With new reporting requirements of the Corporate Transparency Act (CTA) going into effect on January 1, 2024, private fund managers and their counsel need to prepare for performing CTA analyses for funds, management companies, and portfolio-holding legal entities across the firm.
Many private fund entities will be exempt from the beneficial owner reporting requirements. Yet special purpose vehicles, holding companies, aggregators, and blockers related to fund and portfolio structuring might not be exempt. As a result, fund managers and their outside counsel must determine whether their entity management solution supports efficiently evaluating each legal entity for CTA reporting.
Traditional entity management practices may lead to cumbersome evaluation processes, whereas Ontra Atlas, a modern entity management solution, can ease the challenges of new compliance requirements.
Corporate Transparency Act final rule
The Financial Crimes Enforcement Network (FinCEN) promulgated a final rule implementing reporting requirements in the CTA on September 30, 2022 (“Final Rule”). Starting on January 1, 2024, certain domestic legal entities will need to report beneficial ownership information (BOI) to FinCEN under Section 6403 of the CTA.
Unless an exemption exists, the Final Rule requires all U.S. domestic and certain non-U.S. legal entities to disclose information about themselves, their beneficial owners (including persons who exercise substantial control over the company), and up to two company applicants.
FinCEN will maintain the information in a confidential database that law enforcement can access, as well as certain financial institutions with the reporting company’s consent.
Important definitions in the CTA
Beneficial owners are natural persons who directly or indirectly own at least 25% of a reporting company as well as persons who exercise substantial control over the reporting company.
Substantial control under the CTA Final Rule includes natural persons who serve as senior officers of a reporting company and natural persons who either have authority over the appointment or removal of any senior officer or a majority of the board of directors of a reporting company; or persons who direct, determine, or have substantial influence over important decisions the reporting company makes.
Company applicants are natural persons who either directly file the document to create a domestic reporting company or register a foreign reporting company and are primarily responsible for directing or controlling such filing if more than one individual is involved in the process.
Corporate Transparency Act exemptions
The CTA Final Rule exempts 23 types of entities from BOI reporting requirements, such as:
- SEC-registered investment companies as defined in Section 3 of the Investment Company Act of 1940
- SEC-registered investment advisers as defined in Section 202 of the Investment Advisers Act of 1940
- Venture capital fund advisers as described in Section 203 of the Investment Advisers Act and has filed Form ADV with the SEC
- Pooled investment vehicles operated or advised by a bank, credit union, broker-dealer, investment company, investment adviser, or venture capital fund adviser
- Large operating companies operating in the U.S., with 20 or more full-time employees in the U.S., and reporting at least $5 million in gross receipts to the IRS
- Entities wholly owned or controlled, directly or indirectly, by an exempt entity
The necessity of modern entity management for CTA reporting
Many private fund managers and their outside counsel continue to rely on cumbersome, decentralized methods to manage funds’ legal entities. They’ll have to wade through various documents, slides, spreadsheets, and structure charts to perform CTA analyses and provide BOI information to FinCEN.
Law firms responsible for this process could have a particularly hard time managing CTA compliance for their private fund clients as many firms struggle to keep pace with updates to a firm’s many legal entities, such as changes to officers and boards of directors. Law firms with out-of-date information have to spend time confirming their sources or run the risk of providing an inaccurate BOI report.
Private fund managers and their counsel can better prepare for complying with new CTA rules by adopting Ontra Atlas, entity management software. Ontra Atlas is a modern entity management solution built for private equity. It enables fund managers and law firms to:
- Centralize governance information for legal entities across funds
- Update director & officer slates, authorized signatory information, and other governance information in one place, every time
- Maintain key identity details required as part of BOI reporting requirements, including names and addresses of beneficial owners
- Visualize relationships among entities across funds
- Customize and share algorithmically generated structure charts
- Share data while also limiting access through role- and entity-based permissions
CTA reporting requirements
Reporting companies must provide information about themselves, including:
- Full legal name of the reporting company
- All trade names, fictitious names, or doing business as names, regardless of whether the name is registered
- Street address of the company’s principal place of business
- State or tribal jurisdiction of formation
- IRS taxpayer identification number
Reporting companies must provide information about each beneficial owner or company applicant, including:
- Full legal name
- Date of birth
- Current residential or business street address
- A unique identifying number from an acceptable identification document and a legible image of the identification document corresponding to the unique identifying number
When does the Corporate Transparency Act take effect?
Legal entities existing as of January 1, 2024, have a full year to make the required BOI filings. Entities formed after January 1, 2024, have 30 days from formation to make their required filings.
FinCEN has proposed to amend its final BOI Reporting Rule to provide 90 days for reporting companies created or registered in 2024 to file their initial reports, instead of 30 days. The comment period ends October 30, 2023.
Key resources
- Beneficial Ownership Information Reporting Requirements
- Beneficial Ownership Information Reporting Rule Fact Sheet
- Small Entity Compliance Guide
- Additional Beneficial Ownership Information Reference Materials
- News Release, FinCEN issues a Notice of Proposed Rulemaking to extend the deadline for certain companies
What’s coming up
FinCEN will engage in two more rulemakings to establish rules regulating access to the BOI system and to revise FinCEN’s Customer Due Diligence rule to provide consistency with the final rule regarding BOI.
