With the end of the year fast approaching, now is the time to remind private fund managers of the upcoming deadline for compliance with the U.S. Corporate Transparency Act (CTA) and how the CTA affects the pooled investment vehicles (PIVs) they advise. The takeaway here is that the CTA exempts a variety of investment advisers and their PIVs, but each case is different and requires a review of the facts to ensure an appropriate exemption applies.
For example, the CTA exempts certain PIVs that rely upon Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 to avoid public registration but only if the specific investment adviser for the PIV is also exempt from the CTA. And importantly, the CTA does not expressly exempt Securities and Exchange Commission (SEC) exempt reporting advisers (ERAs) or state-registered investment advisers from CTA obligations (unless other exemptions are available).
So, to help with your year-end process, or to perhaps confirm your approach for future formations, we are providing this basic worksheet.
What Is the CTA?
In 2021, Congress passed the CTA to better prevent money laundering and the financing of terrorism through disclosure of company ownership.
The CTA requires disclosure of personal information of "beneficial owners" of nonexempt foreign and domestic "reporting companies" (defined below) through beneficial ownership information (BOI) reports filed electronically with the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN).
BOI reporting rules went into effect on January 1, 2024, and companies formed before that date may be subject to civil or criminal penalties for failure to report starting January 1, 2025.
A "reporting company" is a domestic entity created by the filing of a document with a secretary of state or similar office, or a foreign entity registered to do business in any state or tribal jurisdiction, in each case that is not exempt, potentially including certain private fund managers and the PIVs they advise.
When Is the Initial Reporting Deadline?
Companies Formed Before 2024
Reporting companies formed or registered to do business before January 1, 2024, must file their initial BOI report by January 1, 2025.
Companies Formed During 2024
Reporting companies formed or registered to do business on or after January 1, 2024, and before January 1, 2025, must file their initial BOI report within 90 calendar days of the earlier of (i) the date on which they receive actual notice that their formation has become effective (in the case of a domestic reporting company) or they have been registered to do business (in the case of a foreign reporting company) or (ii) the date on which a secretary of state or similar office first provides public notice (collectively known as "triggering events").
Companies Formed After 2024
Reporting companies formed or registered to do business on or after January 1, 2025, must file their initial BOI report within 30 calendar days of the earlier of the triggering events.
Whose Information Must Be Reported?
Each reporting company, including certain private fund managers and the vehicles they advise, must disclose certain personal information about its "beneficial owner(s)" (and, if the company was formed or first registered on or after January 1, 2024, its "company applicant(s)") to FinCEN.
Beneficial Owner
The term "beneficial owner" means any individual who exercises "substantial control" over the reporting company or who owns or controls a 25 percent "ownership interest" in the reporting company.
Company Applicant
The term "company applicant" means the individual who directly files the document forming a domestic reporting company (or undertakes a similar legal process for a foreign reporting company), and the individual who is primarily responsible for directing or controlling such filing (or similar foreign process) if more than one individual is involved in such filing.
What Information Is Reported?
The reporting company must provide its:
- Legal name;
- Trade name(s);
- Business address;
- Jurisdiction information; and
- IRS taxpayer identification number.
For each of its beneficial owner(s) and company applicant(s) (for entities formed after January 1, 2024) that do not use a FinCEN identifier alternative, the reporting company must provide a:
- Legal name;
- Date of birth;
- Current address; and
- An identification document with a unique identifying number (e.g., passport).
Who Is Exempt?
FinCEN has identified 23 categories of entities that are generally exempt from reporting under the CTA. The following categories are of particular relevance for private fund managers:
Registered Investment Advisers (but Not ERAs – See Below)
A registered investment adviser is any "investment adviser" as defined in Section 202 of the Investment Advisers Act of 1940 that is registered with the SEC under that law. This also includes any "relying adviser" listed in a registered investment adviser's Form ADV umbrella registration.
This definition further applies to any general partner or managing member of a private fund if it (1) is a relying adviser or (2) meets the conditions of the 2005 and 2012 SEC No-Action Letters to the American Bar Association. To meet these conditions, the general partner or managing member must be (a) a special purpose vehicle formed by a registered investment adviser, (b) advised by the registered investment adviser, and (c) comprised only of employees or agents that are "persons associated with" the registered investment adviser and therefore subject to SEC examination.
Venture Capital Fund Advisers
Any investment adviser exempt from registration under Section 203(1) of the Investment Advisers Act and has filed Item 10, Schedule A and Schedule B of Part 1A of Form ADV with the SEC is also exempt from CTA reporting.
Investment Companies and Pooled Investment Vehicles
This exemption applies to any "investment company" as defined in Section 203(1) of the Investment Company Act that is registered with the SEC under said Act, and any PIV that would be an investment company under the Investment Company Act but for exemptions provided under Section 3(c)(1) or 3(c)(7) thereof and is identified in the Form ADV of the investment adviser that advises such PIV. (The investment adviser must also be exempted under the CTA, so this does not include an ERA or state-registered investment adviser, unless a separate CTA exemption applies, like the venture capital fund adviser or Commodity Futures Trading Commission exemption.)
Commodity Pool Operators and Commodity Pool Trading Advisers
Exempt from CTA reporting are any commodity pool operator or commodity trading adviser that is registered with the Commodity Futures Trading Commission.
Large Operating Companies
Companies will be exempt if such an entity:
- Employs more than 20 full-time employees in the United States;
- Has an operating presence at a physical office within the United States; and
- Has filed a federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales, excluding gross receipts or sales from sources outside the United States, as determined under federal income tax principles.
For an entity that is part of an affiliated group of corporations within the meaning of 26 USC § 1504 that filed a consolidated return, the applicable amount is the amount reported on the consolidated return for such group.
Public Company
Any entity with securities registered under Section 12 of the Securities Exchange Act of 1934 or required to file periodic reports with the SEC under Section 15(d) of the 1934 Act is an exempt public company.
Registered Brokers or Dealers
Any broker or dealer registered under the 1934 SEC Act is exempt.
Banks
Any bank as defined under Section 3 of the Federal Deposit Act, Section 2(a) of the Investment Company Act or Section 202(a) of the Investment Advisers Act is exempt. This includes private trust companies regulated by a state banking authority.
Subsidiaries of Exempt Entities
Any entity whose ownership interests are wholly owned or controlled, directly or indirectly, by certain other types of exempt entities are likewise exempt (PIVs are not among the exempt entities included).
FinCEN has not defined "control" for the purposes of the subsidiary exemption, however since ownership is expressly restricted to those subsidiaries which are "wholly owned" by an exempt entity, it remains prudent to interpret "control" narrowly.
An upper-tier management company may qualify for this subsidiary exemption if it is controlled or wholly owned by a large operating company, public company or bank that qualifies for exemption.
A family office entity that is controlled or wholly owned by a private trust company may be exempt under this subsidiary exemption.
Who Is Not Automatically Exempt Under the BOI Rule?
The following types of entities are illustrative (not comprehensive) of the types of entities not automatically or expressly exempt from the CTA reporting requirements based solely on the following status, unless another exemption applies:
- SEC ERAs and state-registered investment advisers;
- Holding companies or other entities that own or control an exempt entity (including an investment adviser or fund general partner or managing member);
- PIVs formed in the United States that are advised by an ERA or state-registered investment adviser;
- PIVs that rely on an exemption other than Section 3(c)(1) or 3(c)(7) of the Investment Company Act, such as the common Section 3(c)(5) exemption;
- An "employees' securities company" within the meaning of Section 2(a)(13) of the Investment Company Act that is exempt from certain provisions thereof;
- A foreign PIV (however, reporting is limited to information relating to the one individual who exercises substantial control over the entity or otherwise has the greatest authority over the entity);
- Commodity pools operated by registered commodity pool operators or commodity pools that do not otherwise rely on an exemption under Section 3(c)(1) or 3(c)(7) of the Investment Company Act; and
- Subsidiaries of PIVs.
Is a BOI Report Required?
Step 1 - Evaluate Ownership Structure
Understand the organizational structure by identifying all entities (including management, operating or advising entities), holding companies, investment vehicles and special purpose vehicles. This includes evaluating up-stream and down-stream entities with direct or indirect ownership or control.
Step 2 - Understand Method of Formation or Registration
Assess which legal entities within an organizational structure meet the definition of "reporting company"―i.e., entities formed or registered to do business by the filing of a document with the secretary of state or any similar office under the law of a state or American Indian tribe.
Step 3 - Analyze CTA Exemptions
Determine whether an entity qualifies for a particular exemption. This is a fact-specific analysis that should be done independently for each entity. If an entity qualifies under one or more exemptions, the entity is not subject to BOI reporting requirements.
Note that once filed, there is an obligation to periodically update each BOI report if there are changes in beneficial ownership.
Who Can Access BOI Reports?
Beneficial ownership information reported to FinCEN is exempt from disclosure under the Freedom of Information Act and is generally private.
However, FinCEN may permit access to:
- Federal agencies engaged in national security, intelligence or law enforcement activity;
- State, local and tribal law enforcement agencies with court authorization;
- Officials at the Department of the Treasury;
- Foreign law enforcement agencies, judges, prosecutors and other authorities that submit a request through a U.S. federal agency to obtain BOI for authorized activities related to national security, intelligence and law enforcement;
- Financial institutions with customer due diligence requirements under applicable law or via consent of the customer; and
- Federal functional regulators or other appropriate regulatory agencies that supervise or assess financial institutions with access to beneficial ownership information to supervise such financial institutions' compliance with customer due diligence requirements.
For More Information
If you have any questions about this Alert, please contact David A. Sussman, Richard Charles "Chuck" Miller, Nicholas Stewart, Ethan Heben, any of the attorneys in our Investment Funds Group, any of the attorneys in our Corporate Transparency Act Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
