December 01, 2023

Implications of the Corporate Transparency Act in the Investment Management Industry

At a Glance

  • The Corporate Transparency Act (CTA) is a new federal law designed to combat money laundering, tax evasion, and other illicit financial activities by requiring “reporting companies” to disclose beneficial ownership information about their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury.
  • There are a number of exemptions carved out for investment management industry firms, however those industry participants should read through the exemptions carefully to make sure they are applicable.

The Corporate Transparency Act, as we have previously reported,1 is a new federal law designed to combat money laundering, tax evasion, and other illicit financial activities by requiring “reporting companies” to disclose beneficial ownership information about their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury. Beginning January 1, 2024, reporting companies, existing and new, will have a reporting obligation to FinCEN. Those companies have 90 days to report beneficial ownership information once the law takes effect.

For investment management firms, there are a wide range of exemptions to the CTA which we discuss below.

Exempt Entities

Common entities in the investment management space that ARE exempt from the CTA filings include:

  • An investment adviser as defined in Section 202 of the Investment Advisers Act of 1940 (Advisers Act) that is registered with the Securities and Exchange Commission (SEC) under the Advisers Act.
  • An investment company as defined in Section 3 of the Investment Company Act of 1940 (ICA) that is registered with the SEC under the ICA.
  • An investment adviser that is described in Section 203(l) of the Advisers Act AND that has filed as an “exempt reporting adviser” on Form ADV with the SEC.
  • Any commodity trading advisor or commodity pool operator registered as such with the Commodity Futures Trading Commission under the Commodity Exchange Act.
  • Any onshore fund managed by an SEC-registered investment adviser or a venture capital fund adviser (as defined in Section 203(l) of the Advisers Act) filed as an “exempt reporting adviser,” provided the fund relies on Section 3(c)(1) or 3(c)(7) of the ICA to avoid registration as an investment company AND the fund appears on Part 1 of the investment adviser’s Form ADV filing.

Nonexempt Entities

As broad as those exemptions are, there are a number of entities that are commonly seen in the investment management industry that ARE NOT exempt and that WILL have a filing obligation under the CTA.

There will be a filing obligation for any of the following:

  • Any fund managed by a registered investment adviser that does not appear on Form ADV (usually because the fund does not meet the definition of a “private fund” because it does not need to rely on 3(c)(1) or 3(c)(7) to avoid registration as an investment company — this would generally include funds that do not invest primarily in securities, such as real estate funds).
  • Any fund managed by an “exempt reporting adviser” relying on the “private fund adviser” exemption provided under Section 203(m) of the Advisers Act.
  • Any fund managed by a state-registered investment adviser.
  • Any fund managed by an unregistered investment adviser or other unregistered entity.
  • Any commodity pool managed by a commodity pool operator (regardless of registration as a commodity pool operator).

I Have to File – What Does That Entail?

For entities that are required to file a beneficial ownership report with FinCEN, the filing must include (i) individuals who, directly or indirectly, own 25% or more of the reporting company’s “ownership interests” and (ii) individuals who, directly or indirectly, exercise “substantial control” over the reporting company as each of the individuals falling under clause (i) or (ii) would be “beneficial owners” of the reporting company. There is a special rule that applies when an exempt entity is a beneficial owner of a reporting company by virtue of owning 25% or more of the ownership interests of the reporting company, which is the reporting company is required to report only the name of the exempt entity and there is no look through obligation; however, the special rule does not apply with respect to identifying individuals who, directly or indirectly, exercise substantial control over the reporting company.

In addition, if a pooled investment vehicle that would be exempt because it is managed by an SEC-registered investment adviser or a venture capital fund adviser (as defined in Section 203(l) of the Advisers Act) filed as an “exempt reporting adviser” is formed under the laws of a foreign country, that entity will be required to make a limited scope filing that identifies only individuals who, directly or indirectly, exercises substantial control over the offshore pooled investment vehicle (there is no requirement to report 25% or more owners).

  1. See our previous reporting for more information on the defined terms in the CTA.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

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