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Managing CTA Compliance - Part 2

This is the second in a two-part series on Managing CTA compliance.

Managing CTA compliance is going to be a significant task for companies when the Corporate Transparency Act takes effect. 

Background

The CTA requires each reporting company to file a beneficial ownership report. That report must identify the company's "company applicant" and each "beneficial owner." For each company applicant and beneficial owner, the report must include each individual's:

1. Full legal name,

2. Date of birth,

3. Current residential address, 

4. A unique identifying number from an acceptable identity document (such as an unexpired drivers license or passport) or a unique identity number generated by FinCEN; and

5. An image file of the document that provides the unique identifying number.

In Part 1 we talked about steps that companies should take to begin collecting the requisite data. In Part 2, we are going to address procedures that companies can adopt to develop "360 degree awareness" of data changes that might trigger a company's duty to file an amendment.

360 Degree Awareness

The Corporate Transparency Act requires a reporting company to file an amendment within 30 calendar days after any change in an item of previously-reported data.

Because a company's beneficial ownership report includes specific items of PII for the company applicant and each beneficial owner, any change in a covered individual's home address or unique identification number (or the document that relates to it) could trigger a duty to file an amendment.

In addition, because the definition of "beneficial owner" includes each individual who has "substantial control," reporting companies must develop a procedure to monitor changes in facts that might change an individual's possession of "substantial control."  

Substantial Control

FinCEN's proposed regulation provides that, "Substantial control over a reporting company includes:

(i) Service as a senior officer of the reporting company;

(ii) Authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors (or similar body);

(iii) Direction, determination, or decision of, or substantial influence over, important matters affecting the reporting company, including but not limited to:

     (A) The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;

     (B) The reorganization, dissolution, or merger of the reporting company;

     (C) Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;

     (D) The selection or termination of business lines or ventures, or geographic focus, of the reporting company;

     (E) Compensation schemes and incentive programs for senior officers;

     (F) The entry into or termination, or the fulfillment or non-fulfillment of significant contracts; and 

     (G) Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; and

(iv) Any other form of substantial control over the reporting company.

At a superficial level, the concept of "substantial control" means that the reporting company's compliance officer must remain aware of changes in corporate governance that might trigger a change.

For example, Mr. Jones might have "substantial control" when the company files its first report because he is on the board of directors. If Mr. Jones subsequently resigns from the board of directors, the company's compliance officer should immediately evaluate whether that fact represents a change that should trigger an amendment to the beneficial ownership report.

At a deeper level, however, depending on the reporting company's structure, relevant changes in circumstances could extend upwards through the ownership structure and require the compliance officer to remain aware of changes inside the entities that own the reporting company.

For example, if more than 25% of the reporting company is owned by ACME Corporation and ACME Corporation has three individuals on its board, each of these three individuals may likely be "beneficial owners" of the reporting company because of their indirect control through ACME Corporation. As a result, a resignation of one of them from the ACME Corporation board might trigger the reporting company to file an amendment (even though traditional corporate governance would not ordinarily extend visibility to those matters down to the reporting company level).  

Accordingly, to ensure that the reporting company has timely access to these kinds of corporate governance changes, reporting companies should put shareholder agreements in place that extend visibility throughout the corporate structure accordingly. 

Companies who must file beneficial ownership reports under the CTA will find this definition of substantial ownership difficult to apply. The CTA provides that it is a felony for any individual willfully to file an inaccurate report. (CTA, Sec. 6403(h)). Those responsible will not want to put themselves in legal jeopardy for making a judgment call about which directors have substantial control.

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fincen, corporatetransparencyact, cta, compliance, corporate transparency act, corporate and business, wilson_jonathan, insights

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