The State of the Corporate Transparency Act is Anything But Clear

On March 1, 2024, the Northern District of Alabama declared the Corporate Transparency Act (the “Act”) unconstitutional. In the case, the National Small Business Association alleged that the Act was vague and unduly burdensome on small businesses, an infringement on states’ powers to govern businesses, and would potentially place personal information of its members at unnecessary risk. While this decision, now on appeal, does bring into question the validity of the Act as implemented by FinCEN, it does not provide the ability for anyone other than the parties to this specific action to delay their compliance. In a statement made by FinCEN, it reiterated this fact by stating:

“While this litigation is ongoing, FinCEN will continue to implement the Corporate Transparency Act as required by Congress, while complying with the court’s order. Other than the particular individuals and entities subject to the court’s injunction… reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.”

While FinCEN’s statement does make it clear that on-going compliance with the Act is expected from all non-party reporting companies, it has not addressed several significant barriers to compliance. While the definition of reporting companies and timeframes for reporting are clear, FinCEN has not yet been entirely clear in its instructions relevant to the application of the Act to the beneficial ownership information that should be reported by trustees holding title to a reporting company through a trust structure. This has left trustees, who desire to comply with the Act, in an uncomfortable position with interpreting who should be reported as the beneficial owner.

Accustomed to regulatory oversight, professional trust companies are working to be in compliance with the Act; however, it remains unclear exactly which individual(s) should be reported in the beneficial ownership registry. Where the reporting company is owned individually, it is clear that anyone (1) owning more than 25% of the company and (2) exercising substantial control over the company should be reported. 

That said, where the trust holds title to a reporting company, the answer becomes less clear. The ownership component is simple; however, the substantial control aspect complicates the question. For instance, in a directed trust structure, the investment advisor does not own the reporting company but is the one exercising decisional authority over the entity and thus having substantial control. The trustee in the directed trust holds title to the entity, meeting the first criteria, but exercises substantial control only as directed by the investment advisor. 

Is it the investment advisor or the directed trustee that is reported, or both? If we assume it is the trustee and that trustee is a corporate entity, is it simply the trust company reported or is it the officers of the trust company who carry out the day-to-day actions of the trust company? If it is the officers of the trust company, how many of them are reported?

These questions remain unclear to trustees. Many trustees have been seeking independent advice from outside legal counsel; however, the answers are not consistent amongst the various experts. While the preamble to the Act seems to indicate that perhaps individuals working at the trust company should be considered intermediaries or agents of the reporting company instead of beneficial owners since their relationship to the reporting company is only through an exempt entity, it also indicates that FinCEN is hesitant to permit this approach due to concerns that allowing exception would create opportunities for evasion. 

For trustees, this answer is likely to lead to over reporting. In an effort to ensure compliance in unclear circumstances, fiduciaries are likely to report at least one of their employees as beneficial owners in the trust structure even though at its heart this is not the true goal of the Act. With the time to comply being now, trustees remain in the difficult position of desiring to comply, but not knowing exactly how.

With the ever-changing regulatory environment creating ever more complexity in the world of trusts, it is more important than ever to have a trustee that can assist in navigating these challenges. 

At Commonwealth Trust Company, we have been preparing for the implementation of the Corporate Transparency Act for some time, asking questions and implementing a practical approach to compliance. We will continue to ask questions, seek guidance, and take a solution oriented approach to compliance.

Commonwealth Trust Company is pleased to provide this article as a guide. Commonwealth Trust Company is not engaged in the practice of law and is not providing legal advice by the provision of these materials. Commonwealth Trust Company recommends that clients seek the opinion of their attorney regarding the specific legal and tax issues addressed in this article.