On
October 23, 2013, the Financial Industry Regulatory Authority (FINRA)
issued proposed rules and forms on Crowdfunding. These rules govern
FINRA members.
General Standards
Proposed
Funding Portal Rule 100 provides that FINRA By-Laws and Funding
Portal Rules apply to all funding portal members, including both the
funding portal and associated persons. This rule also modifies
certain definitions to apply to funding portal members.
Funding Portal Application
Proposed
Funding Portal Rule 110(a) sets forth a simplified membership
application process for funding portals.
As
compared to the rules for broker-dealers, the proposed Funding Portal
Rule 110(a):
- shortens the timeframes for key events; for example, the timeframe for the Department of Member Regulation to approve or deny a funding portal membership application process (MAP) form is 60 days, as opposed to 180 days for broker-dealers
- streamlines and consolidates the standards for granting or denying an application (from 14 standards to 5 standards); the five standards address a portal's (1) ability to comply with the applicable federal securities laws, rules and regulations, and FINRA's Funding Portal Rules; (2) contractual or other arrangements and business relationships necessary to initiate operations; (3) supervisory system; (4) direct and indirect funding sources; and (5) recordkeeping system
- provides that the membership interview may be conducted by videoconference or other means as FINRA may specify
- streamlines the process for appealing a denial of a MAP application by reducing applicable filing and response timeframes from 25 days to 14 days and eliminating provisions for an appeals hearing
- narrows the changes in ownership or control for which a funding portal member would be required to apply for approval
The
proposed forms for funding portals require significantly less
information than broker-dealer forms.
Funding Portal Conduct
Proposed
Funding Portal Rule 200(a) requires a funding portal member to
observe high standards of commercial honor as well as just and
equitable principles of trade. Proposed Funding Rule 200(b) prohibits
a funding portal member from effecting any transaction in, or
inducing the purchase or sale of, any security by means of, or aiding
and abetting, any manipulative, deceptive or other fraudulent device
or contrivance.
Proposed
Funding Portal Rule 200(c) prohibits false and misleading statements.
Funding Portal Compliance
Under
proposed Funding Portal Rule 300(a), a funding portal member will be
required to establish and maintain a system to supervise activities
of associated persons, reasonably designed so as to maintain
compliance with applicable securities laws, regulations and the
Funding Portal Rules.
Proposed
Funding Portal Rule 300(b) contains anti-money laundering (AML)
provisions.
Proposed
Funding Portal Rule 300(c) requires funding portal members (and
associated persons) to report to FINRA (or to the member) regulatory
proceedings, disciplinary and other events using Funding Portal Rule
300(c) Form.
Investigations and Sanctions
Proposed
Funding Portal Rule 800(a) would subject funding portal members to
FINRA rules regarding investigations and sanctions (FINRA Rule 8000
Series) unless the context requires otherwise. FINRA has the
obligation to make available to the public any information filed by a
funding portal member indicated whether the funding portal member or
any associated person of the funding portal is subject to statutory
disqualification.
Arbitration and Mediation: Funding Portal Rule 1200
Proposed
Funding Portal Rule 1200(a) subjects funding portal members to FINRA
code of arbitration procedures for customer disputes, FINRA code of
arbitration procedures for industry disputes (FINRA Rule 13000
Series), and FINRA code of mediation procedures (FINRA Rule 14000
Series), unless the context requires otherwise.
The
comment period on the proposed rules expires February 3, 2014.
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