A Look At A Possible Corporate Transparency Act Exemption
In this article for Law360, Jared Axelrod, Tad Bardenwerper and Nick Niles discuss the application of the Corporate Transparency Act’s reporting requirements specifically to U.S.-domiciled co-issuers in typical collateralized loan obligation (CLO) transactions. David Selinger and Jason Klein also contributed to this article.
In September 2022, the Financial Crimes Enforcement Network, a bureau of the U.S. Department of the Treasury, issued a final rule regarding the reporting of beneficial ownership information under the Corporate Transparency Act. The final rule took effect on Jan. 1, 2024, with certain compliance deadlines following thereafter.
The U.S. District Court for the Eastern District of Texas has issued nationwide preliminary injunctions in two separate cases — Texas Top Cop Shop Inc. v. Garland on Dec. 3[1] and Smith v. U.S. Department of the Treasury on Jan. 7[2] — that enjoin FinCEN from enforcing the CTA reporting or updating deadlines. On Jan. 23, the U.S. Supreme Court lifted the injunction in Texas Top Cop Shop, but the injunction in Smith remains in place.
On Feb. 5, the U.S. Department of Justice appealed Smith to the U.S. Court of Appeals for the Fifth Circuit and asked the Eastern District to suspend the injunction while the appeal is pending, writing in its brief that if the stay is lifted, FinCEN will set a 30-day grace period for filings that had been due in the interim.
With the near-term impact of these cases on CTA reporting deadlines uncertain, it seems prudent to continue preparations for possible reporting deadlines in the near future.
Much has been written on the CTA, with much of that analysis focused on which types of entities are required to report under the act in light of the numerous exemptions set forth in the final rule. This article examines one such scenario: the application of the CTA's reporting requirements specifically to U.S.-domiciled co-issuers in typical collateralized loan obligation, or CLO, transactions.
Overview
A CLO transaction involves the issuance of notes by a special-purpose vehicle to investors — typically in a Rule 144A offering — in which securities are backed by a portfolio of loans managed by a collateral manager.
In a typical CLO transaction, the special-purpose vehicle issuer is a Cayman Islands-exempted company incorporated with limited liability. Many transactions also include a co-issuer special-purpose vehicle entity, which is typically a Delaware limited liability company.[3] The collateral manager in a CLO transaction is a U.S. Securities and Exchange Commission-registered investment adviser that earns a fee for managing the loan portfolio that acts as collateral for the notes.
With respect to the CTA, Cayman issuers are outside the scope of the reporting regime by virtue of their status as offshore entities not registered to do business in a U.S. state or tribal jurisdiction.[4]
Because co-issuers are generally Delaware limited liability companies, however, further analysis as to the applicability of CTA reporting requirements is warranted.
Co-Issuer Analysis
Ownership
The CTA includes an exemption from beneficial ownership reporting for pooled investment vehicles, or PIVs, a category that includes any fund operated or advised by an SEC-registered investment adviser that would be an investment company but for an exclusion under Section 3(c)(1) or 3(c)(7) of the Investment Company Act, so long as the PIV is included on such adviser's Form ADV. The CTA also includes exemptions for certain entities whose ownership interests are controlled or wholly owned, directly or indirectly, by certain other exempt entities.
While subsidiaries of PIVs are not exempt solely as a result of such ownership, such subsidiaries are exempt where their ownership interests are entirely controlled by another qualifying exempt entity — for example, a registered investment adviser.[5]
In typical CLO structures, 100% of the membership interests in the Delaware co-issuer are held by the Cayman issuer. These Cayman issuers will typically meet the definition of a PIV, so long as they rely on the Section 3(c)(1) and 3(c)(7) exclusions under the Investment Company Act, and are identified on the Form ADV of the registered investment adviser acting as collateral manager.
Control
The CTA does not define what it means to "control" ownership interests for the purposes of applying the subsidiary exemption, though related definitions and guidance suggest a plain meaning of the term should be applied.
In a typical CLO structure, pursuant to the terms of the CLO indenture, the issuer grants to the indenture trustee for the benefit of the secured noteholders a security interest over all of its assets, including the membership interests of the co-issuer. The indenture will typically include various negative covenants, including that the issuer will not sell, transfer, exchange or otherwise dispose of, pledge, mortgage, hypothecate or otherwise encumber any part of the assets, except as expressly permitted by the indenture and the collateral management agreement.
The entity that is appointed to act as collateral manager pursuant to the collateral management agreement is granted exclusive control over the management of the issuer's portfolio of assets. Said another way, the issuer does not decide whether to purchase, sell or otherwise transfer an asset — that decision is made by the collateral manager. As a result, the collateral manager, which is generally a registered investment adviser — and therefore an exempt entity — is the party that controls the ownership interests of the co-issuer.
While this control necessarily results from the collateral manager's role in the CLO, due to recent, increased focus on the topic of whether a CTA-exempt party entirely controls the co-issuer's membership interests, it has become increasingly common for the collateral management agreement and/or the indenture to expressly state that the collateral manager possesses requisite control.
For example, a collateral management agreement may include a provision that expressly delegates to the collateral manager sole control over — and sole authority to direct — all actions that the issuer may take in its capacity as owner of all of the co-issuer's outstanding membership interests, such as the following:
The issuer hereby delegates to the collateral manager sole control over and sole authority to direct, and to take on behalf of the Issuer, all actions the issuer may take in its capacity (1) as owner of all of the co-issuer's outstanding membership interests; and (2) with respect to any issuer subsidiary, as owner of all of such issuer subsidiary's outstanding interests, as applicable.
For legacy CLOs where the collateral management agreement does not contain such language, it is our understanding that the board of directors of the special-purpose vehicle issuer would promulgate resolutions to the same effect — an express delegation to the collateral manager of control over the co-issuer's membership interests.
In either context — a provision in the collateral management agreement or a resolution by the issuer's board of directors — a similar result may be obtained: control of the co-issuer by an exempt registered investment adviser, and therefore, an exemption from the CTA's reporting obligations.
Public Policy
While certain service providers operating in the CLO industry have suggested that co-issuers may prefer to file beneficial ownership information under the CTA, such suggestions do not appear to be necessary based on either the plain reading of the CTA discussed above or the public policy goals underpinning the CTA.
FinCEN's stated mission is to protect the financial system from "illicit activity" through the collection of "financial intelligence,"[6] and the CTA is intended to be a tool in this pursuit. However, it is unclear what value CLO co-issuer reporting might have in the typical CLO structure described above.
Such entities are owned by PIVs and controlled by SEC-registered investment advisers, both of which are exempt from reporting. No person other than the issuer owns 25% or more of the co-issuer, and no person other than employees of the SEC-registered investment adviser exercises substantial control of the co-issuer, with the result being that there is no other person that would need to be disclosed under the CTA.
Put another way, filings for CLO co-issuers would create costs for transaction parties in both lost time and additional expenses, while filling the system with ownership and control information solely relating to exempt entities that FinCEN has already concluded it does not want.
Conclusion
As set forth above, a Delaware co-issuer may be exempt from reporting beneficial ownership information under the CTA in a typical CLO structure where (1) 100% of the membership interests in such co-issuer are owned by the Cayman issuer; and (2) such co-issuer's ownership interests are entirely controlled by a registered investment adviser.
With the possible return of the CTA and its filing obligations, as the DOJ has sought to lift the only remaining nationwide injunction on the CTA, we anticipate a number of CLO issuers will need to conduct a CTA analysis.
Based on the approach discussed above, in a typical CLO structure, issuers may be able to assert an exemption from the CTA's reporting requirements. As a result, any entity participating in an exempt CLO transaction need not go through the process of collecting and submitting participants' beneficial ownership information to FinCEN.
***
[1] Texas Top Cop Shop Inc. v. Garland , 2024 WL 5049220 (E.D. Tex. 2024).
[2] Smith v. United States Department of the Treasury , 2025 WL 41924 (E.D. Tex. 2025).
[3] The presence of the domestic co-issuer entity allows for certain types of investors (e.g., insurance companies) to invest in the co-issued classes of notes in the CLO. CLO transaction documents constrain the collateral manager from taking actions that would result in the issuer being deemed to have engaged in a U.S. trade or business for tax purposes.
[4] As discussed below, Cayman issuers may also qualify for certain enumerated exemptions under the CTA, such as the exemption for pooled investment vehicles.
[5] This includes general partners of exempt PIVs, which under longstanding SEC guidance are deemed to be registered.
[6] https://fincen.gov/what-we-do.
