United States: The Corporate Transparency Act: An Overview Of The Impact On Private Funds

Key Takeaways:

• The Corporate Transparency Act (CTA) may trigger reporting obligations to the Department of the Treasury's Financial Crimes Enforcement Network ("FinCen") for private fund managers in 2024 as soon as 90 days after the initial organization of a new entity or by January 1, 2025, for existing entities.
• Private fund managers should now be reviewing the organizational structure charts of the private fund manager itself and any private fund that they manage to identify entities which are either within scope of the CTA or which may qualify for one of the 23 categories of exemptions.
• In particular, SEC exempt private fund advisers, state registered investment advisers, and foreign investment advisers registered to do business in the U.S. should carefully review their reporting obligations under the CTA requirements.
• Implement policies and procedures to track information required for beneficial ownership information ("BOI") reporting and ensure that updated or corrected BOI reports are submitted to FinCEN on a timely basis within 30 days of any change.

What is the purpose of the Corporate Transparency Act ("CTA")?

Effective as of January 1, 2024, the Corporate Transparency Act ("CTA") imposed new federal reporting obligations on certain companies, including potentially private fund managers, to provide beneficial ownership information ("BOI") to the federal government. A "beneficial owner" is everyone who directly or indirectly exercises substantial control or owns or controls 25% or more of the ownership interests of a reporting company. The CTA is a significant anti-money laundering reform and it is expected that it will help bring the U.S. into closer alignment with international standards concerning anti-money laundering and countering terrorism financing. The information reported to FinCEN will be an important tool for regulators and enforcement agencies as they seek to move against those who violate anti-money laundering, terrorism financing, and sanctions laws, among others.

What is a "reporting company" under the CTA?

The CTA requires a "reporting company" to submit beneficial ownership information along with information on each "applicant" for the reporting company to FinCEN.

An entity qualifies as a "reporting company" if it is:

• A "domestic reporting company" defined as a corporation, limited liability company, or other similar entity created by the filing of a document with a secretary of state or any similar office under the law of a State (including commonwealths, territories, or other U.S. possessions) or tribal territory; or
• A "foreign reporting company" defined as a corporation, limited liability company, or other similar entity formed under the laws of a foreign country and registered to dobusiness under the laws of a U.S. State or tribal territory.

Limited partnerships and limited liability partnerships are generally created by filing a certificate with a secretary of state or similar office and will qualify as reporting companies and must submit a BOI report unless an exemption applies.

If a trust is not formed by filing a document with a secretary of state or similar office, then it is not a reporting company and is not required to file a BOI report.

There is no specific exemption from the definition of "reporting company" for family offices.

What are the relevant exemptions to the CTA for private fund managers?

The scope of the CTA's reporting requirements is significantly narrowed by the exclusion of 23 categories of entities from the definition of "reporting company." A more comprehensive list of all of the exemptions, is available here.

An entity that falls into one of the exemption categories will not be required to submit BOI to FinCEN.

The exemptions of most relevance for private funds are as follows:

• Registered investment advisers: Investment advisers registered with the SEC under the Investment Advisers Act of 1940. Despite this exemption the following entities are not included within the scope of the exemption: (i) "private fund advisers" exempt from SEC registration under Section 203(m) of the Advisers Act because they advise solely private funds that have a total of less than $150 million in assets under management in the U.S., (ii) state registered investment advisers, or (iii) any holding company or upstream entity that directly or indirectly owns the investment adviser. Therefore, these categories of entities will be subject to the CTA unless another exemption applies. There is no express exemption for entities that were established by a fund manager to serve as general partners of a limited partnership or managing members in a limited liability company. However, through a series of no-action letters¹ , the SEC has treated a special purpose vehicle established as a private fund's general partner or managing member as being able to rely upon the investment adviser's registration with the SEC provided that certain conditions are met. We are of the view that this rationale would likely apply to this CTA exemption. There is also no express exemption for "relying advisers" who complete Schedule R on Form ADV. These are typically entities that are controlled by or under common control with the registered investment adviser and collectively conduct a single advisory business. We are of the view that these entities listed on Schedule R on Form ADV would fall within this exemption, however FinCEN has not specifically affirmed this position. There is also uncertainty as to how carry vehicles and co-investment vehicles may be treated in fund structures so these vehicles should be reviewed on a case-by-case basis to determine whether they are a "reporting company" under the CTA.
• Venture capital fund advisers: Any investment adviser that is exempt from registration under section 203(l) of the Investment Advisers Act of 1940 because they solely advise venture capital funds. Based on the same rationale applicable to registered investment advisers, it is likely that general partner entities of a venture capital fund adviser that report as special purpose entities should also be considered exempt entities under the CTA.
• Pooled investment vehicle: Any pooled investment vehicle that is operated or advised by one of the following entities that is also exempt from CTA reporting requirements: a bank, credit union, SEC-registered broker-dealer, SEC-registered investment company, investment adviser, or venture capital fund adviser. Note that this exemption does not apply to pooled investment vehicles advised by a state-registered investment adviser.
  • "Pooled investment vehicle" is defined to mean:
    • (i) any investment company, as defined in section 3(a) of the Company Act of 1940; or
    • (ii) any company that:
      • (A) would be an investment company under Section 3(a) but for the exclusion provided from that definition by Section 3(c)(1) or Section 3(c)(7) of the Company Act; and
      • (B) is identified by its legal name by the applicable investment adviser in its Form ADV (or successor form) filed with the SEC or will be so identified in the next annual updating amendment to Form ADV required to be filed by the applicable investment adviser pursuant to Rule 204–1 under the Advisers Act of 1940.
  • There is a carve out from the pooled investment vehicle exemption whereby a foreign pooled vehicle must provide a more limited report to FinCEN of the BOI of the individual who exercises substantial control over the legal entity (unless another exemption applies). If more than one individual exercises "substantial control" over the legal entity, the entity shall report information with respect to the individual who has the "greatest authority over the strategic management" of the entity. Note that such entities must be registered to do business in the U.S. to be subject to the CTA and most foreign pooled investment vehicles are not registered in the U.S.

• Larger Companies: Any entity that: (1) employs more than 20 full-time employees in the U.S., (2) has a physical office in the U.S., and (3) reported more than $5 million in gross receipts or sales on the previous year's federal income tax return.
• Subsidiaries of certain exempt entities: Any subsidiary or other entity owned or controlled (directly or indirectly) by certain entities exempt from reporting requirements including registered investment advisers.
  Note that there is no blanket exemption for subsidiaries of exempted pooled investment vehicles. In the adopting release, FinCEN noted "While distinct legal entities that are wholly owned by exempted pooled investment vehicles may be integrally related to the administration of those pooled investment vehicles, whether they are exempt from the reporting requirements of the CTA depends on whether they themselves, in their own right, meet the criteria of an exemption. FinCEN declines to provide a blanket expansion of this exemption to include all entities related to a pooled investment vehicles or any subsidiary entity that would be used as a vehicle to onboard new outside capital or assets." Therefore, it is necessary to analyze each subsidiary of a pooled investment vehicle to ascertain whether an exemption applies. At this point, FinCEN has provided no express definition or guidance on what constitutes control of ownership interests for purposes of this exemption. We will continue to monitor for this.

What are the relevant deadlines?

For those required to report under the CTA, the following deadlines will apply:

• Non-exempt reporting companies created or registered prior to the effective date of January 1, 2024, will have until January 1, 2025, to file the required reports.
• Non-exempt reporting companies first created or registered in 2024 will have only 90 days to meet their initial reporting obligations.
• Non-exempt reporting companies first created or registered in 2025 and thereafter will have only 30 days to meet their initial reporting obligations.

What information should be reported to FinCen?

Each "reporting company" will be required to provide the following information: (i) its full legal name, (ii) any trade name or "doing business as" name, (iii) the street address of its principal place of business or the primary location in the U.S. where the reporting company conducts business, (iv) the jurisdiction of formation, (v) for a foreign reporting company, the state in the U. S. where such company first registers, and (vi) the taxpayer identification number (including employer identification number) and the foreign jurisdiction taxpayer identification number and jurisdiction (if applicable).

Each individual who is a "beneficial owner" must disclose: (i) their full legal name, (ii) date of birth, (iii) residential street address, (iv) unique identifying number and issuing jurisdiction from their government issued identification document, and (v) an image of the document that shows the unique identification number.

Any changes in BOI are required to be filed within 30 calendar days after the date on which such change occurs. There are no annual filing requirements and the government is not charging fees for submitting a BOI report to FinCEN.

Who can access the information?

BOI reported to FinCEN will be stored in a secure, non-public database. FinCEN will permit federal, state, local and tribal officials as well as certain foreign officials to access the information for authorized activities related to national security, intelligence, and law enforcement. Financial institutions will have access to BOI in certain circumstances, with the consent of the reporting company. Final institutions' regulators will also have access to BOI when they supervise the financial institutions.

What are the penalties for failure to comply with the CTA?

A person who willfully violates the BOI reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues. That person may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000.

What should we do now?

Private funds should begin taking the following steps:

• Conduct an entity-by-entity analysis of every entity within their structures to confirm whether it is a reporting company under the CTA;
• Assess whether any of the 23 reporting exemptions apply with a focus on the exemptions described above;
• Determine who are the beneficial owners (i.e., 25% or more owners) of non-exempt reporting companies; and
• Implement policies and procedures to track information required for BOI reporting and ensure that updated or corrected BOI reports are submitted to FinCEN on a timely basis within 30 days of any change.

Footnote

1. SEC No-Action Letter, American Bar Association, Subcommittee on Private Investment Entities (December 8, 2005) available here and SEC No-Action Letter, American Bar Association, Business Law Section (January 18, 2012) available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.