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Editorial 9 MIN READ

FinCEN's CTA ANPRM: what the comment file actually said

Forty-eight questions, a month of comments, and the shape of a beneficial-ownership registry still being drawn

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 6 sections
  1. What the ANPRM actually asks
  2. What the ABA and the AICPA told FinCEN
  3. What the ACLU and the state bars flagged
  4. Second-order effects the commenters did not all agree on
  5. What remains unclear heading into the proposed rule
  6. Sources

n April 5, FinCEN opened the file on the biggest change to U.S. entity formation in a generation. The Advance Notice of Proposed Rulemaking for the Corporate Transparency Act's beneficial-ownership registry, 86 Fed. Reg. 17,557, closed its comment window on May 5 with forty-eight questions asked and a stack of replies from the ABA, the AICPA, the ACLU, state bars, banks, and several trade groups that do not usually share cover letters.

This is the first real look at the shape of the rule. The statute, enacted as Sections 6401 through 6403 of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 and codified at 31 U.S.C. § 5336, tells FinCEN what to collect. The ANPRM tells us what FinCEN is still deciding. Our January note on the CTA covered the statute as signed. Six months on, the reporting contours have moved from abstract to operational, and what the commenters said is where the next draft will come from.

What the ANPRM actually asks

The notice is unusually long for an advance document. FinCEN put forty-eight numbered questions on the record, covering definitions (who is a "reporting company," what counts as "substantial control," how to handle the twenty-three statutory exemptions), reporting mechanics (what format, what identifiers, how to verify), access (who outside of law enforcement and Treasury gets the data, and under what conditions), and cross-referencing with the existing Customer Due Diligence rule that banks have been running against since 2018.

A few of the questions matter more than the others. Question 3 asks how FinCEN should define "substantial control" beyond the statutory floor of senior officers, appointment power, and important-decision influence. Question 12 asks how to treat foreign reporting companies that qualify to do business in a state. Question 23 asks whether FinCEN should adopt a FinCEN-issued identifier for beneficial owners, which would let a person who controls many entities file once and be cross-referenced rather than re-identified on every filing. Questions 32 through 38 drill into access: which federal agencies, which state and local agencies, which foreign governments, and which financial institutions get to query the database, and what customer-consent framework applies.

The statute set some of these answers. 31 U.S.C. § 5336(a)(11)(A) defines "reporting company" as a corporation, LLC, or "other similar entity" created by a filing with a secretary of state or Indian tribe, plus foreign entities registered to do business in a state. Section 5336(a)(3) defines "beneficial owner" as any individual who directly or indirectly exercises substantial control or owns at least 25% of the ownership interests. Section 5336(c) enumerates the twenty-three exemptions, most of which are entities already regulated at the federal level, plus an exemption for "large operating companies" meeting three tests: more than 20 full-time U.S. employees, more than $5 million in gross receipts or sales reported on a prior-year federal tax return, and an operating presence at a physical office in the United States.

What the ANPRM left for the comment file is everything between those statutory anchors. The definition of "similar entity" is open. The meaning of "substantial control" beyond the four statutory buckets is open. Whether trusts are ever reporting companies is open. How to handle a single natural person who is a beneficial owner of dozens of entities is open. And the whole access-and-disclosure architecture, which Section 5336(c)(2) frames in broad terms with customer-consent carve-outs for banks, is waiting for FinCEN to translate into a workable query interface.

What the ABA and the AICPA told FinCEN

The American Bar Association's Business Law Section filed a comment running more than forty pages. Its headline ask was scope discipline on "substantial control," and the argument is clean: if the definition sweeps in every officer, every board member, and every advisor who has "important decision" influence, a mid-market LLC with a functioning governance structure ends up filing ten or fifteen beneficial owners for one entity. That is not what Congress meant by "beneficial owner." The ABA urged FinCEN to adopt a definition closer to the CDD rule's functional test, which focuses on who actually directs the entity rather than who sits in a role that could.

The ABA also pressed on attorney-client privilege. Lawyers form entities for clients. If the lawyer filing the Certificate of Formation is the "applicant" under § 5336(a)(2), the lawyer's name and ID go into the database. That is a manageable outcome. But the ABA flagged a secondary risk: if FinCEN interprets "applicant" broadly enough to pull in the lawyer's knowledge of the beneficial-ownership chain, the report itself could become a privilege problem. The comment asked for explicit guardrails.

The American Institute of CPAs' letter focused on the compliance tail. CPAs prepare tax returns and financial statements for small businesses, and many of those clients will be reporting companies with no internal compliance function. The AICPA asked for three things: a safe harbor for good-faith errors, a realistic timeline for the initial reporting window (the statute allows up to two years for entities formed before the effective date, and the AICPA argued for the full two), and a clear allocation of responsibility between the entity and its advisors. A CPA who prepares a client's Form 1120 should not, the comment argued, be on the hook for verifying that the client's beneficial-ownership report is accurate.

Both comments raised the "large operating company" exemption. The $5 million gross-receipts threshold is tied to prior-year federal tax returns. A company in its first year, or a company that restructures mid-year, has no prior-year return to point to. The ABA and AICPA both asked FinCEN to clarify how a new entity qualifies, and what happens when a company drops below the threshold for a year.

What the ACLU and the state bars flagged

The ACLU's comment focused on the access side. The CTA authorizes disclosure to federal agencies for national-security and law-enforcement purposes, to state and local law enforcement with court authorization, to foreign governments through specific treaty channels, and to financial institutions with customer consent, under § 5336(c)(2). The ACLU asked FinCEN to build the query system so that every access request leaves an auditable record, and to narrow the "national security" access category to explicit predicates rather than a generalized pull.

The comment also pressed on a First Amendment point that most of the other letters skipped. Reporting company status turns on formation with a state. Sole proprietorships, general partnerships, and unincorporated associations are not reporting companies. That is good for civil-society groups that operate informally, and the ACLU asked FinCEN to confirm the line in plain text. Advocacy groups that do incorporate, especially 501(c)(4)s that engage in politics, may be exempt under the tax-exempt carve-out at § 5336(c)(2)(F), but the ANPRM did not spell out how the exemption applies to newly formed organizations that have not yet received IRS recognition.

State bar comments, notably from Delaware, New York, and California, pushed on the federalism seam. Entity formation is a state function. The CTA does not change that; it layers a federal reporting obligation on top. But the state bars flagged three operational questions. First, will the secretaries of state be asked to collect anything on FinCEN's behalf, and if so, under what cost-reimbursement arrangement. Second, will FinCEN cross-check the state formation rolls against the reporting roster and flag entities that formed but did not report. Third, how will the twenty-three exemptions interact with state-law concepts that do not map cleanly onto the federal categories, such as Delaware's statutory trusts and Texas's series LLCs.

The Delaware comment was specific on series LLCs. Under Delaware law, a series within a series LLC is not a separately formed entity; it is a designation within a single filing. Section 5336(a)(11)(A) requires formation by a filing. Is each series a reporting company, or only the master LLC? The statute does not say. The ABA asked the same question. The answer will move a lot of paper.

Second-order effects the commenters did not all agree on

The bank comments, filed through the ABA's banking group and through the Bank Policy Institute, pushed for FinCEN to treat the beneficial-ownership database as a source that can satisfy part of the CDD rule. Under the current CDD regime, a bank opening an account for a legal-entity customer collects beneficial-ownership information directly from the customer. If the FinCEN database is authoritative, banks want to be able to rely on it, at least for verification, and shift the collection burden off the customer-facing side. The ABA's business-law comment agreed on the verification point but was wary about turning the database into a bank-accessible lookup, because the customer-consent mechanism in § 5336(c)(2)(B) is not frictionless.

The ACLU and some privacy groups opposed giving banks direct query access on the consent model the statute contemplates. Their concern: a customer who "consents" to let a bank pull their beneficial-ownership record in order to open an account is not consenting in a meaningful sense, because refusing means no account. The commenters did not agree on whether that concern should harden into a rule.

On penalties, the statute is already sharp. Section 5336(h) sets civil penalties of up to $500 per day for willful failure to report, criminal penalties of up to $10,000 and two years in prison, and separate penalties for unauthorized disclosure that run to $500,000 and up to five years. Commenters asked FinCEN to build a safe harbor for inadvertent errors corrected within a defined window. The AICPA proposed 90 days. The ABA proposed a graduated structure keyed to willfulness. Whether FinCEN adopts either is an open question for the NPRM.

What remains unclear heading into the proposed rule

The ANPRM was an advance notice, not a draft rule. FinCEN has signaled it intends to issue a Notice of Proposed Rulemaking later this year, and the final rule is expected to follow in 2022. The CTA's effective date is tied to the promulgation of regulations under § 5336(b)(5), so no reporting obligation attaches until FinCEN issues the final rule and sets an effective date.

Three things are worth watching between now and the NPRM. The first is the scope of "substantial control." If FinCEN adopts a narrow, CDD-like definition, small entities file three or four owners per report. If FinCEN adopts a broad role-based definition, the average filing balloons. The second is how the "applicant" concept works in practice. The statute requires reporting the name of the individual who files the formation document, not just the beneficial owners. Registered agents and formation services that file thousands of certificates a year are waiting to learn whether each filing names a specific employee or whether an entity-level identifier suffices. The third is the series LLC question, which will be answered one way or the other and will materially change how series structures are sold in the states that recognize them.

For operators forming entities now, nothing changes today. The statute is in force, but the reporting obligation is not. Nothing you file in June 2021 triggers a FinCEN report. What you should watch is the formation decision itself. An entity formed today will, under the statute's transition rule, have up to two years after the effective date to file its initial beneficial-ownership report. Entities formed after the effective date will have a shorter window, likely measured in days or a small number of weeks. The exact number is one of the forty-eight questions, and the comment file does not agree on an answer.

The rule's first draft will tell us which commenters FinCEN was listening to. The ANPRM read like a genuine question; the NPRM will read like an answer, and the gap between them is where the compliance cost of the next decade gets set.

Sources

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