Trump’s Treasury Department Offers Rare Regulatory Humility

Government is known for many things, but humility isn’t usually one of them. So it was encouraging to see the Treasury Department recently exercise a rare measure of regulatory restraint by narrowing its enforcement approach under the Corporate Transparency Act (CTA).

The CTA, passed in the waning days of the first Trump administration over a presidential veto, aims to crack down on illicit money laundering by requiring certain business entities to report information on their “beneficial owners,” a vaguely defined category, to the Financial Crimes Enforcement Network (FinCEN), housed within the Treasury Department.

This beneficial ownership information (BOI) reporting requirement proved an administrative and legal nightmare. The law targeted small- and medium-sized businesses; all companies over 20 employees and $5 million in gross receipts were exempt. (Big businesses were exempted ostensibly because they are already subject to significant reporting requirements through other regulatory rules in the federal code). In other words, it was predominantly small, independent businesses and limited-liability corporations (LLCs) that faced the enhanced paperwork burden of filing BOI reports—with failure carrying civil penalties of up to $600 per day and criminal sanctions of up to two years in prison and $10,000 in fines.

These burdens were even more onerous when one considers that many American businesses, such as family farms, often operate multiple LLCs at one time to protect parts of their business from liability incurred by other components. Fines for noncompliance could easily reach into thousands of dollars per day.

Worse, many in the small-business community didn’t even know the law existed. The National Federation of Independent Business found that over 80 percent of small-business owners were unaware of the BOI requirement. In November 2024, just two months before the original January 2025 deadline for filing BOI reports, a mere 20 percent of businesses subject to the CTA’s requirement had filed the requisite paperwork.

The law suffers from additional infirmities. The CTA and its implementing regulations spell out 23 discrete exemptions for certain types of companies. It also uses vague, and ultimately meaningless, language to determine who qualifies as a “beneficial owner.” To take just one example, someone could be identified as a beneficial owner subject to the BOI reporting requirement if he exerted “substantial control” over a business via a “formal or informal . . . arrangement [or] understanding”—a confusing standard that mostly serves to provide business for lawyers.

The CTA also poses constitutional questions. More than a dozen lawsuits challenging the measure are making their way through the federal courts. The most serious argument is that the CTA exceeds Congress’s authority under the Constitution’s Commerce Clause.

The Commerce Clause states that Congress has the power to regulate trade and commerce “among the several states,” while any regulation of commerce wholly inside a state remains the prerogative of that state. But application of the CTA is not limited to commercial entities or activity, let alone to interstate commerce. It applies to legal entities incorporated under state laws, even if those entities engage in no commercial conduct whatsoever. Given that some LLCs are engaged in hyper-localized commerce, while others may be currently dormant or are merely created for estate-planning purposes, it’s not hard to see why the law was swiftly challenged.

Rather than regulating commerce, the CTA imposes a reporting requirement on information involving the owners of business entities. That flies in the face of the longstanding principle that corporate ownership and formation law are a matter of state rather than federal law. Despite the modern elastic interpretation of the Commerce Clause, numerous federal courts initially still found the CTA unconstitutional. There ultimately was a split among them, with the law’s survival hanging in the balance when the new administration took office.

Given this backdrop, it’s fair to say that the CTA and its implementing rules flunk at all three levels of governance: regulatory, statutory, and constitutional. But instead of continuing to fight for a lost cause, as federal agencies so often do, the Treasury Department has issued an interim final rule that substantially defangs the CTA.

Under the new rule, the CTA’s enforcement exempts domestic companies and U.S. citizens. The administration will instead focus enforcement only on foreign entities and actors. While some have argued that this domestic exemption could be a bridge too far under the language of the law, the statute directly allows for the agency to create new exemptions for “any entity or class of entities” (emphasis added), which gives the agency broad leeway to act as it did.

While the government is technically not abandoning its legal position that the CTA is constitutional under the Commerce Clause, Treasury’s move will likely moot the bevy of court challenges. By limiting the CTA’s application to foreign entities, the agency smartly aligned its enforcement with the federal government’s stronger constitutional footing in foreign affairs and national security—sidestepping the law’s more tenuous grounding in the Commerce Clause when applied domestically.

The CTA has quietly evolved—from a vaguely drafted, poorly administered, and constitutionally shaky law into a more narrowly tailored, less burdensome statute—all without a Supreme Court ruling. More agencies would do well to emulate Treasury’s regulatory humility. It’s a modest step, but one that points the way toward a healthier, more accountable system of self-governance.

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