The Corporate Transparency Act – Concerns for Trustees of Statutory Trusts
April 7, 2021
The Corporate Transparency Act (the “Act”) potentially imposes new reporting obligations on trustees (“Trustees”) of Delaware Statutory Trusts (“DSTs”) and may require the disclosure of personal information about their employees if DSTs are determined to be subject to the Act. On April 5, 2021, the Department of Treasury published an Advance Notice of Proposed Rulemaking inviting comment on this and other issues. There is a limited window to comment on issues related to the Act, including whether statutory trusts should be among the entities subject to the Act. We summarize below the purpose of the Act and its potential impact on Trustees.
On January 1, 2021, Congress overrode a presidential veto to pass the National Defense Authorization Act for Fiscal Year 2021 (the “NDAA”). The Act, which is located in Section 6403 of the NDAA, seeks to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity” by certain legal entities created by the filing of a document with a secretary of state or a similar office under the laws of a state or Indian tribe (“Reporting Companies”) by (i) creating a partnership between FinCEN and the state departments responsible for forming or registering the formation of Reporting Companies, and (ii) requiring Reporting Companies, or the applicants who create them, to report certain information regarding certain of their principals and owners directly to FinCEN. Under the Act, unless subject to an exemption, Reporting Companies are required to submit to FinCEN a report (the “Report”) containing the full legal name, date of birth, residential or business address, and identification number (if the relevant principal has a FinCEN Identifier, such number may be provided in lieu of this information) of (i) each applicant, (ii) each person who directly or indirectly owns or controls a 25% or greater equity or equity-equivalent interest in the Reporting Company, and (iii) each person who exercises substantial control over the Reporting Company. The Act provides civil and criminal penalties for noncompliance.
Trustees and industry professionals will recognize that the information to be set forth in the Report is almost identical to the information Trustees currently need to acquire regarding their legal entity customers pursuant to FinCEN’s 2018 Customer Due Diligence (the “CDD Rule”). The paradigm shift the Act introduces does not relate to “what” information is collected – it relates to “who” and “when.” Unlike the CDD Rule, which places the obligation on covered financial institutions, like most Trustees, the Act places the obligation on the Reporting Company at formation. Like the CDD Rule, there are also ongoing requirements.
Impact on Trustees
The emergent issue for Trustees is whether they have new or resulting obligations under the Act. If DSTs fall within the definition of Reporting Companies under the Act, someone may have to file a Report for the DST with FinCEN – but is that someone the Trustee?
The Act states that the relevant “who” responsible for filing the Report is the Reporting Company itself, or the person who files the application to create the Reporting Company – its “applicant.” Unfortunately, the Act does not provide any guidance as to which representatives or agents of the Reporting Company must file the Report, and further, in the case of DSTs, it is not clear who qualifies as the “applicant.”
The final regulations could provide that a Trustee is within the class of persons who may be required to file a Report on behalf of a DST, as a Reporting Company. However, in structured finance transactions, the Trustee may be an inappropriate person to assume responsibility for the filing. After all, the Report requires the intimate personal information of the principal manager(s) and beneficial interest holder(s) of the DST – information that in most structured finance transactions is possessed by the sponsor initiating the formation of the DST, not the Trustee.
Nonetheless, Trustees may be caught in the enforcement dragnet if a DST fails to file a Report as required by the Act, which could result in both fines and criminal penalties. In order to avoid this possibility, Trustees should consider including protective language in trust agreements that clearly identifies the party responsible for filing the Report if one is required (or requires a party to provide the information if requested by the Trustee), allocates responsibility for compliance with the Act to the appropriate party, and exculpates and indemnifies the trustee from liability for such role or responsibility. Assigning responsibility by contract, in advance, has a number of potential benefits beyond simply attaching those obligations to the party who is more likely in possession of the information to be reported. It potentially (i) reduces the amount of sensitive information the Trustee need handle, (ii) protects the Trustee if an enforcement action is taken against the DST, (iii) allows the Trustee to avail itself of indemnification rights should the Trustee suffer damages as a result of the counterparty’s failure to perform its duties under the Act, and (iv) establishes an up-front understanding with the Trustee’s clients. Of course, whether an allocation of responsibility for compliance with the Act by contract would be enforceable under the Act or be respected by FinCEN or other authorities is uncertain and could therefore negatively impact the enforceability of any related indemnification or exculpation agreements among the parties. Trustees may also want to consider adding streamlined resignation provisions to trust agreements that become available in a case where the counterparty fails to perform its duties under the Act.
We encourage our clients to review and consider commenting on the Advance Notice of Proposed Rulemaking and on any proposed regulations published by the Department of Treasury. Comments may be submitted through the Federal E-rulemaking Portal accessible at http://www.regulations.gov by referencing Docket Number FINCEN-2021-0005 and RIN 1506-AB49.