FinCEN Eliminates CTA Requirements for All U.S. Companies and U.S. Individuals

As discussed in our last Corporate Transparent Act (CTA) update, the U.S. Treasury Department announced on March 2 that it planned to issue an interim rule excluding U.S. companies and citizens from CTA reporting obligations.

The Financial Crimes Enforcement Network (FinCEN) has now done so, limiting the scope of the CTA to non-U.S. parties. This will dramatically reduce the operational burdens and costs of the CTA for registered investment advisers.

Key Updates to CTA Regulations

On Friday, March 21, FinCEN published an interim rule that:

• Excludes from CTA reporting obligations all “U.S. reporting companies” – any corporation, limited liability company, or other entity that was “created by the filing of a document with a secretary of state or any similar office under the law of a [U.S.] State or Indian tribe”;
• Exempts “foreign reporting companies” – foreign entities registered to do business in the United States – from providing beneficial ownership information concerning U.S. persons who are beneficial owners of the foreign reporting companies;
• Exempts U.S. persons from providing beneficial ownership information to foreign reporting companies; and
• Extends the deadline for foreign reporting companies to file initial beneficial ownership reports, or update or correct previously filed beneficial ownership reports, to 30 days after the date of the publication of the interim rule, or 30 days after their registration to do business in the United States, whichever comes later.

Pooled Investment Vehicle Exemption Modified for Non-U.S. Vehicles

In addition, the new interim rule significantly adjusts reporting obligations for non-U.S. pooled investment vehicles, such as private funds. Previously, non-U.S. pooled investment vehicles that qualified for the CTA’s pooled investment vehicle exemption were still required to report one individual who exercised “substantial control” over the company. If more than one individual exercised “substantial control” over the company, the company was required to report beneficial ownership information on the individual with the “greatest authority over the strategic management of the company.” 

Under the new interim rule, foreign pooled investment vehicles must report beneficial ownership information of an individual with “substantial control” over the entity only if that individual is not a U.S. person. If more than one individual exercises substantial control over the entity and at least one of those individuals is not a U.S. person, the entity must report information for the non‑U.S. person who has the greatest authority over the strategic management of the entity. If there is no individual with substantial control who is not a U.S. person,, the foreign pooled investment vehicle is not required to report any beneficial owners.

This requirement should provide relief for many non-U.S. funds. More importantly, though, we expect that most non-U.S. funds will not be subject to reporting under the CTA at all because they typically do not register to do business in any U.S. State, and therefore will not need to rely on the pooled investment vehicle exemption. The specific requirements for registration my vary by U.S. State and by asset, however, so fund sponsors should confirm internally whether any investment vehicles are so registered (for example, commercial lenders making loans in California may be required to obtain a license in California, even if located out of state). An area of particular focus would be real estate holding vehicles, where a non-U.S. entity that owns real estate within a U.S. State may be required to register in that State. Of course, conducting such activities through a wholly-owned U.S. entity would not trigger CTA reporting obligations under the interim rule.

Comments on the Rule

FinCEN declined to accept public comments on the interim rule prior to its implementation, finding good cause given pending litigation and reporting requirements. FinCEN did invite comments on the interim rule within 60 days of its publication, and will consider and address those comments when a final rule is issued, which FinCEN intends to do this year. 

Consequences of the New Interim Rule

The new interim rule radically reduces the number of companies that will be obligated to file beneficial ownership reports. In the original 2022 CTA final rule, FinCEN estimated that, after the first year in which the CTA was implemented, approximately 5 million entities would be obligated to file reports in each of the next nine years. The new interim rule estimates that approximately 5,000 entities would be required to file reports in each of the next few years. If you have any questions concerning this memorandum, please feel free to contact your regular contacts at the firm.