Legal Alert

The CTA at Two Months: Key Updates and Action Items

by Wesley R. Robinson, Scott L. Diamond, Ryan D. Brown, and Alexander S. Park
March 6, 2024

After years of anticipation, the Corporate Transparency Act (the CTA) officially went into effect on January 1, 2024. Now that we are two months into the CTA era, below are a few updates and recommended action items based on what we have learned thus far.

Challenges to the CTA

It was expected that there would be legal challenges to the CTA, and the other shoe finally dropped on March 1, 2024. In the case of National Small Business United v. Yellen (Case No. 5:22-cv-01448 (N.D. Ala.)), a federal district court in the Northern District of Alabama, Northeastern Division, entered a final declaratory judgment concluding that Congress lacked the power to enact the CTA and infringed on traditional states’ rights. Accordingly, the Financial Crimes Enforcement Network (FinCEN) responded that “it will comply with the court’s order for as long as it remains in effect” and “[a]s a result, the government is not currently enforcing the [CTA] against the plaintiffs in that action.”

Key Takeaways

While reporting companies should stay apprised of the evolving matters in this lawsuit, for the time being, they should still be prepared to file beneficial ownership information ("BOI") reports when they become due to remain in compliance with the CTA.

What to Expect Going Forward

More of the same (i.e., more challenges and more uncertainty). The narrow response from FinCEN indicates that it will likely appeal this decision, and that it still intends to enforce the CTA against other reporting companies until it is told otherwise. Thus, this will be an area that will likely be subject to at least a couple more twists and turns.

State Transparency Acts

New York Governor Kathy Hochul enacted the New York LLC Transparency Act (the NYLTA) upon signing Senate Bill 995B/Assembly Bill 3484A. The NYLTA, which is set to become effective on December 21, 2024, requires the disclosure of personal information about a New York limited liability company’s beneficial owners. While the NYLTA shares many similarities with the CTA, there are notable differences, including to whom it applies, what information must be provided for the reporting company and its beneficial owners, whether exempt entities have to file a report, and the penalties for noncompliance.

Key Takeaways 

If you have limited liability companies formed in New York, or entities in a subsequent state that enacts similar state laws in the future (i.e., California is currently considering a similar act as well), we recommend taking steps to begin preparing for such disclosure requirements and understanding the differences from the CTA.

What to Expect Going Forward 

While inevitably there will be other states that enact similar laws, the extent of such state laws may depend on whether the CTA is deemed unconstitutional per National Small Business United v. Yellen. If so, it is possible that several states will begin enacting similar acts in their respective jurisdictions.

Clarifications to the CTA 

As the CTA has been reviewed and applied to actual circumstances, there have been several provisions that are less than clear and/or arguably “unfair”, including, but not limited to, determining beneficial owners in a trust, understanding the nuances in the large operating company and registered investment advisor exemptions, and preparing for the additional filing requirements if an entity converts from one form to another (e.g., a corporation to a limited liability company). FinCEN has attempted to add “transparency” to some open items by publishing several FAQs clarifying the new requirements. However, even some of these clarifications have led to controversy or pushback. For example, based on recent FAQs released in January 2024, in order to apply for the subsidiary exemption and to satisfy the “controlled or wholly owned” standard, a reporting company must “fully, 100%” control the ownership interests of the “subsidiary” reporting company for the exemption to apply.

Key Takeaways

Companies should continue to stay up-to-date on the CTA and any clarifications or changes to reporting requirements or exemptions that may be applicable to them. Companies should also utilize and take advantage of any expanded filing deadlines during the first year of the CTA, whether it be 90 days after formation (if formed in 2024) or by December 31, 2024 (if formed prior to this year), just in case further guidance is released by FinCEN.

What to Expect Going Forward

While the hope is that FinCEN will continue to provide additional guidance to clarify ambiguous terms and remedy some of the “unfair” provisions, it is likely that many of these areas will remain ambiguous and unchanged. Thus, companies should be diligent in understanding the CTA, consult with their advisors, and take good faith measures to comply with the CTA to the best of their ability to avoid any penalties.

Access to Beneficial Ownership Information

While BOI reports are not disclosed to the general public, certain businesses may obtain access to them. FinCEN recently published a guide that provides an overview of the access requirements for financial institutions that obtain BOI from FinCEN.

Key Takeaways:

  • Financial institutions are permitted to use BOI to fulfill their customer due diligence and other legal obligations under the Bank Secrecy Act; however, financial institutions are not permitted to use BOI for general business or commercial activities.
  • Institutions must develop extensive safeguards to protect the confidentiality and security of BOI.
  • FinCEN may reject any request by a financial institution if it is not made in the proper form and manner.
  • Unless expressly permitted, a person is prohibited from knowingly disclosing or using BOI obtained by the person through a BOI report and the disclosure or use without such permission may result in civil and criminal penalties for reporting violations and for unauthorized use or disclosure of BOI.

What to Expect Going Forward

Financial institution access will not occur until after law enforcement has completed its access phase in. In the meantime, financial institutions should begin to develop consent language as well as policies and procedures for accessing BOI. Further, there expects to be some harmonization of the CTA with the Customer Due Diligence Rules, so financial institutions should stay informed of any potential updates.

Revisions to Organization Documents and Internal Policies 

Many entities have already started to implement protective language into their operating/limited liability company agreements, shareholder agreements, and purchase agreements to offset some of the CTA compliance risk on reporting companies, and have created internal reporting compliance policies to prepare for the ongoing task of maintaining compliance with the CTA.

Key Takeaways

If you have not done so, contact Ballard Spahr or your internal legal counsel to discuss what steps you should be taking to mitigate and offset risk where appropriate.

What to Expect Going Forward

Similar to how companies have adapted to other laws, these terms and provisions will likely become standard language and commonplace policies implemented by all affected entities going forward.

In summary, after two months of the CTA, there are more questions than answers, and while that may not change any time soon, it remains imperative that companies stay informed on the CTA and prepared for ongoing disclosure requirements, as well as any potential modifications that may arise or unexpected curveballs.

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