Registered investment advisor (RIA) firms have an opaque business structure. A company has its own name, and there is not necessarily any public record of who has an ownership interest in any particular company or who helped to start a new RIA firm.
Given that many established RIA organizations often require that employees sign restrictive covenants when hiring them, opaque business structures have long been beneficial for those seeking to break away and start their own firms. Someone still subject to restrictive covenants could keep their involvement with a breakaway firm quiet until the contract is no longer enforceable. Unfortunately, new corporate rules could potentially lead to more lawsuit risk for those starting breakaway RIA firms.
Companies must now report owners and founders
The Corporate Transparency Act (CTA) was a bipartisan effort to counter money laundering and diminish the funds available for terrorist organizations. The CTA created an obligation for any business with an opaque structure to file a report with the Financial Crimes Enforcement Network (FinCEN).
Businesses must identify anyone who has a beneficial ownership interest (BOI) in the company. The CTA defines a BOI as a 25% stake or more. Additionally, companies must also identify anyone who filed the paperwork to start a business or who directly managed someone else who completed that process.
Investors and owners who could previously keep their involvement with an RIA firm quiet may now find that it is easier than ever before for former employers to identify what could be a violation of an enforceable restrictive covenant. Simply starting a limited liability company (LLC) or corporation is no longer sufficient to obfuscate the true owners and investors at an RIA firm.
Understanding how changes in the law might affect those in the financial sector may benefit those preparing to make major career moves.