US Asset Management and Investment Funds Alert
The Corporate Transparency Act (CTA) is going into effect on 1 January 2024 and will mandate the disclosure of certain information related to beneficial owners and controllers of most US domestic entities and certain non-US entities doing business in the United States. These rules will also affect family offices and many family wealth management entities by requiring reporting of beneficial ownership information (BOI) for certain individual owners and control persons. The identifying information will need to be reported to the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Our K&L Gates alert on these rules, with detailed information as to the scope and application, can be found here. Family offices and family investment vehicles should be preparing for this new regulation by reviewing entity ownership and structures and preparing required information for filing when the rules become effective.
These new rules will affect family offices and family investment vehicles in a number of ways and require a substantial level of disclosure of personal information. Direct and indirect changes of ownership can prompt new or updated filing requirements.
WHO IS COVERED AS A REPORTING COMPANY?
Any entity that is considered a “Reporting Company” (and not subject to an exemption) is covered by the CTA and may require action: Broadly, a Reporting Company is any domestic or foreign corporation, limited liability company, limited partnership or similar entity formed or registered to business within any US state or tribal jurisdiction by filing a document.
As a family office is often an entity, it would be covered under these rules and need to report.
A family investment entity, like a limited partnership or limited liability company, would likewise be covered.
ARE THERE EXEMPTIONS?
Certain exemptions that may apply to family offices and family investment entities include the following:
There is an exemption for entities already subject to other federal reporting, so registered investment advisers under the Investment Advisers Act of 1940 (such as multifamily office) are exempt.
Larger family offices may qualify for the exemption for Large Operating Companies, which has a number of requirements including a threshold of at least 20 full-time employees, a physical US office, and more than US$5 million of gross receipts.
Tax-exempt entities such as private foundations are exempt from reporting.
Certain inactive entities do not need to report.
Certain types of trusts, which are not created by a filing with a Secretary of State or similar office, are not expected to be Reporting Companies.
WHO ARE CONSIDERED BENEFICIAL OWNERS WHO NEED TO REPORT?
The “Beneficial Owner” is any individual who either:
Directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, either exercises substantial control over the Reporting Company; or
Owns or controls at least 25% of the ownership interests of the Reporting Company.
There is always at least one, and there can be more than one, Beneficial Owner, even if no one owns at least 25% of the entity.
For family offices, the Beneficial Owner could be the principal owner or owners of the family office or family investment vehicle and could also be certain senior management of a family office and trustees (and in certain cases beneficiaries) of trusts (where the trust is an owner of a Reporting Company).
WHEN IS IT HAPPENING?
For entities organized from 1 January 2024 on, BOI will need to be reported within 30 days of organization.1 There is a phase-in for entities created before 1 January 2024, with reporting of BOI to be completed by 1 January 2025. Subsequent changes of beneficial ownership are to be reported within 30 days.
WHAT IS REPORTED AS BENEFICIAL OWNERSHIP INFORMATION?
A Reporting Company must provide identification information about itself, Beneficial Owners, and Company Applicants. A Company Applicant is the individual who actually files the document that created the Reporting Company and an individual who directs that filing, if different (there can be up to two Company Applicants. For each Beneficial Owner and Company Applicant, the applicable Reporting Company must submit to
FinCEN:The individual’s full legal name;
Date of birth;
Complete current address (in the case of a Company Applicant, a business address may be used; in all other cases, a residential address must be used);
A unique identifying number from an acceptable identification document (passport or driver’s license);
Copies of identifying documentation; and
For individuals who already file with FinCEN, FinCEN will provide a unique identifier (FinCEN Identifier), and this FinCEN Identifier can be submitted instead of separate personal information.
Importantly for family offices and family investment entities, minor children are exempt from reporting BOI if a parent’s identification information is disclosed instead, and ownership of a mere future right to inherit does not give rise to a disclosure obligation.
WHO HAS ACCESS TO THE INFORMATION?
FinCEN is required by law to maintain BOI in a secure nonpublic database with high levels of protection. Federal agencies will have access to the BOI for national security, intelligence, or law enforcement activity. State, local, or tribal law enforcement agencies will have access to BOI if a court so authorizes.
WHAT HAPPENS IF THERE IS FAILURE TO COMPLY?
Failure to meet the reporting requirements or unauthorized disclosure of BOI can result in civil or criminal actions. Willful failure to file a complete initial or updated report with FinCEN is subject to a US$500-per-day fine (up to US$10,000) and imprisonment for up to two years.
1 FinCEN proposed to amend the rules to provide 90 days (instead of 30 days) for Reporting Companies created or registered in 2024 to file their initial reports. Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024, 88 F.R. 66730 (proposed September 28, 2023).