The initial compliance date for FinCEN's final rule on beneficial ownership information reporting requirements is quickly approaching, with certain provisions going into effect on January 1, 2024. Despite limited guidance from FinCEN and numerous unresolved interpretive questions, it is imperative for investment managers, especially those with complex and multi-tiered organizations, to begin scoping their structures and identifying what information they will need to provide to FinCEN, including for certain SPVs and other upper-tier entities.
Reporting Rule Overview
In September 2022, the U.S. Department of the Treasury's Financial Crimes Enforcement Network ("FinCEN") issued its final rule on Beneficial Ownership Information Reporting Requirements (the "Reporting Rule").1 A "reporting company" refers to any corporation, limited liability company ("LLC"), or other similar entity that is (i) created under the laws of a U.S. state by filing a document with a secretary of state or any similar office or (ii) formed under the laws of a foreign country but registered to do business in any U.S. state by filing a document with a secretary of state or any similar office, other than those entities that are eligible for one of 23 exemptions from the definition of reporting company included in the Reporting Rule. The Reporting Rule will require reporting companies to provide FinCEN with certain information about their beneficial owners ("BOI") and company applicants.2
Reporting companies established or registered before January 1, 2024 will have until January 1, 2025 to file their initial reports with FinCEN. A reporting company created or registered after January 1, 2024 will need to submit its initial report within 30 days of (i) receiving notice that its creation or registration to do business has become effective or (ii) a secretary of state issuing a public notice that the entity has been created or registered, whichever is earlier.3
Reporting Rule Applicability to Certain Entities
The industry continues to grapple with difficult questions with respect to the FinCEN reporting requirements as the initial compliance date looms, including questions about the applicability of the Reporting Rule to certain subsidiaries, offshore vehicles, trusts, and look-through entities. Scoping which entities within your organization may have BOI reporting obligations is key. However, instituting policies and procedures around entity creation and the ongoing BOI reporting obligations is just as important. While we expect some additional interpretive guidance from FinCEN before January 1, 2024, the scope and content of any such guidance is difficult to predict. Accordingly, many organizations will need to develop and implement a Reporting Rule compliance infrastructure, including taking positions on some of these unresolved questions, without complete certainty regarding FinCEN's interpretive positions.
The Subsidiary Exemption — RIAs, RICs, PIVs, and SPVs
The subsidiary exemption of the Reporting Rule recognizes that certain entities whose interests are controlled or wholly owned by certain exempt entities should be exempt from the requirements of the Reporting Rule. It is important to note that only the subsidiaries of a limited subset of the 23 entities exempted from the definition of a reporting company qualify for the subsidiary exemption.
For example, the Reporting Rule includes registered investment advisers ("RIAs") and registered investment companies ("RICs") among the 23 enumerated exemptions from the definition of a reporting company. RIAs and RICs are also included in the subsidiary exemption's list of qualifying entities. As such, to the extent an entity's interests are controlled or wholly owned by an RIA or RIC, that entity would qualify for the subsidiary exemption and would not be subject to the requirements of the Reporting Rule.
Conversely, one of the 23 exemptions from the definition of reporting company is for pooled investment vehicles ("PIVs").4 While PIVs themselves are exempt, the subsidiary exemption does not include PIVs in its list of qualifying entities. As such, subsidiaries of a PIV would not qualify for the subsidiary exemption and would need to qualify for a separate exemption or would be subject to a reporting obligation.
Many corporations and private funds utilize special purpose vehicles ("SPVs") for certain investments for regulatory, tax or other reasons. Many of these SPVs will have BOI reporting obligations unless they meet the criteria for another exemption.
Upper Tier Entities
There are no exemptions for entities that own or sit above an exempted entity. Such upper tier entities will have BOI reporting obligations if they meet the definition of a reporting company and do not qualify for another exemption.
Treatment of Look-Through Entities Under the Reporting Rule
Under the Reporting Rule, if one or more exempt entities has an ownership interest in a reporting company and an individual is a beneficial owner of the reporting company exclusively by virtue of the individual's ownership interest in the exempt entity or entities, the report can use the names of the exempt entity or entities instead of the name of the individual. In other words, ownership of an entity through an exempted entity can shield BOI from being reported because only the exempted entity would need to be reported and not the BOI of individual beneficial owners.
Treatment of Offshore Vehicles
Many offshore vehicles would be out of scope of the Reporting Rule as only offshore vehicles that are registered to do business in any U.S. state meet the definitional requirements of the Reporting Rule. While the Reporting Rule does not provide explicit guidance on what it means to be registered to do business in a U.S. state, we note that, barring additional guidance, certain activities such as registering for a Federal Tax ID number are unlikely to cause companies to be subject to the reporting requirements under the Reporting Rule.
Treatment of Trusts
The Reporting Rule defines reporting companies to include (a) corporations; (b) LLCs; and (c) entities created by filing a document with a secretary of state or "similar office." Certain trusts would fall under this definition barring an exemption, such as a Delaware statutory trust, which requires filing a certificate of trust with the Secretary of the State of Delaware. Conversely, a Delaware common law trust likely would not fall under this definition as it does not require such a filing. The boundaries become less clear in other states including Alaska, Hawaii, and Idaho, where trust formation may require a filing with the appropriate court (as opposed to with a secretary of state). The preamble to the Reporting Rule acknowledges this ambiguity but does not explicitly exclude trusts formed by a state court filing, stating that whether an office is "similar" depends on context.
Even if a trust is not considered a reporting company, a trust may still be subject to the beneficial ownership provisions of the Reporting Rule if it owns 25% or more or controls a reporting company, such as an upper tier entity. Because the trust entity itself is not an individual, the Reporting Rule would require that we look through the trust to determine who ultimately holds the ownership interest in or controls the underlying reporting company. The Reporting Rule provides guidelines for identifying the individual who directly or indirectly owns or controls an ownership interest in a reporting company through a trust or similar arrangement, which may include identifying a trustee, beneficiary, grantor, or settlor.5 These issues are nuanced, and global investment managers and companies will need to carefully analyze whether various entities in their organizational structure are in or out of scope.
Unresolved Questions and Anticipated Rules
The lack of clear guidance from FinCEN has raised unresolved questions about how BOI reporting obligations will apply to certain entities. For example, although RIAs are exempted from the reporting obligations, FinCEN has not provided specific guidance on whether relying advisers or general partners are exempted.6
We further note that FinCEN has not finalized the Beneficial Ownership Information Access and Safeguards rule proposed in December 2022 (the "Access Rule"),7 nor has it proposed the highly anticipated Updated Customer Due Diligence rule (the "Updated CDD Rule"), which is expected to revise existing customer due diligence rules no later than one year after the effective date of the Reporting Rule.
Conclusion
Many issues with the Reporting Rule remain unresolved, but organizations cannot afford to remain idle. Instead, it is important for organizations, particularly global investment managers and other regulated entities, to ensure that they are well-versed with existing guidance, monitor for new developments regarding the Access Rule and Updated CDD Rule, and prepare to provide the data required by the Reporting Rule after January 1, 2024.
Footnotes
1. Beneficial Ownership Information Reporting Requirements, Final Rule, 87 FR 59498 (September 30, 2022), available at: https://www.govinfo.gov/content/pkg/FR-2022-09-30/pdf/2022-21020.pdf. See also Linklaters, Proposed Beneficial Ownership Rule Could Impose New Disclosure Requirements on Investment Managers (March 2022).
2. The term "company applicant" refers to the individual who either directly files the document that creates the entity (or in the case of a foreign reporting company, the document that first registers the entity to do business in the United States). An individual who is primarily responsible for directing or controlling the filing by another would also be considered a company applicant.
3. We note that, on September 28, 2023, FinCEN issued a proposal to extend reporting deadlines from 30 days to 90 days for entities created or registered on or after January 1, 2024, and before January 1, 2025. Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024 (September 28, 2023), available at: https://www.federalregister.gov/documents/2023/09/28/2023-21226/beneficial-ownership-information-reporting-deadline-extension-for-reporting-companies-created-or.
4. Generally, a pooled investment vehicle refers to (i) any investment company or (ii) any company that relies on the Section 3(c)(1) or Section 3(c)(7) exclusions from the Investment Company Act of 1940 and that is identified by its legal name by the applicable investment adviser in its Form ADV (or successor form).
5. The Reporting Rule's Preamble also acknowledges that multiple parties in a trust arrangement may simultaneously own or control the ownership interests held in trust, depending on the specifics of the trust arrangement.
6. A relying adviser refers to an adviser that is controlled by or under common control with a filing adviser that makes an umbrella registration that covers the relying adviser.
7. Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifiers for Entities, Notice of Proposed Rulemaking, 87 FR 77404 (December 16, 2022), available at https://www.federalregister.gov/documents/2022/12/16/2022-27031/beneficial-ownership-information-access-and-safeguards-and-use-of-fincen-identifiers-for-entities.
We are also grateful to Bhavishya Barbhaya, Haanbee Choi, Michal Folczyk, Matthew Gallot-Baker, and Daniel Kim for their contributions to this regulatory update.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
