The Incorporation Transparency and Law Enforcement Assistance Act has been introduced by Senator Carl Levin (D-Mich.) and Senator Norm Coleman (R-Minn.), and endorsed by Senator/Presidential candidate Barack Obama (D-Ill.). Obama's press release explains:
Currently, nearly two million corporations and limited liability companies (LLCs) are formed within the United States each year. The States generally form these corporations without asking for the identity of the corporation?s beneficial owners, and numerous law enforcement problems have resulted when some of these corporations have become involved with money laundering, tax evasion, or other misconduct. The bill being introduced would require the States to obtain beneficial ownership information for the corporations formed under their laws and to provide access to this information to law enforcement upon receipt of a subpoena or summons.
The Act increases the paperwork burden on small businesses, as all corporations and limited liability companies - even very small mom and pop businesses that are only engaged in interstate commerce by virtue of the sweeping definition given that term in Wickard v. Filburn - are subject to a new annual reporting requirement. Although the bill apparently will exempt firms subject to SEC registration, there are a substantial number of firms with a large number of shareholders and a somewhat active market (such as those traded on the pink sheets). Their costs of keeping track of their beneficial owners will go up.
All corporations maintain a list of shareholders of record. When investors buy stock of public corporations through a broker, however, their shares typically are registered in so-called ?street name.? The broker places shares in the custody of depository firms, such as Depository Trust Co., which then uses a so-called ?nominee? to register the shares with the issuer. The broker, of course, retains records identifying the beneficial owner of the shares. As a result, a public corporation?s list of record shareholders will consists mostly of street names?i.e., the names of the nominees used by the various depository firms?not the names of the actual beneficial owners. A so-called CEDE list identifies the brokerage firms on whose behalf the depository institution?s nominee holds shares. Dividends and other communications with shareholders can be handled through the CEDE list, as the firm can pass them to the brokers whop then pass them to their clients. But it doesn?t tell the firm the identities of the beneficial owners.
A nonobjecting beneficial owner (NOBO) list pierces the street name by having the brokers provide a list of the names and addresses of beneficial owners who have not objected to being identified as such.
It is costly to prepare and maintain the NOBO list. Many microcaps?i.e., the smallest quasi-public corporations, such as those whose stock is traded on the pink sheets (not subject to SEC periodic disclosure rules) do not maintain NOBO lists. This bill presumably would have the effect of requiring such firms to maintain an up to date NOBO list. And what will the bill do about objecting beneficial owners who refuse to allow their brokerage to identify them?
While it burdens states and legitimate businesses, lawbreakers can easily evade it. Set up a trust with a bank in a country with strong bank secrecy laws. Have the trust serve as owner of the shares of the US corporation. Refuse to disclose the identity of the beneficiaries of the trust. Unless the bill going to prohibit all such trusts from owning US companies, there will be little inconvenience for determined lawbreakers.
One of the things we?ve learned from Sarbanes-Oxley is that we have to start considering the cumulative effect of regulations. When viewed in isolation, a particular regulation may not seem terribly burdensome. When we assess the marginal additional burden contributed by the regulation to the overall regulatory burden on US companies, however, the effect may be quite significant. We?ve seen this in the post-SOX environment, as small firms found the cumulative burden too much to bear. As a result, many domestic companies went dark and many foreign companies stopped raising capital in the US. Indeed, as the Paulson Committee, the US Chamber of Commerce, and the Bloomberg-Schumer study all found, the new regulatory drag on our economy is having a serious impact on the competitiveness of US capital markets. Laws such as this one whose costs seem likely to exceed their benefits are therefore highly suspect.
