I’m not sure what Anti-Money Laundering has to do with the United States military, but Congress included big changes to anti-money laundering law in the National Defense Authorization Act for 2021. After a veto by President Trump and an override by Congress, NDAA has become the law, including Section 6401-6403, the Corporate Transparency Act.
It’s really easy to create a corporation, limited liability company or limited partnership in the United States. There are many, many legal, reasonable and important reasons to be able to do so. From the law enforcement and government sanctions parties, they see the company structure merely as an impediment to their ability to push bad guys out of the US banking system. The government side won and it may have a dramatic impact on the creation and reporting of companies.
The Corporate Transparency Act will require companies to submit a report of their beneficial interest to the U.S. Department of the Treasury’s Financial Crimes and Enforcement Center. For new companies, this information has to be submitted at the time of formation. Existing companies will have to submit this information within two years. All companies will have to update the information for a change of ownership within one year after the change.
The reporting requirement will not apply to all companies, just to any company that fits into the definition of “Reporting Company.” That definition has a lengthy list of companies that are exceptions and fall outside the scope of the Reporting Company definition. Of the twenty-four exceptions, there are some obvious types: public companies, banks, and broker-dealers.
I really wanted to focus on the possible impact on me and private fund managers.
Section 6403 of the NDAA adds a new section 5336 to Title 31 of the US Code. I focused on this exception in 31 USC 5336(a)(11) from the definition of “Reporting Company”:
‘‘(xi) an investment adviser—
(I) described in section 203(l) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3(l)); and
(II) that has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the Securities and Exchange Commission;
So registered investment advisors that report their ownership on Form ADV are not Reporting Companies and don’t have to report ownership. Obviously, they are already reporting ownership.
There is an exception for pooled investment vehicles operated or advised by investment advisers:
‘‘(xviii) any pooled investment vehicle that is operated or advised by a person described in clause (iii), (iv), (vii), (x), or (xi)
Although the definition of “pooled investment vehicle” is very specific:
(A) any investment company, as defined in section 3(a) of the Investment Company Act of 1940 (15 U.S.C. 80a–3(a)); or
(B) any company that—
(i) would be an investment company under that section but for the exclusion provided from that definition by paragraph (1) or (7) of section 3(c) of that Act (15 U.S.C. 80a–3(c));
and
(ii) is identified by its legal name by the applicable investment adviser in its Form ADV (or successor form) filed with the Securities and Exchange Commission.
Later, there is a broader exception:
‘‘(xxii) any corporation, limited liability company, or other similar entity of which the ownership interests are owned or controlled, directly or indirectly, by 1 or more entities described in clause (i), (ii), (iii), (iv), (v), (vii), (viii), (ix), (x), (xi), (xii), (xiii), (xiv), (xv), (xvi), (xvii) (xix), or (xxi);
Companies owned or controlled, directly or indirectly, by a registered investment adviser also fall outside the definition of “reporting company.”
This would seem to be good for private fund managers. The funds and fund subsidiaries seem to fall outside the definition of Reporting Company.
There is still a long path until we get to the point of having to do this reporting. FinCEN will have to establish the regulatory framework and the database to hold this information. It’s not clear how the reporting requirement will specifically interact with the various state secretaries of state who are responsible for company formation.
Sources:
- Corporate Transparency Act (excerpted from the National Defense Authorization Act for 2021)
- Major Changes In AML Compliance And Enforcement-Company Formation And Governance
- Corporate Transparency Act Establishes New Beneficial Ownership Reporting Requirements for U.S. and U.S.-Registered Foreign Companies
