Greg Corombos: And of course, FinCEN is the Financial Crimes Enforcement Network located within the Treasury Department. Danielle, how should investment firms handle BOI privacy concerns?
Danielle Bennett: There's definitely some challenges when you're asking people to provide personal information. First, I'll note that the BOI registry is technically not available to the public. So the actual data that's provided to FinCEN is not available to the public. The purpose of the information is for law enforcement purposes generally. So generally, federal agencies can request and access that information. In addition, there's a potential that banks could also request and access that information for similar purposes. So in other words, it cannot be [for] commercial purposes. But if they have enforcement purposes, they, too, could request that information. That will come after they've stood up the ability for federal agencies to access the information. But generally, it's not available to the public.
One challenge in this space is you have many circumstances within investment funds where there might be a joint venture, and there might be multiple parties to that joint venture. And they need to confirm that a beneficial ownership report has been filed. And that information will come from the abstract that you get from FinCEN once it's filed, and that may include personal information that you don't necessarily want to share with the parties to your joint venture. One of the things you can do is at least obtain a FinCEN identifier for the beneficial owners within your firm so that the only thing reflected on a report that you might be sharing with another party is that FinCEN identifier. While that technically is personally identifiable information, it's not possible at this point for someone to tie that number to an individual because that information is not accessible from FinCEN. So that's just one way to slightly anonymize the information that you're providing.
Greg Corombos: Yeah, it's good to have that security as a smart move. Can investment fund entities be exempt from BOI reporting?
Danielle Bennett: The short answer is yes. Just like any other entities within the United States in any corporate structure, there are exemptions, 23 total, to the BOI reporting requirements. That said, they are complicated. There is not a lot of clarity about some of them, and it's challenging to determine their application to entities. Generally, if an investment fund entity qualifies for an exemption, it will not have to file a BOI report.
But in determining which entities may be exempt, there's some large buckets that could be applicable in this space. The first is a large company exception, and that is a company with more than 20 employees and 5 million in gross receipts. So for example, if you have a portfolio company, and that portfolio company itself, the operating company, is a large company, it is exempt along with its subsidiaries that it 100% controls. There are regulations that set forth how that works. There's an analysis needed, but generally there's an exemption there.
There are pooled investment vehicles that may be exempt. However, the rules expressly state that pooled investment vehicles themselves may be exempt, but their subsidiaries are not exempt. And that also is a challenge in this space.
So there's some inconsistency in the exemptions. There are other entities that are registered with the Securities Exchange Act or investment advisors. Those would also be exempt because that information that would be collected from FinCEN on those entities is already provided to a government agency. So that's the rationale for those exemptions.
Generally speaking, though, there are entities in this space that typically would not necessarily have an exemption that applies. One that comes to mind is “blocker” entities, those types of investment vehicles, and others. You really do need to look at it on a case-by-case basis and go through the exemptions as they're set forth in the Corporate Transparency Act and the regulations to determine which ones are applicable. But it is complicated and it is challenging. We've seen some firms in this space take a pragmatic approach and determined that it's not necessarily worth trying to figure out whether some of the exemptions that aren't clear apply to certain entities, and they're just filing the reports out of an abundance of caution because of a cost benefit and time analysis, frankly,
Greg Corombos: Yeah, that makes sense to do. How can funds establish a process for reporting?
Danielle Bennett: The first thing you need to do in any investment fund is have a handle on how entities are formed on behalf of your firm, where those entities are housed in terms of data and information, and what the process is going to be go[ing] forward, or preparing and filing BOI reports if they are needed. So you need to be able to track your entities. You need to be able to do initially…while we're waiting for some clarity in terms of the exemption application for existing entities. What you need to do initially, is get your arms around all of the entities within your investment firm, and determine [if there] are there any entities that we can perhaps cancel or dissolve with the state? Maybe we don't necessarily need these entities to be active anymore. And if you can get those canceled or dissolved before the deadline of January 1, 2025, you won't necessarily need to file a report for those. So first things first, get your arms around the entities that you have now.
Second, establish a process internally for forming new entities. Because that 90-day timeframe to file reports for newly formed entities this year is a pretty short window. And if you don't know that someone on a particular deal team has formed certain entities, you won't necessarily know that a report needs to be filed within 90 days. So you don't know what you don't know. You need a process internally for approval of formation of entities. And then you need to keep in mind that next year, that timeframe is going back to 30 days, which it initially was in the regulations. That is a very short window. And the indication from FinCEN is that that will in fact go back to 30 days. So before the end of this year, you need a process in place to determine when entities are formed internally, who is forming them, what approvals are needed, and who is filing the beneficial ownership reports. The big picture in all of this is that you really need to get your arms around entity management. And a comprehensive entity management platform would probably be key to tracking that information. We've seen a lot of folks realize that the spreadsheet days are over in terms of managing entities, and it's time to have a single source of truth, so that we don't miss these deadlines and we know the entire universe of entities that an investment firm is responsible for.
Greg Corombos: Well, Danielle, you are certainly correct that I don't know what I don't know. But I certainly know a whole lot more than I did at the beginning of our conversation. Thanks for your insights today. Any final thoughts or advice?
Danielle Bennett: I would say don't wait. It's easy to say that you're going to wait and see, and that things could happen. You know, there's been tort cases determining that perhaps the Corporate Transparency Act is not constitutional. But FinCEN has appealed those and I wouldn't rest my hopes on this going away anytime soon. I would take the time now, while we're still in the first half of the year to, as I said, gather your entity knowledge, determine which entities you need go[ing] forward, determine a process for formation of entities go[ing] forward, and be ready to file. We haven't seen the kind of volume of filings with FinCEN that we expect to see in the second half of the year. And so you don't want to be waiting until November or December to get this done. Because if you have hundreds and hundreds of these reports to do, as you may, you will possibly see some challenges with filing those with FinCEN then. So don't wait. Engage early, at least on the substance. Don't have to file the reports necessarily right away, but you should be ready to file them well before the end of the year.
Greg Corombos: Great advice. Absolutely great advice, Danielle. Again, thank you so much for walking us through what CTA compliance looks like for investment funds. We appreciate it.
Danielle Bennett: Thank you very much.
Greg Corombos: Danielle Bennett is Major and Strategic Accounts Associate Director for CT Corporation. I'm Greg Corombos reporting for Expert Insights. For more information on this subject, please visit ctcorporation.com.
