BackgroundThe CTA requires each reporting company to file a beneficial ownership report. The report must identify the company's "company applicant" and each "beneficial owner." For each company applicant and beneficial owner, the report must include each individual's:
1. Full legal name,
2. Date of birth,
3. Current residential address,
4. A unique identifying number from an acceptable identity document (such as an unexpired drivers license or passport) or a unique identity number generated by FinCEN; and
5. An image file of the document that provides the unique identifying number.
In Part 1 we talked about steps that companies should take to begin collecting the required data. This post suggests that companies should adopt new procedures to manage their CTA compliance.
360 Degree Awareness for CTA ComplianceThe CTA requires reporting companies to file an amendment within 30 calendar days after any change in previously-reported data.
Because the beneficial ownership report includes specific items of personal data, even a small change could trigger the need for an amendment. Examples include a change in home address, the unique identification number or the unique ID document.
In addition, because each person with "substantial control" is defined to be a "beneficial owner," reporting companies must alert the compliance officer of any change that might signal a change in substantial control.
Substantial ControlFinCEN's proposed regulation defines "substantial control" as:
(i) Service as a senior officer of the reporting company;
(ii) Authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors (or similar body);
(iii) Direction, determination, or decision of, or substantial influence over, important matters affecting the reporting company, including but not limited to:
(A) 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;
(B) The reorganization, dissolution, or merger of the reporting company;
(C) Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;
(D) The selection or termination of business lines or ventures, or geographic focus, of the reporting company;
(E) Compensation schemes and incentive programs for senior officers;
(F) The entry into or termination, or the fulfillment or non-fulfillment of significant contracts; and
(G) 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; and
(iv) Any other form of substantial control over the reporting company.
Visibility for the Compliance OfficerTo manage CTA compliance, a reporting company's compliance officer must have 360-degree awareness of changes in circumstances that might trigger an amendment.
For example, Mr. Jones might have "substantial control" when the company files its first report because he is on the board of directors. If Mr. Jones subsequently resigns, the company's compliance officer should immediately evaluate that fact. If Mr. Jones no longer has substantial control, the compliance officer must file an amendment to the beneficial ownership report.
In addition, changes in circumstances could extend upwards through the ownership structure. Changes in substantial control within a shareholder might cause a change in substantial control at the reporting company. As a consequence, the compliance officer will need to have visibility up the ladder of corporate ownership to remain aware of changes that might trigger an amendment.
For example, suppose that 25% of the reporting company is owned by ACME Corporation. Suppose also that ACME Corporation has three individuals on its board. Each of these three individuals would be beneficial owners of the reporting company. As a result, if one of them resigns, the reporting company would need to file an amendment. Traditional corporate governance does not give the reporting company visibility to changes within the company's shareholders. As a result, managing CTA compliance will require the compliance officer to have visibility into the governance of its shareholders.
Accordingly, to ensure that the reporting company has timely access to these kinds of corporate governance changes, reporting companies should adopt shareholder agreements that extend visibility throughout the corporate structure.