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China’s Supreme People’s Court Releases Typical Cases on Film Intellectual Property Protection

On November 3, 2023, China’s Supreme People’s Court (SPC) released the Typical Cases of Film Intellectual Property Protection by the People’s Courts (人民法院电影知识产权保护典型案例). The SPC stated, “In order to strengthen the publicity of the rule of law in the film field, further stimulate the innovation and creativity of the film industry, and promote the prosperity of socialist culture, the Supreme People’s Court issued typical cases on the protection of film intellectual property rights. Typical cases include both criminal cases and civil cases, involving pirated recordings and dissemination of theatrical movies, protection of the integrity rights of works, adaptation rights, information network dissemination rights, reasonable use of copyrights, protection of trade secrets, etc., which are important for promoting the rule of law. It is of positive significance to speed up the construction of a powerful film country.”

8 Typical Cases as explained by the SPC follow:

1. Copyright infringement cases involving Ma XX, Ma YY and others [Criminal Judgment of Yangzhou Intermediate People’s Court of Jiangsu Province （2020）苏10刑初11号]

[Basic case facts] From June 2016 to February 2019, the defendants Ma XX, Ma YY, Wen Jie, and Lu collaborated with others for the purpose of profit, colluded with theater staff to illegally obtain movie masters and keys, and then copied hundreds of movies such as “The Wandering Earth” and “Crazy Alien” with high-definition equipment, and sold the pirated and copied movies to “movie bar” operators to gain illegal profits.

[Judgment Result] The Intermediate People’s Court of Yangzhou City, Jiangsu Province held that the defendants Ma XX, Ma YY, Wen Jie, and Lu copied and distributed other people’s film works without the permission of the copyright owner for the purpose of profit, and jointly implemented the production The act of selling pirated films, with huge illegal gains and other particularly serious circumstances, constitutes a crime of copyright infringement. The four defendants were sentenced to fixed-term imprisonment of four to six years, and fined from RMB 600,000 to RMB 5.5 million, and their illegal gains were recovered. After the verdict was announced, the parties did not appeal or protest, and the first-instance judgment has become legally effective.

[Typical Significance] This case is a typical case in which the act of stealing and distributing theater movies constitutes a crime of copyright infringement. The people’s courts perform their intellectual property trial duties in accordance with the law and severely crack down on illegal and criminal acts of infringement and piracy in the film field, which is of great significance to strengthening the copyright protection of theatrical films and promoting the healthy development of the film and television industry.

2. Liang XX’s copyright infringement case [Criminal Judgement of the Shanghai No. 3 Intermediate People’s Court (2021）沪03刑初101号]

[Basic Case Facts] Since 2018, the defendant Liang XX has instructed Wang YY and others to develop and operate the “Renren Film and Television Subtitle Group” website and Android, IOS, Windows, MacOSX, TV and other clients, and instructed Xie ZZ and others to download unauthorized film and television works from overseas websites, translate, produce and upload them to relevant servers, and provide users with online viewing and downloading through the “Renren Film and Television Subtitle Group” website and related clients operated by them. There are 32,824 unauthorized film and television works on the “Renren Film and Television Subtitle Group” website and related clients, with a total of about 6.83 million members and an illegal business amount of more than 12 million RMB.

[Judgment Result] The Shanghai No. 3 Intermediate People’s Court held after trial that the defendant Liang XX copied and distributed other people’s works without the permission of the copyright owner for the purpose of profit, and there were other particularly serious circumstances, which constituted the crime of copyright infringement. Liang was sentenced to three years and six months in prison and fined RMB 1.5 million, and his illegal gains were recovered. After the verdict was announced, the parties did not appeal or protest, and the first-instance judgment has become legally effective.

[Typical Significance] There are many film and television works in this case and the rights holders are dispersed. The judgment clarified the legal application issues such as the crime of copyright infringement and the determination of the number of infringing film and television works. The criminal liability of the organizers and main participants shall be investigated in accordance with the law, and severe crackdowns shall be carried out for serious infringement of film copyright.

3. Copyright infringement dispute case between Shanghai Art Film Studio Co., Ltd. and Chongqing Yun Media Information Technology Co., Ltd. [Chongqing Fifth Intermediate People’s Court （2019）渝05民初3828号Civil Judgment]

[Basic facts of the case] Shanghai Art Film Studio Co., Ltd. owns the copyrights to the film works of the cartoons “Calabash Brothers” and “Calabash Little King Kong,” as well as the copyright to the character modeling art works of “Calabash Brothers” and “Calabash Little King Kong.” Chongqing Yun Media Information Technology Co., Ltd. (hereinafter referred to as Yun Media Technology Company) and others based on the story clips of the characters such as Seven Calabash Babies and Calabash King Kong in the cartoon, replaced the Mandarin carried by the audio data of the characters in the original work with Sichuan and Chongqing dialects, changed the dialogue content of the characters in the original work, produced multiple short videos of “Calabash Dialect Version,” and uploaded them to websites and public accounts for dissemination. Shanghai Animation Film Studio Co., Ltd. filed a lawsuit in court on the grounds that the above-mentioned actions carried out by Yun Media Technology Company and others constituted copyright infringement.

[Judgment Result] The Fifth Intermediate People’s Court of Chongqing held after trial that Yun Media Technology Company and others jointly produced the short video involved in the case, deliberately exaggerated the use of vulgar, negative, dark and uncivilized terms in dialects, changed the dialogue content of the characters in the original work, and vilified the original work. The character image in the work was uploaded to the Internet platform for wide dissemination, which conflicts with the core socialist values, damages the legitimate rights and interests of the copyright owner, and constitutes copyright infringement. It was ruled that Yun Media Technology Company and others should immediately stop the infringement, jointly publish a statement to eliminate the impact, and jointly compensate for economic losses. After the first-instance judgment, none of the parties appealed.

[Typical Significance] The judgment of this case emphasizes that the derivative use of other people’s film works must not deface the characters in the film works, and must not include cultural dross. It must vigorously promote the core socialist values, which plays a positive guiding role in establishing healthy and civilized rule of law in the film industry.

4. Copyright ownership and infringement dispute case between Yu Mouzhu and Zhejiang Dongyang Meila Media Co., Ltd. [Chengdu Intermediate People’s Court of Sichuan Province （2018）川01民初1122号 Civil Judgment]

[Basic facts of the case] Yu Mouzhu published his novel “Wild Lily in Bloom” (盛开的野百合) on the website under the pseudonym Yu Mou, and adapted the novel into a script of the same name and sent it to Emei Film Group Co., Ltd. Since then, Zhejiang Dongyang Meila Media Co., Ltd. commissioned others to write the “Youth” movie script, and the film of the same name jointly produced with Huayi Brothers Film Co., Ltd. and others was released. Yu Mouzhu believes that the plot setting, character relationships, lines, and song and dance combinations of the “Youth” movie are highly overlapped with its novel and script, constituting substantial similarities, exceeding the boundaries of reasonable reference, and constituting an infringement of its rights to adapt and film and believes Zhejiang Dongyang Meila Media Co., Ltd., as the producer of the film “Youth” and other parties, jointly committed infringement.

[Judgment Result] The Intermediate People’s Court of Chengdu City, Sichuan Province held that there are obvious differences in the specific subject matter, story line, and theme between the “Youth” movie and Yu Mouzhu’s works. As far as the plot of the work is concerned, the multiple similar plots claimed by Yu Mouzhu are objective facts and limited expressions were not original and should not be protected. The plot of the disputed book and the character relationships advocated by Yu are obviously different from the movie “Youth.” Readers and audiences will not believe them to be similar and they do not have substantial similarities. Therefore, the all claims are dismissed. Yu Mouzhu was dissatisfied and appealed. The second-instance judgment of the Sichuan Provincial Higher People’s Court rejected the appeal and upheld the original judgment.

[Typical Significance] The judgment in this case clarified that objective facts and limited expressions are not original and are not protected by copyright law, and should be filtered when comparing infringements. The judgment also clarifies the correct comparison content and comparison method when determining whether a film work is infringing, protects the legitimate rights and interests of film copyright owners in accordance with the law, maintains a fair market competition order, and has positive significance for the prosperity of film creation.

5. Dispute case between Beijing iQiyi Technology Co., Ltd. and Shanghai Qiaojiaren Culture Media Co., Ltd. for infringement of the right to disseminate work information online [Beijing Intellectual Property Court (2021）京73民终2496号 Civil Judgment]

[Basic facts of the case] Beijing iQiyi Technology Co., Ltd. was authorized to obtain the exclusive information network dissemination rights and rights protection rights for the movie “I am not Madame Bovary.” The APP operated by Shanghai Qiaojiaren Culture Media Co., Ltd. (hereinafter referred to as Qiaojiaren Company) provides online playback of the complete content of the film involved and added corresponding dubbing, sign language translation, and source subtitles on the basis of the pictures and sound effects of the video involved in this case, but no identification/prevention mechanism to limit viewership to those with dyslexia was used. Beijing iQiyi Technology Co., Ltd. believes that the APP provides online playback services for the accessible version of the movie “I Am Not Madame Bovary” to unspecified members of the public, infringing on its right to information network dissemination, and filed a lawsuit in court, requesting an order against Qiaojiaren Company to stop the infringement and compensate for economic losses and reasonable expenses.

[Judgment Result] The Beijing Intellectual Property Court held that the “accessible means that can be perceived by people with dyslexia” stipulated in the Copyright Law should include special restrictions on this “accessible means”, that is, it should be limited to meeting the requirements of and exclusive use of people with dyslexia. The alleged infringement of Qiaojiaren Company is open to the unspecified public and does not meet the above conditions. It does not belong to statutory fair use and constitutes infringement. Considering that the original intention of Qiaojiaren Company was to make films accessible to people with disabilities and that the video involved had few clicks, the Court awarded economic losses of 10,000 RMB.

[Typical Significance] This case is the country’s first dispute involving an accessible version of a movie that infringes on the right to disseminate work information online. The judgment clarified that “providing published works to people with dyslexia in an accessible manner that they can perceive” is limited to the exclusive use of people with dyslexia. As a “fair use,” an effective verification mechanism for “people with dyslexia” should be adopted and exclude those who do not meet the criteria. The judgment in this case is conducive to the accurate implementation of the relevant international treaties that our country has joined (the “Marrakesh Treaty”), to the comprehensive protection of the rights of copyright owners, and to the regulation of the production and distribution of accessible versions of movies.

6. Zhejiang Shenghe Network Technology Co., Ltd. and Legend IP Co., Ltd. Confirmation of Non-infringement of Copyright Dispute Case [Hangzhou Internet Court（2021）浙0192民初10369号 Civil Judgment]

[Basic Case Facts] The Korean game “Legend of Mir 2” was launched in China in 2001. The rights holder, Legend IP Co., Ltd. (hereinafter referred to as “Legend IP”), after learning that the movie “Blue Moon” was about to be broadcast exclusively on the platform, believed that the movie infringed on the game’s copyright and sent a letter to the platform requesting to stop distributing the movie. The film producer sent a letter of reminder to Legend IP to enforce their IP, but Legend IP neither withdrew the warning nor sued. After the movie was released, Zhejiang Shenghe Network Technology Co., Ltd., as the copyright owner of the movie, sued for a declaratory judgement that the movie did not infringe the above-mentioned game copyright.

[Judgment Result] The Hangzhou Internet Court held that the overall picture of the game involved in the case is completely different from that of the movie in terms of picture composition, picture smoothness, lens experience, and audio-visual effects, and that the specific creative elements in the selection and arrangement of the audio-visual pictures are very different. There is a substantial difference, and the judgment confirms that there is no infringement. Legend IP was dissatisfied and filed an appeal. The second-instance judgment of the Intermediate People’s Court of Hangzhou City, Zhejiang Province rejected the appeal and upheld the original judgment.

[Typical Significance] The judgment of this case clarifies the thoughts of comparing whether the overall picture of the game and the film works are infringing, and points out that a work created later does not constitute infringement if it only refers to the theme or conception of the prior work, but specifically expresses that it has been separated from or differs from the prior work. The judgment of this case is conducive to guiding the development and prosperity of multi-style cultural innovation and promoting the high quality integrated development of the cultural industry.

7. Dispute over trade secret infringement between Xinli Media Group Co., Ltd. and Beijing Paihua Culture Media Co., Ltd. [Beijing Chaoyang District People’s Court(2017）京0105民初68514号 Civil Judgment]

[Basic facts of the case] Xinli Media Group Co., Ltd. (hereinafter referred to as Xinli Company) is the copyright holder of the movie “The Legend of Wukong.” It entrusted Beijing Paihua Culture Media Co., Ltd. (hereinafter referred to as Paihua Company) with the audio post-production of the film. Both parties signed a contract and agreed on a confidentiality clause. During the performance of the contract, Paihua Company violated the confidentiality agreement by outsourcing some of the work to outsiders for actual completion, and transmitted the film materials to the outsiders under the title “WKZ” (the first letters of the transliteration of the film title) through Baidu Cloud. While the film material was being stored on Baidu Cloud, it was hacked by criminals, causing the film involved to be leaked through the Internet before it was released. Xinli Company sued, requesting Paihua Company to stop the unfair competition behavior of disclosing the trade secrets of the film involved, make a public statement to eliminate the impact, and compensate for economic losses.

[Judgment Result] The Beijing Chaoyang District People’s Court held after trial that Paihua Company violated the confidentiality agreement by disclosing the film material involved to a party outside the case, and uploaded the material to Baidu Cloud, which ultimately caused the material to be leaked on the Internet. Both of these acts constituted Infringement of trade secrets. It was ruled that Paihua Company should compensate Xinli Company for economic losses of 3 million RMB and rights protection expenses of more than 300,000 RMB, and make a public statement to eliminate the impact. After the first-instance judgment, none of the parties appealed.

[Typical Significance] This case is a typical case of protecting materials as trade secrets during the film production process. Film materials are trade secrets, and there are many subjects involved in the film production process. All parties involved in film production have strict confidentiality obligations in all aspects of film production. Any violation of confidentiality obligations shall bear corresponding legal liability. The judgment in this case is conducive to promoting the standardization and legalization of the film production process, is conducive to protecting the rights of relevant rights holders involved in film production, and is conducive to promoting the prosperity and development of the film industry.

8. Unfair competition dispute case between Xinghui Overseas Co., Ltd. and Guangzhou Zhengkai Cultural Communication Co., Ltd. [Guangzhou Intellectual Property Court（2020）粤73民终2289号 Civil Judgment]

[Basic Case Facts] The Hong Kong movie “The King of Comedy” has a high reputation and the relevant public attention is high. Guangzhou Zhengkai Culture Communication Co., Ltd. (hereinafter referred to as Zhengkai Company) and Li XX promoted the accused infringing TV series “The King of Comedy 2018” on Weibo and WeChat official accounts in 2018 as the “series #King of Comedy” , and claimed in media promotions that it was adapted from “The King of Comedy” and so on. Hong Kong film copyright owner Xinghui Overseas Co., Ltd. filed a lawsuit in court, claiming that Zhengkai Company and Li XX were unfair competing.

[Judgment Result] After a hearing, the Guangzhou Intellectual Property Court held that by taking into account the box office receipts of the movie involved during the theatrical release in Hong Kong, the publicity efforts conducted before and during theatrical release, the number of films played on authorized video websites, the degree of continuous media coverage of the movie, and the involvement of the relevant public in the evaluation of the movie, among other factors, it could be fully proved that the titles of the movie involved had a certain degree of influence. The acts of Zhengkai Company and Li XX constituted the act of imitating and confusing the film name and false publicity with a certain degree of influence, and Zhengkai Company and Li XX shall bear the legal liabilities for unfair competition according to law.

[Typical Significance] In this case, the Anti-Unfair Competition Law is applied to protect the names of movies screened in Hong Kong in accordance with the law, and in light of the dissemination characteristics of film works, the essential requirements and considerations for determining the names of audiovisual works “having a certain impact” as prescribed in Article 6 of the Anti-Unfair Competition Law are clarified, which are of positive significance in strengthening the protection of film works, and are conducive to creating a sound market environment for the development and prosperity of the film industry.

The original announcement is available here (Chinese only).

Corporate Transparency Act – What You Need to Know

Beginning on January 1, 2024, the U.S. Treasury Department will be implementing heightened transparency disclosure requirements on US corporate entities. These new requirements include disclosing all beneficial owners of US corporate entities for the purpose of preventing white collar crime including money laundering, terrorism financing, and drug trafficking. The Corporate Transparency Act (“CTA”) was passed in early 2021 as part of the National Defense Authorization Act by the Financial Crimes Enforcement Network (“FinCEN”) which is a division of the U.S. Treasury Department.

REPORTING REQUIREMENTS

The CTA will require US corporate entities, such as corporations and LLCs, as well as other entities that fall under the CTA reporting requirements to disclose their ultimate Beneficial Owner Information (“BOI”). A beneficial owner is defined as an individual who, directly or indirectly, either (i) exercises “substantial control” over a reporting company or (ii) owns or controls at least 25 percent of the ownership interests of a reporting company. Certain foreign entities registered to do business in the United States may also be required to file disclosures under the CTA. Although the CTA’s requirements cover a large range of companies, many entities will benefit from an exemption from the reporting requirement including financial institutions, companies with SEC reporting obligations, insurance companies, accounting firms, certain large operating companies, etc. BOI information that will be required includes the name(s) of the individuals that ultimately own the reporting company, their date of birth, address, and a government-issued identification. BOI requirements specify that it must be the individuals that ultimately own a reporting company that are disclosed, and not simply the identity of the shareholders or the members of an intermediary holding company.

TIMING OF DISCLOSURE FILINGS

Entities created before January 1, 2024, have until January 1, 2025, to file their initial BOI report while entities created after January 1, 2024, must file their initial BOI reports within 30 calendar days of their creation or registration. FinCEN recently issued a notice whereby this 30-day rule may be extended to 90 days for 2024 filings, and the 30-day period would apply for filings made during the 2025 year.

ELECTRONIC FILING

Filing BOI reports will be done electronically through an online interface. FinCEN is currently designing and building a new IT system called the Beneficial Ownership Secure System to collect and store CTA reports, but this system will not be available for filing purposes until January 1^st, 2024. According to FinCEN, the filing system will be secure, and the information provided to FinCEN will not be accessible by the public but may be disclosed to other government agencies.

MISTAKES AND CHANGES TO FILING

If any inaccuracies are identified in a BOI report already made by a reporting company, FinCEN has stated a correction must be made within 30 days. This makes the reporting obligation a rolling requirement, and not merely an annual reporting mechanism.

PENALTIES FOR FAILURE TO FILE

Deliberate non-compliance or providing false information to FinCEN can result in penalties up to $500 for each day of the violation. Criminal penalties include imprisonment for up to two years and/or a fine up to $10,000. Penalties are also applied to companies who are aware of or have reason to know of any error or inaccuracy in the information contained in any previously filed report and fail to correct it within 30 days.

Competition for Control of College-Athletes Enters New Playing Field

November 7, 2023, may become a monumental day in the history of the National Collegiate Athletic Association (NCAA). It is the first day of a potentially groundbreaking hearing. Region 21 of the National Labor Relations Board will be hearing a case brought by members of the football, men’s basketball, and women’s basketball teams against the University of Southern California (USC), the PAC-12, and the NCAA. The crux of their argument is that the three major entities should be considered “joint employers” who have systematically misclassified the players as “student-athletes” rather than as employees.

The implications of this Board hearing could have far-reaching implications across the country. The NLRB General Counsel Jennifer Abruzzo has already signaled that, in her opinion, certain players at colleges and universities should qualify as employees of their institutions. If the administrative law judge were to agree with Abruzzo’s opinion, the impact on the national landscape of collegiate athletics would be immediate.

If these players are found to be employees, each player would be entitled to the benefits of traditionally employed individuals, such as compensation, overtime, social security, worker’s compensation, health and safety protections, protections against discrimination and harassment, and a statutory right to unionize and collectively bargain for a share of collegiate sport revenues.

While being found to be employees would be looked at as a major win for the impacted players, such a determination would cause complicated issues for colleges and universities across the country. These issues include compliance with Title IX of the Education Amendments of 1972 and the Immigration Nationality Act, among others. Further, having some teams but not others qualify likely will create a two-tier system throughout the country. This divide would be even further enhanced if the Board finds certain players, but not others, qualify as employees.

Testimony will not be heard until the week of December 18, at the earliest. Higher education institutions, players, and fans alike will be monitoring this hearing as it progresses.

For more news on Student Athletes as Employees, visit the NLR Entertainment, Art & Sports section.

FINRA Facts and Trends: October 2023

Welcome to the latest issue of Bracewell’s FINRA Facts and Trends, a monthly newsletter devoted to condensing and digesting recent FINRA developments in the areas of enforcement, regulation and dispute resolution. This month, we report on ongoing constitutional challenges to FINRA’s enforcement authority, the possible expansion of the SEC’s WhatsApp record-keeping probe to Zoom and other video calling platforms, several multimillion-dollar settlements of FINRA enforcement actions, and more.

Federal Court Allows FINRA Enforcement Action to Proceed Despite Constitutional Challenges

In the wake of the DC Circuit’s July 2023 ruling that granted an injunction staying a FINRA enforcement proceeding against a broker-dealer based on constitutional challenges of FINRA’s authority, two more FINRA member firms have recently filed federal lawsuits seeking to enjoin FINRA proceedings against them on the same basis. First, in August, Eugene H. Kim filed a lawsuit in the District Court for the District of Columbia (the District Court) seeking a stay of a FINRA enforcement action brought against him for allegedly misusing customer funds. More recently, on October 18, Sidney Lebental filed a similar lawsuit in the District Court, seeking a stay of a FINRA enforcement action brought against him for alleged misconduct in connection with his execution of certain trades.

As we reported in July and September, the DC Circuit’s ruling in July granted a preliminary injunction based on a finding that the plaintiff in that case, Alpine Securities Corporation, had “raised a serious argument that FINRA impermissibly exercises significant executive power.” The two more recent lawsuits filed by Kim and Lebental seek to apply this logic to their own cases, and thus to enjoin FINRA’s Department of Enforcement from proceeding with the actions against them.

But in a ruling issued earlier this month, the District Court declined to grant a stay of the FINRA Enforcement proceeding against Kim. While the District Court acknowledged that it takes guidance from the DC Circuit’s preliminary injunction opinion in Alpine, it held that that opinion “does not suggest that courts must enjoin every challenged FINRA enforcement action pending the Alpine merits decision.” To interpret the DC Circuit’s decision as effectively halting all FINRA enforcement actions, the District Court said, “would upend FINRA’s work—a result that would put investors and US securities markets at risk.”

Will the SEC Turn Its Focus to Zoom Recordings After WhatsApp?

The SEC’s highly publicized sweep of financial service providers’ improper use of WhatsApp and other off-channel communication platforms has resulted in settlements exceeding $2.5 billion. Now, people familiar with the scope and findings of the SEC’s WhatsApp probe have raised concerns that the SEC will expand its record-keeping requirement to include calls over video calling platforms, including Zoom and Microsoft Teams. Those who believe that this expansion is inevitable have already taken steps to meet the SEC’s anticipated scrutiny.

Reuters has reported that the proactive steps taken by some firms include retaining technology specialists and risk consultants not only to ensure that video calls are properly monitored and retained, but also to prevent the use of these platforms for sharing non-public information. Already, two “major global banks” are capturing Zoom sessions, said sources with knowledge of the matter. One of these firms is recording calls by traders and other staff, while the other is capturing all calls so they can be accessed at a future time, if necessary. As of now, video calls are subject to little or no formal record-keeping requirements, as they are viewed as proxies for face-to-face encounters. That may change very soon, with regulators apparently poised to begin assessing the potential for compliance failures over video platforms.

Latest FINRA Dispute Resolution Statistics Point to an Increase in Arbitration Filings

FINRA has released its latest dispute resolution statistics for the current year through September 2023. According to FINRA, the number of arbitration filings has increased nearly 25 percent from this time last year. Customer claims have gone up 14 percent, and breach of fiduciary duty was cited as the most frequent customer claim with a total of 1,127 cases, up from 967 this time last year. The number of industry disputes was 43 percent higher than in September 2022 and breach of contract claims have been the most popular claims so far in 2023, with a total of 201 cases, up from 162 cases a year ago. Notably, filings of Regulation BI arbitration claims by customers continue to rise, with 320 claims filed so far this year, compared to just 216 claims in all of 2022. After cracking the top 15 controversy types in May 2022, Reg BI claims through September have moved the category up to 9th place, and the expectation is that heightened Reg BI scrutiny will give rise to even more claims.

We will report on year-end statistics in early 2024.

Source: FINRA, Dispute Resolution Statistics, https://www.finra.org/arbitration-mediation/dispute-resolution-statistics (last visited Oct. 31, 2023).

Lawsuit Against Broker-Dealer Highlights Risks of Online Impersonators

A Swedish woman recently filed a lawsuit in New Jersey federal court against a New Jersey-based FINRA broker-dealer, AlMax Financial Solutions. The complaint alleges that the plaintiff was defrauded out of more than $180,000 — not by AlMax, but by an impostor website that maintained a website falsely impersonating AlMax.

Notably for FINRA members, the plaintiff’s complaint references FINRA Regulatory Notice 20-30 (Fraudsters Using Registered Representatives Names to Establish Imposter Websites), which informs member firms about reports of fraudsters who run imposter websites while posing as FINRA members.

It is unclear whether the lawsuit, which asserts claims for negligence and violation of the New Jersey Consumer Fraud Act, has any legal merit. For one thing, FINRA Regulatory Notice 20-30 prescribes no mandatory measures that member firms must take to root out impostors, and instead only provides certain actions that members “can take” or that they “may also consider.” Nevertheless, the case is a reminder to member firms of the guidance provided by FINRA concerning these imposter websites, and the risks they may pose.

SDNY Judge Halts FINRA Arbitration Brought by Non-Customers

In a ruling issued on October 13, 2023, US District Judge Naomi Buchwald of the Southern District of New York confirmed that FINRA arbitrations may not be commenced by investors who are not customers of a FINRA member firm, and enjoined an ongoing FINRA proceeding on that basis.

The FINRA proceeding in question was filed against Interactive Brokers LLC, a FINRA member firm, by a group of investors in funds managed by EIA All Weather Alpha Fund I Partners, LLC (EIA). According to the FINRA Statement of Claim, EIA misled its investors and misappropriated their investment assets.

EIA separately maintained trading accounts with Interactive Brokers during the relevant period, the FINRA Statement of Claim said. The investor-claimants filed claims against Interactive Brokers, arguing that — even though the investors themselves had no direct relationship with Interactive Brokers — Interactive Brokers had a responsibility to detect and prevent EIA’s misconduct, but failed to do so. And, because EIA’s relationship with Interactive Brokers was governed by an agreement that contained a broad arbitration provision, the investors contended that its claims against Interactive Brokers were subject to FINRA arbitration, either as third-party beneficiaries of EIA’s agreement with Interactive Brokers, or pursuant to FINRA Rules.

In its ruling after Interactive Brokers filed a lawsuit to stay the arbitration, the Court rejected these arguments. Most significantly, the Court reiterated the Second Circuit’s bright-line rule that to qualify as a “customer” for purposes of FINRA Rule 12200, a person must either purchase a good or service from a FINRA member, or maintain an account with a FINRA member. Since the EIA investors had no such relationship with Interactive Brokers, the Court rejected their claim to be “customers” entitled to avail themselves of FINRA Rules. The Court also found that the investors were not third-party beneficiaries of EIA’s agreement with Interactive Brokers, since they did not meet the “heightened threshold for clarity” required to find that a third party has the right to compel arbitration.

Reminder: New Expungement Rule Is Now Effective

This is a reminder that effective October 16, 2023, FINRA amended its rules to provide a stricter standard and procedural process for registered representatives seeking to expunge negative customer-related complaints. We previously provided a comprehensive analysis of the new FINRA expungement rule.

Notable Enforcement Matters and Disciplinary Actions

Inaccurate Trade Data. A multinational financial services firm was sanctioned a total of $12 million by FINRA and the SEC for allegedly submitting inaccurate trading data to the two regulators for nearly a decade. The Letter of Acceptance, Waiver, and Consent (AWC) detailing FINRA’s findings on this matter is available here, and the SEC’s administrative order is available here.Firms submit electronic blue sheets (EBSs) to regulators in response to requests for trade information. These EBSs provide examiners with trade details, including the nature of each transaction, the buyer and seller, and the transaction price. According to the SEC and FINRA, the respondent firm submitted tens of thousands of EBSs between November 2012 and October 2022 that were rife with inaccuracies for hundreds of millions of individual transactions.
The firm’s reporting failures allegedly stemmed from outdated and inaccurate code, manual validation errors and inadequate verification procedures. Prior to being notified of the inaccuracies, the firm had already begun voluntary remedial efforts, including a full-scale, line-by-line analysis of the code underlying its EBS program, automation of the EBS processing procedures and migration of data to a new reporting system.
Trading Approval. A multinational brokerage firm agreed to pay more than $1.6 million to FINRA and the state of Massachusetts to settle claims that it failed to exercise due diligence when approving investors for options trading. The AWC detailing FINRA’s findings is available here.According to regulators, at least some of the alleged violations resulted from a deluge of new account applications in response to the “meme stock” craze of 2020 and 2021. Among other things, the firm’s automated screening system allegedly approved approximately 400 teenagers under the age of 19 to trade options (an impossibility, since the firm’s rules required all customers seeking to trade options to have at least one year of investment experience after the age of 18). The firm also permitted customers to re-submit rejected applications after artificially inflating their trading experience, income and net worth.
Inaccurate Research Reports. A multinational brokerage firm incurred a $2 million sanction over claims that it published thousands of equity and debt research reports with inaccurate conflicts disclosures between 2013 and 2021. The AWC detailing FINRA’s findings is available here.According to FINRA, the firm not only failed to disclose conflicts, but also disclosed conflicts that did not exist. The violations, amounting to more than 300,000 disclosure inaccuracies, allegedly resulted from a series of technical and operational issues, including problems with data feeds, mistakes in the aggregation of client information and a failure to update old data.

FINRA Notices and Rule Filings

Regulatory Notice 23-16 – FINRA amended its By-Laws to exempt from the Trading Activity Fee any transaction by a proprietary trading firm that is executed on an exchange of which the firm is a member. This exemption relates to the SEC’s recent amendments to Exchange Act Rule 15b9-1, which we reported on last month. The TAF exemption for proprietary trading firms will be effective November 6, 2023.
SR-FINRA-2023-013 – FINRA has proposed a rule change that would amend the FINRA Codes of Arbitration Procedure to disallow compensated representatives who are not attorneys from representing parties in FINRA arbitrations and mediations. The proposed rule change would also codify that law students enrolled in a law school clinic and practicing under the supervision of an admitted attorney may represent parties in FINRA arbitrations and mediations.

By Joshua Klein , Keith Blackman , Russell W. Gallaro of Bracewell LLP

For more on FINRA Trends, visit the NLR Financial Institutions & Banking section.

Inadvertent Errors and Tax Hedge Identification

Businesses often manage their price risks by hedging those risks with financial derivative contracts. Because businesses generate ordinary income and loss on their normal business activities, they want to be sure their hedging activities also generate ordinary tax treatment. If these hedging activities were to generate capital gains and losses, they would be basically worthless for many businesses. As a result, business taxpayers want to be able to net their hedging gains and losses against gains and losses on their normal business activities. (See my article, “Hedging: Favorable Tax Treatment Requires Careful Compliance.”)

Tax Hedge Identification Requirements

In order to receive favorable tax treatment, a hedge (Hedge) must be clearly identified “before the close of the day on which it is acquired, originated, or entered into.”[1] The item (or items) being hedged (Hedged Item) must also be identified on a “substantially contemporaneous”[2] basis, but not more than 35 days after the taxpayer enters into the Hedge. And, the tax hedge accounting method must “clearly reflect income.”

In order to comply with these requirements, taxpayers can either establish an aggregate hedge program where they enter their Hedges into a designated hedge account, or they can attach a notation to a Hedge identifying the specific transaction as a “Hedge.” Either way, taxpayers must unambiguously and timely identify their Hedges and Hedged Items. Simply identifying a hedge for financial accounting purposes is not good enough because the hedge identification must clearly state that the identification is for tax purposes.

The Best Laid Plans

So what happens if a taxpayer fails to unambiguously and timely identify the Hedge and the Hedged Item? Mistakes and errors happen. Tax identification can slip through the cracks. Sometimes the employee responsible for proper identification leaves the company and that responsibility is not promptly assigned to someone else. There are many reasons why tax identifications are made late, are incomplete, or are missed entirely. To discourage incomplete or omitted identification, the Code imposes so-called whipsaw rules that treat the gains on misidentified hedge transactions as ordinary and losses as capital.[3] This is a seriously adverse tax result. In limited circumstances, however, a taxpayer can escape the consequence if the failure to provide a proper identification was due to an “inadvertent error.”[4]

Inadvertent Error

Treas. Reg. §1.1221-2(g)(2)(ii) provides that a taxpayer can treat gains and losses on hedges that it has failed to identify if the failure was due to an “inadvertent error.” Unfortunately, neither the Code nor the Treasury regulations define inadvertent error. All we’ve got to go on in this regard is one private letter ruling and two Chief Counsel Advice Memoranda. These documents are not the type of guidance that taxpayers can rely on or cite as precedent. Nevertheless, they are instructive, however, because they give us a look into what the IRS views as inadvertent error.

In LTR 200051035 the IRS stated, “In the absence of a specific definition in the regulations, the term ‘inadvertent error’ should be given its ordinary meaning. . . . The ordinary meaning of the term ‘inadvertence’ is ‘an accidental oversight; a result of carelessness.’”[5] This view seems sensible and entirely appropriate.

Three years later, in CCA 200851082 the IRS Chief Counsel said that the “Taxpayer should bear the burden of proving inadvertence, and its satisfaction should be judged on all surrounding facts and objective indicia of whether the claimed oversight was truly accidental…. The size of the transaction, the treatment of the transaction as a hedge for financial accounting purposes, the sophistication of the taxpayer, its advisors, and counterparties, among other things, are all probative.”

Fair enough, but shortly thereafter, the IRS expressed its displeasure with taxpayers that should have known better and explained when taxpayers can rely on the inadvertent error excuse to receive tax hedge treatment. In CCA 201046015, the IRS Chief Counsel’s Office said that the failure to promptly address failed or improperly identified hedges would undercut a taxpayer’s inadvertent error claim; and that the inadvertent error exception is not intended to “eviscerate” the hedge identification requirements. The IRS went on to state, “Absent a change in the regulation, [it saw] no compelling policy justification to read the inadvertent error rule as an open-ended invitation for taxpayers to brush aside establishing hedge identification procedures.” A taxpayer’s claim of ignorance of the requirement for hedge identification is no excuse and is not grounds for claiming inadvertent error. In other words, inattention to the hedge identification requirements cannot be excused simply by asserting inadvertent error.

CONCLUSION

Notwithstanding the regulatory provision that provides an “inadvertent” error is an excuse for failing to timely identify hedges, it is now clear that the IRS is only willing to entertain an inadvertent error claim in very limited circumstances. Taxpayers have very little hope of being able to rely on this excuse to avoid the whipsaw rule if they do not properly identify their hedging transactions. This is just one more reason why taxpayers must treat the hedge identification requirement with care and seriousness. Failure to do so can have severe tax consequences.

[1] Code § 1221(a)(7).

[2] Treas. Reg. § 1.1221-2(f)(2).

[3] Code § 1221(b)(2)(B).

[4] Treas. Reg. § 1.1221-2(g)(2)(ii).

[5] Dec. 22, 2000.

Crypto Fraud Remains Focus of CFTC Whistleblower Program

For the second straight year, the majority of whistleblower tips received by the Commodity Futures Trading Commission (CFTC) Whistleblower Program were related to cryptocurrency fraud.

On October 31, the CFTC released its Annual Report on the Whistleblower Program for the 2023 Fiscal Year. The report revealed that during the fiscal year, the CFTC received a record 1,530 whistleblower tips.

According to the report, “the majority of tips received during the Period involved allegations of fraudulent solicitation and subsequent misappropriation of crypto/digital assets.” The report further explains that examples of these crypto frauds include “pump-and-dump schemes, fraudulent representations of moneymaking opportunities, or refusals to honor withdrawal requests.”

“The majority of the tips received this year involved crypto—an area that continues to have pervasive fraud and other illegality,” said CFTC Commissioner Christy Goldsmith Romero in a statement supporting the Whistleblower Program. “With the rise of crypto, more retail customers have come under the CFTC’s jurisdiction, making even more critical the efforts of the CFTC’s Whistleblower Program and the Office of Customer Education and Outreach.”

Through the CFTC Whistleblower Program, qualified whistleblowers are entitled to monetary awards of 10-30% of the sanctions collected by the CFTC in the enforcement action related to their disclosure. To qualify for an award, a whistleblower must voluntarily provide original information that leads to a successful enforcement action of at least $1 million.

Back in 2019, the CFTC Whistleblower Program issued a Whistleblower Alert drawing attention to how individuals can blow the whistle on cryptocurrency fraud. The Alert explains that “when a virtual currency is used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce, CFTC enforcement of the [Commodity Exchange Act] comes into play.”

Since then, the CFTC has filed a number of high-profile charges against entities for crypto fraud. For example, in 2021, BitMEX was ordered to pay $100 million for illegally operating a cryptocurrency trading platform and Coinbase was ordered to pay $6.5 million for false, misleading, or inaccurate reporting and wash trading. Earlier this year, the CFTC charged Binance and its founder, Changpeng Zhao, with operating an illegal digital asset derivatives exchange.

In December 2022, CFTC Chair Rostin Behnam testified before the U.S. Senate about the CFTC’s regulation of digital assets and cryptocurrency. Behnam highlighted the essential role the agency’s whistleblower program plays in its enforcement efforts in these areas. “In the absence of direct regulatory and surveillance authority in an underlying cash market, CFTC enforcement activity begins with a referral or whistleblower tip from an external source,” Behnam stated.

Over the past decade-plus, the CFTC Whistleblower Program has become an integral part of the CFTC’s enforcement efforts. Given that in recent years the agency has increasingly focused on cryptocurrency fraud, it is no surprise that the whistleblower program is playing a central role in the CFTC’s efforts on that front.

“Whistleblowers play a vital role in supporting CFTC investigations related to fraud and other illegality,” Commissioner Romero further stated. “The CFTC could not fully protect customers and markets without whistleblowers. Whistleblowers help identify fraud and other illegality, interpret key evidence, and save considerable Commission resources and time. The faster we can stop fraud, the more we can protect customers from harm.”

This article was authored by Geoff Schweller.

October PFAS Regulatory Update

In October 2023, the United States Environmental Protection Agency (EPA) finalized two separate but analogous rulemakings – one under the Toxic Substances Control Act (TSCA), and one under the Emergency Planning and Community Right to Know Act (EPCRA). Both rulemakings pertain to per- and polyfluoroalkyl substances (“PFAS”), commonly referred to as “forever chemicals.” PFAS are manmade chemicals that have been widely used in industry and consumer products since their inception in the late 1930s. PFAS are most known for their resistance to tricky substances such as grease, water, and oil and have been commonly used in a variety of products like cleaning products, water and stain resistant fabrics, nonstick cookware, medical devices, firefighting foam, beauty products, and even things like microwave popcorn bags and pizza boxes.

These rulemakings are significant because they place broad recordkeeping and reporting requirements on facilities that may not have previous experience with either environmental statute. Under the new TSCA rule, any entity that manufactures or has manufactured (including import or previously imported) PFAS or PFAS-containing articles in any year since January 1, 2011, must now report certain information to EPA. Additionally, under the new EPCRA rule, facilities that use more than 100 pounds of PFAS annually must comply with Toxics Release Inventory (“TRI”) reporting obligations and provide downstream businesses with notifications that products may contain PFAS.

Broad PFAS Reporting under TSCA

Considered one of the most significant rulemakings of the year, on October 11, 2023, EPA finalized a rule under TSCA Section 8(a)(7) requiring any person that manufactures (including import) or has manufactured (including imported) PFAS or PFAS-containing articles in any year since January 1, 2011, to electronically report information regarding “PFAS uses, production volumes, byproducts, disposal, exposures, and existing information on environmental or health effects” through EPA’s agency-wide Chemical Data Exchange (“CDX”) portal. The new rule, effective November 13, 2023, triggers specific reporting dates and deadlines depending on the entity’s size and previous and/or current usage of PFAS.

The first of the reporting dates under the new rule applies to any entity, including small entities, that have manufactured and/or currently manufacture (including imported or currently import) PFAS in any year since January 1, 2011. These entities will have 18 months from the effective date of the rule to report PFAS data to the EPA. The second reporting date applies to “small manufacturers” as defined under 40 CFR 704.3 whose reporting obligations are exclusively from article imports. Entities meeting this definition will have 24 months from the effective date of the rule to report PFAS data to EPA. These dates are estimated to fall in May 2025 and November 2025, respectively.

This rule is likely most applicable to those in the electronics, food packaging, and automotive industries, but will also likely ripple to many other types of industries, including those that manufacture and/or import items such as textiles, circuit boards, wires, cables, and pharmaceuticals.

If you believe you may be impacted by this new rule, we recommend developing a strategy immediately to determine whether your company has manufactured or imported PFAS since January 1, 2011. Additionally, if your company has acquired another company since January 1, 2011, we also recommend reviewing that company’s documentation to determine whether there may be any additional reporting requirements triggered.

PFAS Reporting to the Toxics Release Inventory under EPCRA

On October 20, 2023, just a week after the TSCA PFAS rulemaking was finalized, EPA finalized a second PFAS rulemaking under EPCRA. This rule revised the TRI program to impose two new sets of reporting obligations related to 189 specified PFAS. Scheduled to go into effect on November 30, 2023 (and for annual reporting purposes beginning January 1, 2024), the new rule now requires:

An annual reporting obligation to EPA for facilities that use more than 100 pounds of PFAS annually, and
A requirement for business-to-business downstream notifications of the presence of PFAS in certain products

These new requirements are significant because the previously applicable de minimis exception that exempted products containing less than 1% of PFAS (or 0.1% for PFAS qualifying as carcinogens, such as PFOA) from being considered for either reporting or notification purposes, is now removed. Now, under this new rule, any quantity of the 189 specified PFAS counts towards the 100-pound threshold and triggers the downstream notification obligation. While the new rule only applies to 189 specified PFAS, EPA retains the authority to add additional PFAS in the future.

This rule is significant as it could result in numerous products being newly identified as containing PFAS throughout the supply chain. Companies that manufacture, process, or otherwise use PFAS in their operations should immediately develop a strategy to better understand this new rulemaking and determine whether the TRI reporting requirements may be triggered. Additionally, companies that supply PFAS-containing products to downstream business purchasers should evaluate whether additional notifications of the presence of PFAS in the products they supply may be required.

Conclusion

These rulemakings are complex and will have significant impacts on those in the industrial and manufacturing industries. These rules are also likely just the beginning of the PFAS regulatory iceberg.

NLRB Issues Final Rule on Joint-Employer Status, Answering a Major Question No One Asked

On October 26, 2023, the National Labor Relations Board (NLRB or “Board”) issued its Final Rule (the “Rule”) on Joint-Employer status under the National Labor Relations Act (NLRA). Slated to take effect on December 26, 2023, the Rule returns to and expands on the Obama era Browning-Ferris test, scrapping the NLRB’s 2020 Joint Employer test for the sole reason that the current Board disagrees with the 2020 test, and setting up a potential showdown with the Supreme Court over the “major questions” doctrine and the scope of the NLRB’s administrative authority.

The Final Rule Summarized

Under the new Rule, any entity that shares or codetermines one or more of a group of employees’ “essential terms and conditions of employment” will be considered a joint employer of the employees along with any other entity controlling that work, that is their “primary employer.” Those “essential terms and conditions of employment” as listed in a new NLRB Fact Sheet are:

wages, benefits, and other compensation;
hours of work and scheduling;
assignment of duties to be performed;
supervision of the performance of duties;
work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline;
tenure of employment, including hiring and discharge; and
working conditions related to the safety and health of employees.

The Rule is purported to be grounded in common law agency principles and will apply where control – or potential control – over any of the above terms and conditions is reserved to an entity, irrespective of whether or not such control is actually exercised and whether such control is direct or indirect. The Rule is expected to allow the Board to rely on standard contractual terms, such as those typically found in agreements between temporary agencies and other suppliers of labor and their clients, to make sweeping declarations of joint employer status, regardless of the factual circumstances. Such findings would obligate putative joint employers to engage in collective bargaining with employee representatives over any of those essential terms and conditions of employment over which they potentially exercise control, even if such control is indirect. While the NLRB’s press release about the Rule asserts that, to make a codetermination, the Board will conduct factual analyses on a case-by-case basis, it is clear that the Rule will effectively make it much easier for the Board to designate common business relationships as instances of joint employment.

Potential Concerns and Consequences

An expanded definition of joint employment is the latest indicator of the current NLRB’s efforts to cast a wider net across the nation’s workforce, organized or not. The effects remain to be fully realized but may place more businesses directly under the Board’s jurisdiction. For example, where a non-unionized business has a relationship with an organized shop that the NLRB deems to constitute a joint employment arrangement, that non-unionized business could find itself a responding party to an unfair labor practices charge brought by representatives of the shop workers.

Accordingly, employers and their vendors or other suppliers of services and/or labor must consider how their relationships may be viewed under the Rule. Agreements should be reviewed for any language that could be construed as establishing forms of worker control that would implicate an entity as a joint employer and might benefit from the addition of language explicitly providing that such arrangements do not create an employment relationship.

Legal challenges to the Rule are expected, and the NLRB’s position may be on shaky ground following the Supreme Court’s decision in West Virginia v. EPA, which called into question the validity of agency action that the Court determines to be a “transformative expansion” of administrative authority and an attempt to answer a “major question” that is better left to elected representatives in Congress rather than to the Executive Branch’s administrative agencies. To be sure, if allowed to stand, the NLRB’s efforts to establish a Joint Employer rule will have significant ripples throughout the U.S. economy. We will keep you informed as this issue winds its way through the courts.

H-1B Proposal Modernizes H-1B Requirements and Oversight, Provides Limited Flexibility for F-1 Student Visa Program

The White House Office of Management and Budget (OMB) has reviewed and approved a Department of Homeland Security (DHS) proposal to bring oversight of the H-1B visa program to the modern era. This proposal also creates flexibility in the F-1 student visa program for students who are the beneficiaries of timely filed H-1B cap-subject petitions.

Based upon the information published by the Department of Homeland Security, the proposed rule will:

Revise the regulations relating to the “employer-employee relationship”
Provide flexibility for start-up entrepreneurs
Implement new requirements and guidelines for site visits, including those conducted in connection with petitions filed by H-1B dependent employers whose basic business information cannot be validated through commercially available data
Provide limited flexibility on the employment start date listed on the petition
Address “cap-gap” concerns
Bolster the H-1B registration process to reduce the possibility of misuse and fraud in the H-1B registration system
Clarify the requirement that an amended or new petition must be filed where there are material changes, including the streamlining notification requirements related to certain worksite changes

Written public comments must be submitted by Dec. 22, 2023, online at regulations.gov. The proposal, particularly the component aimed at reducing fraud and misuse in the H-1B registration system, is expected to be welcomed by H-1B petitioners and employee beneficiaries who have faced extreme challenges in the lottery in recent years.

Following DHS precedent, the proposed rule is expected to have a delayed effective date should it proceed.

With the fiscal year 2025 H-1B registration season fast approaching, employers and potential H-1B registrants should consider this new proposed rule when solidifying plans for the upcoming registration period.

This article was co-authored by Tieranny Cutler.

For more news on H-1B Oversight Proposal, visit the NLR Immigration section.

Businesses Beware: Penalties for Failure to Comply with Reporting Requirements of the Corporate Transparency Act

Businesses, especially small and privately-owned businesses, should be aware of federal reporting requirements becoming effective Jan. 1, 2024. Congress enacted the Corporate Transparency Act (“CTA”) in 2021 to combat money laundering, terrorism financing, securities fraud, and other illicit financial activities by requiring businesses to be transparent about their ownership. With significant exceptions, the CTA generally requires businesses to report certain information—known as Beneficial Ownership Information (“BOI”)—to the federal government. BOI must be reported to the Financial Crimes Enforcement Network (“FinCEN”)—a Bureau of the U.S. Department of Treasury—where the information will be stored in a secured database. Last year, FinCEN published final regulations implementing the CTA’s reporting requirements. These regulations become effective Jan. 1, 2024.

Businesses should begin preparing for compliance with the CTA, as initial reports for existing businesses must be submitted prior to Jan. 1, 2025, and the penalties for non-compliance are severe.

What is BOI?
The CTA generally requires most domestic and foreign business entities doing business in the United States to report BOI concerning:

persons who directly or indirectly hold a 25% or greater interest in the business;
persons who directly or indirectly “exercise substantial control over” the business; and
for businesses formed after Jan. 1, 2024, persons who assisted in the preparation of the business’s organic documents.
To Whom and When Must BOI be Reported?
For existing businesses, BOI must be reported prior to January 01, 2025.
Businesses formed after Jan. 1, 2024, will have 30 days from confirmation of their formation, incorporation, or registration to report BOI.
If a business’s beneficial ownership changes following the submission of a BOI report, the business must report updated BOI to FinCEN within 30 days after such change.
Penalties for Failure to Comply with the CTA
The penalties for willfully failing to comply with the CTA’s reporting requirements are quite severe. Any person who willfully fails to report BOI or reports it inaccurately may be subject to civil and criminal penalties, including fines up to a maximum of $10,000 and imprisonment up to 2 years. Businesses should be aware that, although they may have been required to supply information regarding the entity to the secretary of state or other similar office upon formation or registration, BOI reports concern the business’ owners or controllers and must be submitted to FinCEN in addition to any information supplied to a state during the entity’s formation or registration.

An Evolving Landscape: Interplay between State Law and the Impact of the CTA on Businesses
It is yet to be seen whether states will adopt similar or identical BOI reporting requirements. As of the date of this post, legislation is pending in New York that would require LLCs to submit BOI to the New York Department of State upon organization or registration with the state. This same legislation also requires existing LLCs to amend their organic documents to include BOI.

Pennsylvania amended its Business Corporation Law effective Jan. 1, 2023, and now requires businesses conducting business in the state to file annual reports containing information regarding the entity itself. Pennsylvania does not currently require reporting of BOI. However, it is likely that Pennsylvania and many other states will soon follow the lead of the federal government and New York in requiring businesses to report BOI on a state level.

Conclusion
The CTA’s adoption is a watershed moment in the regulation of business entities. For the first time, businesses will be required to internally track and monitor their BOI to ensure compliance with the CTA. Moreover, compliance with the CTA will require businesses to evaluate their control structures and contractual relationships. For example, while it may be simple to determine whether a person owns 25% or more of a business, the determination of whether someone “exercises substantial control over” the business may not be so straightforward.

It is strongly recommended that businesses consult an experienced and qualified attorney to determine whether they are subject to the CTA’s reporting requirements, as well as any similar requirements imposed by states in the future.

By Rocco L. Beltrami , John F. Lushis, Jr. of Norris McLaughlin P.A.

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

Tag: business

China’s Supreme People’s Court Releases Typical Cases on Film Intellectual Property Protection

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