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Compliancemaj 06, 2024

Expert Insights: Investment funds and compliance with the beneficial ownership reporting rule

The Corporate Transparency Act (CTA) went into effect on January 1, 2024, requiring non-exempt companies to file a beneficial ownership information (BOI) report with FinCEN. As many investment firms currently have or will have non-exempt entities within their organizational structures, firms should take steps to understand the CTA’s compliance obligations, including how to prepare for filings ahead of their reporting deadlines.

Danielle Bennett, Major and Strategic Accounts Associate Director for CT Corporation, provides essential information on the CTA as it relates to investment funds, including applicability, different reporting deadlines, and ongoing compliance. She also discusses the nuances when determining exemption status (ex. pooled investment vehicles may be exempt, but their subsidiaries may not be), as well as how investment firms can handle BOI privacy concerns.

Related resource: What investment funds should know about the Corporate Transparency Act

TRANSCRIPT

Greg Corombos: Hi, I'm Greg Corombos. Our guest in this edition of Expert Insights is Danielle Bennett, Major and Strategic Accounts Associate Director for CT Corporation. Danielle works with investment funds and alternative investments on all aspects of corporate compliance and entity management. Our podcast today is one in a series focusing on the Corporate Transparency Act. CT Corporation has received hundreds of questions from customers on the Corporate Transparency Acts implications. And during today's podcast, Danielle will focus on what investment funds need to know about the Corporate Transparency Act. So Danielle, thank you so much for your time today. I'm really looking forward to the conversation.

Danielle Bennett: Thanks, Greg for having me on today. I'm looking forward to our conversation as well. The Corporate Transparency Act — the CTA we’ll call it — went into effect on January 1, 2024. And unless investment fund entities are exempt, they too will need to comply with the beneficial ownership information reporting. So we'll call that BOI requirements under the CTA. While there are still some open questions in terms of exemption application and filing mechanics, every investment fund needs to understand the requirements and determine if their entities must comply and then file reports as necessary. 

Greg Corombos: Alright, let's dig into some of those questions then. First of all, when do investment funds need to comply with BOI reporting? 

Danielle Bennett: First, I should note that some entities, or in some cases a majority of entities in a fund structure, will be exempt from BOI reporting obligations. 

However, I expect that most investment firms will have entities within their organizational structures that will be required to file BOI reports. So we can't just hope this goes away or wait until the last minute. Now, what is the last minute? Domestic and foreign reporting entities created before January 1, 2024 — so we'll call those existing entities — must file an initial BOI report by January 1, 2025. Domestic and foreign reporting companies created on or after January 1, 2024 and before January 1, 2025 — so we'll call those newly created entities in 2024 — must file an initial BOI report within 90 days of receiving actual or public notice of their creation or registration. So practically speaking, that means that a report must be filed within 90 days of formation of the entity if the entity is formed within 2024.

Greg Corombos: When must BOI reports be updated? 

Danielle Bennett: So first, the CTA does not require annual reporting of beneficial ownership information. So this isn't like the Annual Statement of Information you'd file in California, or the report you might file in Delaware for a corporation. It is not a recurring annual requirement. That said, if there's a change in certain information or change and beneficial owners, the entity must file an updated BOI report no later than 30 days after the date on which the change occurred. So that is a very short timeframe. Changes requiring an updated report including entities registering a new “doing business as name” (so a DBA), a change in address, a change in beneficial ownership (including the death of a beneficial owner), and a change in the beneficial owners name, address, or unique identifying number. Notably, an amendment or filing currently does not need to be made when an entity is canceled or dissolved with the domestic state.

Greg Corombos: And what information must an investment fund actually report?

Danielle Bennett: So the BOI reporting rule requires the disclosure of information related to the reporting company, as well as to the beneficial owners and company applicants of the reporting company. So we'll break that down. First, each reporting company must disclose its full legal name, any DBA, a complete current street address (the principal place of business), the jurisdiction of formation, and the Taxpayer Identification Number. Usually we call that the EIN. A beneficial owner is any individual who directly or indirectly exercises substantial control over the reporting company or who directly or indirectly owns or controls 25% of the ownership interests in the reporting company. So in the investments funds space, in many instances, there's no one person that owns or controls 25% of a reporting company. And so the substantial control factors will definitely come into play. And those are set forth in the FinCEN guidance. But generally, that would include officers of the entity or those with decision-making authority. 

So once you've identified those beneficial owners, those beneficial owners must disclose their full name and date of birth, a complete residential street address, a unique identifying number for one of the following documents a passport, a non-expired identification document from the state — a non-expired states driver's license or non-expired passport from a foreign government ID if that individual does not possess any of the other documents. An image of that document must also be uploaded. 

Now, if a beneficial owner obtains a FinCEN Identifier, which is a unique number issued by FinCEN, the reporting company can include that FinCEN Identifier in lieu of all of that information for the beneficial owner. So rather than having to upload the driver's license and fill in all that information, you can just provide the FinCEN Identifier for that beneficial owner, you can go to the FinCEN website to obtain a FinCEN identifier. It's a very quick process, and there's a step-by-step guide on the website. 

Now, company applicants are also required for any entities that are formed after January 1 2024. So those are our existing entities. The company applicant is the person who submitted the documents to the state to form the entity or directed the formation of the entity. So in some instances, that could be a vendor, such as CT, who has handed the documents to the state to form the entity, and that person can provide their FinCEN Identifier or the same personal information that's required for a beneficial owner.

Next Steps for Your Business

Is your company required to file a beneficial ownership report?

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.

Danielle Bennett
Major & Strategic Accounts Associate Director

Danielle Bennett is a major & strategic accounts associate director. She supports a broad range of investment funds and alternative investments customers.

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