Investment funds need to start preparing to comply with the beneficial ownership information reporting (BOI) requirements under the Corporate Transparency Act (CTA).
What investment funds should know about the Corporate Transparency Act
The CTA takes effect on January 1, 2024. In the next few months, every investment fund must make sure they understand the requirements, determine if they and/or their portfolio companies must comply, and begin preparations to ensure compliance.
What does the Corporate Transparency Act mean for investment funds?
The CTA is part of the Anti-Money Laundering Act passed in 2021. Congress’ stated objective was to prevent money laundering and other illicit activities being committed by “shell companies” by increasing transparency into the structure and ownership of business entities.
The CTA will have a significant reporting and compliance impact on private sector and portfolio companies. Investment funds need to understand their obligations under the Act and consider whether they and/or entities within their structure are required to file reports.
When do investment funds need to comply with BOI reporting?
BOI reporting goes into effect according to the following timelines:
- Domestic reporting companies created before January 1, 2024, and foreign reporting companies that first registered to do business in the United States before January 1, 2024 must file an initial BOI report by January 1, 2025.
- Domestic reporting companies created on or after January 1, 2024, and foreign reporting companies that first registered to do business in the United States on or after January 1, 2024 must file an initial BOI report within 30 days of receiving actual or public notice of their creation or registration.
A domestic reporting company is defined as any entity that is a corporation, a limited liability company, or is created by the filing of a document with a Secretary of State or similar office under the law of a state or Indian tribe.
Similarly, a foreign reporting company is defined as any entity that is a corporation, a limited liability company, or other entity formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction.
Reports are filed with the Financial Crimes Enforcement Network (FinCEN), a division of the Department of the Treasury.
What information must an investment fund report?
The beneficial ownership information report of domestic reporting companies created on or after January 1, 2024, must set forth information about the company, its beneficial owners, and its company applicants. For companies created before January 1, 2024, company applicant information is not required.
The reporting company information must include:
- Full legal company name
- Any trade name or “doing business as” (DBA) name
- A complete current street address of the principal place of business
- Jurisdiction of formation
- Taxpayer identification number
The beneficial owner information must include:
- Full legal name
- Date of birth
- A complete current residential street address
- A unique identifying number and the issuing jurisdiction from one of the following documents:
- A non-expired U.S. passport
- A non-expired identification document issued by a State, local government, or Indian tribe
- A non-expired State driver’s license; or
- A non-expired passport issued by a foreign government, if the individual does not possess any of the other permissible documents
- An image of the document from which the unique identifying number was obtained
- If a beneficial owner has obtained a FinCEN identifier, the reporting company may include the FinCEN identifier in its report in lieu of the required information with respect to the beneficial owner
A beneficial owner is any individual (1) who directly or indirectly exercises “substantial control” over the reporting company, or (2) who directly or indirectly owns or controls 25 percent or more of the “ownership interests” of the reporting company.
The company applicant information must include:
The company applicant information needed is the same as the beneficial owner information (except that certain company applicants give their business address).
- If a company applicant has obtained a FinCEN identifier, the reporting company may include the FinCEN identifier in its report in lieu of the required information with respect to the company applicant.
There can be up to two individuals who qualify as company applicants — (1) the individual who directly files the document that creates, or first registers, the reporting company; and (2) the individual who is primarily responsible for directing or controlling the filing of the relevant document. Note that individuals working for outside vendors can be considered “company applicants” if they have directly filed the formation documents for the subject entity.
How should investment firms handle BOI privacy concerns?
Privacy of information is a significant concern for United States businesses that prefer to shield their identities. The BOI registry will not be available to the public. Under the CTA, FinCEN is authorized to disclose beneficial ownership information to a limited group of requestors and only for certain purposes.
This includes federal agencies involved in law enforcement and national security, state and local law enforcement with court authorization, financial institutions with consent, the US Department of Treasury, agencies that regulate financial institutions, and certain foreign agencies requesting through a US agency.
Can investment fund entities be exempt from BOI reporting?
There are 23 exemptions to the BOI reporting requirements. If an investment fund entity qualifies for an exemption and is not a reporting company, it will not have to file a BOI report. In determining which entities may be exempt, consider the following provisions:
- Companies that are already under regulatory oversight and already disclose BOI are likely to be exempt.
- Public companies with securities registered under the Securities Exchange Act (1934) are exempt.
- Banks, credit unions, and bank holding companies are exempt.
- A fund manager with the SEC may be exempt, however the fund itself may not be.
- Pooled investment vehicles managed or advised by a bank, federal or state credit union, broker-dealer or investment adviser registered with the SEC, or venture capital fund adviser are exempt.
- Even if a fund management entity is exempt, the portfolio companies and subsidiaries held as investments may not be. Although in general, subsidiaries wholly owned by one or more exempt entities are also exempt, the subsidiary exemption is not available to subsidiaries wholly owned or controlled by pooled investment vehicles.
- CTA reporting requirements are likely applied to blocker entities, feeder funds, and similar alternative investment vehicles. However, that should be determined based on each individual investment vehicle.
- Funds advised by a registered investment adviser and relying on the Section 3(c)(1) or 3(c)(7) exceptions under the Investment Company Act of 1940 may be exempt, but their subsidiaries may not be.
- Exemptions may also be available to entities that are registered investment companies or subject to certain exclusions from investment company registration, including those used by certain private equity funds.
What are the penalties for noncompliance?
Failure to file a BOI report with FinCEN or provide complete or updated information could result in substantial penalties.
Noncompliance could result in civil penalties of $500 per day and criminal penalties of up to $10,000 and up to 24 months in prison.
How can funds establish a process for reporting?
In addition to initial reports, non-exempt entities must track and provide FinCEN with any updates to beneficial ownership information. To ensure timely and ongoing compliance, investment funds must establish a process to effectively monitor their beneficial owners.
Portfolio companies that are reporting companies must also keep track of their beneficial owners. When taking on new investors they must be aware of whether those investors would be considered beneficial owners, which would trigger a need to update any report submission and identify the new beneficial owners.
A comprehensive enterprise management system would be key to tracking BOI information effectively. In the coming months before the CTA takes effect, investment funds must evaluate their corporate governance structures and determine if any changes need to be made. Investment funds should update their internal policies to reflect the requirements of the CTA. They should begin compiling reporting information and determine how they will track the information and any changes thereto, whether via an entity management platform or some other method. They must also put in place compliance procedures for the timely filing of reports and any future updates. Finally, as mergers and acquisitions come up, investment funds should consider incorporating compliance with the CTA into their due diligence inquiries on targets.
Getting ready for 2024
Although year-end compliance actions are commonplace, this year will be more complex with the CTA taking effect. To prepare, investment funds should do a thorough review of all entities they own or control and consider canceling or dissolving those that are no longer needed or active.
For upcoming transactions or new shelf entities, investment funds should consider timing of formation: there is a 30-day reporting deadline for entities formed on or after January 1, 2024, and a one-year deadline for entities already in existence on January 1, 2024. As noted, the due diligence process for acquisitions should include a determination of whether the target is a reporting company and whether it has complied with the CTA.
For more information
If you would like more information about this topic or to sign-up for updates, visit our Corporate Transparency Act resource page. You can also take our short quiz to help determine if filing may be required.