What Next for Diversity and Inclusion Initiatives in Financial Services? (UK)
As was widely reported in the press, the FCA and Prudential Regulation Authority both recently issued announcements (FCA announcement / PRA announcement), the contents of which are variously being reported as “a retreat from efforts to help under-represented groups” (as per the Guardian) and, by contrast, a welcome “response to criticism that [the proposed new rules on D&I] would add an onerous reporting burden for firms and create overlap with government proposals to legislate in this area” (as per the Financial Times).
So is the FCA abandoning its D&I efforts, reducing the heat under them, or simply aligning its efforts with Prime Minister Starmer’s aims of reducing regulatory burdens and boosting economic growth?
Of course, the proof of the pudding is in the eye of the beholder, or something like that (please excuse the potentially messy mixed metaphor), so to assist in sorting fact from fiction, here is our high-level summary of what has been announced and what it means, probably.
Joint FCA and PRA update on D&I – proposed changes not going ahead
In 2023 the PRA and FCA each published a consultation paper entitled, respectively, “D&I in PRA-regulated firms” and “D&I in the financial sector – working together to drive change”. The proposals within the papers were largely aligned but did diverge in some respects. Their stated aim was to “drive change” by linking D&I to a firm’s overall strategy, ensuring that strategy is embedded in the firm’s day-to-day operations and culture, requiring firms to gather extensive D&I data to inform improvement, and developing an understanding of “what good looks like” across the sector. These proposals were fairly complicated and imposed some potentially very onerous requirements (see our Roadmap published at the time here for a reminder: D&I in the Financial Sector Roadmap).
At that stage, it looked very likely that the rule changes would go ahead – it was very much a “when”, not an “if”. Soon thereafter, however, the House of Commons Treasury Committee Report on “Sexism in the City” on 5 March 2024 pushed back on the extensive data gathering and reporting requirements under the regulators’ proposals.
“We welcome the focus of the PRA and FCA on diversity and inclusion in financial services, and agree they have a role to play. We have concerns, however, about their proposals to require firms to implement strategies, collect and report data and set targets. These requirements would be costly for firms to implement and have unclear benefits, while not capturing the many smaller firms that we have heard have some of the worst cultures and levels of diversity. We are also concerned that the requirements would be treated by many firms as another ‘tick-box’ compliance exercise, rather than necessarily driving the much-needed cultural change. Instead, we recommend that all financial services firms, particularly private businesses, hedge funds and other smaller firms, sign up to the voluntary Women in Finance Charter. We recommend that the regulators drop their plans for extensive data reporting and target setting. In our view, a lack of diversity is a problem that the market itself should be able to solve without such extensive regulatory intervention. Boards and senior leadership of firms should take greater responsibility for improving diversity and inclusion given that it should lead to a competitive advantage in the development of talent. Firms that perform best on diversity and inclusion and have the best cultures should be able to benefit from the clear business advantages this provides, leaving those that perform badly in these areas to suffer the consequences for their reduced competitiveness and profitability.”
In short, whilst the Treasury Committee was very much in favour of increased D&I in financial services, it did not believe that extensive reporting of data and target setting was the way to achieve that.
Since then, there has been a significant political sea-change in the UK with the new Labour government holding a significant mandate to make sweeping legislative changes, many of which deal with D&I. As such, it is perhaps not surprising that the regulators have reconsidered their positions and the FCA and PRA have now confirmed that “in light of the broad range of feedback received, expected legislative developments and to avoid additional burdens on firms at this time, the FCA and PRA have no plans to take this work further”.
Our view: Undoubtedly, the proposals made by the FCA and PRA would have placed a significant regulatory burden on financial services firms. The announcements made refer expressly to the pushback from Treasury Committee, but equally both reiterate that D&I within regulated firms can “deliver improved internal governance, decision making and risk management”, i.e their position is that they are not turning their back on D&I, just on the onerous reporting requirements. In terms of those “expected legislative developments” (as per the FCA and PRA’s statements), Labour has indeed announced various proposals in this regard, including ethnicity and disability pay gap reporting (see here for a recap: Labours New Employment Rights Bill – Key Changes UK). There is arguably some sense in waiting until that legislation is passed before moving forward (if at all) with any specific new rules for the financial services sector. That said, as some of the press coverage notes, this does come amidst a wave of D&I rollbacks in the US. There had been speculation about what impact those rollbacks might have in other jurisdictions. While this decision from the PRA and FCA does not seem to be a direct result of the situation in the US, it does undoubtedly add to the overall geopolitical picture, where the perceived value of D&I initiatives is increasingly scrutinised.
The proposed new Non-Financial Misconduct (NFM) rules remain on the agenda, but are given some more thought
Another aspect of D&I high on the FCA’s agenda in recent years has been NFM, following trenchant criticism from regulated firms and professional advisers. Specifically, the FCA has taken flak for its new rhetoric on bullying and discrimination being noticeably at odds with the types of NFM about which it took most enforcement action in the past (this was largely confined to serious criminal activity and dishonesty). That mismatch, combined with a lack of a clear definition or guidance or obvious understanding of the nuances of either bullying or harassment at law, has made it difficult for firms to know the relevance of NFM to their fitness and propriety assessments and when giving regulatory references in any particular set of circumstances.
However, the FCA has committed to fixing this issue and the consultation paper referred to above (“D&I in the financial sector – working together to drive change”) included a very lengthy explanation of how NFM should be defined and when it would be relevant to fitness and propriety (see Appendix 1 to the consultation paper).
Towards the end of last year, the FCA suggested that it was prioritising proposals to tackle NFM and that final rules on its definition and relevance would be published early in 2025. However, while the FCA has confirmed that tackling NFM remains a priority, it has now stated that it “is important that [the] approach is proportionate and aligned with planned legislation. The legislative landscape has also changed since [it] consulted”. The commitment to provide detail on next steps is now only “by the end of June”.
Our view: It seems very likely that the NFM proposals will proceed in some form. The loss of regulatory face if they do not would be too great. However, we note the reference to the importance of the approach being “proportionate” and “aligned with planned legislation”. Labour’s new Employment Rights Bill includes various proposed changes to the rules on harassment which might be relevant to NFM. For example, it is proposed that the new mandatory duty to take reasonable steps to prevent sexual harassment in the workplace (which came into force only in October) will be amended to require employers to take “all” reasonable steps. Labour have also proposed the re-introduction of a new statutory obligation also to take such steps to prevent harassment of employees by third parties. In addition, workers who report sexual harassment will qualify for whistleblowing protection. The view might conveniently be taken that the new law is broad enough to minimise the need for much more work on the position of D&I within NFM.
Most of the ERB is not expected to come into force until 2026 and we note that the commitment made by the FCA is not to provide the new rules by this June, but merely an update on next steps – so while we can expect some further clarity at that time, it is unlikely to be the final answer. It is to be hoped, though not particularly expected, that any revised guidance floated at that time would sufficiently reflect those nuances and allow employers to make proportionate calls on the impact of certain behaviours on regulatory fitness and propriety based on the actual facts of the situation, not its legal definition.
So-called “naming and shaming” changes not going ahead
More briefly, there had been a proposal to increase the circumstances in which investigations into firms were publicised as part of a drive to increase enforcement transparency – however, considerable concerns were expressed and so these plans have been abandoned. The FCA will stick to publicising investigations in exceptional circumstances only, as is currently the case.
Our view: The proposal to “name and shame” investigated firms was subject to widespread criticism from the industry, including concerns about the impact on consumer confidence and various other unintended consequences. In consumers’ eyes, being “named and shamed” would clearly imply the company to be guilty until proven innocent, except that even being found innocent would not remove the stigma of the original publication. For many, this will be seen as a victory. However, we note that the final policy will be published by the end of June and so it remains to be seen exactly how the “exceptional circumstances” provision for publicising investigations will be defined.
Commissions Are ‘Wages’ Under the New Jersey Wage Payment Law, New Jersey Supreme Court Rules
On March 17, 2025, the Supreme Court of New Jersey held that “commissions” must be considered “wages” under the New Jersey Wage Payment Law (WPL) and cannot be excluded as “supplementary incentives” because they are tied to the “labor or services” of employees.
Quick Hits
New Jersey Supreme Court Ruling on Commissions as Wages: On March 17, 2025, the Supreme Court of New Jersey ruled that commissions must be considered “wages” under the New Jersey Wage Payment Law (WPL) and cannot be excluded as “supplementary incentives” since they are tied to the labor or services of employees.
Case Background and Court’s Decision: In Musker v. Suuchi, Inc., the court determined that commissions earned by a sales representative for selling PPE during the COVID-19 pandemic were “wages” under the WPL, and rejected the argument that these commissions were “supplementary incentives” because they were tied to her labor or services.
Implications for Employers: The ruling clarifies that commissions are always considered “wages” under the WPL, regardless of whether they are for new or temporary products.
Background
In Musker v. Suuchi, Inc. the plaintiff, Rosalyn Musker, a sales representative, earned a salary plus commissions pursuant to an individualized sales commission plan (SCP) to sell software subscriptions. In March 2020, Suuchi, Inc., began to also sell personal protective equipment (PPE) because of the rise of COVID-19. Musker ultimately completed PPE sales that generated approximately $35 million in gross revenue for Suuchi. The parties disagreed regarding the amount of commissions owed to Musker pursuant to the SCP for her PPE sales and further disagreed as to whether such payment constituted “wages” or “supplementary incentives” under the WPL.
Musker then filed suit against Suuchi claiming it violated the WPL by withholding from her payment of commissions for her PPE sales. Suuchi, on the other hand, argued that Musker’s WPL claim should be dismissed because the commissions for the PPE sales in this instance would be considered “supplementary incentives” and not “wages” under the WPL. Specifically, Suuchi argued that because PPE was a new product and not its primary business, Musker’s commissions for her PPE sales should be considered “supplementary incentives” under the WPL.
Both the Superior Court of New Jersey and the New Jersey Appellate Division denied Musker’s WPL claim, concluding that because her sale of PPE went “above and beyond her sales performance, and the [PPE] commissions are calculated independently of her regular wage,” such commissions did not constitute “wages” under the WPL.
The Supreme Court of New Jersey disagreed and held that Musker’s commissions for the sale of PPE could not be excluded from the definition of “wages” as a “supplementary incentive.”
Commissions Are Wages and Cannot be Excluded as Supplementary Incentives
The supreme court pointed out that the WPL defines the term “wages” as “the direct monetary compensation for labor or services rendered by an employee, where the amount is determined on a time, task, piece, or commission basis excluding any form of supplementary incentives and bonuses which are calculated independently of regular wages and paid in addition thereto.” (Emphases in the original.) Unfortunately, however, the WPL does not define what constitutes a “supplementary incentive.”
In reviewing the WPL’s definition of “wages,” the Supreme Court of New Jersey concluded that a “supplementary incentive” is compensation that “motivates employees to do something above and beyond their ‘labor or services.’” The court opined that the “primary question addressing whether compensation is a ‘supplementary incentive’ is not whether the compensation only has the capacity to [incentivize work or provide services], but rather whether the compensation incentives employees to do something beyond their ‘labor or services.’”
In so concluding, the court clarified that a “commission” can never be a “supplementary incentive” because “supplementary incentives,” unlike “commissions,” are not payment for employees’ labor or services. To illustrate this point, the court provided several examples of “supplementary incentives” which it determined are not tied to employee’s “labor or services” and therefore would not constitute “wages” under the WPL, including: working out of a particular office location, meeting a certain attendance benchmark, or referring prospective employees to open positions.
Accordingly, the court held that Musker’s commissions from her PPE sales were not “supplementary incentives” because those sales necessarily resulted from her “labor or services.” Accordingly, the court held that those commissions would be considered “wages” under the WPL. Further, the court rejected Suuchi’s argument that because PPE was a new product for the company and it only temporarily sold such product, the sale of PPE therefore fell outside the regular “labor or services” an employee provides. Rather, as a result of the COVID-19 pandemic, selling PPE became part of Musker’s job and thus, commissions for selling PPE became owed to her as “wages” pursuant to the WPL.
Key Takeaways
The Supreme Court of New Jersey has clarified that commissions can never be “supplementary incentives” and excluded from the definition of “wages” under the WPL. Commissions are “wages” pursuant to the WPL, regardless of whether they are based on sales of new products or products temporarily marketed by their employers. Commissions are tied to employees’ “labor or services” and, as a result, are not “supplementary incentives.” Furthermore, the penalties under the WPL include liquidated damages of up to 200 percent of the wages recovered, as well as attorneys’ fees for successful claimants. Employers may want to keep in mind that all commissions are owed to employees to ensure compliance with the WPL to avoid exposure to significant financial penalties.
No Ifs or Buts: Supreme Court Holds the Line on Unauthorized Profits
In Rukhadze and others v Recovery Partners GP Ltd and another [2025] UKSC 10, the Supreme Court had the task of deciding whether a change was needed to the law on equitable obligations and liabilities of fiduciaries.
The duty under the microscope was the so-called “profit rule”, i.e. that a fiduciary must account to his principal for any profit derived from or made out of the fiduciary relationship, save where the principal has provided his informed consent to the fiduciary retaining that profit. Such profit has long been treated in equity as held on constructive trust for the principal from the moment it is made.
In Rukhadze, the Court re-examined whether it needed to apply a common law “but for” causation test before granting an account of profits in such circumstances. Was the Court required to ask whether the fiduciary would have made the profit but for its breach, for example because the principal would have consented to it or because the fiduciary could have terminated the relationship before he gained the opportunity and would have made the same profit anyway?
To state the relevant facts briefly, the case centred around asset recovery services provided to the family of deceased Georgian businessman Arkadi Patarkatsishvili (“Badri”). Those services were initially carried out by “SCPI”, a company in which the individual appellants held senior roles and were fiduciaries. When the appellants left SCPI, they continued to provide the services to Badri’s family and received fees for doing so. The respondents (SCPI’s successors) claimed that the appellants were in breach of duty by, inter alia, taking for themselves SCPI’s business opportunity, and sued the appellants for an account of profits represented by the payments made to the appellants by the family. At first instance, the appellants were held to be in breach of fiduciary duty and ordered to make an account of profits, in the amount of the payments made by the family less 25% as an equitable allowance for the appellants’ work and skill in providing the services. The Court of Appeal dismissed the appellants’ appeal.
Before the Supreme Court, the appellants argued that applying “what if” counterfactuals with a “but for” common law causation test would provide more clarity, predictability, common sense and justice to this area of equity and avoid harsh results.
However, in a majority verdict, the Court declined to allow the appeal, holding that there is no requirement for a “but for” causation test, with Lord Briggs summarising at [36]:
The question is not, would the profit have been made even if there had been no antecedent breach of fiduciary duty, but did the profit owe its existence to a significant extent to the application by the fiduciary of property, information or some other advantage which he enjoyed as a result of his fiduciary position, or from some activity undertaken while he remained a fiduciary which the conflict duty required him to avoid altogether. For that purpose the court looks closely at the facts, i.e. what actually did happen, but does not concern itself with what might have happened in a hypothetical “but for” situation which did not in fact occur.
Therefore, the duty to account to a principal applies to all fiduciaries and is not merely a remedy; rather it is a duty that arises at the moment the profit is gained.
In its reasoning, the Court considered that there are in-built limitations to the application of the profit rule, namely that there must be a sufficient link between the fiduciary relationship and the profit gained. While the duty to account does not depend on any prior breach, where the profit follows on from a breach of the conflict duty, the sufficient link required will usually be established and “the accountability for the resulting profit will usually follow”. [42] Further, the Court was content that any possible injustices or harsh results would be better alleviated by its discretion to grant an equitable allowance, as the trial judge had ordered in this case, rather than an application of a broad “but-for” test.
Arguments put forward by the appellants that the increasing number of fiduciary relationships in the business world supports a relaxation of the deterrent role of the current law were not persuasive and in fact tended to underline that the duty of single-minded loyalty owed by a fiduciary should be very carefully protected.
Application to Sport
As in the wider business world, there are an ever-increasing number of fiduciaries in sport, including sports agents, whether the traditional “on-field” agents or those working in “off-field” commercial settings; directors and partners in sports clubs, governing bodies and other entities; and trustees in charitable trusts, foundations and investment structures.
Rukhadze will serve as a reminder from the highest court in the land to all sports fiduciaries of the significant obligations and liabilities they owe to their principal in that role. The consequences of breach are severe.
Sports agents have long recognised this fact. In the landmark Court of Appeal case in Imageview Management Ltd v Jack [2009] EWCA Civ 63, which considered a secret profit of £3,000 made by a football agent in assisting his football player principal’s club to obtain a work permit for him, the Court ordered both an account of the profit made and forfeiture of all remuneration received by the agent from the player. While forfeiture of remuneration was not considered on the facts in Rukhadze, until we have a Supreme Court judgment offering further clarity in this area, all fiduciaries remain mindful that this draconian remedy will be ordered by courts and tribunals in appropriate cases.
As Rukhadze confirms, it is prudent for fiduciaries to seek and obtain the informed consent of their principal if they wish to retain profits earned. Likewise, when fiduciaries wish to act for both sides in a transaction (as is common with on-field sports agents), informed consent should be obtained from each principal to avoid a breach of the fiduciary’s duty to avoid conflicts of interest. If not, fiduciaries may find that only a quantum meruit allowance remains on the table where it is held to be fair and equitable to recompense the skill and effort used in the transaction. As per Rukhadze, such an equitable allowance may only represent a fraction of the profit gained.
FinCen Issues a Huge Reprieve Form Domestic Reporting Companies
O frabjous day! the Financial Crimes Enforcement Network (FinCEN) late last Friday issued an interim final rule that removes the requirement for U.S. companies and U.S. persons to report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act (CTA). Here is the FinCEN’s summary:
In that interim final rule, FinCEN revises the definition of “reporting company” in its implementing regulations to mean only those entities that are formed under the law of a foreign country and that have registered to do business in any U.S. State or Tribal jurisdiction by the filing of a document with a secretary of state or similar office (formerly known as “foreign reporting companies”). FinCEN also exempts entities previously known as “domestic reporting companies” from BOI reporting requirements.
Thus, through this interim final rule, all entities created in the United States — including those previously known as “domestic reporting companies” — and their beneficial owners will be exempt from the requirement to report BOI to FinCEN. Foreign entities that meet the new definition of a “reporting company” and do not qualify for an exemption from the reporting requirements must report their BOI to FinCEN under new deadlines, detailed below. These foreign entities, however, will not be required to report any U.S. persons as beneficial owners, and U.S. persons will not be required to report BOI with respect to any such entity for which they are a beneficial owner.
Upon the publication of the interim final rule, the following deadlines apply for foreign entities that are reporting companies:
Reporting companies registered to do business in the United States before the date of publication of the IFR must file BOI reports no later than 30 days from that date.
Reporting companies registered to do business in the United States on or after the date of publication of the IFR have 30 calendar days to file an initial BOI report after receiving notice that their registration is effective.
The CTA has been proven to be a costly disaster that has imposed unnecessary costs on small businesses that are no doubt cheering Friday’s announcement.
FinCEN Removes Beneficial Ownership Reporting Requirements for U.S. Companies and U.S. Persons, Sets New Deadlines for Foreign Companies
On March 21, 2025 the Financial Crimes Enforcement Network (FinCEN) issued an interim final rule that removes the requirement for U.S. companies and U.S. persons to report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act (CTA).
Going forward, only foreign companies (not U.S. companies owned by non-U.S. persons) that have registered to do business in the U.S. will be required to comply with the CTA.
Foreign entities that meet the new definition of a “reporting company” and do not qualify for an exemption from the reporting requirements must report their BOI to FinCEN under new deadlines, detailed below. These foreign entities, however, will not be required to report any U.S. persons as beneficial owners, and U.S. persons will not be required to report BOI with respect to any such entity for which they are a beneficial owner.
The following deadlines apply for foreign entities that are reporting companies:
Reporting companies registered to do business in the United States before March 21, 2025, must file BOI reports no later than 30 days from that date.
Reporting companies registered to do business in the United States on or after March 21, 2025, have 30 calendar days to file an initial BOI report after receiving notice that their registration is effective.
CTA 2.0 – FinCEN Limits CTA’s Reporting Requirements to Certain Non-U.S. Entities and Non-U.S. Individuals
The Financial Crimes Enforcement Network (FinCEN) issued an interim final rule on March 21, 2025, that eliminates the Corporate Transparency Act (CTA) reporting requirements for U.S. entities and U.S. individuals. The rule is effective upon its publication in the federal register; however, the interim final rule may be updated following a sixty-day comment period.
FinCEN’s press release provided the following summary of the impact of the interim final rule:
“Thus, through this interim final rule, all entities created in the United States — including those previously known as “domestic reporting companies” — and their beneficial owners will be exempt from the requirement to report BOI to FinCEN. Foreign entities that meet the new definition of a “reporting company” and do not qualify for an exemption from the reporting requirements must report their BOI to FinCEN under new deadlines, detailed below. These foreign entities, however, will not be required to report any U.S. persons as beneficial owners and U.S. persons will not be required to report BOI with respect to any such entity for which they are a beneficial owner.”
Non-U.S. entities that meet the definition of “reporting company” are generally (1) formed in a non-U.S. jurisdiction and (2) registered with a U.S. jurisdiction to do business in such jurisdiction. These non-U.S. entities will have thirty days from the later of (i) the date of publication of the interim final rule in the federal register and (ii) the date of becoming registered to do business in a U.S. jurisdiction.
Removing the reporting obligations of U.S. entities and U.S. individuals substantially limits the number of required filings. By FinCEN’s own estimate in the interim final rule, it anticipates roughly 12,000 filings annually (over each of the first three years). In the final reporting rule in effect prior to the interim final rule, FinCEN estimated roughly 10,510,000 filings annually (over each of the first five years).
Corporate Transparency Act 2.0 – Narrowing Reporting Requirements
On March 21, 2025, the Financial Crimes Enforcement Network (“FinCEN”) issued an interim final rule that significantly changes the reporting requirements under the Corporate Transparency Act (“CTA”). This alert summarizes the key changes to the reporting requirements and what they mean for your business.
Key Takeaways
Domestic companies1 are now exempt from all reporting requirements.
Foreign companies and foreign pooled investment vehicles no longer need to report U.S. person beneficial owners2 (but will need to report any non-U.S. person beneficial owners).
Compliance is still effectively voluntary as FinCEN has announced it will not be enforcing penalties and this rule is not yet effective.
Exemption for Domestic Companies
All domestic reporting companies are now completely exempt from the requirement to:
File initial beneficial ownership information (“BOI”) reports.
Update previously filed BOI reports.
Correct previously filed BOI reports.
FinCEN states that this reduction of requirements will eliminate the substantial compliance burdens for millions of U.S. businesses whose information would not be “highly useful” in the efforts to “detect, prevent, or prosecute money laundering, the financing of terrorism of terrorism, proliferation finance, serious tax fraud, or other crimes.”3
Changes for Foreign Companies
Foreign companies still must report beneficial ownership information, but with two important exemptions:
Foreign companies are exempt from reporting beneficial ownership information for any U.S. persons who are beneficial owners.
U.S. persons are exempt from providing their beneficial ownership information to foreign companies.
Foreign companies with only U.S. beneficial owners will not need to report any beneficial owners.
Changes for Foreign Pooled Investment Vehicles
Foreign pooled investment vehicles now only need to report:
Non-U.S. individuals who exercise substantial control over the entity (not an individual who has the greatest authority over the strategic management of the entity).
If multiple non-U.S. individuals exercise control, only the non-U.S. person with the greatest authority must be reported.
Foreign pooled investment vehicles with only U.S. beneficial owners will not need to report any beneficial owners.
Extended Deadline
Foreign reporting companies and pooled investment vehicles will have until the later of 30 days after this rule is published in the federal register, or 30 days after their registration to do business in the United States.
Next Steps
FinCEN is accepting comments on this interim final rule. The agency will assess these exemptions based on public comments and plans on issuing a final rule later this year.
1 See our prior advisories on the general application of the CTA and its specific application for those with entities for estate planning purposes for information on what is a domestic reporting company, a foreign reporting company, and beneficial owner information.
2 As a reminder, generally a beneficial owner is any individual who (directly or indirectly) (a) exercises substantial control over the company or (b) owns or controls at least 25% of the company’s ownership interests.
3 Please see full rule and explanation from FinCEN here.
No Soup for You – SEC Commissioners Revoke Authority of Director of Enforcement to Launch Investigations
In a famous Seinfeld episode, a master soup maker had strict rules for ordering his delicious confections. A violation of his rules, resulted in “No soup for you!” Just like the soup maker who had the power to withhold soup from anyone who violated the rules for ordering soup, the U.S. Securities and Exchange Commission (SEC) announced its final rule rescinding the delegation of authority that had allowed the SEC’s Director of the Division of Enforcement to “issue formal orders of investigation” — i.e., the authority to unilaterally open new investigations and issue subpoenas.
For the past 15 years, the SEC has afforded the Director the discretion to authorize and open formal investigations and issue subpoenas on behalf of the agency. This final rule effectively returns that authority solely to the SEC’s five Commissioners, restoring the pre-2009 framework. In other words, the Commissioners will exercise greater (and exclusive) control over whether to authorize formal orders to open investigations and issue subpoenas. [1]
According to the SEC, the change is based on its “experience with its nonpublic investigations” and “is intended to increase effectiveness by more closely aligning the Commission’s use of its investigation resources with Commission priorities.” [2] Centralizing this power with the full Commission may introduce more deliberation and oversight—but it could also lead to fewer or delayed investigations, depending on the Commission’s priorities and capacity to act.
This action follows vigorous criticism by FinTech companies that the SEC has been regulating the industry by enforcement and not through rules proposed by the SEC that are subject to public comment under the Administrative Procedure Act. SEC Commissioner Hester Peirce recently stated she has been concerned the use of enforcement was “part of [a] … larger strategy to use [the SEC’s] enforcement tool to regulate the crypto industry.” [3] The final rule stripping the Director of the power to launch investigations without the approval of the Commissioners will likely be cheered by the FinTech industry.
The new rule is set to become effective 30 days after its publication in the Federal Register.
[1] Release Nos. 33-11366; 34-102552; IA-6862; IC-35492 (March 10, 2025), available at https://www.sec.gov/files/rules/final/2025/33-11366.pdf.[2] Id.[3] Getting Back on Base: Statement of Commissioner Hester M. Peirce on the Dismissal of the Civil Enforcement Action Against Coinbase (Feb. 27, 2025), available at: https://www.sec.gov/newsroom/speeches-statements/peirce-statement-coinbase-022725.
Scott N. Sherman also contributed to this article.
FinCEN’s New Interim Final Rule (1) Exempts Domestic Companies from Corporate Transparency Act Reporting and (2) Sets New Deadlines for Reporting by Foreign Companies
On March 21, 2025, the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury (Treasury) significantly limited the scope of reporting required under the Corporate Transparency Act (CTA).[1] “Domestic reporting companies” (now referred to as “domestic entities”) are exempt from reporting beneficial ownership information. Instead, “reporting companies” are limited to those entities previously defined as “foreign reporting companies.” Even as to foreign reporting companies, beneficial ownership information as to any U.S. person[2] need not be reported.
FinCEN will also apply the exemption and deadline extension as of March 21, 2025, in advance of publication in the Federal Register.
This approach is consistent with the announcements from FinCEN on February 27, 2025, and from Treasury on March 2, 2025. See our alerts dated March 4, 2025, Treasury May Be Shifting CTA Reporting Rule Away from Domestic and Toward Foreign Reporting Companies: Miller Canfield, and February 28, 2025, FinCEN Again Delays CTA Reporting Deadlines and Suspends Enforcement: Miller Canfield.
Here is a summary of the most significant amendments to the Reporting Rule:
Changes the definition of “reporting company” to include only a foreign entity (previously a “foreign reporting company”).[3]
Adds a new exemption from the definition of “reporting company” for any “domestic entity” (previously a “domestic reporting company”), thereby removing all domestic entities and their beneficial owners from the scope of any CTA initial reporting, correction, or update requirements.[4]
Exempts (foreign) reporting companies from reporting beneficial ownership information with respect to any U.S. person beneficial owners. Thus, a foreign reporting company that has only U.S. person beneficial owners will be exempt from reporting any beneficial owners.
Exempts U.S. persons from having to provide beneficial ownership information to any foreign reporting company as to which they are beneficial owners.
Revises a special rule applicable to “foreign pooled investment vehicles” to exempt such investment vehicles from having to report beneficial ownership information of U.S. persons who exercise substantial control over the entity.
Sets new reporting deadlines for foreign entities that are reporting companies as follows:
Initial reports:
Reporting companies that that were registered to do business in the U.S. before March 21, 2025 must file beneficial ownership information reports no later than April 20, 2025.
Reporting companies that that were registered to do business in the U.S. on or after March 21, 2025 must file beneficial ownership information reports no later than 30 calendar days of the earlier of (i) the date the reporting company receives actual notice that its registration is effective, or (ii) the date on which a secretary of state or similar office provides public notice that the reporting company has been registered to do business.
Updated reports: The deadline for reporting any change to required information previously submitted, is the later of (i) April 20, 2025, or (ii) 30 calendar days after the change occurs.
Corrected reposts: The deadline for reporting any change to required information previously submitted, is the later of (i) April 20, 2025, or (ii) 30 calendar days after the reporting company becomes aware or has reason to know change occurs.
[1] New interim final rule (“IFR”) available at: Beneficial Ownership Information Reporting Requirement Revision and Deadline | FinCEN.gov. The Reporting Rule, as amended, is available at: https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements
[2] The CTA refers to the definition of United States person as set forth in Section 7701(a)(30) of the Internal Revenue Code of 1986) which includes U.S. citizens and lawful permanent residents, among others. 26 U.S. Code § 7701 – Definitions | U.S. Code | US Law | LII / Legal Information Institute.
[3] The new “reporting company” definition in the IFR is “[a]ny entity that is: (A) a corporation, limited liability or other entity; (B) formed under the law of a foreign country; and (C) registered to do business in any State or tribal jurisdiction by the filing of a document with the secretary of state or any similar office under the law of that state or Indian tribe.”
[4] The new “domestic entity” definition in the IFR is “[a]ny entity that is: (A) corporation, limited liability company or other entity; and (B) created by the filing of a document with a secretary of state or any similar office under the law of a State of Indian Tribe.”
FinCEN Issues Interim CTA Rule, U.S. Entities and Individuals Exempted From Reporting
Highlights
The Financial Crimes Enforcement Network (FinCEN) issued an interim final rule that changes requirements for reporting beneficial ownership information (BOI) under the Corporate Transparency Act
The rule narrows existing reporting requirements and requires only entities previously defined as “foreign reporting companies” to report BOI
FinCEN defines new exemptions from reporting for domestic entities and U.S. persons
The Financial Crimes Enforcement Network (FinCEN) recently issued a press release concerning the issuance of a new interim final rule that removes requirements for U.S. companies and persons to report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act (CTA).
Consistent with the U.S. Department of the Treasury’s March 2, 2025, announcement, FinCEN is adopting the interim final rule to narrow BOI reporting requirements under the CTA to apply only to entities previously defined as “foreign reporting companies.”
In the new interim final rule, FinCEN revises the definition of “reporting company” to mean only those entities that are formed under the law of a foreign country and that have registered to do business in any U.S. state or tribal jurisdiction by filing a document with a secretary of state or similar office (such entities, previously defined as “foreign reporting companies”).
Additionally, FinCEN adds a new exemption available to entities formed in the U.S., previously defined as “domestic reporting companies.” Such entities are exempt from BOI reporting and do not have to report BOI to FinCEN, or update or correct BOI previously reported to FinCEN.
Thus, through the interim final rule, entities created in the United States – along with their beneficial owners – are exempted from requirements to report BOI to FinCEN.
Two Changes for Foreign Reporting Companies
With limited exceptions, the interim final rule does not change existing requirements for foreign reporting companies. However, the new interim rule does make two significant modifications to such requirements:
The interim rule extends the deadline to file initial BOI reports, and to update or correct previously filed BOI reports, to 30 calendar days from the date of its publication to give foreign reporting companies additional time to comply.
The interim final rule exempts foreign reporting companies from having to report the BOI of any U.S. persons who are beneficial owners of the foreign reporting company and exempts U.S. persons from having to provide such information to any foreign reporting company of which they are a beneficial owner.
Foreign entities that meet the new definition of a “reporting company” and do not qualify for an available exemption must report their BOI to FinCEN in compliance with these new deadlines.
Under the new interim rule, a reporting company is any entity that is:
a corporation, limited liability company, or other entity
formed under the law of a foreign country
registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of that state or Indian tribe
Reporting companies that registered to do business in the United States before the date of publication of the interim final rule must file BOI reports no later than 30 calendar days from the date of the new interim rule’s publication in the Federal Register. Reporting companies that register to do business in the United States on or after the date of publication of the interim final rule have 30 calendar days to file an initial BOI report after receiving notice their registration is effective.
FinCEN is accepting comments on this interim final rule until 60 days after it is published in the Federal Register and notes that it will assess the exemptions included in the subsequent final rule, as appropriate, in light of those comments. It intends to issue a final rule this year.
SEC Eases Verification Burdens in Rule 506(c) Offerings
The SEC’s Division of Corporation Finance recently issued an interpretive letter[1] providing additional insight as to what constitutes “reasonable steps” to verify an investor’s accredited investor status under Rule 506(c) of Regulation D, a private offering exemption that permits general solicitation. Compared to Rule 506(b), which does not permit general solicitation, Rule 506(c) is not relied upon frequently.[2] Use of Rule 506(c) has been deterred to some degree because of the burdens and uncertainty surrounding compliance. The SEC Staff’s interpretive letter addresses some of the uncertainty that had deterred widespread use of Rule 506(c), opening the door to broader utilization. Though a welcome clarification of how the SEC Staff would interpret Rule 506(c)’s conditions, the interpretive letter leaves several questions unanswered, including whether it can be applied to particular types of investors.
Background: The Verification Challenge
Rule 506(c) allows issuers to engage in general solicitation in connection with an unregistered offering if the issuer takes “reasonable steps” to verify that all investors are accredited investors. In adopting Rule 506(c), the SEC stated that if the minimum investment amount is sufficiently high, then the issuer may not need to take additional steps to verify “accredited investor status,” absent contrary facts, but it did not indicate the minimum investment amounts that might qualify for such treatment.
Historically, many issuers avoided 506(c) offerings due to the lack of guidance on what minimum investment amount would be sufficient for the issuer not to undertake an additional verification process that in many cases would require extensive diligence into an investor’s “accredited investor” status. For example, in the case of certain investors qualifying on the basis of their assets or income, Rule 506(c) expressly provides that an issuer satisfies its diligence requirements if it reviews the investors’ bank statements or tax returns (which is considered burdensome for some investors and also raises privacy and data security concerns), or relies on certifications by specified market intermediaries such as registered investment advisers, broker‑dealers, accountants or attorneys (many of whom are unwilling to provide them). While the inclusion in the rule text of specific information an issuer could review may have been intended to operate as a “bright line” and aid compliance, the practical difficulties made the verification process unappealing in many cases. The interpretive letter provides additional guidance that should facilitate the diligence required under Rule 506(c).
Key Takeaways
The SEC Staff’s agreed that, when accepting investments from certain types of investors, absent an issuer’s knowledge of contrary facts, an issuer may reasonably conclude that it has taken “reasonable steps” to verify the investor’s accreditation if:
Investors must make a minimum investment of at least the amounts specified below:
$200,000 for natural persons
$1,000,000 for certain entities
The issuer obtains written representations from investors confirming:
The investor is an accredited investor under Rule 501(a)
The investment is not financed by third parties for the specific purpose of making the investment
The issuer does not have actual knowledge contradicting these representations
Which Investors Are Covered?
The new guidance applies to most categories of accredited investor that are subject to an asset test, including:
Individuals[3]
Corporations, partnerships, LLCs or similar entities[4]
Trusts [5]
Other entities not separately covered by another prong of the accredited investor definition that have not been formed for the specific purpose of making the investment[6]
Family offices[7]
Entities entirely owned by other accredited investors meeting the conditions described in the letter[8]
Because the relief provided by this interpretive letter does not explicitly encompass all categories of accredited investors, issuers in Rule 506(c) offerings must still take care to identify any investors that fall outside of this guidance so that additional verification can be performed if necessary.
Implications for Fundraising Beyond the US
Even though the SEC’s guidance may allow issuers or fund sponsors to exercise greater freedom for aspects of their US fundraising activities, if they are seeking to raise capital in non-US countries then they should be mindful of the regulatory regimes in these countries as well. For example, if an issuer or fundsponsor engages in more publicized fundraising activities in the US, this could impact its ability to rely on a reverse solicitation exemption in countries outside the US. This would be a key consideration if the fundsponsor were seeking to raise capital from investors in the European Economic Area or the UK as these regimes apply the requirements of the Alternative Investment Fund Managers Directive. Therefore, issuers and fund sponsors seeking to raise capital from non-US as well as US investors should factor in the requirements of these non-US countries before they engage in any more liberal marketing initiatives as a consequence of the new SEC guidance.
The new guidance is a staff interpretive letter, which is not a formal, binding interpretation of the SEC. Although the SEC can ordinarily be expected to respect the staff’s guidance absent differing facts, a court is not required to rely on, or defer to, the letter.
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[1] Available at: https://www.sec.gov/rules-regulations/no-action-interpretive-exemptive-letters/division-corporation-finance-no-action/latham-watkins-503c-031225
[2] 17 CFR 230.506(c).
[3] 17 CFR 230.501(a)(5) and (6). Rule 501(a)(6) allows individuals to qualify on the basis of income, rather than assets.
[4] 17 CFR 230.501(a)(3).
[5] 17 CFR 230.501(a)(7).
[6] 17 CFR 230.501(a)(9).
[7] 17 CFR 230.501(a)(12).
[8] 17 CFR 230.501(a)(8).
Brian Schwartz, Robert Sutton, John Verwey & Frank Zarb contributed to this post.
How the Trump Administration’s War on Cartels Will Reshape the Financial Sector
On March 11, 2025, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a Geographic Targeting Order (GTO) aimed at disrupting drug trafficking and money laundering along the southwestern border. The GTO significantly lowers the Currency Transaction Reports (CTR) threshold from $10,000 to $200 for money service businesses (MSBs) operating in 30 zip codes across California and Texas. Treasury Secretary Scott Bessent emphasized the move as part of a broader effort to curb cartel influence, underscoring “deep concern with the significant risk to the U.S. financial system [from] the cartels, drug traffickers, and other criminal actors along the Southwest border.”
Despite its broader deregulatory agenda, the Trump administration has made clear that financial crime regulations — particularly those targeting money laundering, sanctions compliance, and illicit financing — are exceptions to its broader policy shift. The administration’s intensified crackdown on drug cartels underscores the financial sector’s growing role in national security and foreign policy enforcement. Banks and regulated institutions operating along the U.S.-Mexico border, or with substantial exposure to Mexico and Central America, must prepare for heightened compliance and due diligence expectations.
The Southwest Border GTO: A Glimpse into FinCEN’s Enforcement Priorities
GTOs compel financial institutions to implement heightened monitoring and reporting measures within specific high-risk regions. These orders, typically in effect for 180 days with the possibility of renewal, serve as a key intelligence-gathering and enforcement tool to disrupt illicit financial flows.
The March 11 GTO affects MSBs — including foreign exchange dealers, check cashers, issuers of traveler’s checks, and money transmitters — rather than banks. However, its implications extend far beyond these institutions. The drastic reduction of the CTR threshold to $200 reflects the cartels’ ability to efficiently launder drug proceeds through small, frequent transactions that evade traditional detection mechanisms.
Should the data gathered from this GTO indicate widespread illicit activity, regulators may extend its reach to regional and community banks, imposing even greater compliance burdens. More critically, the order signals heightened regulatory scrutiny on financial institutions’ roles in detecting and preventing cartel-related transactions. Banks with exposure to high-risk sectors must proactively enhance monitoring systems, train staff on emerging threats, and prepare to demonstrate robust compliance measures during regulatory examinations.
Drug Cartels as Terrorist Organizations: A Paradigm Shift for Financial Institutions
On his first day in office, President Trump signed an executive order initiating the designation of certain drug cartels as Foreign Terrorist Organizations (FTOs). On February 20, the State Department formally classified eight cartels under this designation, triggering sweeping legal and financial consequences.
Under U.S. law, FTO designation prohibits financial institutions from conducting transactions with these organizations and mandates the immediate blocking or freezing of assets linked to them. The move significantly expands the enforcement scope of the Treasury’s Office of Foreign Assets Control (OFAC), which oversees sanctions on terrorist organizations and other prohibited entities.
For financial institutions, this shift requires a fundamental reassessment of compliance strategies. Banks must refine sanctions screening processes, update risk management frameworks, and bolster due diligence measures to ensure they do not inadvertently facilitate transactions tied to these entities. Even transactions that do not explicitly list cartel-affiliated individuals or businesses may pose risks, necessitating enhanced scrutiny of financial flows originating from cartel-controlled regions.
In addition to shifting compliance strategies, the new FTO designation carries with it a risk for increased civil litigation against banks under the Anti-Terrorism Act (ATA). From approximately 2014 to present, federal courts throughout the country have seen an increase in civil matters against banks for providing financial services to FTOs and/or their affiliates, and therefore aiding and abetting acts of terrorism. While these claims ordinarily involve foreign banks predominantly located in the Middle East, Russia, China, and Europe, this new designation and the accompanying GTO could result in similar lawsuits against U.S. depository institutions.
Cartels have embedded themselves in diverse sectors — including agriculture, mining, transportation, and even financial services — complicating compliance efforts. Institutions that fail to adapt face increased criminal and civil liabilities, underscoring the urgent need for proactive risk mitigation measures.
The Road Ahead: Navigating an Intensified Regulatory Landscape
As the Trump administration intensifies efforts to dismantle cartel financial networks, financial institutions must brace for a rapidly evolving regulatory environment. Enhanced reporting obligations, stricter compliance requirements, and expanded due diligence mandates are set to redefine risk management strategies across the sector.
Institutions operating along the U.S.-Mexico border will be particularly affected, navigating the dual pressures of FinCEN’s GTO mandates and broader cartel-related sanctions. Strengthening internal controls, refining anti-money laundering frameworks, and integrating advanced transaction monitoring tools will be critical in maintaining compliance and mitigating legal risks.
While these regulatory shifts may impose short-term costs, they ultimately safeguard financial institutions from unwitting involvement in illicit activities. More importantly, they reinforce the industry’s pivotal role in national security efforts, ensuring that the financial system remains a bulwark against transnational crime.
By staying ahead of regulatory developments and embracing a proactive compliance posture, banks and financial institutions can not only protect themselves but also contribute meaningfully to the broader fight against cartel-driven financial crime.