The Corporate Transparency Act (CTA) will require each reporting company to include the PII of each of its beneficial owners and company applicants. Pundits have dug into the question of identifying beneficial owners, but have ignored the difficulty of identifying company applicants.
FinCEN's draft regulations define "company applicant" as follows:
(e) Company applicant. For purposes of this section, the term "company applicant" means:
(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.
In practice, this rule will be harder to implement than many realize.
For most companies, the individual "who files the document that creates" the company will be a lawyer or paralegal. In many instances, there may be several lawyers and paralegals involved. As a result, the singular "company applicant" may actually be several individuals, each of whom will need to be included in the company's beneficial ownership report.
In addition, the definition includes "any individual who directs or controls the filing of such document by another person." This "controlling person" may often be the individual who hired the law firm or who directs the actions of the law firm on behalf of the company (or the group of individuals who are forming the company). As a consequence, in many cases the "company applicant" will be a collection of individuals that may include clients, the employees of clients, lawyers, paralegals and legal secretaries who handle filings for the law firm.
These details are important because there are relatively few rules in the draft regulations that direct which individuals need to be included in the "company applicant" group.
If a person is a "company applicant," their PII must be included in the reporting company's beneficial ownership report. If a company applicant's PII changes (such as a change in address, for example) the company must amend its beneficial ownership report within 30 days. If there are numerous individuals included in the "company applicant" group, that increases the number of potential data changes that might trigger a duty to amend the report.
Because companies can sometimes outlive their lawyers, the potential for a deceased company applicant becomes problematic.
Section 380(b)(3)(iv) of the proposed regulations allows a company to exclude from the report "any company applicant [who] died before [one year before the effective date of the final rule]" but only with respect to "a reporting company . . . created or registered before [the effective date of the final rule]." If a deceased company is excluded from the report, "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."
Importantly, this exclusion for deceased company applicants only applies to reporting companies in existence before the regulations take effect. The CTA filing regime will likely continue for many years. Will the regulations require reporting companies formed after the date the regulations take effect to track their company applicants in perpetuity (and even after their death)? The outcome seems absurd but the draft regulations do not provide otherwise.
As a practical matter, personnel at law firms change over time. Will law firms have a duty to track their partners, associates, paralegals and legal secretaries for their lifetimes in order track their PII for beneficial ownership reporting? Will those partners, associates, paralegals and legal secretaries have a duty to keep in touch with their former clients, even after they have changed firms or retired? That would also seem like an absurd conclusion, but FinCEN has not provide a safe harbor to avoid that result.
Practical questions like this will be important to companies and their lawyers. Implementing new systems and new procedures will take time. And yet, most lawyers and law firms have not yet started the process of determining how they will comply. Lawyers and law firms would be well advised to get started as soon as possible to determine what they will need to meet these new challenges.