Category: Financial Services Law

Recent FinCEN FAQs Provide Additional Guidance on Compliance

The US Financial Crimes Enforcement Network (FinCEN) released several new FAQs this month to provide further clarity on the Corporate Transparency Act’s (CTA) provisions.
Notably, FinCEN provided guidance on who is considered “primary responsible” for directing a filing, as well as what is necessary to qualify under the subsidiary exemption, among other matters.

The CTA’s requirements went into effect on January 1, 2024. As we’ve previously detailed, reporting companies formed prior to that date will be required to file their initial reports with FinCEN no later than January 1, 2025. A reporting company created during 2024 is required to file its initial report within 90 days of its creation or registration, and one created on or after January 1, 2025, will have 30 days to file its initial report. A previously registered company will need to update its registration within 30 days of a change in its beneficial ownership or other information reported to FinCEN. For detailed overviews of the CTA, please visit our earlier posts located here, here, and here.

Company Applicants: Who is “Primarily Responsible” for Directing a Filing?
The CTA requires that reporting companies formed on or after January 1, 2024, disclose their “company applicant.” An individual is a “company applicant” if (1) they directly file the company’s formation or registration documents with a secretary of state or similar office or (2) if more than one person is involved in the filing, they are primary responsible for directing or controlling the filing. A maximum of two individuals can be reported as company applicants.

The FAQs clarify that the person who signs the formation document, such as an incorporator, is not necessarily a company applicant. Instead, the rule focuses on the person responsible for making decisions about the filing, including how the filing is managed, what contents to include, and when and where filing will occur.

FinCEN provides three scenarios to illustrate the rule. In two of the scenarios, an attorney or a paralegal instructed by that attorney completes a company creation document using information provided by a client and sends the document to a corporate service provider to be filed with a secretary of state. In this scenario, the attorney will one of the company applicants, and the employee at the corporate service provider who directly filed the document with the secretary of state will be the other company applicant. In the third scenario, the attorney’s client initiated the company creation directly with the corporate service provider — in this case, the client will be a company applicant (as will the employee at the corporate service provider who directly filed the document).

Subsidiary Exemption: Is Partial Control of a Subsidiary’s Ownership Interests By an Exempt Entity Sufficient to Qualify for the Subsidiary Exemption?
The short answer is — no.

The CTA lists 23 categories of entities that are exempt from the beneficial ownership information (BOI) reporting requirements. A subsidiary of certain categories of exempt entities will also be exempt if the subsidiary is controlled or wholly owned, whether directly or indirectly, by one or more of such exempt entities.

The FAQs clarify what happens when the exempt entity partially controls the subsidiary. Partial control is insufficient for an entity to fall within the subsidiary exemption — a subsidiary’s ownership interests must be fully, 100% owned or controlled by the exempt entity to qualify for this exemption. Thus, control of ownership interests means that one or more exempt entities entirely control all of the ownership interests in the reporting company, in the same way that an exempt entity must wholly own all of a subsidiary’s ownership interests for the exemption to apply.

Selected Additional Matters Covered by the New FAQs
Reporting Company Ownership Subject to Dispute: If ownership of a reporting company is the subject of active litigation, all individuals who own or control (or claim to own or control) at least 25% of the company’s interests are considered beneficial owners, and BOI must be submitted for each individual (in addition to BOI for all individuals who exercise substantial control over the company). If, after the legal dispute is solved, the reporting company has different beneficial owners from those initially reported, an updated BOI report must be filed within 30 calendar days after the litigation is resolved.
Third-Party Couriers or Delivery Service Employees: Third-party courier or delivery service employees who solely deliver documents to a secretary of state are not company applicants, as long as the third-party courier, the delivery service employee, and the delivery service that employs them play no other roles in the creation or registration of the reporting company.
Automated Incorporation Service: An automated incorporation service’s employees are not company applicants if the service solely provides software, online tools, or generally applicable written guidance for the creation of a reporting company and its employees are not directly involved in filing creation documents.
No Photo on Identification Document for Religious Reasons: If a beneficial owner’s or company applicant’s identification document does not include a photograph for religious reasons, the reporting company may submit an image of that identification document when submitting its report, provided that the document is otherwise an acceptable type of identification. If the individual in question obtains a FinCEN identifier, then the burden of providing the identification document to FinCEN would fall on the individual and not on the company (which would only need to report the FinCEN identifier).
No Permanent Residential Address: When a reporting company must report an individual’s residential address, but no such permanent address is available, the reporting company should report the residential address that is current at the time of filing the report. If the address later changes, the reporting company must submit an updated report within 30 days from such change. The use of a FinCEN identifier by the individual will eliminate the company’s need to submit an updated report, although the individual would be required to update his or her address with FinCEN directly.

© 2024 ArentFox Schiff LLP

by: Evgeny Magidenko of ArentFox Schiff LLP

For more news on Corporate Transparency Act Compliance, visit the NLR Corporate & Business Organizations section.

2024: The Year of the Spot Bitcoin ETP

The US Securities and Exchange Commission (SEC) is making 2024 a significant year for exchange-traded products (ETPs) by declaring effective the registration statements of ten Bitcoin ETPs, and approving their listing on one of the major stock exchanges. This is a monumental step to bringing access to Bitcoin to a broader retail market in the US For over a decade, the staff of the SEC (Staff) had denied or otherwise blocked applications to list spot Bitcoin ETPs, claiming, in part, that there were insufficient protections against market manipulation in the underlying Bitcoin market. The approvals issued this week unlock – although do not widely open – a previously dead bolted door to registered products offering direct exposure to Bitcoin, providing an opportunity for retail investors to have easier access to exposure to Bitcoin in a regulated product.

The approvals follow the US federal appeals court ruling in August 2023 that the SEC was “arbitrary and capricious” in its decision to reject an application by the NYSE Arca to list shares of the Grayscale Bitcoin Trust. In granting the approvals, Chair Gensler acknowledged that the law had changed following the Grayscale decision stating “we are now faced with a new set of filings similar to those we have disapproved in the past. Circumstances, however, have changed.” Rather than appeal the court ruling, the staff of the SEC chose to engage with the sponsors of proposed spot Bitcoin ETPs to discuss parameters necessary for approval, including the inclusion of additional disclosure and other requirements to provide for investor protection. In approving the listing of the ETPs, the SEC relied, in part, on its confirmation that the “CME bitcoin futures market has been consistently highly correlated with this subset [(Coinbase and Kraken)] of the spot [B]itcoin market throughout the past 2.5 years,”1 a fact which was heavily leaned upon in the Grayscale decision. Among the requirements insisted upon by the Staff were requirements that the ETPs effect sales and redemptions of ETP creation units solely in cash (rather than in-kind) and hardcoding of key service providers (including Bitcoin custodians) into the listing rule. The SEC’s approved all listing rule applications simultaneously, in an effort to prevent a single ETP from having a first mover advantage.

While this initial round of approvals is promising for the ETP and cryptocurrency industries, it does not signal a general acceptance of all spot cryptocurrency ETPs. Rather, the SEC granted approval only to ETPs investing in Bitcoin, and it is unclear whether it will be receptive to products investing in other crypto assets. Chair Gensler’s statement in announcing the approvals indicated that he and the staff remain skeptical of digital assets generally, including Bitcoin, stating that the approval is not an endorsement of Bitcoin and that investors should remain cautious and aware of the risks. Issuers wishing to offer similar products with other digital asset investments may now have examples to follow, but will still need to undergo a comprehensive review process, and ultimate approval is not guaranteed. Moreover, future exchange-traded products seeking to directly invest other cryptocurrencies or digital assets may have to satisfy a correlation test similar to that which was relied on by the SEC in approving the current products and may not be able to do so.

1 SEC Release, Order Granting Accelerated Approval of Proposed Rule Changes, as Modified by Amendments Thereto, to List and Trade Bitcoin-Based Commodity-Based Trust Shares and Trust Units, No. 34-99306 (10 January 2024).

Copyright 2024 K & L Gates
For more news on Bitcoin ETPs in 2024, visit the NLR Securities & SEC section.

Regulatory Update and Recent SEC Actions 2024

REGULATORY UPDATES

RECENT SEC LEADERSHIP CHANGES

Stephanie Allen Named as SEC’s Director of Media Relations and Speechwriting

The Securities and Exchange Commission (the “SEC”) announced the appointment of Stephanie Allen as director of media relations and speechwriting, effective Oct. 1, 2023. Allen served as director of speechwriting and senior adviser to the chair since March 2023, and replaces Aisha Johnson, who recently departed the agency.

Allen will serve as the primary spokesperson for the SEC and for Chair Gensler and will lead media relations for the Office of Public Affairs. Allen was previously the executive director of the Ludwig Institute for Shared Economic Prosperity. Before that, she was the director of strategic communications and marketing at Promontory Financial Group, an IBM company. After working for two senators earlier in her career, she served as Chair Gensler’s speechwriter at the Commodity Futures Trading Commission.

SEC Names Kate E. Zoladz as Regional Director of Los Angeles Office

The SEC named, on November 29, 2023, Kate Zoladz as regional director of the SEC’s Los Angeles Office. Zoladz joined the SEC in 2010 as a staff attorney in the Los Angeles office and later joined the Division of Enforcement’s Asset Management Unit in 2017. Zoladz recently served as acting co-director since June 2023 and the associate regional director for enforcement since October 2019.

Daniel Gregus, Director of the Chicago Regional Office, to Depart the SEC

The SEC announced on December 7, 2023, that Daniel R. Gregus, director of the Chicago Regional Office, would leave the agency at the end of December after more than 30 years of service. Vanessa Horton and Kathryn Pyszka are now the acting co-directors. Horton has been an associate regional director of the Investment Adviser/Investment Company (IA/IC) examination program in the Chicago Regional Office since 2020. She joined the SEC’s Chicago office in 2004 as an accountant and was later an exam manager and an assistant regional director in the Chicago IA/IC examination program. Pyszka has served as an associate regional director for enforcement in the Chicago office since 2017. She began her SEC service in 1997 as a staff attorney and later served in the positions of branch chief, senior trial counsel, and as an assistant director in the Chicago office and the Enforcement Division’s Market Abuse Unit.

SEC Risk Alerts

SEC Announces 2024 Exam Priorities

The SEC’s Division of Examinations (the “Division”) issued its report (the “Report”) on October 16, 2023, regarding exam priorities for the upcoming year concerning investment advisers, broker-dealers, self-regulatory organization, and other market participants.

According to the Report, examination priorities continue to focus on whether investment advisers are adhering to their duty of care and duty of loyalty obligations. Areas of continued focus include:

  • Investment advice provided to clients (with an emphasis on advice to older clients and those saving for retirement) with regard to products, investment strategies, and account types:
    • Complex products, such as derivatives and leveraged exchange-traded funds (“ETFs”);
    • High-cost and illiquid products, such as variable annuities and non-traded real estate investment trusts (“REITs”); and
    • Unconventional strategies, including those that purport to address rising interest rates.
  • Processes for determining that investment advice is provided in clients’ best interest, including:
    • Making initial and ongoing suitability determinations;
    • Seeking best execution;
    • Evaluating costs and risks; and
    • Identifying and addressing conflicts of interest.

Per the Report, assessments will look at the factors that advisers consider in light of the clients’ investment profiles, including investment goals and account characteristics. Examinations will review how advisers address conflicts of interest, including: (i) mitigating or eliminating the conflicts of interest, when appropriate, and (ii) allocating investments to accounts where investors have more than one account (e.g., allocating between accounts that are adviser fee-based, brokerage commission-based, and wrap fee, as well as between taxable and non-taxable accounts).

Additionally, examinations will focus on the economic incentives and conflicts of interest associated with advisers that are dually registered as broker-dealers, use affiliated firms to perform client services, and have financial professionals servicing both brokerage customers and advisory clients to identify, among other things: (i) investment advice to purchase or hold onto certain types of investments (e.g., mutual fund share classes) or invest through certain types of accounts when lower cost options are available; and (ii) investment advice regarding proprietary products and affiliated service providers that result in additional or higher fees to investors. Exams will include review of disclosures made to investors and whether they include all material facts relating to conflicts of interest associated with the investment advice sufficient to allow a client to provide informed consent to the conflict.

Specific areas of focus will include:

  • Marketing Rule and whether advisers, including advisers to private funds, have:
    • Adopted and implemented reasonably designed written policies and procedures to prevent violations of the Advisers Act and the rules thereunder including reforms to the Marketing Rule;
    • Appropriately disclosed their marketing-related information on Form ADV;
    • Maintained substantiation of their processes and other required books and records; and
    • Disseminated advertisements that include any untrue statements of a material fact, are materially misleading, or are otherwise deceptive and, as applicable, comply with the requirements for performance (including hypothetical and predecessor performance), third-party ratings, and testimonials and endorsements.
  • Compensation arrangements:
    • Fiduciary obligations of advisers to their clients, including registered investment companies, particularly with respect to the advisers’ receipt of compensation for services or other material payments made by clients and others;
    • Alternative ways that advisers try to maximize revenue, such as revenue earned on clients’ bank deposit sweep programs; and
    • Fee breakpoint calculation processes, particularly when fee billing systems are not automated.
  • Valuation assessments regarding advisers’ recommendations to clients to invest in illiquid or difficult to value assets, such as commercial real-estate or private placements.
  • Disclosure review for the accuracy and completeness of regulatory filings, including Form CRS, with a particular focus on inadequate or misleading disclosures and registration eligibility.
  • Policies and procedures with respect to:
    • Selecting and using third-party and affiliated service providers;
    • Overseeing branch offices when advisers operate from numerous or geographically dispersed offices; and
    • Obtaining informed consent from clients when advisers implement material changes to their advisory agreements.
Investment Advisers to Private Funds

According to the Report, examinations will prioritize specific topics, such as:

  • Portfolio management risks in connection with exposure to recent market volatility and higher interest rates and effects on funds experiencing poor performance, significant withdrawals, and valuation issues for private funds with more leverage and illiquid assets.
  • Adherence to contractual requirements regarding limited partnership advisory committees or similar structures (e.g., advisory boards), including adhering to any contractual notification and consent processes.
  • Accurate calculation and allocation of private fund fees and expenses (both fund-level and investment-level), including valuation of illiquid assets, calculation of post commitment period management fees, adequacy of disclosures, and potential offsetting of such fees and expenses.
  • Due diligence practices for consistency with policies, procedures, and disclosures, particularly with respect to private equity and venture capital fund assessments of prospective portfolio companies.
  • Conflicts, controls, and disclosures regarding private funds managed side-by-side with registered investment companies and use of affiliated service providers.
  • Compliance with Advisers Act requirements regarding custody, including accurate Form ADV reporting, timely completion of private fund audits by a qualified auditor, and the distribution of private fund audited financial statements.
  • Policies and procedures for reporting on Form PF, including upon the occurrence of certain reporting events.
Registered Investment Companies (including Mutual Funds and ETFs)

Per the Report, exam focus may include the following assessments:

  • Compliance programs and fund governance practices—review boards’ processes for assessing and approving advisory and other fund fees, particularly for funds with weaker performance relative to their peers;
  • Disclosures to investors and accuracy of reporting to the SEC;
  • Valuation practices, particularly for those addressing fair valuation practices (e.g., implementing board oversight duties, setting recordkeeping and reporting requirements, and overseeing valuation designees), and, as applicable, the effectiveness of registered investment companies’ derivatives risk management and liquidity risk management programs;
  • Fees and expenses and whether registered investment companies have adopted effective written compliance policies and procedures concerning the oversight of advisory fees and implemented any associated fee waivers and reimbursements. Areas of particular focus include:
    • Charging different advisory fees to different share classes of the same fund;
    • Identical strategies offered by the same sponsor through different distribution channels but that charge differing fee structures;
    • High advisory fees relative to peers; and
    • High registered investment company fees and expenses, particularly those of registered investment companies with weaker performance relative to their peers.
    • Examinations will also review the boards’ approval of the advisory contract and registered investment company fees.
  • Derivatives risk management and whether registered investment companies and business development companies have adopted and implemented written policies and procedures reasonably designed to prevent violations of the SEC’s fund derivatives rule (Investment Company Act of 1940 (the “Investment Company Act”) Rule 18f-4). Review of compliance with the derivatives rule may include:
    • Review of the adoption and implementation of a derivatives risk management program;
    • Board oversight, and whether disclosures concerning the registered investment companies’ or business development companies’ use of derivatives are incomplete, inaccurate, or potentially misleading; and
    • Procedures for, and oversight of, derivative valuations.

Division staff will also focus on the following areas:

  • Cybersecurity
  • Cryptocurrency assets (focus on a range of activities surrounding crypto assets and related products, including offering, selling, recommending, trading, and providing advice on such assets); and
  • Anti-Money Laundering (“AML”) programs.

Cybersecurity: With respect to cybersecurity, the Division noted that “operational disruption risks remain elevated due to the proliferation of cybersecurity attacks, firms’ dispersed operations, intense weather-related events, and geopolitical concerns.” According to the release, the examination staff will focus on firms’ policies and procedures, internal controls, governance practices, oversight of third-party vendors, and responses to “cyber-related incidents” such as ransomware attacks. Reviews will consider how firms train staff on issues including identity theft prevention and customer records and information protection. Staff will also place a particular focus on “the concentration risk associated with the use of third-party providers, including how registrants are managing this risk and the potential impact to the U.S. securities markets.”

Crypto Assets and Emerging Financial Technology: The release highlights concerns based on the continued growth and popularity of crypto assets (and their associated products and services) and the increase in automated investment tools, artificial intelligence, and trading algorithms or platforms. The Division’s goal is twofold: (1) to ensure that registrants meet their fiduciary duties when recommending or advising about crypto assets; and (2) that compliances, risk disclosures, and operational resiliency practices are routinely reviewed and updated to account for the unique challenges crypto assets provide.

For crypto assets that are funds or securities, this includes ensuring that crypto assets are complying with the custody requirements under the Investment Advisers Act of 1940 (the “Advisers Act”) and whether policies and procedures are reasonably designed, and accurate disclosures are made, relating to technological risks associated with blockchain and distributed ledger technology.

Anti-Money Laundering: The Division will continue to focus on whether broker-dealers and certain registered investment companies have proper AML programs as required by the Bank Secrecy Act. Specifically, the Division will examine whether broker-dealers and investment companies are appropriately tailoring AML programs, conducting independent testing, establishing an adequate customer identification program, and meeting their filing obligations.

SEC Rulemaking

SEC Adopts Amendments to Rules Governing Beneficial Ownership Reporting

The SEC adopted rule amendments governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) on October 10, 2023, requiring market participants to provide more timely information on their positions.

Exchange Act Sections 13(d) and 13(g), along with Regulation 13D-G, require an investor who beneficially owns more than five percent of a covered class of equity securities to publicly file either a Schedule 13D or a Schedule 13G, as applicable. An investor with control intent files Schedule 13D, while “Exempt Investors” and investors without a control intent, such as “Qualified Institutional Investors” and “Passive Investors,” file Schedule 13G.

The adopted amendments (among other things): i) shorten the deadline for initial Schedule 13D filings from 10 days to five business days and require that Schedule 13D amendments be filed within two business days; ii) generally accelerate the filing deadlines for Schedule 13G beneficial ownership reports (the filing deadlines differ based on the type of filer); iii) clarify the Schedule 13D disclosure requirements with respect to derivative securities; and iv) require that Schedule 13D and 13G filings be made using a structured, machine-readable data language.

In addition, the adopting release provides guidance regarding the current legal standard governing when two or more persons may be considered a group for the purposes of determining whether the beneficial ownership threshold has been met, as well as how, under the current beneficial ownership reporting rules, an investor’s use of certain cash-settled derivative securities may result in the person being treated as a beneficial owner of the class of the reference equity securities.

The amendments were published in the Federal Register on November 7, 2023, effective on February 5, 2024. Compliance with the revised Schedule 13G filing deadlines will be required beginning on September 30, 2024. Compliance with the structured data requirement for Schedules 13D and 13G will be required on December 18, 2024. Compliance with the other rule amendments will be required upon their effectiveness.

“Today’s adoption updates rules that first went into effect more than 50 years ago. Frankly, these deadlines from half a century ago feel antiquated,” said SEC Chair Gary Gensler. “In our fast-paced markets, it shouldn’t take 10 days for the public to learn about an attempt to change or influence control of a public company. I am pleased to support this adoption because it updates Schedules 13D and 13G reporting requirements for modern markets, ensures investors receive material information in a timely way, and reduces information asymmetries.”

SEC Adopts Rule to Increase Transparency in the Securities Lending Market

The SEC adopted on October 13, 2023, new Rule 10c-1a, which will require certain persons to report information about securities loans to a registered national securities association (“RNSA”) and require RNSAs to make publicly available certain information that they receive regarding those lending transactions. According to the SEC, the rule is intended to increase transparency and efficiency of the securities lending market.

Rule 10c-1a will require certain confidential information to be reported to an RNSA to enhance the RNSA’s oversight and enforcement functions. The new rule requires that an RNSA make certain information it receives, along with daily information pertaining to the aggregate transaction activity and distribution of loan rates for each reportable security, available to the public. The Financial Industry Regulatory Authority (“FINRA”) is currently the only RNSA.

The adopting release was published in the Federal Register on November 3, 2023. The compliance dates for the new rule are as follows: (1) an RNSA is required to propose rules within four months of the effective date; (2) the proposed RNSA rules are required to be effective no later than 12 months after the effective date; (3) covered persons are required to report information required by the rule to an RNSA starting on the first business day 24 months after the effective date; and (4) RNSAs are required to publicly report information within 90 calendar days of the reporting date.

SEC Adopts Rule to Increase Transparency Into Short Selling and Amendment to CAT NMS Plan for Purposes of Short Sale Data Collection

The SEC adopted, on October 13, 2023, new Rule 13f-2 to provide greater transparency to investors and other market participants by increasing the public availability of short sale related data. Specifically, Rule 13f-2 will require institutional investment managers that meet or exceed certain thresholds to report on Form SHO specified short position data and short activity data for equity securities. The Commission will aggregate the resulting data by security, thereby maintaining the confidentiality of the reporting managers, and publicly disseminate the aggregated data via EDGAR on a delayed basis. This new data will supplement the short sale data that is currently publicly available.

Relatedly, the Commission also adopted an amendment to the National Market System Plan (“NMS Plan”) governing the consolidated audit trail (“CAT”). The amendment to the NMS Plan governing the CAT (“CAT NMS Plan”) will require each CAT reporting firm that is reporting short sales to indicate when it is asserting use of the bona fide market making exception in Rule 203(b)(2)(iii) of Regulation SHO.

The adopting release for Rule 13f-2 and related Form SHO, as well as the notice of the amendment to the CAT NMS Plan, was published in the Federal Register on November 1, 2023. The final rule, Form SHO, and the amendment to the CAT NMS Plan will become effective 60 days after publication of the adopting release in the Federal Register. The compliance date for Rule 13f-2 and Form SHO will be 12 months after the effective date of the adopting release, with public aggregated reporting to follow three months later, and the compliance date for the amendment to the CAT NMS Plan will be 18 months after the effective date of the adopting release.

Clearing Agency Governance and Conflicts of Interest

On November 16, 2023, the SEC adopted Rule 17Ad-25 and related rules under the Exchange Act to improve clearing agency governance to mitigate conflicts of interest that may influence the board of directors or equivalent governing body of a registered clearing agency. The rules identify certain responsibilities of the board of a clearing agency, increase transparency into board governance, and, more generally, improve the alignment of incentives among owners and participants of a registered clearing agency. The rules establish new requirements for board and committee composition, independent directors, management of conflicts of interest, and board oversight.

The adopted rules:

  1. Define independence in the context of a director serving on the board of a registered clearing agency and require that a majority of the board—or 34 percent—be independent directors;
  2. Establish independent director requirements for the compensation of certain other board committees and identify circumstances that would preclude a director from being an independent director;
  3. Require a clearing agency to establish a nominating committee and a written evaluation process for evaluating board nominees and the independence of nominees and directors and specify requirements with respect to its composition, director fitness standards, and documentation of the outcome of the written eval practice;
  4. Require a clearing agency to establish a risk management committee, specify requirements with respect to the committees’ purpose and composition, and include an annual re-evaluation of such composition;
  5. Require policies and procedures for the management of risks from relationships with service providers for core services that directly support the delivery of clearance or settlement functionality or any other purpose material to the business of the registered clearing agency, with delineated roles for senior management and the board; and
  6. Require policies and procedures for the board to solicit, consider, and document its consideration of the views of participants and other relevant stakeholders regarding material developments in the registered clearing agency’s risk management and operations.

The final rule was published in the Federal Register on December 5, 2023, with an expected compliance 12 months after such publication for all requirements except for the independence requirement for the board and board committees, for which the compliance date is 24 months after publication.

SEC Defends Voting Disclosure Changes Before Fifth Circuit

In July of 2022, the SEC adopted amendments to its rules governing proxy voting advice. Specifically, the rule requires mutual funds, ETFs and certain other registered funds to disclose more information about how they cast votes on behalf of investors. (See Blank Rome’s Investment Management Regulatory Update dated October 2022, “SEC Adopts Amendments to Proxy Rules Governing Proxy Voting Advice,” for further discussion). The rule is set to become effective July 1, 2024.

Since passing the rule, four states (Texas, Louisiana, Utah, and West Virginia) have challenged the SEC’s authority to require fund managers to disclose additional information about votes they cast. Their argument to the Fifth Circuit is that the real purpose of the voting disclosure change is to empower corporate activities rather than the investing public. The SEC maintains, however, that the amendments fall within its authority under the Investment Company Act and that the SEC reasonably concluded that the changes would facilitate investors’ ability to access information important to investment decisions and mitigate conflicts of interest.

SEC Adopts Rule to Prohibit Conflicts of Interest in Certain Securitizations

On November 27, 2023, the SEC adopted Dodd-Frank rules against trader conflicts. Securities Act Rule 192 implements Section 27B of the Securities Act of 1933 (the “Securities Act”), a provision added by the Dodd-Frank Act. The Rule seeks to prevent the sale of asset-backed securities (“ABS”) that pose a material conflict of interest. Specifically, it prohibits a securitization participant, for a period of time, from engaging, directly or indirectly, in any transaction that would involve or result in any material conflict of interest between the participant and an investor in the relevant ABS. Rule 192 provides exceptions for risk-mitigating hedging activities, liquidity commitments, and bona fide market-making activities of a securitization participant.

Under new Rule 192, conflicted transactions include a short sale of the relevant ABS, the purchase of a credit default swap or other credit derivative that entitles the securitization participant to receive payments upon the occurrence of specified credit events in respect of the ABS, or a transaction that is substantially the economic equivalent of the aforementioned transactions, other than any transaction that only hedges general interest rate or currency exchange risk.

SEC Adopts Rules to Improve Risk Management in Clearance and Settlement and Facilitate Additional Central Clearing for the U.S. Treasury Market

The SEC adopted rules on December 13, 2023, to enhance risk management practices for central counterparties in the U.S. Treasury market and facilitate additional clearing of U.S. Treasury securities transactions. The rule changes update the membership standards required of covered clearing agencies for the U.S. Treasury market with respect to a member’s clearance and settlement of specified secondary market transactions. Additional rule changes are designed to reduce the risks faced by a clearing agency and incentivize and facilitate additional central clearing in the U.S. Treasury market.

According to the release, the amendments require that covered clearing agencies in the U.S. Treasury market adopt policies and procedures designed to require their members to submit for clearing certain specified secondary market transactions. These transactions include: (i) all repurchase and reverse repurchase agreements collateralized by U.S. Treasury securities entered into by a member of the covered clearing agency, unless the counterparty is a state or local government or another clearing organization or the repurchase agreement is an inter-affiliate transaction; (ii) all purchase and sale transactions entered into by a member of the clearing agency that is an interdealer broker; and (iii) all purchase and sale transactions entered into between a clearing agency member and either a registered broker-dealer, a government securities broker, or a government securities dealer.

Further, the amendments permit broker-dealers to include customer margin required and on deposit at a clearing agency in the U.S. Treasury market as a debit in the customer reserve formula, subject to certain conditions. In addition, the amendments require covered clearing agencies in this market to collect and calculate margin for house and customer transactions separately. Finally, the amendments require policies and procedures designed to ensure that the covered clearing agency has appropriate means to facilitate access to clearing, including for indirect participants. The amendments also include an exemption for transactions in which the counterparty is a central bank, sovereign entity, international financial institution, or natural person.

ENFORCEMENT ACTIONS AND CASES

SEC Charges Investment Adviser with Failing to Properly Disclose Investments by Publicly Traded Fund

The SEC charged an investment adviser, on October 24, 2023, for failing to accurately describe investments in the entertainment industry that comprised a significant portion of a publicly traded fund it advised. The investment adviser settled the charges and agreed to pay a $2.5 million penalty.

According to the SEC’s order, from 2015 to 2019, one of the investment adviser’s trusts made significant investments, through a lending facility, in Aviron Group, LLC, a company that developed print and advertising plans for one to two films per year. According to the SEC’s order, the investment advisor inaccurately described Aviron as a “Diversified Financial Services” company in many of the trust’s annual and semi-annual reports. In addition, according to the order, the investment adviser stated that Aviron paid a higher interest rate than was actually the case, and in 2019, the investment adviser identified these inaccuracies and the trust accurately reported the Aviron investment in reports going forward.

Per the SEC’s order, the investment adviser willfully violated fraud-based disclosure prohibitions under Section 34(b) of the Investment Company Act and Section 206(4) of the Advisers Act and related Rule 206(4)-8. Without admitting or denying the SEC’s findings, the investment adviser agreed to a cease-and-desist order and a censure in addition to a monetary penalty.

Previously, in 2022, the SEC charged and then resolved its action against William Sadleir, the founder of Aviron, for misappropriating the trust’s funds invested in Aviron.

“Retail and institutional investors rely on accurate disclosures of the companies that make up a closed-end or mutual fund’s portfolio to evaluate a current or prospective investment in the fund,” said Andrew Dean, co-chief of the Enforcement Division’s Asset Management Unit. “Investment advisers have a responsibility to provide this vital information, and [the adviser here] failed to do so with the Aviron investment.”

SEC Charges President/CCO of Asset Management Advisory Firm with Fraud

The SEC charged a president and chief compliance officer of registered investment adviser, Prophecy Asset Management LP (“Prophecy”), on November 2, 2023, for his involvement in a multi-year fraud that concealed losses of hundreds of millions of dollars from investors.

Prophecy advised multiple hedge funds and reported more than $500 million in assets under management. The SEC’s complaint alleged that the president and Prophecy misled the funds’ investors, auditors, and administrator about the funds’ trading practices, risk, and performance—all while collecting more than $15 million in fees.

According to the SEC’s complaint, the president led investors to believe that their investments were protected from loss, telling them the funds’ capital was shared among dozens of sub-advisers who traded in liquid securities and posted cash collateral to offset any trading losses they incurred. However, the SEC alleged that in reality, most of the funds’ capital went to one sub-adviser, who incurred massive trading losses that far exceeded the cash collateral he had contributed. In addition, the complaint alleged that the president caused the funds to invest in highly illiquid investments, which also resulted in substantial losses to the funds, concealed these losses by fabricating documents and engaging in a series of sham transactions, and deceived investors about the diversification and trading strategies in two other funds. The complaint pleads by 2020, after losses in funds that Prophecy managed amounted to more than $350 million, the president and Prophecy indefinitely suspended redemptions by investors.

The SEC’s complaint charged the president with violations of Section 17(a) of the Securities Act, Rule 10b-5, Section 206(1) and (2) of the Advisers Act, and Rule 206(4)-8 of the Advisers Act.

SEC Announces Enforcement Results for FY23

The SEC announced on November 14, 2023, its enforcement results for fiscal year 2023. The SEC filed 784 total enforcement actions in fiscal year 2023, a three percent increase over fiscal year 2022. These included 501 original, or “stand-alone,” enforcement actions, an eight percent increase over the prior fiscal year; 162 “follow-on” administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders; and 121 actions against issuers who were allegedly delinquent in making required filings with the SEC.

The stand-alone enforcement actions ranged from billion-dollar frauds to emerging market investments involving crypto asset securities and cybersecurity. The pool of charged individuals or entities included a diverse array of market participants from public companies and investment firms to gatekeepers (such as auditors and lawyers) to social media influencers. Notably, fiscal year 2023 was record-breaking for the SEC’s Whistleblower Program with awards totaling nearly $600 million and more than 18,000 whistleblower tips, which is nearly 50 percent more tips than in the previous fiscal year.

In total, the SEC obtained orders for $4.949 billion in financial remedies, second only to the record-setting $6.439 billion in fiscal year 2022. Of this $4.949 billion, $3.369 billion was obtained in disgorgement and prejudgment interests and $1.580 billion in civil penalties. The SEC also obtained orders barring 133 individuals from serving as officers and directors of public companies, the highest number of bars obtained in a decade.

Crypto Currency Exchange Agrees to pay $4.3 Billion in Fines for Violations of the Bank Secrecy Act

On November 21, 2023, the largest Crypto Currency Exchange (the “Exchange”) in the world agreed to pay a historic $4.3 billion fine for failing to register as a money-transmitting business and allowing users to evade U.S. sanctions against Iran. The Exchange’s founder pled guilty to failing to maintain an effective anti-money laundering program in violation of the Bank Secrecy Act. This agreement marks the end of the Department of Justice’s yearlong investigation over alleged money laundering, bank fraud, and sanctions violations.

The Exchange also agreed to pay several other penalties to resolve enforcement actions by the CFTC and Treasury Department. Under the CFTC’s proposed orders, the Exchange will pay $2.7 billion, the founder will pay $150 million, and former CCO will pay $1.5 million for ignoring potential money launder and terrorists financing on its platform and for failing to register with the CFTC.

Additionally, the FinCEN settlement will require the Exchange to pay $3.4 billion in civil money penalty and will be subject to a five-year monitorship. Office of Foreign Assets Control will require the Exchange to pay a $968 million penalty. The Treasury will also retain access to the company’s books, records, and systems for the five-year monitorship.

SEC Charges Real Estate Fund Adviser with $35 Million Fraud

The SEC filed a complaint in the U.S. District Court for District of Arizona, on November 28, 2023, charging an adviser, his investment company, and related entities controlled by the adviser with violating the antifraud provisions of the federal securities laws.

The SEC alleged that the adviser misappropriated more than $35 million from private real estate funds and other investment vehicles by using a substantial portion of the funds to pay for his family members’ personal expenses and to fund private jets, yachts, and expensive residences. Further, the adviser issued a press release from another wholly owned LLC that stated the company’s intention to purchase 51 percent of all minority shares in an unrelated public company, at $9 a share, more than nine times the company’s then-current trading price. The shares jumped over 150 percent in after-hours trading shortly after the press release was issued. The adviser had purchased more than 72,000 call options in the company at a price far below the stock price in the days leading up to the press release, hoping to exercise the options at a profit after manipulating the stock price.

Global Bank and Affiliated Entities to Pay $10 Million for Providing Prohibited Mutual Fund Services

The SEC announced, on December 13, 2023, that a global bank and two affiliated entities (“Entities”) agreed to pay $10 million to settle the SEC’s charges that they provided prohibited underwriting and advising services to mutual funds.

In October 2022, the Superior Court of New Jersey entered a consent order that resolved a case alleging that the Entities violated the antifraud provisions of the New Jersey securities laws in connection with its role as underwriter to residential mortgage-backed securities. According to the SEC’s order, the global bank and its affiliates were prohibited from serving as a principal underwriter or investment adviser to mutual funds or employees’ securities companies pursuant to the Investment Company Act unless an exemptive order was received. The SEC order found, however, that the Entities continued serving in these prohibited roles until the SEC granted them time-limited exemptions on June 7, 2023. Without admitting or denying the SEC’s findings, the Entities agreed to pay more than $6.7 million in disgorgement and prejudgment interest and civil penalties totaling $3.3 million.

“Today’s action holds the [Entities] accountable for not complying with eligibility requirements,” said Corey Schuster, Asset Management Unit co-chief. “This action reinforces the need for entities to properly monitor for events that may cause disqualification and proactively seek and obtain waivers from the Commission before becoming disqualified, or refrain from performing prohibited services.”

BarnBridge DAO Agrees to Stop Unregistered Offer and Sale of Structured Finance Crypto Product

The SEC announced on December 22, 2023, that BarnBridge DAO (“BarnBridge”), a purportedly decentralized autonomous organization, and its two founders will pay more than $1.7 million to settle charges that they failed to register BarnBridge’s offer and sale of structured crypto asset securities known as SMART Yield bonds. The SEC also charged the respondents with violations stemming from operating BarnBridge’s SMART Yield pools as unregistered investment companies.

According to the SEC’s orders, the respondents compared the SMART Yield bonds to asset-backed securities and marketed them broadly to the public. Investors could purchase “Senior” or “Junior” SMART Yield bonds through BarnBridge’s website application. SMART Yield pooled crypto assets deposited by the investors and used those assets to generate fixed or variable returns to pay investors. A BarnBridge white paper, published by one of the founders, claimed that SMART Yield bonds would “mirror the safety and security of highly rated debt instruments offered by traditional finance…while still providing the outsized return” through its smart contract protocols. According to the orders, SMART Yield attracted more than $509 million in investments from investors, and BarnBridge was paid fees by the investors based on the size of their investment and their choice of yield.

To settle the SEC’s charges, BarnBridge agreed to disgorge nearly $1.5 million of proceeds from the sales, and its two founders each agreed to pay $125,000 in civil penalties.

Without admitting or denying the SEC’s findings, BarnBridge and its two founders agreed to cease-and-desist orders prohibiting them from violating and causing violations of the registration provisions of the Securities Act and the Investment Company Act. The SEC orders referenced remedial actions initiated by the founders.

SEC BuyBack Disclosure Rule Vacated by Appeals Court

The Fifth U.S. Circuit Court of Appeals in New Orleans, on December 19, 2023, granted a motion filed by business groups to vacate the SEC’s new rule that required companies to provide timelier disclosures on stock buybacks. Prior to this ruling, on October 31, 2023, the court found that the SEC “acted arbitrarily and capriciously” and in so doing violated the Administrative Procedure Act by failing to conduct a proper cost-benefit analysis when drafting the rule. The SEC was given 30 days to “correct the defects in the rule” but did not file a new draft. On December 7, 2023, business groups filed a motion for the court to vacate the rule.

The SEC’s finalized rule in May 2023 required companies to disclose daily stock buyback information either quarterly or semiannually to include the number of shares repurchased each day and the average price paid on that day. In addition, the rule required companies to indicate whether certain directors or officers traded the relevant securities within four days before or after public announcement of an issuer’s buyback plan or program.

© 2023 Blank Rome LLP
For more on SEC regulations, visit the NLR Securities & SEC section.

2024 Regulatory Update for Investment Advisers

In 2023, the Securities and Exchange Commission issued various proposed rules on regulatory changes that will affect SEC-registered investment advisers (RIAs). Since these rules are likely to be put into effect, RIAs should consider taking preliminary steps to start integrating the new requirements into their compliance policies and procedures.

1. Updates to the Custody Rule

The purpose of the custody rule, rule 206(4)-2 of the Investment Advisers Act of 1940 (Advisers Act), is to protect client funds and securities from potential loss and misappropriation by custodians. The SEC’s recommended updates to the custody rule would:

  • Expand the scope of the rule to not only include client funds and securities but all of a client’s assets over which an RIA has custody
  • Expand the definition of custody to include discretionary authority
  • Require RIAs to enter into written agreements with qualified custodians, including certain reasonable assurances regarding protections of client assets

2. Internet Adviser Exemption

The SEC also proposed to modernize rule 203A-2(e) of the Advisers Act, whose purpose is to permit internet investment advisers to register with the SEC even if such advisers do not meet the other statutory requirements for SEC registration. Under the proposed rule:

  • Advisers relying on this exemption would at all times be required to have an operational interactive website through which the adviser provides investment advisory services
  • The de minimis exception would be eliminated, hence requiring advisers relying on rule 203A-2(e) to provide advice to all of their clients exclusively through an operational interactive website

3. Conflicts of Interest Related to Predictive Data Analytics and Similar Technologies

The SEC proposes new rules under the Adviser’s Act to regulate RIAs’ use of technologies that optimize for, predict, guide, forecast or direct investment-related behaviors or outcomes. Specifically, the new rules aim to minimize the risk that RIAs could prioritize their own interest over the interests of their clients when designing or using such technology. The new rules would require RIAs:

  • To evaluate their use of such technologies and identify and eliminate, or neutralize the effect of, any potential conflicts of interest
  • To adopt written policies and procedures to prevent violations of the rule and maintain books and records relating to their compliance with the new rules

4. Cybersecurity Risk Management and Outsourcing to Third Parties

The SEC has yet to issue a final rule on the 2022 proposed new rule 206(4)-9 to the Adviser’s Act which would require RIAs to adequately address cybersecurity risks and incidents. Similarly, the SEC still has to issue the final language for new rule 206(4)-11 that would establish oversight obligations for RIAs that outsource certain functions to third parties. A summary of the proposed rules can be found here: 2023 Regulatory Update for Investment Advisers: Miller Canfield

© 2023 Miller, Canfield, Paddock and Stone PLC
For more news on 2024 Updates for Investment Advisers, visit the NLR Securities & SEC section.

Wealth Management Update January 2024

JANUARY 2024 INTEREST RATES FOR GRATS, SALES TO DEFECTIVE GRANTOR TRUSTS, INTRA-FAMILY LOANS AND SPLIT INTEREST CHARITABLE TRUSTS

The January applicable federal rate (“AFR”) for use with a sale to a defective grantor trust, self-canceling installment note (“SCIN”) or intra-family loan with a note having a duration of 3-9 years (the mid-term rate, compounded annually) is 4.37%, down from 4.82% in December 2023.

The January 2024 Section 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 5.20%, down from the 5.80% Section 7520 rate in December 2023.

The AFRs (based on annual compounding) used in connection with intra-family loans are 5.00% for loans with a term of 3 years or less, 4.37% for loans with a term between 3 and 9 years, and 4.54% for loans with a term of longer than 9 years.

REG-142338-07 – PROPOSED REGULATIONS RELATED TO DONOR ADVISED FUNDS

On November 13, 2023, the Department of the Treasury and IRS released Proposed Regulation REG-142338-07 under Section 4966; providing guidance related to numerous open-issues with respect to certain tax rules relating to donor advised funds “(DAFs”).

Pursuant to §4966(d)(2)(A), a DAF is defined generally as a fund or account (1) that is separately identified by reference to contributions of a donor or donors, (2) owned and controlled by a sponsoring organization, and (3) with respect to which a donor (or person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in the fund or account by reason of the donor’s status as a donor.

Under the proposed regulations, the definition of a DAF is consistent with the definition under the statute (the same three elements), however, the proposed regulations provide key definitions with respect to specific terms under the Statute.

Element #1: a fund that is separately identified by reference to contributions of a donor or donors.

Separately Identified: The proposed regulations provide that a fund or account is separately identified if the sponsoring organization maintains a formal record of contributions to the fund relating to a donor or donors (regardless of whether the sponsoring organization commingles the assets attributed to the fund with other assets of the sponsoring organization).

If the sponsoring organization does not maintain a formal record, then whether a fund or account is separately identified would be based on all the facts and circumstances, including but not limited to whether: (1) the fund or account balance reflects items such as contributions, expenses and performance; (2) the fund or account is named after the donors; (3) the sponsoring organization refers to the account as a DAF; (4) the sponsoring organization has an agreement or understanding with the donors that such account is a DAF; and (5) the donors regularly receive a statement from the sponsoring organization.

Donor: The proposed regulations broadly define a Donor as any person described in 7701(a)(1) that contributes to a fund or account of a sponsoring organization. However, the proposed regulations specifically exclude public charities defined in 509(a) and any governmental unit described in 170(c)(1). Note: Private foundations and disqualified supporting organizations are not excluded from the definition of a donor since they could use a DAF to circumvent the payout and other applicable requirements.

Element #2: a fund that is owned or controlled by a sponsoring organization. The definition of a sponsoring organization is consistent with §4966(d)(1), specifically, an organization described in §170(c), other than a private foundation, that maintains one or more DAFs.

Element #3: a fund under which at least one donor or donor-advisor has advisory privileges.

Advisory Privileges: In general, the existence of advisory privileges is based on all facts and circumstances, but it is presumed that the donor always has such privileges (even if no advice is given).

The proposed regulations provide that advisory privileges exist when: (i) the sponsoring organization allows a donor or donor-advisor to provide nonbinding recommendations regarding distributions or investments of a fund; (ii) a written agreement states that a donor or donor-advisor has advisory privileges; (iii) a written document or marketing material provided to the donor or donor-advisor indicates that such donor or donor-advisor may provide advice to the sponsoring organization; or (iv) the sponsoring organization generally solicits advice from a donor or donor-advisor regarding distributions or investment of a DAF’s assets.

Donor-Advisor: Defined by the proposed regulations as a person appointed or designated by a donor to have advisory privileges regarding the distribution or investment of assets held in a DAF. If a donor-advisor delegates any of the donor-advisor’s advisor privileges to another person, such person would also be a donor-advisor.

Potential Issue related to Investment Advisors: Is a donor’s personal investment advisor deemed a “donor-advisor?” Pursuant to the proposed regulations:

  • An investment advisor will not be deemed a donor-advisor if he or she:
    • Serves the supporting organization as a whole; or
    • Is recommended by the donor to serve on a committee (of more than 3) of the sponsoring organization that advises as to distributions
  • However, an investment advisor will be deemed a donor-advisor if he or she manages the investments of, or provides investment advice with respect to, both assets maintained in a DAF and the personal assets of a donor to that DAF while serving in such dual capacity. This provision, if finalized may have important consequences for fee structures used by supporting organizations since payments from a DAF to an investment advisor who is considered a donor-advisor will be deemed a taxable distribution under §4966. The IRS is requesting additional comments on this potential issue and is still under consideration.

Exceptions to the Definition of a DAF Under the Proposed Regulations:

  • A multiple donor fund or account will not be a DAF if no donor or donor-advisor has, or reasonably expects to have, advisory privileges.
  • An account or fund that is established to make distributions solely to a single public charity or governmental entity for public purposes is not considered a DAF.
  • A DAF does not include a fund that exclusively makes grants for certain scholarship funds related to travel, study or other similar purposes.
  • Disaster relief funds are not DAFs, provided they comply with other requirements.

Applicability Date: The proposed regulations will apply to taxable years ending on or after the date on which final regulations are published in the Federal Register.

EILEEN GONZALEZ ET AL V. LUIS O. CHIONG ET AL (SEP. 19, 2023)

Miami Circuit Court enters significant judgment for liability related to ownership of golf cart.

Eileen Gonzalez and Luis Chiong and their families were neighbors in a Miami suburb. The families were good friends and had many social interactions. Luis owned a golf cart which he constantly allowed to be driven and used by other people and Eileen’s minor children were often passengers on this specific golf cart.

Luis’ step-niece, Zabryna Acuna, was visiting for July 4th weekend in 2016. Zabryna (age 16 at that time) visited often and during each visit, she had permission to drive the golf cart. On July 4, 2016, Zabryna took the golf cart for a drive with Luis’ son and Eileen’s minor children as passengers.

While driving on a public street, Zabryna ran a stop sign and collided with another car which caused all of the passenger to be ejected from the golf cart. Every passenger suffered injuries, however, Eileen’s son, Devin, suffered a particularly catastrophic brain injury. This led to an eventual lawsuit.

The Circuit Court ruled that Luis owed the plaintiffs a duty of reasonable care which he breached and was negligent in entrusting the golf cart to his niece who negligently operated it causing the crash and injuries at issue. The Court further held that pursuant to the Florida Supreme Court, a golf cart is a dangerous instrumentality, and the dangerous instrumentality doctrine imposes vicarious liability upon the owner of a motor vehicle who voluntarily entrusts it to an individual whose negligent operation if it causes damage to another.

Ultimately, the Court awarded a total judgment of $50,100,000 (approximately $46,100,000 to Devin and approximately $4,000,000 to his parents).

IR-2023-185 (OCT 5, 2023)

The IRS warns of Art Valuation Schemes (Oct 5, 2023).

The IRS essentially issued a warning to taxpayers that they will be increasing investigations and taxpayer audits for incorrect or aggressively creative deductions with respect to donations of art. Additionally, the IRS is paying attention to art promoters who are involved in such schemes.

The IRS is warning taxpayers to exercise caution when approached by art promoters who are commonly attempting to facilitate the following specific scheme wherein: (i) a taxpayer is encouraged to purchase art at a significantly discounted price; (ii) the taxpayer is then advised to hold the art for a period of at least one year; and (iii) the taxpayer subsequently donates the art to a charity (often times a charity arranged by the promoter) and claim a tax deduction at an inflated market value, often significantly more than the original purchase price.

This increased scrutiny has led to over 60 completed audits with many more in process and has led to more than $5,000,000 in additional tax.

The IRS reminds taxpayers that they are ultimately responsible for the accuracy of the information reported on their tax return regardless of whether they were enticed by an outside promoter. Therefore, the IRS has provided the following red flags with respect to the purchase of artwork: (i) taxpayers should be wary of buying multiple works by the same artist that have little to no market value outside of what a promoter is advertising; and (ii) when the appraisal coordinated by a promoter fails to adequately describe the artwork (such rarity, age, quality, condition, stature of the artist, etc.).

Within the Notice, the IRS details the tax reporting requirements for donations of art. Specifically, whenever a taxpayer intends to claim a charitable contribution deduction of over $20,000 for an art donation, they must provide the following: (i) the name and address of the charitable organization that received it; (ii) the date and location of the contribution; (iii) a detailed description of the donated art; (iv) a contemporaneous written acknowledgement of the contribution form the charitable organization; (v) completed Form 8283, Noncash Charitable Contribution, Section A and B including signatures of the qualified appraiser and done; and (vi) attach a copy of the qualified appraisal to the tax return. They may also be asked to provide a high-resolution photo or digital image.

NEW YORK PUBLIC HEALTH LAW AMENDED TO PERMIT REMOTE WITNESSES FOR HEALTH CARE PROXIES (NOV 17, 2023)

An amendment to Section 2981 of New York Public Health Law was signed into law by the governor on November 17, 2023.

Section 2981 was amended to add a new subdivision 2-a, as follows:

2-A. Alternate procedure for witnessing health care proxies. Witnessing a health care proxy under this section may be done using audio-video technology, for either or both witnesses, provided that the following conditions are met:

  1. The principal, if not personally known to a remote witness, shall display valid photographic identification to the remote witness during the audio-video conference;
  2. The audio-video conference shall allow for direction interaction between the principal and any remote witness;
  3. Any remote witness shall receive a legible copy of the health care proxy, which shall be transmitted via facsimile or electronic means, within 24 hours of the proxy being signed by the principal during the conference; and
  4. The remote witness shall sign the transmitted copy of the proxy and return it to the principal.

SMALL BUSINESS SUCCESSION PLANNING ACT INTRODUCED (OCT 12, 2023)

On October 12, 2023, the Small Business Succession Planning Act was introduced to provide businesses with resources to plan successions, including a one-time $250 credit to create a business succession plan and an additional one-time $250 tax credit when the plan is executed.

Under the proposed Bill, the SBA will provide a “toolkit” to assist small business concerns in establishing a business succession plan, including:

  1. Training resource partners on the toolkit;
  2. Educating small business concerns about the program;
  3. Ensuring that each SBA district office has an employee with the specific responsibility of providing counseling to small business concerns on the use of such toolkit; and
  4. Hold workshops or events on business succession planning.

Pursuant to the proposed Act, the following credits would be available:

  1. $250 for the first taxable year during which the SBA certifies that the taxpayer has: (a) established a business succession plan; (b) is a small business concern at that time; and (c) does not provide for substantially all of the interests or assets to be acquire by one or more entities that are not a small business concern.
  2. An additional $250 for the first taxable year which the SBA certifies that the taxpayer has successfully completed the items described above.

Look-back Rule: If substantially all of the equity interests in business are acquired by an entity that is not a small business concern within three-years of establishment of a business succession plan or completion of such responsibilities (as the case may be) the credits will be subject to recapture.

Small Business Concern (defined under Section 3 of the Small Business Act): A business entity that (a) is legal entity that is independently owned and operated; and (b) is not dominant in its field of operation and does not exceed the relevant small business size standard (subject to standards and number of employees provided by the North American Industry Classification System).

Henry J. Leibowitz, Caroline Q. Robbins, Jay D. Waxenberg, and Joshua B. Glaser contributed to this article.

© 2023 Proskauer Rose LLP.
For more news on Wealth Management in 2024, visit the NLR Financial Institutions & Banking section.

Beware of Corporate Transparency Act Scams and Fraud

The Corporate Transparency Act’s (CTA) Beneficial Ownership Information reporting requirements are set to take effect on January 1, and bad actors are already using the CTA’s requirements to solicit unauthorized access to Personally Identifiable Information. To that end, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued a warning regarding such scams. FinCEN describes these efforts as follows:

“The fraudulent correspondence may be titled “Important Compliance Notice” and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests (emphasis added). Please do not respond to these fraudulent messages, or click on any links or scan any QR codes within them.”

© 2023 Varnum LLP
For more news on Corporate Transparency Act Scams and Fraud, visit the NLR Corporate & Business Organizations section.

2023 Foreign Direct Investment Year End Update: Continued Expansion of FDI Regulations

As previously reported, regulations and restrictions on Foreign Direct Investment (“FDI”) have expanded quickly in the United States and in many of its trading partner countries around the world. FDI has been further complicated in the U.S. by the passage of individual State laws – often focused the acquisition of “agricultural land,” and in Europe by the passage of screening regimes by the individual Member States of the European Union (E.U.).

In 2023, fifteen U.S. States enacted some form of FDI restrictions on real estate. Some States elected to incorporate U.S. Federal regulations regarding who is prohibited from acquiring certain real estate, while other States have focused on broadly protecting agricultural lands. State laws also vary from those that prevent foreign ownership, to those that only require reporting foreign ownership.

Thus far Alabama, Arkansas, Florida, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Minnesota, Mississippi, Missouri, Montana, Nebraska, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, and Wisconsin have passed laws related to FDI in real estate.

Alabama, Arkansas, Florida, Illinois, Iowa, Kansas, Maine, Missouri, Ohio and Texas all currently require foreign investors to disclose acquisitions of certain real estate, much like the U.S. Federal Agricultural Foreign Investment Disclosure Act of 1978 (AFIDA). Arkansas, Illinois, Maine, and Wisconsin, actually allow acquirers to fulfill their reporting requirements by simply submitting a copy of applicable federal AFIDA reports. Texas currently only limits Direct Foreign Investment in certain “critical infrastructure.”

Ohio, Pennsylvania, South Carolina, South Dakota, and Wisconsin limit foreign investment in real estate based on the number of acres; while Iowa, Minnesota, Missouri, Nebraska, North Dakota, and Oklahoma ban foreign ownership of certain land completely.

The Alabama Property Protection Act (“APPA”), which went into effect in 2023, is one of the most expansive of the U.S. State laws, and which also incorporates U.S. Federal law. The APPA restricts FDI by a “foreign principal” in real estate related to agriculture, critical infrastructure, or proximate to military installations.

The APPA broadly covers acquiring “title” or a “controlling interest.” The APPA also broadly defines “foreign principal” as a political party and its members, a government, and any government official of China, Iran, North Korea, and Russia, as well as countries or governments that are subject to any sanction list of the U.S. Office of Foreign Assets Control (“OFAC”). The APPA defines “agricultural and forest property” as “real property used for raising, harvesting, and selling crops or for the feeding, breeding, management, raising, sale of, or the production of livestock, or for the growing and sale of timber and forest products”; and it defines covered “critical infrastructure” as a chemical manufacturing facility, refinery, electric production facility, water treatment facility, LNG terminal, telecommunications switching facility, gas processing plant, seaport, airport, aerospace and spaceport infrastructure. The APPA also covers land that is located within 10 miles of a “military installation” (of at least 10 contiguous acres) or “critical infrastructure.”

Notably, APPA does not specifically address whether leases are considered a “controlling interest,” nor does it specify enforcement procedures.

U.S. Federal Real Estate FDI

Businesses involved in the U.S. defense industrial base have been historically protected from FDI by the Committee on Foreign Investment in the United States (“CFIUS”). The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) expanded those historic protections to include certain Critical Technologies, Critical Infrastructure, and Sensitive Data – collectively referred to as covered “TID.”

FIRRMA specifically expanded CFIUS to address national security concerns arising from FDI impacting critical infrastructure and sensitive government installations. Part 802 of FIRRMA established CFIUS jurisdiction and review for certain covered real estate, including real estate in proximity to specified airports, maritime ports, military installations, and other critical infrastructure. Later in 2022, Executive Order 14083 further expanded CFIUS coverage for certain agricultural related real estate.

Covered installations are listed by name and location in appendixes to the CFIUS regulations. Early this year, CFIUS added eight additional government installations to the 100-mile “extended range” proximity coverage of Part 802. The update necessarily captured substantially more covered real estate. Unlike covered Section 1758 technologies that can trigger a mandatory CFIUS filing, CFIUS jurisdiction for covered real estate currently remains only a voluntary filing. Regardless, early diligence remains critical to any transaction in the United States that may result in foreign ownership or control of real estate.

U.S. Trading Partners FDI Regimes

The U.S. is not alone in regulating FDI, or the acquisition of real estate by foreign investors. Canada, United Kingdom and the European Union have legislative frameworks governing foreign investment in business sectors, technology, and real estate. Almost all European Union Member States have some similar form of FDI screening.

Key U.S. trading partners that have adopted FDI regimes include, Australia, Austria, Belgium, China, Germany, France, Hungary, Ireland, Italy, Japan, Luxembourg, Netherlands, Poland, Singapore, Spain, and Sweden. What foreign parties, economic sectors, or technologies are covered vary from country to country. They also vary as to the notification and approval requirements.

The UK National Security and Investment Act (NSI Act) came into effect on 4 January 2022, giving the UK government powers to intervene in transactions where assets or entities are acquired in a manner which may give rise to a national security risk. There were over 800 notifications under the NSI during the previous 12-month reporting period. In November 2023 the Deputy Prime Minister Oliver Dowden published a call for evidence on the legislation which aims to narrow and refine the scope of powers to be more ‘business friendly’, given that very few notified transactions have not been cleared within 30 working days. We will revisit developments on this in 2024.

The UK has continued to implement other reforms to improve transparency of foreign ownership of UK property. Part of the UK Economic Crime (Transparency and Enforcement) Act 2022 requires the register of overseas entities. The register is maintained by Companies House and requires overseas entities which own land in the UK to disclose details of their beneficial owners. Failure to comply with the new legislation will impact any registration of ownership details at the UK Land Registry (and thus the relevant legal and equitable ownership rights in any relevant property) and officers of any entity in breach will also be liable to criminal proceedings.

Recommendations

Whether a buyer or a seller, all transactions involving FDI should include an analysis of the citizenship of the interested parties, the nature of the business, land and products, and the applicability of laws and regulations that can impact the parties, timing, or transaction.

Copyright © 2023 Womble Bond Dickinson (US) LLP All Rights Reserved.
For more news on Foreign Direct Investment Updates, visit the NLR Global law section.

CFTCs Increased Reach over Environmental Commodities

During 2023 the Commodity Futures Trading Commission (CFTC) engaged in several regulatory actions aimed at further clarifying its jurisdictional reach over environmental commodity markets generally and the voluntary carbon credit (VCC) markets in particular. First, on June 20, 2023, the CFTC issued an alert seeking whistleblower tips relating to carbon market misconduct. CFTC noted that many VCCs serve as the underlying commodity for futures contracts that are listed on CFTC designated contract markets (DCMs) over which the CFTC has full enforcement authority as well as the regulatory oversight. Importantly, the CFTC also noted that it has anti-fraud and anti-manipulation enforcement authority over the related spot markets for VCCs as well as carbon allowances and other environmental commodities products that are linked to futures contracts.1

Second, on July 19, 2023 the CFTC held its second convening where several market participants expressed the view that reliability, integrity and resilience of VCCs will be significantly improved with greater regulatory involvement.2

Third, in response to a growing demand to become more actively involved in environmental commodity markets on December 4, 2023, the CFTC issued proposed Guidance Regarding the Listing of Voluntary Carbon Credits Derivatives and Request for Comment (VCC Guidance).3 The VCC Guidance “outlines factors for a DCM to consider in connection with product design and listing [of futures contracts on VCCs] to advance the standardization of such products in a manner that promotes transparency and liquidity.”

The VCC Guidance is remarkable because: (i) it is non-binding (i.e., it is only guidance, not a regulation – stating that DCMs “should consider”); (ii) it notes several times that “for the avoidance of doubt, this proposal is not intended to modify or supersede the Appendix C Guidance” [to Part 38 of CFTC regulations];4 (iii) it addresses the already existing regulatory requirements for DCOs (i.e., Core Principle 3 – the requirement that all listed futures are not readily susceptible to manipulation);5 (iv) it attempts to reach over spot physically-settled VCC markets over which the CFTC does not have the regulatory jurisdiction and can only exercise its limited enforcement anti-fraud and anti-manipulation jurisdiction; (v) it requires DCMs to “consider” a number of VCC characteristics that are clearly outside of DCM’s control and probably competency, which include transparency, additionality, permanency and risk of reversal, robust quantification, governance and tracking mechanisms, and measures to prevent double-counting of VCCs; (vi) it requires DCMs to submit to the CFTC “explanation and analysis of the contract” it intends to list; (vii) it requires DCMs to actively monitor VCC contracts to ensure that they continue to meet these standards; and (viii) notes that the same standards should apply to swap execution facilities (SEFs) that may list swaps on VCCs. Finally, this VCC Guidance is followed by a number of questions and an open comment period ending on February 16, 2024.

The VCC Guidance is an important step forward to promoting transparency and integrity of VCC markets within the jurisdictional constraints of the CFTC. Even though the VCC Guidance does not (and cannot) impose any additional compliance requirements on DCMs and SEFs short of promulgating a rulemaking in compliance with the Administrative Procedure Act, it is clear that DCM’s compliance burden with respect to listed VCC contracts before the VCC Guidance was issued are clearly different than after the VCC Guidance would become effective. Further, unlike other physically-deliverable commodities that serve as underliers to futures contracts on DCMs, VCCs traded in spot and forward markets are treated differently and will probably be in the same category as virtual currencies.

https://icvcm.org/

1 https://www.cftc.gov/PressRoom/PressReleases/8723-23

2 https://www.cftc.gov/PressRoom/Events/opaeventvoluntarycarbonmarkets071923

3 https://www.cftc.gov/PressRoom/PressReleases/8829-23

4 https://www.ecfr.gov/current/title-17/chapter-I/part-38/appendix-Appendix%20C%20to%20Part%2038

5 https://www.law.cornell.edu/uscode/text/7/7

© Copyright 2023 Cadwalader, Wickersham & Taft LLP
For more news on CFTC Environmental Oversight, visit the NLR Financial Institutions & Banking section.

The Corporate Transparency Act December 2023 Update

The Corporate Transparency Act (“CTA” or the “Act”) comes into effect on January 1, 2024. Enacted by Congress as part of the Anti-Money Laundering Act of 2020, the CTA requires certain entities, domestic and foreign, to report beneficial ownership to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

The CTA’s reporting obligations will apply to “Reporting Companies” (discussed below) currently in existence, and to those formed after January 1, 2024. However, while FinCEN estimates that the CTA will affect over 32 million entities, it will largely impact only smaller and unregulated companies. For example, companies that meet the CTA’s definition of a “large operating company,” are publicly traded or regulated, or are a subsidiary of certain exempt entities are not required to submit beneficial ownership information to FinCEN. Accordingly, while all companies should take note of the CTA and the significant change in the law for corporate reporting obligations, an equally vast number of entities will likely find themselves exempt from these requirements.

With the CTA’s effective date fast approaching, companies should consider its potential impact to their compliance obligations and, if appropriate, implement appropriate policies and procedures for handling reporting.

WHAT DOES THE CTA REQUIRE?

The CTA will require Reporting Companies to file reports electronically with FinCEN identifying their beneficial owners, in addition to certain other information. For Reporting Companies formed prior to 2024, these reports require information about the Reporting Company and its beneficial owners. Reporting Companies formed prior to 2024 will have until January 1, 2025, to file an initial report.

For Reporting Companies formed on or after January 1, 2024, reports will require information about the Reporting Company and its beneficial owners, as well as its company applicants (i.e., individuals involved in the company’s formation filing). Reporting Companies formed after January 1, 2024, will have 30 days from formation to file their initial reports, although FinCEN recently issued a final rule extending this reporting period to 90 days for companies created or registered in 2024.

WHO MUST REPORT?

Reporting Companies are defined as legal entities that are formed through a filing in a state secretary of state’s office or similar office under the law of a state or Indian tribe. Reporting Companies can be domestic or foreign and include, but are not limited to, corporations, limited liability companies, certain partnerships and certain trusts. A foreign Reporting Company is an entity formed under foreign law that registers to do business in any state or Indian tribe. Certain entities outside of the CTA’s scope include sole proprietorships, most general partnerships, common law trusts, unincorporated
associations, and foreign entities not registered to do business in a state or tribal jurisdiction. These entities are likely to have no reporting obligations under the CTA.

EXEMPT ENTITIES

The CTA provides 23 exemptions for Reporting Companies that would otherwise be required to report beneficial ownership information under the Act. These exemptions are predominantly for large or heavily regulated companies, including:

  • securities reporting issuers, banks, credit unions, depository institution holding companies, money services businesses, brokers-dealers, securities exchange or clearing agencies, pooled investment vehicles, regulated investment companies and investment advisors, insurance companies and state-licensed insurance providers, and accounting firms;
  • “large operating companies” who have more than 20 full-time employees in the U.S., an operating presence at a physical office within the United States, and more than $5 million in gross receipts or sales on their previous years’ U.S. tax returns;
  • U.S. publicly traded companies;
  • governmental authorities and tax-exempt entities; and
  • inactive entities who have been in existence prior to January 1, 2020, are not engaged in active business, are not owned in any manner by a foreign person, have not had a change in ownership within the last 12 months, have not sent or received any amount greater than $1,000 within the last 12 months, and have no assets or ownership interests in any entity in the United States or abroad.

The CTA also exempts subsidiaries of certain exempt entities if those exempt entities own or control the subsidiary.

WHAT MUST BE REPORTED?

Reporting Companies are required to report to FinCEN:

  • basic company information, including full legal name, trade names, business address, state of incorporation or business registration, and employer identification number;
  • information of Beneficial Owners, including full legal name, date of birth, residential street address, unique ID number from individual’s identification document and issuing jurisdiction of acceptable ID document (e.g., driver’s
    license, passport, state-issued ID, etc.), and image of ID document from which unique ID number was obtained;
  • information of Company Applicants, including full legal name, date of birth, business address, unique ID number from individual’s identification document and issuing jurisdiction of acceptable ID document, and image of ID document from which unique ID number was obtained. A “Company Applicant” is defined as the individual who directly files a document with the state secretary of state’s office to create the entity or register it to do business in the state, and the individual who is primarily responsible for directing or controlling the filing.

There is no cap on the number of beneficial owners a Reporting Company is required to report. In contrast, a Reporting Company cannot have more than two reportable company applicants. Additionally, the CTA only requires Reporting Companies formed on or after January 1, 2024, to report company applicants in their initial reports. There is no requirement to report company applicants for entities formed prior to January 1, 2024.

WHO IS A BENEFICIAL OWNER?

A beneficial owner is defined as any individual who, directly or indirectly, either exercises substantial control over a Reporting Company or owns or controls at least 25% of the ownership interests of such Reporting Company.

An individual may exert substantial control by (i) serving as a senior officer (e.g., company’s president, CEO, COO, CFO or general counsel, or any officer who performs a similar function), (ii) having authority to appoint or remove certain officers or a majority of directors (or similar governing body) of the Reporting Company or (iii) having “substantial influence” over important matters at the company, regardless of their title or role.

Ownership interests in a company generally refer to any arrangement that establishes ownership rights in the Reporting Company, such as stock, capital or profit interests, convertible interests, options to buy or sell any of the above-named interests, or contracts, relationships or other understandings. Option interests must be treated as exercised for purposes of the analysis. Additionally, a beneficial owner may own or control such interest directly or indirectly, jointly with another person or through an agent, custodian, trust or intermediary entity.

The CTA identifies five instances where an individual who would otherwise be a beneficial owner under the Act qualifies for an exception. In these cases, the Reporting Company does not have to report the individual’s information to FinCEN. These exceptions are as follows:

  • a minor child;
  • a nominee, intermediary, custodian or agent;
  • an employee (excluding senior officers);
  • an inheritor, whose only interest in the company is a future interest through a right of inheritance; and
  • a creditor.

HOW TO REPORT

No filings are due prior to the Act’s effective date. While FinCEN has published draft forms for filing by a Reporting Company for comment, they are not yet finalized. FinCEN is also in the process of setting up the beneficial owner reporting infrastructure, the Beneficial Ownership Secure System (“BOSS”), which has not yet been finalized.

If beneficial owners or company applicants do not want to provide their personal data to a Reporting Company, individuals have the option of applying directly to FinCEN for a “FinCEN identifier” (a “FinCEN ID”). The individual will need to provide directly to FinCEN all of the same data that he or she would need to submit to the Reporting Company, but then would only need to provide his or her FinCEN ID to the Reporting Company for inclusion on its reporting.

Individuals who receive FinCEN IDs have the burden of keeping their data updated with FinCEN, whereas a Reporting Company has the burden of keeping the individual’s data current if the individual reports such data directly to the Reporting Company.

WHEN TO REPORT

For non-exempt Reporting Companies in existence as of January 1, 2024, they will have until January 1, 2025, to make their initial beneficial ownership report.

For non-exempt Reporting Companies formed on or after January 1, 2024, they will need to file their first beneficial ownership report within 30 calendar days after the date of formation. On November 29, 2023, FinCEN issued a final rule extending this deadline to 90 days for companies formed or registered in 2024. The time of formation is the earlier of (i) a company receiving actual notice of its registration from the state secretary of state or (ii) a company receiving notice of its registration becoming publicly available.

In addition to filing initial reports, Reporting Companies are also obligated to make reports within 30 days of a change to any data that FinCEN requires to be reported for the company and its beneficial owners.

PENALTIES FOR NONCOMPLIANCE

Congress included steep penalties for non-compliance with the CTA’s reporting requirements. Specifically, the CTA provides that willfully reporting or attempting to report false or fraudulent beneficial ownership, or willfully failing to make updates, shall be punishable with a civil penalty up to $500 per day while such violation continues, with a possible criminal fine up to $10,000 and up to two years in prison. If a reporting violation is found to be “willful,” the CTA provides that responsible parties can include individuals that cause the failure, or are senior officers of the Reporting Company at the
time of the failure. The CTA also enhances criminal penalties when a Reporting Company’s failure to file is combined with other illegal activity.

Additionally, it is also unlawful to knowingly disclose or knowingly use beneficial ownership information obtained by the person for an unauthorized purposes. Violations are punishable with a mandatory civil penalty of $500 per day while the violation continues, plus a possible criminal fine of up to $250,000, five years in prison, or both.

HOW YOU CAN PREPARE

The CTA will alter the ways entities organize and govern themselves and it will impose substantial and continuing reporting obligations. In the weeks leading up to the CTA’s implementation, entities should be developing internal policies and procedures to assess their reporting obligations, identify beneficial owners, and identify company applicants on a go-forward basis.

Reporting Companies may wish to consider adopting a CTA compliance policy. Such a policy can educate managers and senior officers on obligations under the CTA, address procedures for reporting to FinCEN and monitoring changes to a company’s reporting status and beneficial ownership, and address the application of the CTA to potential future affiliates of the Reporting Company.

Reporting Companies may also wish to consider how the CTA may implicate its constituent documents and evaluate amending existing operating agreements to incorporate provisions addressing compliance with the CTA. Similarly, some entities may wish to consider their organizational structures and corporate governance in light of the obligation to collect and report personally identifiable information. Additionally, Reporting Companies should consider how the CTA will impact future material transactions, such as mergers and acquisitions.

© 2023 Vedder Price
by: Joel R. Thielen of Vedder Price
For more news on Corporate Transparency Act Updates, visit the NLR Financial Institutions & Banking section.

Beneficial for Whom? Requirement to Provide Beneficial Ownership Information for Business Entities Begins January 1, 2024

On January 1, 2024, the Corporate Transparency Act, a US federal law, will begin requiring certain corporations and limited liability companies to disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury. The corporate ownership structures of many gaming companies, particularly those that utilize a private equity or Voteco model, may be subject to the reporting obligations.

Unless an exemption applies, entities subject to these obligations must report information about their beneficial owners, including their full legal names, dates of birth, addresses, unique identification numbers, and an image of one of the following non-expired documents: (i) state driver’s license; (ii) US passport; or (iii) identification document issued by a state, local government, or tribe. Gaming companies should consult with their legal counsel on their specific structures and the applicability of the reporting obligations to their corporate ownership models.

The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information, may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required beneficial ownership information report may be held accountable for that failure.

The obligation to report this information is generally required for entities with at least one beneficial owner who owns 25% or more of the entity or exercises substantial control over it. An individual exercises substantial control over a reporting company if that individual meets any of four general criteria: (1) the individual is a senior officer; (2) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company; (3) the individual is an important decision maker; or (4) the individual has any other form of substantial control over the reporting company.

Reporting companies created or registered to do business before January 1, 2024, will have until January 1, 2025, to file their initial reports. Under FinCEN’s regulations, reporting companies created or registered on or after January 1, 2024, will have 90 days after their company’s creation or registration to file their initial reports, and those created or registered on or after January 1, 2025, will have 30 days after their company’s creation or registration to file their initial reports.

© 2023 Jones Walker LLP
For more news on the Corporate Transparency Act and Beneficial Ownership Information, visit the NLR Criminal Law / Business Crimes section.