The Corporate Transparency Act: Compliance Update for Private Fund Managers

Over the past few weeks, we have received a number of inquiries from clients that are looking for clarity on the Corporate Transparency Act (CTA) and how this transformative regulation set applies to private fund managers, particularly in light of the current political climate and recent legal developments. 

As background, Judge Amos L. Mazzant III of the U.S. District Court for the Eastern District of Texas issued a preliminary injunction on December 3, 2024, that blocked enforcement of the CTA and its beneficial ownership information (BOI) reporting requirements nationwide.

The plaintiffs, including the National Federation of Independent Business (NFIB), Texas Top Cop Shop and other small businesses, argued that the CTA exceeded Congress’s authority under the Commerce Clause, infringed on First Amendment rights and violated Fourth Amendment protections by compelling disclosure of private information. 

Judge Mazzant ruled that the CTA likely exceeded Congress’s constitutional powers and that its reporting requirements were not inherently tied to interstate or foreign commerce. The court enjoined the January 1, 2025, compliance deadline under the Administrative Procedure Act (§ 705) and stayed enforcement of the BOI reporting requirements pending further court proceedings.

Given this recent legal development, and the interest from our client base, we wanted to share guidance that explains the CTA in more detail and the potential steps that private fund managers should consider to ensure they are complying with this new regulation in time for any potential upcoming deadline, and the implications of the recent preliminary injunction blocking its enforcement. 

What is the CTA? 

Enacted by Congress on January 1, 2024, the CTA creates new reporting obligations for a wide range of U.S. based companies (approximately 32.6 million!), and certain non-U.S. based companies doing business in the U.S., requiring reporting companies to disclose information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Treasury, about a company’s owners and persons who exercise control of the company. This BOI requirement aims to enhance transparency and combat financial crimes such as money laundering, terrorist financing and tax evasion. 

While simple in concept, the CTA is very technical in its application, with significant penalties for non-compliance, including fines up to $10,000 and imprisonment. 

The recent ruling from the U.S. District Court for the Eastern District of Texas has effectively halted the implementation of these requirements pending further court proceedings. FinCEN has recently confirmed that it will honor the injunction.

Therefore, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports if they choose to do so.

Despite this injunction, businesses, including private fund managers and certain reporting companies within the private fund manager’s organizational structure, should stay informed about potential future developments and be prepared to comply if enforcement resumes.

At Silver, we are here to guide you through these changes and ensure your compliance strategies are effective and adaptable. 

Overview of the CTA Requirements

Defining Reporting Companies Under the CTA

Under the CTA, a reporting company is defined as any corporation, limited liability company (LLC) or similar entity created or registered to do business in the United States. These entities are required to file detailed BOI reports unless they qualify for one of the 23 exemptions outlined in the regulation.

Exemptions cover specific entities, such as brokers and dealers in securities, investment companies, investment advisers, venture capital fund advisers and pooled investment vehicles. Notably, exemptions extend to entities registered under the Commodity Exchange Act and large operating companies meeting criteria related to size, ownership and operational scope.  In many cases, entities owned or controlled by an exempt entity, such as an investment adviser, can avail itself of one of the 23 exemptions.

However, exemptions are not universally applicable. For instance, state-registered investment advisers and non-U.S. funds operating in the U.S. may still fall within the reporting requirements. Additionally, exempt reporting advisers and the private funds they advise may still need to comply. 

Silver recommends that businesses review their specific circumstances carefully to determine if they and related entities qualify for an exemption in anticipation for any potential CTA filing obligation.

Beneficial Owner Qualifications

The CTA defines a beneficial owner as an individual who either exercises substantial control over the company or owns 25% or more of its interests.

Substantial control includes roles such as senior officers, decision-makers who influence the company’s operations and individuals with authority over appointments and removals of leadership. This broad definition ensures that the CTA captures all individuals with significant influence over the company, whether directly or indirectly.

Determining who qualifies as a beneficial owner may require detailed analysis of ownership structures and governance roles. 

Unlocking the Details: What You Need to Report

Reporting companies are required to provide detailed information about both the company itself and its beneficial owners.

For the company, this includes its full legal name, principal business address, jurisdiction of formation and a Taxpayer Identification Number (TIN) or equivalent for foreign entities. Beneficial owners must provide their full legal name, date of birth, residential or business address and information from a government-issued photo ID, including an image of the ID.

For entities formed after January 1, 2024, additional information is required for company applicants, the individuals responsible for filing formation documents. This ensures that FinCEN has a comprehensive view of the individuals involved in the company’s establishment and operation.

Filing Process and Deadlines

FinCEN continues to develop the infrastructure to administer these requirements in accordance with the strict security and confidentiality requirements of the CTA, including the information technology system that will be used to store beneficial ownership information: the Beneficial Ownership Secure System (BOSS). 

Deadlines (which are currently stayed due to the injunction) for filing depend on when the company was formed:

• Companies formed before January 1, 2024, must file by January 1, 2025.
• Companies formed between January 1, 2024, and January 1, 2025, must file within 90 days of their formation.
• Companies formed on or after January 1, 2025, must file within 30 days of their creation.
• Updates to BOI reports must be filed within 30 days of any changes, such as alterations to ownership or control. These strict deadlines underscore the importance of having accurate and up-to-date information readily available.

Penalties for Non-Compliance

Non-compliance with the CTA can result in severe consequences. Civil penalties include fines of up to $500 per day, while criminal penalties can reach $10,000 and two years of imprisonment. FinCEN does offer a 90-day safe harbor for correcting inaccuracies in reports, provided the errors were not knowingly submitted.

These penalties highlight the importance of maintaining meticulous records and submitting any potential future reports on time. Silver encourages businesses to take a proactive approach to compliance, ensuring that systems are in place to monitor and update information as needed.

Key Post-Injunction Takeaways and Considerations for Advisers 

With the injunction in place, the CTA requirements are temporarily unenforceable and the deadlines are currently stayed as a result. The injunction halts the immediate requirement to gather and submit the filing.  However, businesses should still review their circumstances, and may elect to continue to collect the relevant information related to reporting companies, to be prepared should the CTA’s requirements be reinstated.  

While the current compliance deadline for existing companies is January 1, 2025, the preliminary injunction suspends this deadline indefinitely. Pending further legal developments, businesses may not need to act immediately. On December 5, 2024, the Department of Justice, on behalf of the Department of the Treasury, entered a notice of appeal in the case.  At Silver, we are closely monitoring these updates to provide our clients with timely guidance and support.

Silver advises private fund managers to continue to assess their eligibility for exemptions and, where applicable, establish clear processes for identifying beneficial owners and compiling the required information. For companies facing uncertainty, engaging with legal and compliance experts is essential to navigate these complexities.

Elevating Compliance in a New Age of Transparency

The CTA introduces a new era of corporate transparency, with far-reaching implications for businesses across the United States. Although its implementation is currently blocked, companies should stay informed and prepared to comply should enforcement resume. Understanding the reporting requirements, identifying beneficial owners and meeting compliance deadlines are critical steps to avoid penalties and maintain regulatory integrity.

Silver recommends taking a proactive approach by monitoring ongoing litigation and legislative updates, preparing compliance systems, continuing to collect the requisite information of those entities previously identified as covered under the CTA and consulting with professionals to understand potential future obligations.  

Please feel free to contact us at [email protected] with any questions or concerns about the information outlined above. Silver is ready to assist your firm in confidently navigating these requirements and ensuring compliance with these regulatory standards.