The Corporate Transparency Act (CTA), enacted as part of the National Defense Authorization Act for Fiscal Year 2021, mandates certain U.S. businesses to disclose beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). This article is the second article in a series that I am publishing to help guide clients through the new requirements of the CTA. You can read the first article in the series – an introductory overview of the CTA – here. While the overall aim of the CTA is to enhance financial transparency and combat illicit financial activities, some entities are intentionally excluded from the law. The CTA provides 23 specific exemptions for circumstances in which an entity need not file a report of Beneficial Ownership Information (BOI).

The 23 Exemptions:

  1. Reporting Public Companies: This exemption mainly applies to very large companies who are subject to Securities and Exchange Commission (SEC) reporting and disclosure requirements already. If an entity is required to file reports such as Form 10-K, 10-Q, 8-K and so forth under the Securities Exchange Act of 1934 (the 1934 Act) as (A) an issuer of a class of securities registered under §12 of the 1934 Act or (B) subject to reporting under §15(d) of the 1934 Act, then the entity is exempt from the CTA. This exemption makes a certain amount of sense because it would be impractical, cost-prohibitive, and perhaps privacy-invading for a large company like Microsoft, Google, Berkshire Hathaway, or Wal Mart to disclose every single one of its public shareholders.
  2. Governmental Entities: Federal, state, local, and tribal governments, along with their subdivisions, are exempt. In order to qualify as a “government” an entity must be (A) established under federal, state, local, or tribal law and (B) exercise governmental authority on behalf of the United States, a State, a Tribe, or a political subdivision.
  3. Banking Entities: Banks are exempt. Banks are already extensively regulated, and it would be redundant to attempt to require CTA disclosures. For purposes of this exemption, the definition of Bank is found in: (A) §3 of the Federal Deposit Insurance Act, (B) §2(a) of the Investment Company Act of 1940, or (C) §202(a) of the Investment Advisers Act of 1940
  4. Credit Unions: Credit Unions are exempt, probably for most of the same reason that banks are exempt. “Credit Union” is defined in §101 of the Federal Credit Union Act (FCUA).
  5. Bank Holding Companies/S&L Holding Company: Bank Holding Companies and Savings & Loan Holding Companies, as defined in §2 of the Bank Holding Company Act of 1956 and §10(a) of the Home Owners’ Loan Act, respectively, are exempt. Presumably, again, these institutions are already heavily regulated
  6. Certain Money Businesses Already Registered with FinCEN: Any “money transmitting business” registered with FinCEN under 31 USC 5330 is exempt because it’s already registered with FinCEN, so one would not expect much to be gained by registering with FinCEN a second time. So is a “money services business already registered with FinCEN under 31 CFR 1022.380, presumably for the same reason.
  7. Registered Securities Brokers or Dealers: The terms “broker” and “dealer” are defined in §3 of the 1934 Act. If you are a broker or dealer and you are already registered under §15 of the 1934 Act, you are exempt.
  8. Registered Securities Exchanges or Clearing Agencies: The terms “securities exchange” and “clearing agency” are defined in §3 of the 1934 Act. If you are a securities exchange or a clearing agency and you are registered under §6 or §17A of the 1934 Act, you are exempt.
  9. Other 1934 Exchange Act Registered Entities: If you do not fall under exemption 1 (Reporting Issuer), exemption 7 (Broker/Dealer), or exemption 8 (Securities Exchange/Clearing Agency), but you are nonetheless registered with the SEC under the 1934 Act, you are exempt.
  10. Registered Investment Companies and Registered Investment Advisers (RIAs): If you are an “Investment Company” as defined in Section 3 of the Investment Company Act of 1940 and registered with the SEC under the same Act, you are exempt. If you are an “Investment Adviser” as defined in §202 of the Investment Advisers Act of 1940 and registered with the SEC under the same Act, you are exempt.
  11. Venture Capital Fund Adviser: The term “Venture Capital Fund Adviser” is defined in §203(l) of the Investment Advisers Act of 1940. If a VC Adviser has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the SEC, then that VC Adviser is exempt.
  12. Insurance Company: An “Insurance Company” within the meaning of §2 of the Investment Company Act of 1940 is exempt. That definition is as follows: “a company which is organized as an insurance company, whose primary and predominant business activity is the writing of insurance or the reinsuring of risks underwritten by insurance companies, and which is subject to supervision by the insurance commissioner or a similar official or agency of a State; or any receiver or similar official or any liquidating agent for such a company, in his capacity as such.”
  13. Insurance Producer Licensed By a State: an “insurance producer” that is authorized by a State and subject to supervision by the insurance commissioner or a similar official or agency of a State is exempt, provided that the “insurance producer” has an operating presence at a physical office in the US.
  14. Registered Entities Under the Commodities Exchange Act: An entity can qualify for this exemption in two ways. First, a “registered entity” as defined in §1a of the Commodity Exchange Act is exempt. Second, any of the following, if registered with the Commodities Futures Trading Commission (CFTC) is exempt: “futures commission merchant”, “introducing broker”, “swap dealer”, “major swap participant”, “commodity pool operator”, or “commodity trading advisor” (per §1a of the Commodity Exchange Act), or a “retail foreign exchange dealer” (per §2(c)(2)(B) of the Commodity Exchange Act).
  15. Accounting Firms: Any public accounting firm registered under §102 of Sarbanes-Oxley is exempt
  16. Public Utilities: Any regulated public utility that provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States is exempt. The term “regulated public utility” is defined in 26 USC 7701(a)(33)(A).
  17. Financial Market Utilities: A “financial market utility” designated by the Financial Stability Oversight Council in accordance with the Payment, Clearing, and Settlement Supervision Act of 2010 is exempt.
  18. Pooled Investment Vehicles Operated By Exempt Entities: A pooled investment vehicle operated by an exempt entity is also exempt if the exempt operating entity falls under exemption 3 (Banks),  exemption 4 (Credit Unions), exemption 7 (Securities Brokers/Dealers), exemption 10 (Investment Companies and RIAs), or exemption 11 (VC fund advisers).
  19. Certain Federally Tax-Exempt Entities: Certain entities described in §501(c) (including but not limited to 501(c)(3) charitable organizations) and accordingly tax-exempt under §501(a), certain political entities described in §527(e)(1), and certain trusts described in §4947(a)(1) or (2). Please note that this exemption does not necessarily extend to, for example, state designated nonprofit corporations. The corporation or other entity must qualify for the relevant federal tax exemption in order to be CTA-exempt.
  20. Entity Assisting a Federally Tax-Exempt Entity: An entity will be exempt from CTA on the basis of assisting a tax exempt entity (exemption 19) if it (A) operates exclusively to provide financial assistance to, or hold governance rights over, any entity described in exemption 19, (B) is a U.S. entity, (C) is beneficially owned or controlled exclusively by one or more U.S. citizens or lawful permanent residents, and (D) derives a majority of its funding or revenue from U.S. citizens or lawful permanent residents.
  21. Large Operating Companies: A “large operating company” is exempt. In order to qualify as a “large operating company” for purposes of the CTA an entity must meet each of the following:
    • employs more than 20 full time employees in the United States (these terms are defined very specifically; consult your attorney!); AND
    • has an operating presence at a physical office within the United States; AND
    • filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales. For an affiliated group that filed a consolidated return, the applicable amount is the amount on the consolidated return.
  22. Subsidiaries of Exempt Entities: A wholly-owned subsidiary of an entity exempt from CTA reporting is also exempt from CTA reporting, except for exemption 6 (Certain Money Businesses Already Registered with FinCEN), exemption 18 (Pooled Investment Vehicles Operated By Exempt Entities), or exemption 20 (Entity Assisting a Federally Tax-Exempt Entity).
  23. Inactive Entities: An “inactive entity” is not required to file BOI reports under CTA. The CTA’s definition of “inactive entity” is very strict, requiring  one to meet the following six criteria in order to be considered inactive:
    • Existed on or before January 1, 2020; and
    • Is not engaged in active business; and
    • Is not directly, indirectly, wholly, or partially owned by a foreign person; and
    • Has not experienced any change in ownership in the preceding twelve-month period; and
    • Has not sent or received $1,000+, directly, indirectly, or through any affiliate, in the preceding 12 month period; and
    • Does not otherwise hold any kind or type of assets

Implications and Further Reading:

While these exemptions serve various purposes, they also raise questions regarding potential loopholes and regulatory oversight. The CTA is a very new law, so it remains to be seen how some of these exemptions may develop, be broadened, or be narrowed. For more on the CTA, you can read our big list of CTA myths here or read our guide to CTA compliance.

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