The U.S. government’s latest measures, which aim to prevent the misuse of complex ownership entities such as shell companies, are set to significantly impact the private fund industry. These measures are part of the Beneficial Ownership Information Reporting (BOI) Rule, a consequence of the Financial Crimes Enforcement Network’s (FinCEN) adoption of the Corporate Transparency Act (CTA).
The practical application of the CTA was called into question when the U.S. District Court for the Northern District of Alabama deemed the act unconstitutional in the case of Nat’l Small Bus. United v. Yellen [judgment text]. However, this decision currently applies only to the plaintiffs in the case and the government has already appealed.
Attempted compliance with the CTA should remain a priority for fund managers despite ongoing litigation. The BOI Rule demands that all reporting companies must submit detailed beneficial ownership information to FinCEN, and any entity not in compliance can face civil and criminal penalties.
Interestingly, not all entities are subjected to reporting under the BOI rule. There exist 23 exemptions to this rule, which should be carefully analyzed by legal entities to understand their compliance requirements. This evaluation is particularly relevant to the private funds industry, as SEC-registered investment advisers and certain private funds they manage are exempt. It is noteworthy to mention, however, that upper-tier entities within an organizational structure are more likely to be reporting companies.
FinCEN recently published guidance detailing the complexities of the “subsidiary exemption.” For an entity to qualify, its ownership interests must be “fully, 100 percent owned or controlled by an exempt entity.”
It is beneficial for fund managers to develop a robust strategy for the identification of reporting companies and for the generation of comprehensive organizational charts. Investment entities should also prepare systems to track BOI reporting information and any changes that affect their compliance status. Finally, the development of a CTA compliance policy can ensure the dedicated monitoring of FinCEN’s FAQs and Small Entity Compliance Guide.
The adoption and compliance to the new BOI Rule and Corporate Transparency Act underline the efforts undertaken to ensure the accountability and transparency of legal entities and prevent financial crimes.
You can read the original article at Bloomberg Law.