Lawyers advising corporate clients will have new ethical duties as a result of the Corporate Transparency Act.Congress adopted the Corporate Transparency Act in December 2020. The CTA will take effect when FinCEN finalizes implementing regulations in 2022.
The Legal Duty of Competence
of the Model Code of Professional Responsibility requires a lawyer to "provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation." Competent representation requires that "a lawyer should keep abreast of changes in the law." Comment 1.1(8)
. The Corporate Transparency Act will require lawyers to adopt new procedures to maintain their ethical practice.
Filing Obligations under the Corporate Transparency Act
The Corporate Transparency Act
is one of the biggest developments in corporate legal practice in decades. The law requires nearly every corporation, LLC and limited partnership to file a beneficial ownership report with FinCEN
, the Financial Crimes Enforcement Network.
When FinCEN implements its regulations
(expected during 2022) reporting companies formed after the effective date will need to file their first report within 14 days. Pre-existing companies will have one year to file their first report.
Each beneficial ownership report will need to provide identifying information for each beneficial owner and company applicant. The CTA defines beneficial owners as individuals who fill one of two categories. Those who exercise substantial control over the reporting company. And those who own more than 25% of the company. The law requires the report to include each individual's name, home address, social security number or another unique identifying number.
Company applicants are the individuals who file the organizational documents for the company (and the individuals who direct those filings).
A reporting company must file an amendment within 30 calendar days after any change in previously reported information. For example, if a reporting company reported that it was owned by three individuals (providing the home address and identifying information for each), and one of those individuals changed her residential address, that change would trigger an amendment.
New Law Requires New Procedures
The 30 day amendment requirement will pose a challenge for lawyers. Most lawyers know their clients, but don't always know all of their client's shareholders and business partners. Even a lawyer with a close client relationship might not be aware of an individual shareholder's residential address (or the fact that the residential address has changed).
As a result, lawyers may need to help their clients amend shareholder agreements to include a duty of shareholder notice. The amended agreement would require shareholders to notify the company of any change in their previously-reported information.
Lawyers will have an ethical duty to develop a series of disclosures and reminders for their clients that in light of the Corporate Transparency Act. Clients will need to understand their filing obligations and their need to remain aware of changes in beneficial ownership information.