The Corporate Transparency Act (CTA) was enacted in 2021, and requires certain corporations, limited liability companies and similar entities (including statutory trusts created by filing a document) to file beneficial ownership reports with the Financial Crimes Enforcement Network (FinCEN) beginning in 2024. The reports are intended to help prevent and combat money laundering and other illicit activity in the United States by providing information to law enforcement and national security agencies about the owners of such entities.

FinCEN issued final rules (the CTA rules) that are effective January 1, 2024 and can be found at 31 CFR 1010.380¹. These rules are designed to require reporting to FinCEN about the formation or existence of entities defined as Reporting Companies (unless an exemption applies), and to identify the individuals who beneficially own such entities. Unfortunately the broad scope of these rules might capture some types of securitization issuing entities, and as a result the rules impose a new compliance burden on the securitization industry. This compliance burden is two-fold: first, reporting will be required in the near term as to non-exempt entities newly formed on or after January 1, 2024; and second, as to non-exempt entities formed before that date, reporting will be required by January 1, 2025.

Some of the most important questions about these provisions in this context are: (i) what types of securitization issuing entities are Reporting Companies; (ii) what exemptions are available to issuing entities that are Reporting Companies; (iii) who are its Beneficial Owners; (iv) what types of interests are Ownership Interests; and (v) how best to ensure compliance.

While this alert focuses on the impact on securitization issuing entities, the discussion in this alert may apply similarly as to other entities formed by securitization sponsors, such as depositors and aggregating trusts.

Reporting Companies

The domestic Reporting Company definition captures corporations, LLCs and entities that are created by filing a document with a secretary of state or similar office under the laws of a State or Indian tribe. Entities formed under the law of a foreign country are also captured, if they are registered to do business under the laws of a State or Indian tribe. “State” includes any US state, D.C., or other US territory.

Among typical US securitization issuing entities, Delaware statutory trusts (DSTs) and LLCs fall within the definition of Reporting Company.

Common law trusts (as well as other entities that are not created by filing a document with a secretary of state or other similar office as described above) are not included in the definition of Reporting Company and, therefore, are not required to report. Common law trusts are frequently used to issue pass-through certificates, especially RMBS and CMBS that are REMICs for tax purposes.

Reports Required

Reporting Companies that are formed in or authorized to do business in the US are subject to the CTA reporting requirements, unless an exemption applies.

Non-exempt Reporting Companies formed on or after January 1, 2024 will be required to submit an Initial Report within 90 days of formation (30 days if formed on or after January 1, 2025). Non-exempt Reporting Companies formed prior to January 1, 2024 will be required to submit an Initial Report by January 1, 2025. These reports must be filed with FinCEN, and must contain information about the Reporting Company, its Beneficial Owners who are individuals, and solely for Reporting Companies formed on or after January 1, 2024, its Company Applicants (who are also individuals).

Beneficial Owners are described below. Company Applicants include (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 individual participates in the filing). There can only be one or two Company Applicants. These functions may be performed by persons at a business formation service or a law firm, or by persons who control (or who are with an entity that controls) the Reporting Company.

An Updated Report will be required if there is any change to the information previously filed, as to a Reporting Company or its Beneficial Owners. A change in information as to a Company Applicant does not trigger an Updated Report.

Information Required

For a Reporting Company the required information includes the company’s legal name, trade name or “doing business as” name, current address, the company’s jurisdiction of formation (or, for a foreign reporting company, the state, territory or tribal jurisdiction where it first registers) and the company’s EIN. Foreign reporting companies must provide a foreign tax identification number if they do not have an EIN.

For a Beneficial Owner or a Company Applicant, the information required includes full legal name, date of birth, complete current address, and unique identifying number and issuing jurisdiction. For a Company Applicant acting in the course of their business, the street address of the business may be used. In all other cases and for all Beneficial Owners, the individual’s residential street address must be provided. The unique identifying number and issuing jurisdiction must come from a US passport, State driver’s license, identity card issued by a State or local government or Indian tribe, or non-US passport. In each case, the document must be non-expired. An image of the document must be uploaded with the filing.

FinCEN identifier

For any Reporting Company or individual providing information on a CTA filing, the company or individual may instead obtain a FinCEN identifier by providing the required information to obtain the identifier. For Beneficial Owners and Reporting Companies who appear in multiple filings, this alternative would avoid the need to upload the same information repeatedly. For anyone who obtains a FinCEN identifier (including a Company Applicant), if the information provided changes, the person must file an update.

As noted above, for any Reporting Company or Beneficial Owner for whom information was previously filed on a CTA report, an Updated Report will be required if there is any change to the information. However, if for such person a FinCEN identifier was used, an Updated Report would not be needed so long as the identifier information was updated. Again, this would avoid the need to upload the same information repeatedly.

For individuals who are Company Applicants, especially for those who do not perform this role on a regular basis, it may be preferable to not obtain a FinCEN identifier, because the Company Applicant information in an Initial Report is not required to be updated.

Exemptions

There are numerous exemptions from the CTA reporting requirements available to certain types of entities, listed in CTA rule paragraph (c)(2). Applicable subsections under (c)(2) are shown below.

Exemptions are available to the following entities by reason of their status, which in most cases will not change over time:

1. SEC reporting companies – an issuer with securities registered under the Securities Exchange Act of 1934 (1934 Act) Section 12, or that is required to file reports with the Securities and Exchange Commission (SEC) under 1934 Act Section 15(d);
2. Governmental authority – an entity established under the laws of the US, a State or a political subdivision of a State, or an Indian tribe, and exercising governmental authority;
3. Banks – as defined under various federal laws which generally must be either chartered under US or State law, FDIC insured, or a branch or agency in the US of a foreign bank (note: foreign banks themselves are not included in this exemption);
4. Credit unions – federal or state;
5. Depository institution holding companies – including a bank holding company or S&L holding company;
6. Money services businesses - registered with FinCEN;
7. Broker dealers – registered with the SEC under the 1934 Act;
8. Securities exchange or clearing agency - registered with the SEC under the 1934 Act;
9. Other entities registered with the SEC under the 1934 Act;
10. Investment companies registered with the SEC under the Investment Company Act of 1940 (1940 Act); and investment advisors (RIA) registered with the SEC under the Investment Advisers Act of 1940 (Advisers Act);
11. Venture capital fund adviser as defined in the Advisers Act;
12. Insurance companies as defined in the 1940 Act – State insurance commissioner supervised;
13. State-licensed insurance producer;
14. Commodity Exchange Act registered entity;
15. Public accounting firm registered in accordance with the Sarbanes-Oxley Act;
16. Regulated public utility;
17. Financial market utility – must be designated by the Financial Stability Oversight Council as systemically important;
18. Managed ‘‘pooled investment vehicles’’ (PIVs) – must be managed by an RIA or another entity described in iii, iv, vii, x or xi – PIV includes: (i) any investment company, as defined in 1940 Act Section 3(a) or (ii) a company that: (A) would be an investment company but for the exclusion provided from that definition by Section 3(c)(1) or 3(c)(7) of the 1940 Act; and (B) is or will be identified by the applicable RIA in its Form ADV;
19. Tax-exempt entity – as described in Section 501(c) or other provisions of the Internal Revenue Code of 1986;
20. Entity assisting a tax-exempt entity – as described in the CTA rules;

Additional exemptions that may apply depending on the circumstances:

21. Large operating company exemption – available for companies that: (1) have more than 20 full-time employees in the US, (2) have an operating presence at a physical office within the US, and (3) have filed a federal income tax or information return in the US for the previous year demonstrating more than $5,000,000 in gross receipts or sales (excluding gross receipts or sales from sources outside the US).
22. Subsidiary exemption - applies to an entity whose ownership interests are entirely controlled or wholly owned, directly or indirectly, by one or more listed exempt entities, which list includes all the ones described above except vi (a money service business), xviii (a managed PIV) and xx (an entity assisting a tax exempt entity). This exemption is available for a subsidiary that is owned by two or more unaffiliated entities all of whom are listed exempt entities.
23. Inactive entities – applies to any entity that: (1) existed on or before January 1, 2020, (2) is not engaged in active business, (3) is not owned by a foreign person, (4) has not sent or received more than US$1,000 in the prior 12 months, and (5) does not hold any type of assets.

Exemption use cases for securitization issuing entities

As noted above, common law trusts are not included in the definition of Reporting Company, and therefore the CTA reporting requirements do not apply to issuing entities that are common law trusts.

For issuing entities, such as Delaware statutory trusts, that are included in the Reporting Company definition, in many cases such entities will be wholly owned directly or indirectly by exempt entities such as SEC reporting companies, banks, registered broker dealers, insurance companies and large operating companies, and therefore will be exempt from the CTA reporting requirements under the subsidiary exemption.

As for issuing entities whose ownership ultimately flows up to a foreign bank, the subsidiary exemption does not automatically apply. In such cases, for the exemption to apply, the foreign bank would need to be an SEC reporting company, or a depository institution holding company or other listed exempt entity, or there would need to be an intermediary affiliate that is a listed exempt entity such as an SEC reporting company, a branch or agency of the foreign bank in the US, a US registered broker dealer or a large operating company.

The PIV exemption is of limited use for securitization issuing entities because it appears that issuing entities themselves are not exempt under the PIV exemption if they rely on an exclusion from the definition of investment company contained in Section 3(c)(5) of the 1940 Act or Rule 3a-7 thereunder, as many or most securitization issuing entities do. Since PIVs are not listed entities under the “subsidiary” exemption, an issuing entity that is sponsored and owned by a fund in many cases would not be exempt from the CTA reporting requirements, even if the fund itself is exempt under the PIV exemption. On the other hand, for securitization issuing entities that are actively managed by an RIA, and that rely on the exclusion in Section 3(c)(7) of the 1940 Act, such entities may qualify for the PIV exemption.

For legacy (pre-2020) securitization issuing entities, unfortunately the exemption for inactive entities may not be available in most cases because of its requirements (the minimal cash flow and no assets conditions of this exemption).

Beneficial Owners

If an entity is subject to the CTA reporting requirements, then information must be provided as to its Beneficial Owners.

“Beneficial Owner” with respect to a Reporting Company means any individual who, directly or indirectly, either a) exercises substantial control over the Reporting Company, or b) owns or controls at least 25% of the ownership interests of the Reporting Company.

Substantial control is broadly defined, and can arise in numerous ways including being a senior officer, having the ability to appoint or remove a senior officer or a majority of the board, or by directing or having substantial influence over important decisions of the Reporting Company (including, for example, the sale or transfer of principal assets, issuances of equity, incurrence of significant debt, and entry into significant contracts). Indirect substantial control can arise in various ways including through ownership or control of majority voting rights, rights associated with a financing, control through intermediaries, and contractual and other arrangements.

Under guidance issued by FinCEN, ownership interests in a Reporting Company held by a trust could be considered to be owned or controlled by multiple parties, including a trustee, beneficiary, grantor or settlor, depending on the degree of control over the trust held by the party.

Reporting as to Beneficial Owners is required only as to individuals, and for securitization issuers there may be no individuals who fit within the definition of “Beneficial Owner.” Typically a securitization issuer is a passive entity for which there is little possibility of any managerial discretion. Also, securitization entities typically do not have individuals who are senior officers, and instead may have corporate entities that are members or trustees. In addition, the business and operations of a securitization entity may be run by servicers, administrators and other corporate entities. Persons with substantial influence over important decisions of securitization entities typically are corporate entities, not individuals. However, depending on the governance structure and the types of important decisions that may be taken by an issuing entity, it is possible that an individual could be viewed as exercising substantial control over an issuing entity.

In addition to the “substantial control” analysis, it may be necessary to look at the equity ownership of corporate entities that are owners of securitization entities to determine whether there is an individual who indirectly might own or control at least 25% of the ownership interests of the Reporting Company, and therefore be a reportable Beneficial Owner.

Importantly, there is a special rule for Reporting Companies owned by exempt entities. If a non-exempt Reporting Company is owned directly or indirectly by one or more entities that are exempt under any of the exemptions available in paragraph (c)(2) of the CTA rules, then for each exempt owning entity it is not necessary to list in the CTA report any individual who may be a Beneficial Owner of the Reporting Company solely by virtue of the individual’s ownership interest in the exempt owning entity. Instead, the CTA report need only list the names of the exempt owning entities, in lieu of the information otherwise required as to individuals who may be Beneficial Owners. In such a case it would still be necessary to determine if there is an individual who directly or indirectly exercises substantial control over the Reporting Company, other than via ownership.

For securitization issuing entities that may not rely on the subsidiary exemption and that are required to file CTA reports, the above special rule may significantly reduce the compliance burden.

Ownership Interests

The CTA rules define “Ownership Interest” broadly (including reference to “certificate of interest in a business trust”), but attempt to delineate between equity and debt. Being a creditor or holding debt of an entity does not make a person a Beneficial Owner, unless there are additional rights or interests that give the person the ability to exercise substantial control over the entity. Clearly, a DST trust certificate would be treated as an Ownership Interest.

It is unclear whether interests in a securitization other than a DST trust certificate could be an Ownership Interest. For example, in a REMIC deal with a DST issuer, it is possible that all regular interests (including first loss) would be considered debt and not equity for CTA purposes, consistent with their tax status as debt, but this is not clear at this time. In a non-REMIC deal with a DST issuer, for classes of notes that are below investment grade or otherwise are not treated as debt for tax purposes, it is not entirely clear that these classes will not be treated as an Ownership Interest for CTA purposes.

Moving forward towards CTA compliance as to securitization entities that are Reporting Companies, it will be necessary for issuers and their advisors to develop positions as to what types of interests in a securitization entity should be treated as Ownership Interests for CTA purposes, so that the necessary diligence can be performed. Consideration should be given to seeking regulatory guidance on these issues. For securitization entities that intend to rely on the subsidiary exemption, it will be necessary to determine which interests in the entity should be treated as Ownership Interests for CTA purposes.

Duty to File

The duty to file reports under the CTA rules falls on the Reporting Company.

It is unlawful for any person to willfully provide false information directly or indirectly in a report filed under the CTA rules. Thus a Company Applicant or Beneficial Owner who provides false information for inclusion in the report can be liable.

It is unlawful for any person to willfully fail to report complete or updated information as required under the CTA rules. Any “person” for this purpose includes the Reporting Company, or any person who “causes the failure”, or is a senior officer of the Reporting Company at the time of the failure.

For newly formed DSTs, we expect that the trustee will require the depositor or another designated entity to covenant to assure compliance with the CTA rules.

Key Takeaways and Recommendations

Securitization industry participants will need to adjust systems and processes to take into account the CTA rules, as to issuing entities and other entities such as depositors and aggregating trusts. Compliance will be required in the near term as to entities newly formed on or after January 1, 2024, and for entities formed before that date compliance will be required by January 1, 2025.

Issuing entities that are common law trusts are not subject to the CTA rules.

For securitization issuing entities that are DSTs or other types of Reporting Companies, in many cases the subsidiary exemption will apply. However, for such entities that are owned by funds or other entities that are not listed exempt entities under the subsidiary exemption, reporting may be required.

For issuing entities such as DSTs, consideration should be given to tweaking the corporate structure if needed to ensure the availability of the subsidiary exemption.

For issuing entities that are not exempted as subsidiaries, we recommend tweaking the governance structure as needed to avoid there being individuals (as opposed to corporate entities) who exercise substantial control over the entity as contemplated in the rules, wherever possible. If such entities are owned by entities that are exempt under any of the exemptions available in CTA rule paragraph (c)(2), then for each exempt owning entity the CTA report need only list the names of the exempt owning entities rather than individuals owning through the exempt owning entities, provided that such individuals do not otherwise have substantial control.

We recommend that securitization industry participants develop systems and procedures (including record keeping) to determine the status of newly formed entities under the CTA rules, including whether it is a Reporting Company, and whether the subsidiary exemption or another exemption applies.

We also recommend that entities develop a system for updating and correcting beneficial ownership information regularly, such as by ensuring that relevant agreements include a requirement that anyone who could be a beneficial owner must provide updated and accurate information on a timely basis in the future.

For more general information about the CTA rules, including as to how to file, penalties, access to filed reports and similar state laws, please see Dentons’ accompanying client alert, “Beneficial Ownership Reporting and the Corporate Transparency Act.”

Please contact your relationship lawyer at Dentons or any of the co-authors of this client alert to discuss how these rules apply to your company and its affiliates and to assist you in connection with your obligations under these complex new requirements.

[1] 31 CFR 1010.380 can be found here (last accessed Nov. 20, 2023).