Legal Entity Customers and Exemptions

Q: Who is a legal entity customer?

A: The Rule defines a legal entity customer as a corporation, limited liability company, other entity created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account. The definition also includes limited partnerships, limited liability partnerships, business trusts that are created by a filing with a state office, and any other entity created in this manner.

A legal entity customer does not include sole proprietorships, unincorporated associations, or natural persons opening accounts on their own behalf.

Q: Are there any entities that are excluded from the definition of the legal entity customer and for which a covered financial institutions is not required to obtain beneficial ownership information?
A: Yes. The CDD Rule excludes from the definition of legal entity customer certain entities that are subject to Federal or State regulation and for which information about their beneficial ownership and management is available from Federal or State agencies, such as:

• Financial institutions regulated by a Federal functional regulator or a bank regulated by a State bank regulator;
• Certain exempt persons for purposes of the currency transactions reporting obligations:
  • A department or agency of the United States, of any State, or of any political subdivision of a State;
  • Any entity established under the laws of the United States, or any State, or of any political subdivision of any State, or under an interstate compact;
  • Any entity (other than a bank) whose common stock or analogous equity interests are listed on the New York, American, or NASDAQ stock exchange;
  • Any entity organized under the laws of the United States or of any State at least 51% of whose common stock or analogous equity interests are held by a listed entity;
• Issuers of securities registered under section 12 of the Securities Exchange Act of 1934 (SEA) or that is required to file reports under section 15(d) of that Act;
• An investment company, as defined in section 3 of the Investment Company Act of 1940, registered with the U.S. Securities and Exchange Commission (SEC);
• An SEC-registered investment adviser, as defined in section 202(a)(11) of the Investment Advisers Act of 1940;
• An exchange or clearing agency, as defined in section 3 of the SEA, registered under section 6 or 17A of that Act;
• Any other entity registered with the SEC under the SEA;
• A registered entity, commodity pool operator, commodity trading advisor, retail foreign exchange dealer, swap dealer, or major swap participant, defined in section 1a of the Commodity Exchange Act, registered with the Commodity Futures Trading Commission;
• A public accounting firm registered under section 102 of the Sarbanes-Oxley Act. 
  
  Additional regulated entities:
• A bank holding company, as defined in section 2 of the Bank Holding Company Act of 1956 (12 USC 1841) or savings and loan holding company, as defined in section 10(n) of the Home Owners’ Loan Act (12 USC 1467a(n));
• A pooled investment vehicle operated or advised by a financial institution excluded from the definition of legal entity customer under the final CDD rule;
• An insurance company regulated by a State;
• A financial market utility designated by the Financial Stability Oversight Council under Title VIII of the Dodd-Frank Wall Street Reform and Customer Protection Act of 2010;
  
  Excluded Foreign Entities:
• A foreign financial institution established in a jurisdiction where the regulator of such institution maintains beneficial ownership information regarding such institution;
• A non-U.S. governmental department, agency or political subdivision that engages only in governmental rather than commercial activities; and
• Any legal entity only to the extent that it opens a private banking account subject to 31 CFR 1010.620.

Q: Are trusts included in the definition of legal entity customer?
A: No. The definition of legal entity customers only includes statutory trusts created by a filing with the Secretary of State or similar office. Otherwise, it does not include trusts. This is because a trust is a contractual arrangement between the person who provides the funds or other assets and specifies the terms (i.e., the grantor/settlor) and the person with control over the assets (i.e., the trustee), for the benefit of those named in the trust deed (i.e., the beneficiaries). Formation of a trust does not generally require any action by the state.

The CDD Rule does not supersede existing obligations and practices regarding trusts generally. The preamble to each of the CIP rules notes that, while financial institutions are not required to look through a trust to its beneficiaries, they "may need to take additional steps to verify the identity of a customer that is not an individual, such as obtaining information about persons with control over the account."3 We understand that where trusts are direct customers of financial institutions, financial institutions generally also identify and verify the identity of trustees, because trustees will necessarily be signatories on trust accounts. Furthermore, under supervisory guidance for banks, "in certain circumstances involving revocable trusts, the bank may need to gather information about the settlor, grantor, trustee, or other persons with the authority to direct the trustee, and who thus have authority or control over the account, in order to establish the true identity of the customer."