business development company or BDC), then they could qualify for the exemption as a wholly-owned subsidiary thereof.
The CLO co-issuer is a Delaware special purpose vehicle that is wholly-owned by the CLO issuer when the CLO issuer is an offshore vehicle and holds no assets, and will likely be considered a “reporting company.” The CLO co-issuer exists solely to accommodate certain investors (namely insurance companies) that seek to invest in securities co-issued by an onshore entity for certain regulatory capital purposes. Because the CLO co-issuer is not directly advised by the collateral manager of the CLO, it will not qualify as a “pooled investment vehicle.” The CTA also has an exemption for wholly-owned subsidiaries of entities that fall under certain other exemptions, including the exemptions for “securities reporting issuers,” “banks” and “investment companies,” among others. However, there is no such exemption for wholly-owned subsidiaries of “pooled investment vehicles.” This means that CLO co-issuers may have to file the relevant beneficial ownership information. We think that the best situated persons to be listed under each of those positions is likely the board of directors of the CLO issuer that wholly owns and typically manages the CLO co-issuer. However, there may be some debate over whether the collateral manager of the CLO issuer is more appropriately identified as the party that exercises substantial control over the CLO Co-issuer.
CMBS and CRE CLOs
Traditional CMBS issuing entities, e.g., in conduit, single-asset single-borrower, or government-sponsored enterprise (GSE) securitizations, are often structured as New York common law trusts. New York common law trusts are created by a declaration of trust pursuant to the governing pooling and servicing agreement or trust and servicing agreement, and no filing with a secretary of state or any similar office is required. Because no such filing is required for their creation, an issuing entity that is a New York common law trust would not be a reporting company under the CTA, and no reporting of beneficial ownership information of such entity would need to be filed.
CRE CLO securitizations, however, are typically structured such that the issuer is either (i) an offshore exempted company organized under the laws of Bermuda or the Cayman Islands or (ii) a Delaware limited liability company. In addition, the offshore exempted company issuer will often be accompanied by an onshore co-issuer that is usually a Delaware limited liability company. Whether offshore or onshore, CRE CLOs will generally not be able to rely on the exemption to the CTA afforded for pooled investment vehicles. This is because CRE CLOs typically rely on the exemptions to the 1940 Act afforded under Section 3(c)(5)(C) or Rule 3a-7, and not on Sections 3(c)(1) or 3(c)(7). However, an offshore CRE CLO issuer does not require for its formation any filing with a secretary of state or any similar office, and as a result, would neither be a reporting company under the CTA nor be required to file any beneficial ownership information thereunder. By contrast, an onshore issuer or co-issuer of a CRE CLO is typically organized as a Delaware limited liability company and does file a certificate of formation with the Secretary of State of the State of Delaware. Moreover, as discussed above, an onshore CRE CLO issuer, like all CRE CLO issuers, does not qualify for the pooled investment vehicles exemption. As a result, the full reporting requirements can be expected to apply to onshore issuers and co-issuers of CRE CLOs.
ABS
Application of the CTA more generally to the asset-backed securitization space is less clear than it might otherwise be for the products described above, and asset-backed issuers should generally consider the provisions outlined in the CTA to be applicable to them. This is because, unlike those products described above, asset-backed securitizations of residential mortgages, consumer loans, credit card and trade receivables, automobile loans and many other products are often structured so as to rely on Section 3(c)(5) or Rule 3a-7 as an exemption from registration under the 1940 Act, and not Section 3(c)(1) or Section 3(c)(7). As such, the “pooled investment vehicles” exemption discussed above will not be applicable for securitization vehicles that are structured as limited liability companies or statutory trusts. It is important to note, though, that as is the case with CMBS SPVs, to the extent an asset back securitization makes use of a common law trust (or any entity that is not otherwise formed by a filing with a state office), the CTA will not apply.
Two exemptions that may apply to the special purpose vehicle issuers in the asset-backed space under the CTA, however, are those provided for “subsidiaries of certain exempt entities” and for “financial market utilities.” To qualify for the former, the entity’s ownership interests must be wholly owned, directly or indirectly, by an entity that is otherwise exempt. Because the CTA speaks to the ownership interest and not specifically to control, each sponsor in a securitization should look to the membership interests or certificate of trust to determine whether the exemption may be applicable. On many transactions in the market, it will not be possible to make the determination though, as the ownership interests are sold to investors through a clearing entity like The Depository Trust Company. In this situation, industry groups are currently exploring whether a second exemption for “financial market utilities” may be applicable, as clearing agencies like The Depository Trust Company meet the criterion specified in the CTA. Further updates here may be warranted as practice develops.
The Bottom Line
The CTA will have wide-ranging impacts on asset-backed securitizations, and it will take time for our industry to fully understand the various ripple effects created by the BOI reporting requirements. This daunting new regulatory hurdle created by the CTA is just one of the many obstacles that the industry is challenged to overcome. With only two months until the CTA drops, it’s time to face the music and prepare for what lies ahead.
1. For a summary and discussion of the Commodity Futures Trading Commission (Commission or CFTC) proposed rule changes on October 2, 2023, see our OnPoint published on October 17, 2023, CFTC Proposes Significant Disclosure Requirements with which CPOs and CTAs Operating under CFTC Rule 4.7 Will Have to Grapple.
