My Lawyer is Dead: Now What Do I Do?

One of the nagging unresolved problems in FinCEN's draft regulations to implement the Corporate Transparency Act (the "CTA"), is the rule regarding "company applicants."

Reporting companies under the CTA must provide specified personally identifiable information ("PII") about each of their beneficial owners and company applicants. The regulation defines "company applicant" as: (1) For a domestic reporting company, any individual who files the document that creates the domestic reporting company as described in paragraph (c)(1)(i) of this section, including any individual who directs or controls the filing of such document by another person; and (2) For a foreign reporting company, any individual who files the document that first registers the foreign reporting company as described in paragraph (c)(1)(ii) of this section, including any individual who directs or controls the filing of such document by another person.

For many corporations and LLCs in the U.S., the company applicant will be the lawyer "who files the [articles of incorporation / articles of organization] that creates" the reporting company.

The definition will also include the individual who "directs or controls the filing of such document," which, in many cases, might be the individual client or client representative who asked the lawyer to perform the task. In many medium-sized and large law firms, the term "company applicant" could include several individuals.

Consider as an example where the client, Mr. Jones, phones a partner at a law firm to ask that the lawyer form a new corporation. The partner might hand off the task to an associate. The associate might prepare the articles of incorporation and then ask a paralegal or legal secretary to perform the administrative task of filing the document with the Secretary of State. In this example, the "company applicant" would probably include the partner (because they took the client's order and directed the associate to perform the task), the associate (who prepared the documents and then directed the paralegal to file them), the paralegal (who actually filed the document) and the client as well because the client directed the engagement.

Naming all four individuals as the company applicant might see like overkill, but there is no safe harbor in FinCEN's regulations for omitting any individual who satisfies the definition. On the contrary, an inaccurate beneficial ownership report can generate a civil penalty of $500 per day which can be transformed into a felony if the inaccurate report is "willful." Prudence would seem to dictate that reporting companies interpret FinCEN's definitions broadly and include the PII of all potentially included individuals.

But companies can have longer lives the individuals. What is the reporting company's duties when one of its company applicants is deceased? (Or if the company applicant becomes disabled, retires, leaves professional life, or simply ceases to keep in touch with the reporting company?)

FinCEN has given us relatively little guidance so far. In Section 1010.350(d)(3)(iv), FinCEN's draft regulations provide:

(iv) Deceased company applicant. If a reporting company was created or registered before [effective date of the final rule], and any company applicant died before [one year after effective date of the final rule], the report shall include that fact, as well as any information required under paragraph (b)(1) of this section of which the reporting company has actual knowledge with respect to such company applicant.

This approach allows the reporting company to report that the company applicant is deceased without further detail. But this rule is limited to a reporting company created before the effective date of the final rule. Shouldn't there also be a rule for reporting companies created after the effective date of the final rule? (Certainly FinCEN is not empowered to grant eternal life for compoany applicants its regulations become effective?)

Without any change to the draft regulations, the current text seems to obligate the reporting company to report the company applicant's PII forever, even after the company applicant's death, disability, retirement, change in career, or other withdrawal from a relationship with the reporting company. That's not a practical solution and also doesn't serve well FinCEN's desire to have an accurate and comprehensive database of beneficial ownership. (Keeping the PII for deceased company applicants in the FInCEN database would actually detract by obscuring the inactive status of those individuals.)

We hope that FinCEN has the opportunity to improve its rules. Until then, however, reporting companies and their attorneys will need to develop corporate governance procedures and information management systems to make it feasible for them to maintain PII for their company applicants and beneficial owners.

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.

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