Corporate Transparency Act: Key Considerations for Securitizations

Time 6 Minute Read
December 20, 2023
Legal Update

We are committed to informing our clients about regulatory developments that may impact their business. With that in mind, we urge you to consider your reporting obligations under the Corporate Transparency Act (the “CTA”). The CTA, passed by Congress in 2021, designed to combat money laundering, requires some entities to report beneficial ownership information to Financial Crimes Enforcement Network (“FinCEN”). On September 29, 2022, FinCEN issued final regulations (the “Final Rule”) implementing the beneficial ownership reporting requirements of the CTA. The Final Rule becomes effective January 1, 2024. Non-exempt entities created on or after January 1, 2024, will be required to report soon after their creation, as described below. The myriad non-exempt entities created before January 1, 2024, will have an extra year to report under the Final Rule; they must report by January 1, 2025. Please see this Hunton Andrews Kurth LLP Client Alert for a general overview of the CTA.

We have summarized below some of the ways in which the CTA will apply to typical structured finance entities and procedures. We understand, of course, that many of our clients’ needs and transaction structures may require deeper analysis. Please reach out to your Hunton Andrews Kurth team for further guidance, as appropriate.

Reporting Companies

The Final Rule takes an expansive view of what constitutes a “Reporting Company.” Under the regulations, a “domestic reporting company” is any entity that is created by the filing of a document with a secretary of state or similar office of a jurisdiction within the US. Entities formed in non-US jurisdictions are also covered under this definition if registered to do business in a US jurisdiction.

LLCs and statutory trusts are within the scope of the definition of Reporting Company. Conversely, sole proprietorships, common law trusts and general partnerships usually would not be reporting companies because a filing is not required to create them. Complex structures, such as series trusts and series LLCs, will require individual analysis. Additionally, trustees of trusts (including common law trusts) will want to consider whether the assets of those trusts are interests in companies required to report their beneficial owners under the CTA, because in certain cases the trustee may be deemed to be a beneficial owner of such a trust asset. The Hunton Andrews Kurth team is available to assist with these determinations.

Reporting Companies are required to register with FinCEN subject to the CTA unless an exemption applies. Reporting Companies are required to report: 1) the full name of the reporting company, 2) any trade name or “doing business as” name, 3) the business street address (the street address of the principal place of business), 4) the state or Tribal jurisdiction of formation and 5) an IRS TIN (or for foreign entities, a foreign tax identification number).

FinCEN has provided that the initial report for newly registered entities formed after January 1, 2024 through December 31, 2024, is due within 90 days from the earlier of (i) the date on which the Reporting Company receives actual notice that its creation (or registration) has become effective or (ii) a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the reporting company has been created or registered. Entities created or formed on January 1, 2025 and thereafter, will have 30 days to file the initial report. As discussed above, existing entities formed prior to January 1, 2024, will have until January 1, 2025 to file.

Reporting Companies will have 30 days to file an updated report to FinCEN upon knowledge of any change with respect to any information previously submitted to FinCEN related to beneficial ownership or information reported regarding any particular company applicant or beneficial owner, as appropriate.

There are 23 exempted entity types, including those for banks, credit unions, SEC reporting companies and governmental authorities, among others. The most relevant exemption for the securitization space is the subsidiary exemption, which applies to entities whose ownership interests are entirely controlled or wholly owned, directly or indirectly, by one or more listed exempt entities. In many cases, issuing entities, such as SPV LLCs and statutory trusts, may be directly or indirectly owned by a covered, exempted entity and therefore would be exempt from reporting requirements under the Final Rule.

This analysis of relevant exemptions should be completed on each newly formed entity in a transaction to ensure appropriate compliance. Please consult with your Hunton Andrews Kurth team if you would like assistance in this analysis.

Beneficial Owner Disclosure

Reporting Companies are required to submit to FinCEN certain information for each Beneficial Owner. The Final Rule defines a “Beneficial Owner” as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.” Substantial control is defined as service as a senior officer of the Reporting Company, authority over the appointment or removal of any senior officer, majority or dominant minority status on the board of directors, and direction, determination, or decision of, or substantial influence over, important matters affecting a reporting company. Ownership interests for purposes of the 25% rule is defined broadly to include both equity in the reporting company and other types of interest, such as capital or profit interests, warrants, rights, options or convertible interests that convey ownership interests. Debt instruments are also included if they permit the holder to exercise the same rights as those other types of equity or ownership interests.

Reporting Companies are required to report the following for each of its Beneficial Owners: 1) full legal name, 2) date of birth, 3) current residential street address and 4) unique identifying number from an acceptable identification document and to provide an image of that document.

Company Applicant

Reporting Companies formed on or after January 1, 2024, are also required to disclose Company Applicants, who are defined as: 1) the individual who directly files the document to create or register the reporting company and 2) the individual who is primarily responsible for directing or controlling such filing if more than one person is involved in the filing.

Company Applicants are required to provide the individual’s full legal name, date of birth and complete current address. A business address is required for a Company Applicant “who forms or registers an entity in the course of such company applicant’s business.” A residential address is required for all other individuals, including beneficial owners.

We’re Here To Help

Navigating the intricacies of the Corporate Transparency Act can be complex and our team is available to provide counsel tailored to your specific needs. Our attorneys are available to assist you in understanding the implications of the CTA on your entities and transactions and we can provide guidance in ensuring compliance with the new regulatory framework.

Hunton Andrews Kurth will continue to monitor closely the development and implementation of the Corporate Transparency Act in this evolving regulatory landscape. Please contact us if you have any questions or would like further information regarding these developments or other questions related to compliance.

Thank you for entrusting us with your legal needs. We look forward to continuing to serve you.

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