CTA Exemption #22 – Subsidiaries of Certain Exempt Entities

Perhaps the most impactful exemption under the CTA is Exemption #22 – Subsidiaries of Certain Exempt Entities. This exemption makes entities whose ownership interests are controlled or wholly owned, directly or indirectly, by any of the following types of exempt entities, exempt themselves:

• Securities reporting issuer;

• Governmental authority;

• Bank;

• Credit union;

• Depository institution holding company;

• Broker or dealer in securities;

• Securities exchange or clearing agency;

• Other Exchange Act registered entity;

• Investment company or investment adviser;

• Venture capital fund adviser;

• Insurance company;

• State-licensed insurance producer;

• Commodity Exchange Act registered entity;

• Accounting firm;

• Public utility;

• Financial market utility;

• Tax-exempt entity; or

• Large operating company

For more detail on the meaning of each of the above types of exempt entities, click here.

FinCEN’s use of the phrase “controlled or wholly owned” was initially cause for confusion, as companies and their counsel could not be sure whether an entity that was, for example, 95% controlled by an exempt entity would mean that it was exempt from the CTA’s reporting requirements under this exemption, given that the word “wholly” preceded the word “owned” but not “controlled.”

In response to this confusion, FinCEN clarified the scope of this exemption, and unfortunately, the clarification was not to the benefit of business owners. A subsidiary’s ownership interests must be fully, 100 percent owned or controlled by an exempt entity in order for this exemption to apply. In other words, every entity that is either an owner or a control party of the entity being analyzed must itself be exempt.