3 October 2022

Highlights from the First Tranche of Final Corporate Transparency Act Regulations

The first of three tranches of the highly anticipated Corporate Transparency Act regulations were published on 30 September 2022. The Corporate Transparency Act, enacted 1 January 2021, (the “CTA”) provides for the creation of a non-public beneficial ownership registry of certain entities formed or doing business in the United States. Implementing regulations were required for the law to take effect, and now the first set have under new section 31 CFR 1010.380 (the “1010.380 Regulations”). The 1010.380 Regulations are effective 1 January 2024.

Entities qualifying as “reporting companies” and formed on or after 1 January 2024 will have 30 days to report beneficial ownership and applicant information. Entities qualifying as “reporting companies” and formed before 1 January 2024, will have until 1 January 2025 to report beneficial ownership information.

Background

Under the framework provided by the CTA, entities formed or registered to do business by filing papers with a US State, Indian Tribe, or US territory or possession (“reporting companies”) are required to report the parties responsible for the filing (the “applicants”) and the owners and controllers of the entities (the “beneficial owners”) to the United States Treasury Financial Crimes Enforcement Network (“FinCEN”), unless exempted. Exempted entities are generally those in regulated industries, tied to government or non-profit purposes, or large operating businesses. The first tranche of regulations (the 1010.380 Regulations) detail who is required to be reported under the CTA as well as the reporting mechanics. The second tranche, yet to be released, is expected to create the framework for access to information reported under the CTA, which is limited to domestic and foreign law enforcement authorities for a range of purposes and to financial institutions (and their regulators) for limited verification and financial institution regulatory purposes. The third tranche, also not yet released, is expected to update the customer due diligence rules promulgated in 2016, which require US banks to collect beneficial ownership information when opening new accounts.

Changes from Proposed Regulations

The 1010.380 Regulations largely follow the Proposed Regulations from December 2021, with a few key changes. Some of the changes are:

1. Newly created reporting companies have 30 days from the receipt of or publication of notice by a government authority confirming formation or registration (rather than fourteen days from the entity making a filing) to file initial reports. Updated reports are also required 30 days (rather than fourteen) following changes in information.
2. Reporting companies formed prior to the effective date of the 1010.380 Regulations (1 January 2024) are not required to report applicant information. This is due to the burdensomeness of requiring longstanding existing entities to investigate who was responsible for forming the entity, particularly as some entities were formed decades ago.
3. Newly created reporting companies are required to report applicant information, but they are not required to update applicant information. This is due to the difficulty in keeping track of such persons after company formation.
4. The 1010.380 Regulations provided further clarifications regarding who is considered to exercise substantial control over an entity. The full details are beyond the scope of this short alert, but a few highlights include:
   • Clarifying who is defined as a “senior officer” of a reporting company and thus deemed to exercise substantial control, and
   • Explicitly stating that a trustee of a trust may be deemed to exercise substantial control over a reporting company by reason of holding the corpus of company shares.
5. “Company applicants” are limited to no more than two persons, that is, the person who directly files the formation documents and the person most responsible for directing the filing (if different than the person filing). By limiting the reporting to these two persons, the final regulations do not follow the proposed regulations in potentially requiring a large number of persons involved with a filing to be reported.

Actions Needed

For most reporting companies, determining beneficial ownership should be straightforward. For existing reporting companies with complex ownership structures, advice may be necessary to determine who should be reported as beneficial owners. It is expected that further guidance will be issued on this complex issue over the coming years, but with an effective date of 1 January 2024 (with reporting on existing entities due 1 January 2025), ownership structures may need to be reviewed in advance so that appropriate beneficial ownership information is obtained. Further, entity governance documents may need updating to require owners to promptly report ownership changes to entity management. Additionally, directors and officers of reporting companies may need to review their personal liability risk with respect to fulfilling the required reporting.