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Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules in the definition of beneficial owner and defined in the regulations. Second, the proposed rule clarifies that a person acting as a senior officer of a reporting company could not avail himself or herself of the exception. Under the CTA, only employees who are acting solely as an employee may be exempt. The statute does not, however, specify what it means to act solely as an employee, and this phrase may be viewed as ambiguous. FinCEN proposes to address this ambiguity by distinguishing between employees and senior officers and by clarifying that a person acting as a senior officer of an entity is not a person acting solely as an employee.
In the common law of agency and corporate law, senior officers have long been distinguished from employees, with officers often regarded as principals and employees regarded as agents.117 Senior officers may be considered employees in some contexts, such as for certain tax purposes where the distinction between officers and employees may be less relevant. But in contexts focused more on an individuals ownership or control of an entity, such as disclosure requirements or imputation of conduct for various purposes, senior officers are often treated differently.118 In the context of the CTAs exceptions from the definition of beneficial owner, FinCEN
believes that distinguishing employees from senior officers would appropriately ensure that individuals whose functions enable them to exercise substantial control over an entity in many important ways are reported as beneficial owners.119 Exempting senior
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117 See,
e.g., Goldman v. Shahmoon, 208 A.2d 492, 494 D. Ch. 1965 It is clear that the terms officers and agents are by no means interchangeable. Officers as such are the corporation. An agent is an employee . . . .;
Rosenblum v. New York Cent. R. Co., 57 A.2d 690, 691 Pa. Sup. Ct. 1948 distinguishing regular employees and mere agents from executive officers.
118 See, e.g., 12 U.S.C. 308.602 debarment of accounting firms; 15 U.S.C. 78p requiring disclosures from directors, officers, and principal stakeholders; 15 U.S.C. 77aa disclosure of directors and officers in securities issuers registration statement; 22 CFR 126.7 revocation of export licenses on the basis of senior officer conduct.
119 In corporate and agency-law contexts, a formal or functional position as a senior officer can be a key indicator of an individuals substantial control over an entity. See United States ex rel. Vavra v.
Kellong Brown & Root, Inc., 848 F.3d 366, 374 5th Cir. 2017; see also, e.g., U.S. Sentencing Commission Guidelines, U.S.S.G. sec. 8A1.2 cmt.
3B High-level personnel of the organization, means individuals who have substantial control over the organization or who have a substantial role in the making of policy within the organization.
The term includes: A director; an executive officer;
an individual in charge of a major business or functional unit of the organization, such as sales,
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officers from the definition of beneficial owner would seem to frustrate the CTAs objective of identifying individuals who exercise substantial control over an entity, and who may thereby be in a position to use the entity for illicit purposes. FinCEN welcomes comments on the exclusion of senior officers from this exemption.
d. Inheritance The inheritor exception restates statutory text with one added clarification. The CTAs definition of beneficial owner excludes an individual whose only interest . . . is through a right of inheritance. 120
Proposed 31 CFR 1010.380d4iv clarifies that this exception refers to a future interest associated with a right of inheritance, not a present interest that a person may acquire as a result of exercising such a right. In proposing this addition, FinCEN seeks to emphasize that once an individual has inherited an ownership interest in an entity, that individual owns it.
Individuals who may in the future come to own ownership interests in an entity through a right of inheritance do not have ownership until the inheritance occurs. But once an ownership interest is inherited and comes to be owned by an individual, that individual has the same relationship to an entity as any other individual who acquires an ownership interest through another means. FinCEN thus believes this clarification is necessary to avoid exempting individuals on the basis of how ownership interests are acquired.
e. Creditors Finally, the CTAs definition of beneficial owner excludes a creditor of a reporting company unless the creditor exercises substantial control over the entity or owns or controls 25 percent of the entitys ownership interests.121
Based on FinCENs understanding that the overarching intent of the CTA is to identify real parties in interest, FinCEN
interprets this exception to mean that the mere fact that an individual is a creditor cannot make that individual a beneficial owner of the reporting company: What is relevant is whether the individual exercises substantial control of the reporting company or owns or controls 25 percent of the reporting companys ownership interests. However, the CTA does not define the term creditor. Drawing from U.S. tax law, proposed 31 CFR
administration, or finance; and an individual with a substantial ownership interest..
120 31 U.S.C. 5336a3Biv.
121 31 U.S.C. 5336a3Bv.

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1010.380d4v clarifies that an exempt creditor is an individual who meets the definition of beneficial owner in proposed 31 CFR 1010.380d solely through rights or interests in the reporting company for the payment of a predetermined sum of money, such as a debt and the payment of interest on such debt. The proposed rules clarify that any capital interest in the reporting company, or any right or interest in the value of the reporting company or its profits, would not be considered rights or interests for payment of a predetermined sum, regardless of whether they take the form of a debt instrument. Accordingly, if an individual has a right or ability to convert the right to payment of a predetermined sum to any form of ownership interest in the company, that would prevent that individual from claiming the creditor exception. FinCEN
believes this approach is necessary to prevent individuals from obscuring their ownership of a company by structuring their ownership interests in the form of debt, when in substance they hold an interest with characteristics of equity.
One commenter noted that it is not uncommon for creditors to have socalled equity kickers allowing some form of sharing in cash flow or capital gains in addition to fixed interest.
FinCEN believes such arrangements would not be within the proposed creditor exemption because the payments would not be for a predetermined sum. Therefore, it would be considered an ownership interest that could aggregate to a reportable ownership interest. FinCEN welcomes further comments on whether there are specific creditor or security interests that involve equity-like attributes that should be considered as within the creditor exemption and how such exemptions could be integrated into the proposed rule, including an explanation of how such interests would not affect the proposed rules ability to generate a highly useful database. FinCEN also welcomes comments on whether the proposed rules implementing these statutory exceptions are sufficiently clear, and which, if any, require further clarification.
C. Company Applicant A reporting company would be required to report identifying information about a company applicant under proposed 31 CFR 1010.380a1.
Proposed 31 CFR 1010.380e defines a company applicant as any individual who files a document that creates a domestic reporting company or who first registers a foreign reporting
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