Category: Technical Topics

The CTA’s Effect on Bearer Stock: An Introduction

The Corporate Transparency Act (CTA), enacted to promote transparency and combat illicit activities, has significant implications for various aspects of corporate governance and ownership structures.

One notable area affected by the CTA is the issuance of bearer stock, a once-common method in some states for evidencing ownership interest in a company.

The CTA explicitly prohibits the issuance of bearer shares, fundamentally altering how ownership interests can be documented and transferred.

This article explores the impact of the CTA on bearer stock and the broader implications for corporate transparency and compliance.

Understanding Bearer Stock

Bearer stock refers to shares of a company owned by whoever holds the physical stock certificates, without the need for registration or ownership records. This form of stock ownership has historically been attractive due to its anonymity and ease of transfer.

However, these same characteristics have made bearer stock a vehicle for money laundering, tax evasion, and other illicit activities, as it allows ownership to be transferred without leaving a paper trail.

The Corporate Transparency Act’s Provisions

The CTA includes a specific prohibition against the issuance of bearer shares. According to the CTA §5336(f):

“A corporation, limited liability company, or other similar entity formed under the laws of a State or Indian Tribe may not issue a certificate in bearer form evidencing either a whole or fractional interest in the entity.”

The core premise of bearer stock—anonymous ownership—is fundamentally at odds with the transparency objectives of the CTA.

By explicitly prohibiting the issuance of bearer shares, the CTA ensures that all ownership interests must be registered and traceable. Companies that previously relied on bearer stock for anonymity must now transition to registered shares, where ownership is documented and reported.

Effect on BOI Reporting Requirements

The CTA imposes a new compliance requirement on companies, including regular updates and corrections to beneficial ownership information (BOI) filings.

Bearer stock, which lacks a mechanism for tracking ownership changes, means companies with these shares must adopt more transparent ownership structures that allow for accurate and timely reporting to the Financial Crimes Enforcement Network (FinCEN).

Entities that continue to issue bearer stock or fail to comply with BOI reporting requirements face increased regulatory scrutiny and potential penalties. The CTA empowers authorities to enforce compliance and penalize non-compliant entities, further deterring the use of bearer stock.

Companies must ensure their ownership structures align with the CTA’s transparency goals to avoid legal and financial repercussions.

Broader Implications for Corporate Governance

The CTA effect on bearer stock is part of a broader shift towards greater transparency and accountability in corporate governance.

By eliminating anonymous ownership, the CTA fosters a business environment where illicit activities are harder to conceal. This shift benefits legitimate businesses by creating a level playing field and enhancing trust among investors, regulators, and the public.

Companies must adapt to these new requirements by transitioning to registered shares and ensuring compliance with BOI reporting obligations.

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CTA Exemption for a Broker or Dealer in Securities: Introduction

The Corporate Transparency Act (CTA) was enacted to bring transparency into the ownership structures of legal entities in the US. Its primary aim is to uncover and mitigate illicit activities such as money laundering and fraud. As there are many kinds of entities operating in the U.S. economy, providing exemptions for certain types of entities due to the nature of their activities is something to be aware of. Among the 23 identified exemptions, this article expands upon the “broker or dealer in securities” exemption.

Broker or Dealer Under the Securities Exchange Act

To understand the CTA exemption for a broker or dealer in securities, it is essential to grasp the definitions provided under section 3 of the Securities Exchange Act of 1934 (SEA) (15 U.S.C. 78c): Broker: A broker is defined as any person engaged in the business of effecting transactions in securities for the account of others. This includes individuals or firms that facilitate the buying and selling of securities on behalf of clients, such as stockbrokers and brokerage firms. Dealer: A dealer, on the other hand, is any person engaged in the business of buying and selling securities for their own account, through a broker or otherwise. This category includes market makers and firms that trade securities for their own investment purposes.

Qualification Criteria for the Broker or Dealer in Securities Exemption

An entity can qualify for this exemption if both of the following conditions are met:

1. Definition Alignment: The entity must be a “broker” or “dealer,” as defined in section 3 of the SEA (15 U.S.C. 78c). This ensures that the entity is engaged in the business of trading securities either on behalf of others or for its own account.
2. Registration Requirement: The entity must be registered under section 15 of the SEA (15 U.S.C. 78o). This section mandates registration for brokers and dealers who conduct transactions in securities, ensuring they adhere to regulatory standards designed to protect investors and maintain market integrity.

Revisiting Exemption Status

It is important to maintain thorough records to support any claimed exemption from the CTA and to periodically revisit the exemption status. If definitions are not met and/or the entity is no longer registered under the applicable section of the SEA, the entity may be subject to CTA  reporting requirements. If an initial BOI report has already been filed and later meets this exemption, a “newly exempt entity” BOI Report will need to be filed within 30 days of the status change – you cannot simply cease reporting right away. The CTA exemption for a broker or dealer in securities acknowledges the extensive regulatory oversight these entities already undergo. Registered brokers and dealers are subject to rigorous standards and scrutiny by regulatory bodies such as the Securities and Exchange Commission (SEC). By recognizing this existing oversight, the CTA aims to avoid redundancy in reporting requirements while still fulfilling its objective of transparency and anti-fraud measures.

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In today’s regulatory environment, accurately reporting beneficial ownership under the Corporate Transparency Act (CTA) is crucial for avoiding penalties. One specific area of focus is the role of corporate trustees and how they should be reported as beneficial owners. This article delves into the nuances of how to report a corporate trustee and the conditions under which a corporate trustee can be named instead of individual beneficial owners. Understanding these aspects is essential for ensuring accurate and compliant reporting practices. 

How to Report a Corporate Trustee as a Beneficial Owner

The process for reporting a corporate trustee as a beneficial owner depends on the structure and extent of ownership the trustee holds in the reporting company. Below are the steps you should take to determining the right beneficial owners: 

Determine Ownership Proportion

Calculate the percentage of the reporting company that the corporate trustee indirectly controls through the trust. For example, if a corporate trustee owns 70% of a trust that holds 40% of a reporting company, then it controls 28% of the company, qualifying as a beneficial owner.

Consider the Conditions for Reporting the Name of the Corporate Trustee

The corporate trustee can only be reported by name instead of the individual beneficial owners if: 

• The corporate trustee itself is exempt from reporting requirements.
• The beneficial ownership threshold (25% control) is met solely through the trustee’s ownership interest in the reporting company.
• No individual beneficial owner of the corporate trustee exercises substantial control over the reporting company. The same criteria for substantial control apply as they would for any other beneficial owner.

Consider the Conditions for Reporting the Name and FinCEN ID of the Corporate Trustee

The corporate trustee can only be reported by name and its FinCEN ID instead of the individual beneficial owners if: 

• The corporate trustee itself has filed a BOI Report and has provided their ID to the reporting company.
• The beneficial ownership threshold (25% control) is met solely through the trustee’s ownership interest in the reporting company.
• The corporate trustee and the reporting company have the same beneficial owners.
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Accurately reporting corporate trustees as beneficial owners is a complex yet essential task in today’s regulatory landscape. By understanding and adhering to these guidelines, organizations can ensure they meet compliance requirements and avoid potential penalties.

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How To Respond as a Newly Exempt Entity Under BOI Rule

If a company has previously filed a Beneficial Ownership Information Report (BOIR) under the Corporate Transparency Act (CTA) and subsequently undergoes structural or ownership changes that grant it an exempt status, it is no longer mandated to submit updates to FinCEN. However, simply ceasing updates is not the first step if your company becomes exempt; certain measures must be taken in light of this new status.

Understanding BOIR

The Beneficial Ownership Information Report (BOIR) is a critical reporting requirement created under the CTA, and which triggers filing requirements beginning January 1, 2024. These disclosure rules mandate that certain entities disclose information about their beneficial owners and potentially their company applicants as well to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. These reporting companies must also report any changes in beneficial owner information within 30 days of the change occurring. 

What to Do If Your Company Becomes Exempt

If your company becomes exempt from filing a BOIR after having previously submitted a report, several steps should be taken to ensure compliance: 

1. Consult with legal counsel or regulatory authorities to confirm that your company meets the criteria for exemption under the BOI rule.
2. Once it is determined that your company is exempt, you must report to FinCEN that your company is “newly-exempt” by selecting the applicable box on a new BOIR. Other information to be provided on this final report includes the FinCEN Identifier that was assigned from the initial report or legal name, tax ID type, tax ID number, and country/state of jurisdiction of the newly-exempt entity. This information will be used to tie the report to the previous filing.
3. Retain all records and documentation related to your previous BOIR filings, as these may be needed for audits or inquiries in the future.
4. Continue to seek advice from legal and financial professionals to stay informed about any changes in regulatory requirements that may affect your company and its exemption status. 

Are Your Prepared for the CTA? 

If your company becomes exempt from filing a BOIR after previously reporting, it is important to confirm your exemption status, file a new BOIR, retain records, and stay informed about ongoing compliance obligations. Remaining vigilant and proactive in your approach to regulatory compliance is key to navigating the evolving landscape of corporate transparency and financial regulation.

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What is Substantial Control, and Why Does it Matter?

The Corporate Transparency Act (CTA) introduces the reporting of beneficial owners of majority U.S. and foreign entities to the Financial Crimes Enforcement Network (FinCEN). Traditionally, the term “beneficial owner” has been closely associated with individuals holding a financial interest in a company, as delineated under the Bank Secrecy Act. However, the CTA broadens this definition to encompass individuals with “substantial control” over a company. This part of the definition may call for professionals and their clients to have a second thought about who to report as beneficial owners on their entities’ Beneficial Ownership Information (BOI) reports. Below, we will seek to answer the question: what is substantial control?

Understanding “Substantial Control”

The CTA defines three primary avenues through which an individual can exert substantial control over a reporting company, directly or indirectly, thereby qualifying as a beneficial owner:

1. Senior Officer Role: This category includes individuals serving in high-ranking positions such as President, CEO, COO, CFO, or those undertaking similar responsibilities. It’s crucial to recognize that the essence of substantial control reaches beyond formal titles, focusing instead on the functions and duties performed. Companies lacking positions with traditional corporate titles must evaluate the roles of their members to identify those fulfilling equivalent senior management responsibilities.
2. Authority over Appointments: Individuals with the power to appoint or dismiss senior officers or board of directors embody another facet of substantial control. This authority signifies a significant influence over the company’s strategic direction and operational dynamics, making it a critical factor in the identification of beneficial owners.
3. Decision-Making Power: The capacity to make or influence critical business decisions is a definitive marker of substantial control. FinCEN categorizes these critical decisions into three broad areas:
   • Business Decisions: Including but not limited to the company’s strategic focus, venture creation or termination, and significant operational changes.
   • Financial Decisions: Encompassing major asset transactions, investments, budget approvals, and financial structuring.
   • Structural Decisions: Relating to corporate restructuring, mergers, and amendments to governance documents.

There is also a fourth category that FinCEN specifies in the final regulations that is not necessarily defined, as it is the ‘catch-all.’ Essentially, the last avenue is “any other form of substantial control over the reporting company.” FinCEN explains that control exercised in new and unique ways can still be substantial. For instance, within the realm of flexible corporate frameworks, there might be distinct signs of control that do not fit neatly into the previously mentioned categories. This broad category introduces the potential for diverse interpretations as legal experts and certified public accountants (CPAs) guide their clients. In such cases, some advisors might lean towards recommending the reporting of individuals even in situations where it’s unclear if they align precisely with any of FinCEN’s provided examples. An often-overlooked aspect of substantial control involves individuals holding a Power of Attorney (POA) that grants them the authority to make decisions on behalf of the company or its owners. Such individuals may not hold any formal title or position within the company but can exert control equivalent to that of a beneficial owner through their decision-making capabilities.

Implications for Reporting Companies

Determining individuals with ‘beneficial ownership’ under the CTA requires a comprehensive review of a company’s governance structure and decision-making processes. Business owners must perform a diligent assessment to identify individuals who, through their roles, authority, or decision-making power, exert substantial control over the company.

Are You Prepared to File?

To download our Substantial Control Organizer to aid in the collection of beneficial owner information from your clients, click here: Substantial Control Organizer.

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