Effective January 1, 2024, the U.S. Treasury Department Financial Crimes Enforcement Network (“FinCEN”) established the Beneficial Ownership Information Reporting Requirements Rule (the “BOIR Rule”) to implement certain beneficial ownership information reporting requirements of the Corporate Transparency Act (the “CTA”). The BOIR Rule requires most entities to report certain identifying information about their beneficial owners, unless the entity falls under a list of enumerated exemptions. Although FinCEN is expected to continue to update its interpretation of the BOIR Rule and the CTA, the current interpretation is relevant to private equity fund sponsors who, after conducting an entity-level analysis, may be eligible to avail themselves of an exemption.
Who is subject to the BOIR Rule?
Corporations, LLCs or other entities formed by filing a document with a secretary of state or similar office, as well as foreign entities registered to do business in the U.S. by filing with a secretary of state (collectively, “reporting companies”) are required to file their beneficial ownership information with FinCEN under the BOIR Rule.
The BOIR Rule provides for 23 exemptions from this filing. The primary exemptions relevant to funds include:
– Large Operating Companies – companies that have an operating presence and physical office in the U.S. with more than 20 employees and more than $5 million in U.S. sourced consolidated annual receipts.
– Registered Entities – many entities that are registered with the SEC or subject to federal supervision, such as regulated financial institutions, registered investment advisers (“RIAs”), pooled investment vehicles (“PIVs”) and registered investment companies.
– Subsidiaries of Exempt Entities – subsidiaries of exempt entities that are wholly owned or controlled by an exempt entity are also exempt; however, this exemption does not apply to subsidiaries of exempt PIVs.
What must be reported?
Reporting companies that do not fall under any exemption must report:
– Certain identifying information of the reporting company, including any trade names and its tax identification number.
– Each individual who, directly or indirectly, holds 25% or more ownership or exercises “substantial control” over the reporting company (each, a “beneficial owner”)
– Certain identifying information for each beneficial owner, including residential address and a copy of a valid governmental ID.
When is the filing due?
Entities formed after January 1, 2024 must file within 90 days of formation.
Entities formed before January 1, 2024 must file before January 1, 2025.
Entities that have made an initial filing must file an updated filing within 30 days of any change to any information reported.
Considerations for the Private Equity Industry
Private equity sponsors will need to conduct a top-down evaluation of each entity within the structure of their funds to determine if any such entity is required to file with FinCEN. Although the BOIR Rule provides exemptions for some subsidiaries of exempt entities, the subsidiary exemption does not apply to subsidiaries of PIVs and requires that the subsidiary is controlled or wholly owned by the exempt entity. Due to these limitations, many holding companies and special purpose vehicles will likely be required to file. Similarly, many upper-tier management holding companies and GPs may be subject to filing unless they otherwise qualify for an exemption. Importantly, foreign entities that are not registered to do business in the U.S. are outside the scope of the CTA and not subject to the reporting requirements.
RIAs and Relying Entities
The BOIR Rule explicitly exempts any investment adviser (as defined in the Investment Advisers Act of 1940, (the “Advisers Act”)) that is registered under the Advisers Act with the SEC. Importantly, the exemption does not extend to investment advisors only registered on the state level. Although other exemptions may apply, the RIA exemption requires registration with the SEC.
Additionally, although FinCEN has not provided specific guidance on the topic, the general consensus in the legal community is that “relying advisors” that conduct their advisory business through an “umbrella registration” are also exempt under the BOIR Rule. The SEC rules provide that relying advisors are RIAs in substance, although they are not required to file separate registrations when identified on the affiliate’s Form ADV. Given FinCEN’s reliance on many SEC rules in the BOIR Rule, an inconsistent interpretation would have little regulatory benefit, while introducing undue complexity and ambiguity.
Similarly, certain GPs created by an RIA may also rely on the exemption as a deemed investment adviser if they meet the conditions set forth in the SEC Staff’s 2005 and 2012 no-action letters to the American Bar Association. In relevant summary, the conditions of these letters are (a) the RIA established the entity to act as the fund’s GP, (b) the formation documents designate the RIA to manage the fund’s assets, (c) all of the investment advisory activities of the GP are subject to the Advisers Act and subject to SEC examination, and (d) the RIA subjects the GP and its employees and agents to the RIA’s supervision and control.
Pooled Investment Vehicles
The exemption for PIVs is likely to apply to most funds managed by private equity sponsors, but each fund must clearly satisfy the requirements of the BOIR Rule. The exemption requires that the PIV: (1) is either (a) a registered investment company, or (b) a fund that relies on an exemption under sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 and is (or will be) identified by name in the adviser’s Form ADV; and (2) is operated or advised by a bank, credit union, broker dealer, RIA or venture capital fund adviser (each as defined in the BOIR Rule). A limitation to this exemption is that the vehicle must be listed on the Form ADV. For vehicles that are not listed, the adviser should review the potential implications of listing the vehicle and consider whether the benefits of qualifying for the PIV exemption outweigh the potential downside of identification.
Importantly, the subsidiary exemption in the BOIR Rule does not apply to subsidiaries of PIVs. Direct and indirect subsidiaries of PIVs must independently qualify for a reporting exemption, unless the facts and circumstances of the fund reflect that the subsidiary is controlled by an RIA or other exempt entity. In some cases, if the PIV is wholly owned or controlled by an RIA, certain subsidiaries of the PIV may be deemed to be controlled by the RIA and therefore fall under the RIA’s subsidiary exemption. However, relying on this indirect exemption should be considered on a case-by-case basis for each PIV subsidiary, as the analysis here is dependent on the relationship among the relevant entities.
Subsidiary exemption
The subsidiary exemption under the BOIR Rule provides that “any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more exempt entities” is exempt from the filing requirements. However, the availability of this exemption requires careful analysis of the ownership and control rights that an exempt entity has over the subject subsidiary, as each such subsidiary must 100% owned or 100% controlled by an exempt entity to avail itself of the subsidiary exemption.
Upon a determination that an entity is 100% owned or controlled by an RIA, such entity may avail itself of the subsidiary exemption. However, as noted above, subsidiaries of an exempt PIV are not presumptively exempt from the BOIR Rule. Such subsidiaries must independently satisfy the criteria of an exemption under the BOIR Rule unless they are otherwise wholly controlled by an exempt entity. This determination is highly fact specific and requires a review of both ownership and minority voting rights of such PIV subsidiary.
Due to the fact specific analysis required to rely on this exemption, fund professionals must carefully examine their fund structure from the top down to determine which entities satisfy the subsidiary exemption criteria. Reliance on this exemption should be based on careful consideration alongside trusted legal advisors.
Take Aways
In conclusion, implementation of the BOIR Rule presents unique challenges for the private equity industry. There are several exemptions that apply to private equity fund sponsors; however, due to the nuanced nature of these exemptions and the complex structure of most private equity funds, fund sponsors must carefully evaluate each entity within its fund structure to determine if it satisfies the criteria of an applicable exemption. Although FinCEN continues to refine its guidance, the CTA and the BOIR Rule are in effect now and private equity fund sponsors must be vigilant in determining its current reporting obligations in connection with new entity formations and its upcoming reporting deadlines for existing funds.
Dated: June 12, 2024
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
