FinCEN Final Rule on Beneficial Ownership Reports

On December 11, 2020, as part of the National Defense Authorization Act for 2021, the U.S. Senate passed the Corporate Transparency Act (CTA). The bill was vetoed by President Trump but bipartisan supermajorities in both houses of Congress overrode that veto and the bill became law.

In December 2021, the Financial Crimes Enforcement Network (or "FinCEN") of the U.S. Treasury Department issued a preliminary draft of regulations (the "Preliminary Rule") that would implement the beneficial ownership reporting requirements of the CTA.[1] On September 30, 2022, FinCEN issued its final rule (the "Final Rule"), indicating that the new reporting requirements would take effect on January 1, 2024.[2]

The CTA requires most companies doing business in the U.S. to file a beneficial ownership report with FinCEN that discloses specific items of personally identifiable information ("PII") with respect to each beneficial owner of the company. This Client Alert summarizes FinCEN's Final Rule that governs (a) who must file, (b) what must be included in the filing, and (c) when the filing must take place.

The CTA provides that the information FinCEN collects will not be available to the public. Instead, FinCEN will maintain a database of beneficial ownership data that it will make available to law enforcement. FinCEN's provision of that data to law enforcement will be outlined in a future FinCEN rulemaking.

WHICH COMPANIES ARE REQUIRED TO COMPLY?

The CTA applies to each "reporting company," which may be either a "domestic reporting company" or a "foreign reporting company.

A "domestic reporting company" is any entity that is either (a) a corporation, (b) a limited liability company, or (c) created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe."[3]

A "foreign reporting company" is any entity that is (a) a corporation, limited liability company, or other entity, (b) formed under the law of a foreign country, and (c) registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe."[4]

The Final Rule exempts from the definition of "reporting company" twenty-three separate categories of entities that are highly regulated and whose beneficial ownership is already a matter of public record.[5] The twenty-three exemption categories are generally unchanged from the exemption categories outlined in the Preliminary Rule.

WHAT MUST BE REPORTED?

If a reporting company must file a beneficial ownership report, the contents of the report will depend on whether the reporting company "was created or registered before January 1, 2024."[6]

Reporting companies created or registered before the effective date of the Final Rule (January 1, 2024) will not be required to report information regarding their company applicant. Reporting companies created or registered after the effective date of the Final Rule will be required to report information regarding their company applicant. This is a significant change from the Preliminary Rule, which had contemplated that all reporting companies would report on their company applicants.

The initial report filed by a reporting company must include:[7]

(i) For the reporting company:

(A) The full legal name of the reporting company;

(B) Any trade name or "doing business as" name of the reporting company;

(C) A complete current address consisting of:

(1) In the case of a reporting company with a principal place of business in the United States, the street address of such principal place of business; and

(2) In all other cases, the street address of the primary location in the United States where the reporting company conducts business;

(D) The State, Tribal, or foreign jurisdiction of formation of the reporting company;

(E) For a foreign reporting company, the State or Tribal jurisdiction where such company first registers; and

(F) The Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) of the reporting company, or where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction;

The initial report must also include:[8]

(ii) For every individual who is a beneficial owner of such reporting company, and every individual who is a company applicant with respect to such reporting company:

(A) The full legal name of the individual;

(B) The date of birth of the individual;

(C) A complete current address consisting of:

(1) In the case of a company applicant who forms or registers an entity in the course of such company applicant's business, the street address of such business; or

(2) In any other case, the individual's residential street address;

(D) A unique identifying number and the issuing jurisdiction from one of the following documents:

(1) A non-expired passport issued to the individual by the United States government;

(2) A non-expired identification document issued to the individual by a State, local government, or Indian tribe for the purpose of identifying the individual;

(3) A non-expired driver's license issued to the individual by a State; or

(4) A non-expired passport issued by a foreign government to the individual, if the individual does not possess any of the documents described in paragraph (b)(1)(ii)(D)( 1), (b)(1)(ii)(D)( 2), or (b)(1)(ii)(D)( 3) of this section; and

(E) An image of the document from which the unique identifying number in paragraph (b)(1)(ii)(D) of this section was obtained.

In addition, a reporting company must file an amendment to "reflect any change with respect to required information previously submitted to "FinCEN concerning a reporting company or its beneficial owners."[9]

Significantly, the rule requiring amendments reflecting changes only covers changes regarding the "reporting company or its beneficial owners." The Preliminary Rule had required amendments to reflect changes to "company applicants" as well, but that requirement was eliminated in the Final Rule.

The Final Rule also clarified that an amendment would be required to reflect changes in a reporting company's exemption status.[10] If a reporting company was formerly exempt, but loses its exemption, it must file an "updated report" that announces the change and that includes all the information required in a reporting company's initial report.

WHEN ARE REPORTS REQUIRED?

With only a few small, but significant, exceptions, the timing requirements of the Final Rule mirror the requirements in the Preliminary Rule.

First, any domestic reporting company created on or after January 1, 2024 must file a report within 30 calendar days of the earlier of (1) the date on which it receives actual notice that its creation has become effective or (2) the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the domestic reporting company has been created.[11] This is a slight change from the Preliminary Rule which had required an initial report within only 14 days of the date of formation.

Second, any entity that becomes a foreign reporting company on or after January 1, 2024 must file a report within 30 calendar days of the earlier of (1) the date on which it receives actual notice that it has been registered to do business or (2) the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the foreign reporting company has been registered to do business.[12] This is a slight change from the Preliminary Rule which had required an initial report within only 14 days of the date of registration.

Third, both domestic reporting companies and foreign reporting companies in existence before January 1, 2024 have until January 1, 2025 to file an initial report.[13] This concept of an initial report within one year of the effective date of the Final Rule is the same timing contemplated in the Preliminary Rule.

As noted earlier, the 30-day rule governing amendments remains unchanged from the Preliminary Rule (except that no amendment is required to reflect a change in information regarding a company applicant). Reporting companies must file an amendment within 30 calendar days after any change with respect to "required information previously submitted to FinCEN concerning a reporting company or its beneficial owners."[14]

WHO IS A BENEFICIAL OWNER?

The PII required in a beneficial ownership report relates to a reporting company's beneficial owners and (with respect to reporting companies formed after the effective date of the Final Rule) company applicants.

The definition of "beneficial owner" contained in the Final Rule is generally consistent with the definition in the Preliminary Rule.

Under the Final Rule, a "beneficial owner" means, "means any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company."[15] As with the Preliminary Rule, the Final Rule looks only to the "individual" and requires reporting companies to look through non-natural persons to derive the individuals who own or control them.

Also, the definition of "beneficial owner" includes any person who "exercises substantial control." The Final Rule provides[16] that, "An individual exercises substantial control over a reporting company if the individual:

(A) Serves as a senior officer of the reporting company;

(B) Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);

(C) Directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding:

(1) The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;

(2) The reorganization, dissolution, or merger of the reporting company;

(3) Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;

(4) The selection or termination of business lines or ventures, or geographic focus, of the reporting company;

(5) Compensation schemes and incentive programs for senior officers;

(6) The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;

(7) Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; or

(D) Has any other form of substantial control over the reporting company."

Like the Preliminary Rule, the Final Rule's definition is non-exclusive and requires the reporting company to include any individual who "has any other form of substantial control." As a result, many reporting companies will need to engage counsel to consider whether particular corporate governance arrangement bring individuals within the ambit of "substantial control" and thereby render them into beneficial owners.

The Final Rule also clarifies[17] that an individual may exercise "substantial control" over a reporting company, directly or indirectly, including as a trustee of a trust or similar arrangement, through:

(A) Board representation;

(B) Ownership or control of a majority of the voting power or voting rights of the reporting company;

(C) Rights associated with any financing arrangement or interest in a company;

(D) Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company;

(E) Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or

(F) any other contract, arrangement, understanding, relationship, or otherwise.

As with the Preliminary Rule, this guidance is non-exclusive and requires a reporting company to consider "any other contract, arrangement, understanding, relationship or otherwise" that might cause an individual to exercise "substantial control" in an indirect manner. The Final Rule establishes a facts and circumstances test that cannot be circumvented through a formalistic arrangement if there is an unwritten or covert "understanding, relationship or otherwise" that gives an individual indirect "substantial control." Reporting companies should carefully consider family arrangements, contracts and unwritten understandings that might bear on the question of whether an individual indirectly exercises "substantial control."

WHO IS A COMPANY APPLICANT?

As noted earlier, a key change in the Final Rule is that information regarding company applicants is only required with respect to reporting companies formed or registered after the effective date of the Final Rule (January 1, 2024). The Preliminary rule had required information regarding company applicants from all reporting companies.

The Final Rule also clarifies the identity of a "company applicant" as follows:[18]

(1) For a domestic reporting company, the individual who directly files the document that creates the domestic reporting company as described in paragraph (c)(1)(i) of this section;

(2) For a foreign reporting company, the individual who directly files the document that first registers the foreign reporting company as described in paragraph (c)(1)(ii) of this section; and

(3) Whether for a domestic or a foreign reporting company, the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.

This formulation should simplify the process of identifying the "company applicant" because the definition in the Final Rule looks to identify the individual who "is primarily responsible" for directing or controlling the filing. In contrast the Preliminary Rule held upon the possibility that a "company applicant" could include multiple individuals since its definition included "any individual who directs or controls the filing" By restricting the definition to the individual who is "primarily responsible" the Final Rule limits the identity to a single individual.

TAKEAWAYS

FinCEN's publication of the Final Rule has started a countdown to the effective date of the Final Rule on January 1, 2024. Reporting companies in existence before that date will have until January 1, 2024 to file an initial report of beneficial ownership. Reporting companies created or registered after that date will have 30 calendar days after the date of formation or registration to file an initial report.

While these deadlines may seem distant, they are not. Many existing companies will need to engage counsel to evaluate their corporate governance arrangements to determine who are their beneficial owners. In some instances, reporting companies and individual may want to change their corporate governance arrangements in order to clarify or exclude certain individuals from becoming beneficial owners. Nearly all companies will need to adopt procedures to collect the PII required for filing a beneficial ownership report and will need to obtain tools and systems for collecting and storing that confidential PII.

Compliance will be important because the CTA provides that the knowing failure to provide complete and/or updated information, or willfully providing false or fraudulent information, is punishable by civil penalties of up to $10,000 ($500/day) and criminal penalties of up to two years in prison.

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About The Author

Jonathan Wilson is the co-founder of FinCEN Report Company with 31 years of experience in corporate, M&A and securities matters. He is the author of The Corporate Transparency Act Compliance Guide (to be published by Lexis Nexis in the summer of 2023) and the Lexis Practical Guidance Practice Note on the Corporate Transparency Act.