Andrew Weiner returns to the podcast with Joel and continues the conversation on The Corporate Transparency Act (CTA), its purpose, what led to its passage, and how it intersects with Customer Due Diligence (Rules or “KYC”) and The Financial Crimes Enforcement Network (“FinCEN” ). Part 2 of 2.
Transcripts
Joel Simon:
Let’s continue our chat about the CTA! My understanding is that it does not apply to larger or more established companies, but it would seem that funds, new investment vehicles and almost any typical startup business would be required to report information that has historically been kept secret. Why is this such an important development?
Andrew Weiner:
I agree with you, Joel, that the CTA will be a particular burden on small businesses, which generally won’t have an exemption but are the least able to undertake another paper-intensive obligation. I agree that it is likely subject to the regulations the many major businesses can avoid any substantial disclosure. Particularly as a real estate lawyer, there are numerous substantial entities that will still have to comply and it will still be a big deal, at least for my industry. A second important question: Who is a beneficial owner of the reporting company whose personal data must be disclosed? The definition of “beneficial owner” with respect to any reporting company is any individual who directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, either exercises substantial control over the reporting company or owns or controls not less than 25 percent of the beneficial interest of the reporting company. This is a binary test. Control parties must be disclosed, and 25 percent or more beneficial owners must be disclosed. In addition, the CTA requires disclosure of applicants—anyone who files an application to form a reporting entity under any state or tribal law, or an application to qualify as a non-U.S. reporting entity to do business in the U.S., must also be identified and disclosed. This is a bit of a head-scratcher since filers are almost never principal owners or control parties but are more likely to be legal assistants, in-house counsel or junior associates in law firms. Staff of corporate service companies may perhaps also be considered applicants. This is likely to shake up the manner in which entities are formed.
Joel Simon:
It seems to me that regulators will have their hands full in fleshing out the details on this one, and that lawyers and clients should try to get a jump on things to stay ahead of the curve. What are some examples of issues and scenarios that you can see need to be addressed?
Andrew Weiner:
The definition of “beneficial owner” is, at its fullest literal extension, breathtakingly broad, subjective and full of ambiguities. Perhaps the regulations will help, perhaps not. The statute, for example, does not mention attribution roles. Are members of the family aggregated? Are affiliated companies always aggregated? Substantial control is not a recognized term in normal business activities. The phrase “arrangement, understanding, relationship or otherwise”—will this be used to allow fishing expeditions by FinCEN? If an entity has an interest in a reporting company, as I mentioned earlier, but no individuals who themselves are beneficial owners of the reporting company in which it has an interest, it may also be a reporting company. In this event, its beneficial owners must be reported so an entity that does not do anything other than invest in another reporting company and not control it and not own 25 percent will have people who control the second entity. If the entire chain must be disclosed and can be cross-indexed, then this is a much deeper investigation than first appears. As to substantial control, if decisions are made by unanimous or supermajority consent, or if decision-making is diffuse or if an individual is required directly or indirectly for a quorum, is that substantial control? How about control over day-to-day operations or typical major decision rights? If you are an entity whose chair or key investor actually makes major decisions, or at least needs to be consulted but has no formal direct authority, is he or she reportable? Can the lender or creditor class cross the line if the loan documents or rules in the bankruptcy give them control or funding rights. As to ownership, in determining 25 percent or more beneficial ownership, how are complex capital stacks evaluated? How are tiered returns, promotes, contention payments and equity kickers taken into account? How about different classes of stock, particularly preferred stock. And who makes this decision? Is it the company that reports or the investor who has the information? To be determined. The approach taken by treasury in its regulations will, as with many things as to the CTA, be key.
Joel Simon:
When do you think that approach will be known?
Andrew Weiner:
vailable by the end of summer:
Joel Simon:
How much lead time do you think we have in order to get ready for the new rules that will be coming down the pipe, and what kind of penalties apply for lack of compliance?
Andrew Weiner:
ve, which is not likely until:
Joel Simon:
Well, this certainly is an area people should keep an eye on as the rules come out, public comments are solicited, and compliance regimes ramp up. Thanks for filing us in on the Corporate Transparency Act today, Andy. It’s been great chatting with you.
Andrew Weiner:
Thanks for having me join you Joel. I hope to return when the regulations are proposed to give you an update.
