2024 Legal, Compliance & Risk virtual meeting key takeaways

April 23, 2024

During the Legal, Compliance & Risk virtual meeting, NAREIM members discussed what different firms, with varying risk profiles, firm and entity structures, and internal vs. external resources, are doing to prepare for the impact of the CTA.

Following the November 2023 addition of the final rule to implement the Corporate Transparency Act's (CTA) reporting requirements, real estate investment management firms were left grappling with ambiguity around which exemptions were irrelevant and where to focus their compliance efforts.

A live poll showed while nearly 80% of firms are doing CTA filings, only 60% are planning to make any modifications to existing policies affecting employees in light of CTA obligations – with those considering changes to their firms’ compliance manuals (16%) and employee handbooks (8%). There’s still time, groups agreed, as pre-Jan 1, 2024, entities have until year-end to complete their CTA filings. For most organizations, the onus will be on the Legal (46%), followed by their Compliance (36%) resources within the firm. About half of firms are using service providers CT. Corp (24%) and CSC (20%) for their filings, and about one-fifth are relying on outside legal counsel, including Ropes & Gray, DLA Piper, Mayer Brown and Wolters Kluwer.

Contrasting case studies by 3 NAREIM member firms covered the following:

Strategies to determine which of your firm’s entities are covered

• Determine covered entities based on exemptions and unique structures, ruling out some entities while considering the need for filings on others.

• Use outside counsel's advice to identify entities subject to filings, considering titles and decision-making authority within the organization.

• Assess exemptions and focus on fund-specific personnel and wholly-owned subsidiaries, depending on your firm’s structure.

Allocating responsibility for CTA filings

• In many cases, filings are primarily handled by a firm’s Legal team, supported by a corporate paralegal, who works closely with outside service providers for assistance.

• Some firms take a different approach, where administrative staff rather than legal and compliance teams manage filings, ideally supported by compliance tech solutions that can offer real-time data collection and validation.

Optimizing service providers

• Most firms use CT Corp. and CSC, with one manager emphasizing the need for tech solutions to integrate information for efficient filing.

Selecting the right owners or control people

• Members echoed the importance of continuously educating control persons within the      organization about their responsibilities and obtain necessary information for filings.

To understand potential liability risks associated with control persons, engage legal counsel with expertise in your firm’s unique corporate structure and risk tolerance.

Best practices to obtain identifying numbers for individuals connected to filings

• To avoid holding sensitive data, firms can have individuals provide their information directly to service providers.

• Encourage individuals to create their own FinCEN IDs, with the company assisting where necessary.

How to get through backlog filings

• Bolster your internal resources by hiring a paralegal to assist in efficiently addressing backlog filings well in advance of year-end.

• Consider creating an internal tech resource to manage filings, in adherence to the upcoming 30-day filing requirement.

Among the top best practices shared were to adapt your approach to the Corporate Transparency Act based on your firm’s unique structure, size, and risk tolerance—enabled by a long-term relationship with and ongoing education of your outside counsel. And to work across departments—including Accounting, Research & Portfolio Management—to obtain information needed to better allocate costs like paralegal time, legal counsel and filing fees.

Additional best practices for CTA compliance shared by NAREIM members included:

• Negotiate agreements with service providers to mitigate liability risks around managing and transferring investor information for filings.

• Thoroughly assess exemptions for specific types of investment vehicles, such as 3(c)5 funds.

• Clarify reporting requirements, particularly for distributed entity models.

• Develop strategies to efficiently manage a large volume of filings and potential system crashes.

• Establish clear entity structures and understand the unique complexities of each.

• Work with outside counsel or internal teams to determine the qualification of Independent Directors as control persons.

• Use a system or create a process to track ongoing compliance updates based on identified liability risks.

• Implement a process for obtaining and managing identifying numbers for individuals connected to filings.

• Stay updated on regulatory changes and seek clarification on ambiguous exemptions.

• Plan ahead for potential challenges, including backlog filings and liability concerns.

Click here to view the poll results.