Corporate Transparency Act (CTA)

The Corporate Transparency Act (CTA) is federal legislation designed to fight money launderingThe process of making illegally obtained money appear legitimate through complex transfers and transactions., terrorist financingThe provision of financial support to terrorist organizations or activities., and other illegal financial activities. The law works by requiring certain companies to disclose information about who actually owns and controls them—their "beneficial ownersInvestors who have economic ownership in a fund, counted for purposes of the Section 3(c)(1) exemption's 100-investor limit.."

However, the law's reach has changed dramatically since it first took effect. In March 2025, the FinCEN FinCEN FinCEN (Financial Crimes Enforcement Network) is a bureau within the U.S. Department of the Treasury responsible for collecting, analyzing, and disseminating financial intelligence to combat money laundering, terrorist financing, and other financial crimes, with evolving authority over hedge funds and investment advisers. issued new rules that significantly narrowed the law's scope. Now, only foreign companies that have registered to do business in the United States must report this ownership information. Most domestic hedge fund vehicles are completely exempt.

Congress passed the Corporate Transparency Act at the end of 2020 as part of a broader package called the Anti-Money Laundering Act of 2020Federal legislation that significantly expanded anti-money laundering requirements and included the Corporate Transparency Act.. Lawmakers wanted to strengthen existing anti-money laundering Anti-money laundering (AML) Anti-money laundering (AML) refers to the set of laws, regulations, and procedures designed to prevent the conversion of illegally obtained funds into legitimate assets, requiring financial institutions to implement monitoring systems, customer due diligence, and suspicious activity reporting. rules and close loopholes that criminals were using to hide money through shell companiesCompanies that exist primarily on paper with minimal or no actual business operations, often used to obscure ownership..

This legislation was designed to work alongside existing anti-money laundering laws, including the Bank Secrecy ActFederal law requiring financial institutions to assist U.S. government agencies in detecting and preventing money laundering. and the USA PATRIOT Act of 2001. These laws already required banks and other financial institutions to monitor suspicious activityTransactions or patterns that may indicate money laundering, terrorist financing, or other illegal activities. and report them to authorities.

Initially, the CTA cast a wide net. It required most domestic corporations, limited liability companies (LLCs), and similar entities to report beneficial ownership information BOI reporting Beneficial ownership information (BOI) reporting refers to disclosure requirements under the Corporate Transparency Act that require certain foreign entities registered to do business in the United States to identify and report the natural persons who ultimately own or control the entity to FinCEN. As of March 26, 2025, U.S. hedge funds and other domestic entities are exempt from these requirements. to FinCEN. However, legal challenges and policy reviews led to significant changes in March 2025 that exempted domestic companies entirely.

Under the current rules effective March 2025, only "foreign reporting companies" must comply with these requirements. These are companies formed under foreign law that have registered to conduct business in any U.S. state or tribal jurisdiction.

Here's what the current limited scope means:

• Domestic hedge fund vehicles are exempt regardless of how they're structured (corporation, LLC, etc.)
• U.S. persons don't need to report as beneficial owners of any entity
• Foreign entities must file quickly—they have just 30 days after registering in the U.S. to submit their initial report
• Previous requirements were eliminated—domestic companies that were already reporting no longer need to do so

This represents a major shift from the original law, which would have affected thousands of domestic investment vehicles.

Even though the Corporate Transparency Act now has limited impact on hedge funds, it's still part of a larger anti-money laundering system. Many hedge fund advisers had already adopted voluntary anti-money laundering programs as good business practice, and these programs remain valuable.

This legislation connects with existing due diligence practices that many advisers use when evaluating high-risk investors. This includes extra scrutiny for politically exposed personsIndividuals who hold prominent public positions and may present higher corruption risks. and investors from Non-Cooperative Countries and Territories (NCCTs)Jurisdictions identified by international bodies as having inadequate anti-money laundering controls. known for weak anti-money laundering enforcement. While domestic reporting requirements are gone, these due diligence practices are still important for managing regulatory and reputation risks.

Since domestic entities are now exempt, most hedge funds face very few direct requirements under the Corporate Transparency Act. However, there are still some things to consider:

Limited Direct Obligations: Most U.S.-organized hedge fund vehicles don't need to report anything. Investment advisers themselves also aren't subject to beneficial ownership reporting. This means most funds don't need to build systems for collecting and reporting ownership information.

Ongoing Risk Management: Even with the exemption, hedge funds should continue focusing on voluntary anti-money laundering programs and investor due diligence. They should also coordinate with service providers on other compliance requirements and monitor for potential future regulatory changes.

Foreign Entity Considerations: Hedge funds that use foreign-organized vehicles registered in the U.S. may still have reporting obligations under the CTA. Due diligence on foreign service providers and counterparties remains important, as does compliance with sanctions screening programs administered by the OFAC sanctions OFAC sanctions OFAC (Office of Foreign Assets Control) sanctions are economic and trade restrictions imposed by the U.S. government against targeted countries, regimes, individuals, and entities, requiring hedge funds to implement compliance programs to screen investors and avoid prohibited transactions. .

The Corporate Transparency Act operates alongside other reporting requirements that still apply to hedge funds. These include FBAR filing, which require U.S. persons to report financial interests in foreign accounts. Hedge fund advisers also continue to file various SEC reports, including Form ADV and Form PF.

Because the CTA now has such limited scope, it rarely conflicts with existing hedge fund reporting requirements. However, advisers should stay informed about potential regulatory developments that could change this situation.

Several other regulatory initiatives have also experienced delays or changes:

FinCEN AML Requirements: The proposed rule requiring investment advisers to implement formal anti-money laundering programs has been postponed until January 1, 2028. This gives the industry more time to prepare and allows regulators to further assess the requirements.

SEC Private Fund Adviser Rules: In August 2023, the SEC adopted comprehensive rules governing private fund advisers. However, the Fifth Circuit Court of AppealsFederal appellate court that reviews decisions from district courts in Texas, Louisiana, and Mississippi. struck down these rules in June 2024, eliminating those specific regulatory requirements.

While the March 2025 changes dramatically reduced the Corporate Transparency Act's immediate impact on hedge funds, regulators remain focused on fighting illicit finance. The current rule is interim final ruleA rule that takes effect immediately while allowing for public comment before final adoption., meaning it's subject to public commentsWritten submissions from stakeholders during the regulatory rulemaking process to provide feedback on proposed regulations. and could change again after FinCEN reviews the feedback.

Hedge fund advisers should continue monitoring regulatory developments and maintaining strong voluntary compliance programs. Given ongoing enforcement focus on anti-money laundering violations, there's always potential for new regulatory initiatives targeting illicit finance risks in the investment management sector.

The key takeaway is that while the CTA currently has minimal direct impact on most hedge funds, the underlying policy goals—preventing money laundering and increasing financial transparency—remain high priorities for regulators. Staying proactive with compliance programs helps funds manage both current risks and potential future requirements.