With the new requirements that corporations, limited liability companies and other entities report the identities of their beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”), the chief compliance officer (“CCO”) of an investment adviser firm and sponsors of pooled investment vehicles should be aware that certain investment adviser firms and pooled investment vehicles are eligible for an exemption from FinCEN’s beneficial ownership reporting requirements.
Overview of the Beneficial Ownership Reporting Requirements
The beneficial ownership reporting requirements stem from the Corporate Transparency Act (“CTA”) which was passed into federal law in 2021 on a bi-partisan basis and aims to curb illicit financial activities by mandating the disclosure of beneficial owners of various entities to the U.S. government.
Corporations, limited liability companies, and other entities are required to file a beneficial ownership report with FinCEN. The report will disclose each “beneficial owner” of the reporting company, which is defined as any individual who, directly or indirectly, exercises substantial control over an entity or owns or controls at least 25% of the ownership interests of an entity.
If the reporting company was created or registered to do business before January 1, 2024, then it will have until January 1, 2025, to file its initial beneficial ownership information report with FinCEN. If the reporting company was created or registered on or after January 1, 2024, and before January 1, 2025, it will have 90 calendar days after receiving notice of the company’s creation or registration to file its initial beneficial ownership report with FinCEN.
The information collected from an entity’s beneficial ownership report will be accessible to law enforcement agencies and, in certain cases, financial institutions (with customer consent), facilitating the identification and prevention of financial crimes.
Exemptions for Investment Adviser Firms
Significantly, the CTA and the subsequent guidance from FinCEN, the Small Entity Compliance Guide: Beneficial Ownership Information Reporting Requirements, provides exemptions for 23 categories of entities, including Exemption #10 for entities which meet the definition of an “investment adviser” under Section 202(a)(11) of the Investment Advisers Act of 1940 as amended (“IAA ’40”) and is also registered as an investment adviser with U.S. Securities and Exchange Commission (“SEC”) under the IAA’40. For purposes of Exemption #10, this exemption does not appear to include an investment adviser firm registered with a state securities regulator or not required to register as exempt reporting adviser (“ERA”). Consequently, the state-registered investment adviser firm will need to look for other exemptions.
Under Exemption #13, an entity qualifies for an exemption from the BOI reporting requirements if the entity is an “insurance producer ” authorized by the state and subject to supervision by the state insurance regulator and has an operating presence at a physical office in the United States.
In addition, FinCEN provides Exemption #18 for a pooled investment vehicle if it meets a two prong test.
- The first prong requires that the pooled investment vehicle must either (i) meet the definition of an “investment company” under Section 3(a) of the Investment Company Act of 1940 (“ICA”), or (ii) would meet the definition of an “investment company” under Section 3(a) of the ICA but for the paragraph (1) or (7) of Section 3(c) of the ICA and also is included (referencing the entity’s legal name) in the applicable investment adviser’s Form ADV or will be so identified in the next annual updating amendment of the Form ADV.
- Under the second prong, the pooled investment vehicle must also be operated or advised by one of the following FinCEN exempt entities: a bank as defined in Exemption #3; a credit union as defined in Exemption #4; a broker or dealer in securities as defined in Exemption #7; an investment company or investment adviser as defined in Exemption #10; or a Venture capital fund adviser as defined in Exemption #11.
The pooled investment vehicle must meet both prongs to be exempt from FinCEN’s reporting requirements.
Please refer to the Small Entity Compliance Guide: Beneficial Ownership Information Reporting Requirements for other available exemptions such as an investment company, venture capital fund adviser, broker-dealer, insurance company, bank, or credit union. To the extent that an investment adviser firm is owned by another legal entity which doesn’t qualify for a FinCEN exemption, it appears that the parent company will need to file a beneficial ownership report for itself.
According to FinCEN’s FAQs on Beneficial Ownership Reporting Requirements, these exempt entities are not required to report their beneficial ownership information to FinCEN under the current regulations. This exemption is predicated on the rationale that such entities are already subject to comprehensive regulatory oversight and reporting requirements, which include obligations to disclose beneficial ownership information.
Anticipating Anti-Money Laundering Rule for Investment Advisers
In late 2023, the White House has announced that U.S. Department of the Treasury plans to propose in 2024 a new anti-money laundering rule for investment advisers. The U.S. Department of Treasury provided further details in the following excerpt from a press release:
Investment advisers are not subject to consistent or comprehensive AML/CFT obligations in the United States, creating the risk that corrupt officials and other illicit actors may invest ill-gotten gains in the U.S. financial system through hedge funds, private equity firms, and other investment services. In line with the U.S. Strategy on Countering Corruption, Treasury is re-examining the 2015 NPRM regarding this sector, and aims to issue in the first quarter of 2024 an updated NPRM that would propose applying AML/CFT requirements pursuant to the Bank Secrecy Act, including suspicious activity reporting obligations, to certain investment advisers.
For investment adviser firms especially those managing or advising private funds, this development signals the need for proactive engagement with regulatory trends and potential adjustments to compliance strategies. Staying informed about proposed changes and participating in the rule-making process through public comments can help shape outcomes that are both effective in combating financial crimes and practical for the industry.
Conclusion
In summary, while the immediate reporting obligations under the CTA may not apply to SEC registered investment adviser firms as defined in FinCEN Exemption #10 or pooled investment vehicles as defined in FinCEN Exemption #18, it appears at this time that state-registered investment advisers will need to report beneficial ownership information to FinCEN (unless qualifying under another FinCEN exemption).
Disclosures
The information contained in this blog post is general in nature, intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. This is merely a summary and does not necessarily include all material requirements and exceptions from the applicable rule or regulatory guidance. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult U.S. Department of Treasury’s rules and published guidance for more details about the topics referenced above. Since this is a new regulation, there’s a significant possibility that the U.S. Department of Treasury will issue further regulatory guidance which will not necessarily be reflected in this blog post. RIA Compliance Consultants, Inc. is not a law firm and does not provide legal services. This is not a legal opinion as to whether a particular entity is required to file a beneficial ownership information report with the U.S. Department of Treasury. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.
Posted by Bryan Hill
Labels: Anti-Money Laundering
