FinCEN has had a busy year with rulemaking impacting the industry, issuing the new Corporate Transparency Act (CTA) as well as a new AML rule for advisers. This ComplianceAlert focuses on the CTA as that compliance date hits first, and discusses how it may or may not impact your firm. We will address the new AML rule in a subsequent ComplianceAlert.
What is the Corporate Transparency Act?
The Corporate Transparency Act (CTA) requires entities to report to FinCEN certain information about their owners and persons who exercise control over the entity. Firms that meet the definition of a Reporting Company will be required to report beneficial ownership information on an annual basis with FinCEN.
CTA Definitions
Reporting Company – most entities formed in or registered to do business in the US. (See below for Reporting Company Exemptions.)
Beneficial Owner – any individual who (i) owns 25% or more of a reporting company or (ii) exercises “substantial control” over a reporting company. Many senior executives (such as a company’s president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function) will be deemed beneficial owners under the CTA due to their control over a reporting company.
Substantial Control – An individual is a beneficial owner with “substantial control” if the individual:
- Is a senior officer or general counsel (such as a company’s president, chief financial officer, chief executive officer, chief operating officer, or any other officer who performs a similar function);
- Has authority to appoint or remove certain officers or a majority of directors;
- Is an important decision-maker regarding the business, finance, or structure;
- Has another form of substantial control over the reporting company, such as:
- Has rights associated with any financing arrangement or interest in the Reporting Company;
- Has control over one or more intermediary entities that separately or collectively exercise substantial control; or
- Has arrangements or financial or business relationships, formal or informal, with other individuals or entities acting as nominees. (An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual does not need to report information.)
Financial Firm Exemptions
There are 23 exemptions from being considered a Reporting Company. Those applicable to asset managers and other investment firms, directly or indirectly, are:
Investment companies or investment advisers – The entity has to be either (i) an investment company as per Section 3 of the Investment Company Act of 1940 (the Investment Company Act) or (ii) an investment adviser as per Section 202 of the Investment Advisers Act of 1940 (the Advisers Act). In addition, the entity must be registered with the SEC under either of these regulations.
Venture capital fund advisers – The entity must (i) be an investment adviser described in Section 203(l) of the Advisers Act, and (ii) have filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the SEC.
Pooled investment vehicles – The entity must (i) be operating or advised by a CTA-exempt bank, credit union, broker or dealer, investment company or investment adviser, or venture capital fund adviser, and (ii) either (a) an investment company, registered under the Investment Company Act or (b) fund relying on paragraph (1) or (7) of Section 3(c) of that Act. In addition, the fund must be identified by its legal name by the applicable investment adviser (whether such adviser is a registered adviser or exempted adviser) in its Form ADV (or successor form) filed with the SEC. This exemption does not extend to pooled investment vehicles of exempt reporting advisers that are not venture capital fund advisers. This exemption is not available to US funds managed by advisers relying on the Foreign Private Fund Adviser exemption.
Broker or dealer – The entity must be registered under Section 15 of the Securities Exchange Act.
Commodity Exchange Act registered entity – The entity must be registered as a futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor.
Subsidiaries of certain exempt entities – Any entity may be considered exempt under the subsidiary exemption if it is controlled or wholly owned, directly or indirectly, by another exempt entity (except an inactive entity). If an exempt entity controls some but not all of the ownership interests of the subsidiary, the subsidiary does not qualify for the exemption, and it must file.
Please keep in mind that a facts and circumstances analysis must be performed for all entities under control by an investment firm in order to determine which exemptions may or may not be available to it.
Other Business Exemptions
Large operating company (not investment-related) – The entity must: (A) employ more than 20 full-time employees in the US, (B) have an operating presence at a physical office within the US, and (C) have filed a Federal income tax or information return in the US for the previous year demonstrating more than $5,000,000 in gross receipts or sales.
Unless your firm fits within one of the exemptions noted above, you will need to file a report of beneficial ownership with FinCEN as described below.
Reporting Deadlines
| Reporting Company Created: | Due Date: |
| Between Jan 1, 2024, and Dec 31, 2024 | 90 days after receiving actual or public notice, whichever is earlier, of their company’s creation or registration |
| On or after January 1, 2025 | 30 days |
| Before January 1, 2024 | Initial report by January 1, 2025 |
Conclusion
Many asset managers are exempt from filing a report because:
- The advisers are either SEC registered advisers or relying on an exemption from registration;
- The funds are exempt because they rely on either Section 3(c)1 or 3(c)7 exemptions from registration;
- The funds are registered under the Investment Company Act of 1940; or
- Many GPs to private funds are exempt if they are a relying adviser and wholly owned by a SEC registered adviser, an exempt entity.
The report itself is not difficult to complete and file. It may be found here on the FinCEN website at https://boiefiling.fincen.gov/fileboir
