A FinReg Backtrack Brings Good News for Small Business
A new deregulatory push in the financial regulation arena will help small businesses and family farms
Since its inception, the second Trump administration has been signaling an intention to usher in a pro-growth deregulatory agenda. As the administration finds its sea legs, much of this action has played out via high-profile changes in federal agency leadership and the rescinding of Biden-era rules. But a recent decision by the Treasury Department to substantially reform Beneficial Ownership Interest requirements under the Corporate Transparency Act provides a foretaste of the type of proactive regulatory changes that may be afoot—particularly in the area of finance. The winners will be American small businesses and family farms by reducing needless paperwork that many of these entities were not even aware was required under the law.
Breaking Down the CTA
The Corporate Transparency Act (CTA) was passed in the waning weeks of the first Trump administration, after it was tucked into the 2021 National Defense Authorization Act (NDAA). Passed under the auspices of combating money laundering, the act was designed to fight back against the use of shell corporations engaged in illegal or dangerous activity that could harm the United States. Specifically, the CTA requires “reporting companies” to disclose the identity and information of any beneficial owner—that is, the person who ultimately owns a company and benefits from it financially, even if they’re not listed on official documents—to the Financial Crimes Enforcement Network located inside the Treasury Department.
This may all sound like the sort of inside-baseball regulatory-speak that only a corporate lawyer representing a massive public company would concern themselves with, but these reporting requirements were actually designed to most directly target smaller and medium-sized businesses. That’s because the CTA exempted 24 different types of entities, including any business with a physical office in the U.S. that has more than 20 employees and $5 million in gross revenue.
Despite the CTA comprising a mere 21 pages of the gargantuan NDAA, it “packs a regulatory punch,” as one federal judge put it when striking down the CTA for exceeding Congress’ Article I powers under the U.S. Constitution (on the grounds that general incorporation law is left to the states under our system of federalism, not the federal government). The CTA’s regulatory punch is best demonstrated by the enforcement penalties at play for failing to adhere to its edicts. Not complying with the law’s Beneficial Ownership Information (BOI) reporting requirements could result in civil penalties of up to $591 per day, in addition to criminal penalties of up to two years imprisonment and a $10,000 fine.
Again, it is important to consider who was most squeezed by these excess paperwork burdens and punitive penalties. Far from Bermuda billionaires, it might ironically be folks like the American farmer. Not only had estimates suggested that over 32 million U.S. businesses could be affected by the BOI requirements—not including the millions of new businesses started each year—but the American Farm Bureau Federation predicted that around 230,000 American farmers could be hurt. Given that family farms make up over 97% of farms in America—to say nothing of the CTA’s aforementioned exemption of entities with over 20 employees and $5 million in gross revenue—it is clear that it’s not Big Ag that would bear the brunt of the BOI requirements.
Agricultural operations are particularly vulnerable to paperwork rules like these BOI requirements, which seek to turn green-thumbed farmers into green-eyeshade accountants. That’s because these small business owners are not sitting behind computer screens at remote desk jobs, but, as one report puts it, are “out in the fields, operating the machinery, repairing what is broken, and ensuring production doesn’t come to a standstill.”
Compounding the problem is that many of these farms operate multiple LLCs simultaneously. For instance, they often have one LLC for their free-range egg business, another for their raw honey business, a third for their traditional crop fields and perhaps a fourth for the springtime maple syrup run—all of which would be subject to BOI filing requirements. In other words, that $500-plus daily fine could quickly became $2,000 in daily fines just from a single owner neglecting to file the requisite BOI reports on time. Surveys of small businesses showed that most business owners didn’t even know what the CTA was, let alone have awareness of the potential penalties involved.
About-Face
Groups like the National Federation of Independent Business and the Center for Individual Rights have brought lawsuits challenging the CTA, resulting in 11 cases currently wending their way through the federal court system, including the previously cited district court case in which the CTA was struck down and enjoined. But now the Treasury Department in the second Trump administration may have rendered this litigation moot.
Earlier in the year, Treasury announced that it was suspending enforcement of the CTA with respect to U.S. companies and would not pursue fines or penalties for such entities failing to file BOI reports. Treasury also promised a forthcoming revised rulemaking on the CTA. Recently, an interim final rulemaking was duly issued, and it officially exempts U.S. companies from the BOI reporting requirement, as well as exempting non-U.S. companies from having to report U.S. individuals as beneficial owners.
This effort is being cited by the Treasury Secretary as a key part of the administration's broader pro-growth deregulatory push, and predictably, cries of the administration “gutting” an anti-money-laundering statute have picked up. According to one critic, “The White House has killed the Corporate Transparency Act, which was itself a tiny first step in the marathon journey of stopping U.S. companies from being the most egregiously opaque shell structures on the planet.”
Treasury’s decision will also likely trigger its own legal challenges on the grounds that, while the agency is given authority under CTA to create exemptions to the BOI reporting requirements, the decision to exempt all U.S.-based companies nearly swallows the original rule and undermines the purpose of the law. Would-be challengers might draw in part on the recent Supreme Court holding in Loper Bright—which overturned previous case law that required courts to show substantial deference to agency interpretations of statutes like the CTA—to make this case.
Notably, however, the CTA itself specifically empowers Treasury to create additional exemptions for “any entity or class of entities” (emphasis added) if requiring such entities to report beneficial ownership information “would not serve the public interest” nor be “highly useful for national security purposes”—language that would seem to buttress the agency’s statutory argument.
Regardless of how any future pending litigation plays out, one thing is clear: The administration is beginning to go on offense with its deregulatory agenda, and the opening shots in this push are coming from the realm of financial regulation. Despite this financial overlay, it’s everyday folks like the American farmer who stand to benefit most.
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