Document ID: SEC-2015-1751-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-10-28T04:00Z

[Federal Register Volume 80, Number 208 (Wednesday, October 28, 2015)]
[Notices]
[Pages 66341-66348]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-27371]

[[Page 66341]]

Vol. 80

Wednesday,

No. 208

October 28, 2015

Part III

Securities and Exchange Commission

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Self-Regulatory Organizations; Financial Industry Regulatory Authority, 
Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule 
To Establish Fees for Funding Portals; Notice of Filing of a Proposed 
Rule Change To Adopt the Funding Portal Rules and Related Forms and 
FINRA Rule 4518; Notices

  Federal Register / Vol. 80 , No. 208 / Wednesday, October 28, 2015 / 
Notices  

[[Page 66342]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76238; File No. SR-FINRA-2015-041]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule To Establish Fees for Funding Portals

October 22, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 9, 2015, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. FINRA has 
designated the proposed rule change as ``establishing or changing a 
due, fee or other charge'' under Section 19(b)(3)(A)(ii) of the Act \3\ 
and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal 
effective upon receipt of this filing by the Commission. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt Section 15 of Schedule A to the FINRA 
By-Laws (``Section 15'') governing fees for funding portals that are 
FINRA members.
    Below is the text of the proposed rule change. Proposed new 
language is in italics.
* * * * *
BY-LAWS OF THE CORPORATION
* * * * *
SCHEDULE A TO THE BY-LAWS OF THE CORPORATION
    Section 1 through Section 14 No Change.

Section 15--Funding Portal Member Fees

    (a) FINRA shall, in accordance with this section, collect fees that 
are designed to recover the costs to FINRA of the supervision and 
regulation of funding portal members, including the membership process 
and performing examinations, policy, rulemaking, interpretive and 
enforcement activities. FINRA shall periodically review funding portal 
fee revenues in conjunction with these costs to determine the 
applicable fees and rates. FINRA shall publish notices of the fees and 
adjustments to the assessment rates applicable under this section.
    (b)(1) Each funding portal applicant for membership shall be 
assessed an application fee of $2,700 at the time Form FP-NMA is filed.
    (b)(2) Each funding portal applicant for approval of a change in 
ownership or control shall be assessed an application fee of $500 at 
the time Form FP-CMA is filed.
    (b)(3) If an application pursuant to paragraph (b)(1) or (b)(2) is 
rejected as incomplete or is withdrawn by the funding portal applicant 
in accordance with Funding Portal Rule 110(a)(5) or (a)(7), the 
application fee shall be refunded less $250, which shall be retained by 
FINRA as a processing fee.
    (c)(1) Each funding portal member shall pay an annual gross income 
assessment determined in accordance with Section 1(c) of this Schedule 
A. Gross revenue is defined for assessment purposes as gross revenue as 
reported on Form FP--Statement of Revenue.
    (c)(2) The annual fee of a funding portal that is not a member 
throughout FINRA's full calendar year from January 1 to December 31 
shall be based upon the number of quarter years of membership. The 
proration for a new funding portal member shall include the quarter 
year in which the funding portal member is admitted to membership. The 
proration for a funding portal member that withdraws from membership 
shall include the quarter year in which the funding portal member's 
withdrawal from membership is effective.
    (c)(3) A funding portal member that is a successor organization to 
a previous funding portal member or members shall assume the unpaid 
balance of the assessments of its predecessor or predecessors and its 
next assessment shall be determined, if applicable, upon the assessment 
data of its predecessors. Whether a funding portal member is the 
successor organization to a previous funding portal member or members 
shall be determined by FINRA upon a consideration of the terms and 
conditions of the particular merger, consolidation, reorganization, or 
succession. A funding portal member that has simply acquired the 
personnel and offices of another funding portal member under 
circumstances that do not constitute the funding portal member a 
successor organization shall not be required to assume the unpaid 
assessments of the other member.
    (d) A nonresident funding portal member shall reimburse FINRA for 
any expenses incurred in connection with examinations of the member to 
the extent that such expenses exceed the cost of examining a member 
located within the continental United States in the geographic location 
most distant from the District Office of appropriate jurisdiction.
    (e) FINRA shall assess each funding portal member a fee of $100 on 
the first day and $25 for each subsequent day, up to a maximum of 
$1,575, that a new disclosure event or a change in the status of a 
previously reported matter is not timely filed pursuant to Funding 
Portal Rule 800(b)(2).
    (f)(1) A funding portal member shall pay a fee of $1,500 at the 
time that it files an application to initiate eligibility proceedings 
pursuant to Funding Portal Rule 900(b). Any funding portal member whose 
application results in a full hearing for eligibility in FINRA pursuant 
to Funding Portal Rule 900(b) shall pay to FINRA an additional fee of 
$2,500.
    (f)(2) A funding portal member that continues to associate with any 
individual subject to disqualification or otherwise ineligible from 
association with a member shall pay annually to FINRA a fee of $1,500 
when such person or individual is classified as a Tier 1 statutorily 
disqualified individual, and a fee of $1,000 when such person or 
individual is classified as a Tier 2 statutorily disqualified 
individual.
    (g) A funding portal member shall pay $15 for processing and 
posting to the CRD system each set of fingerprints submitted 
electronically by the member, or $30 if submitted in non-electronic 
format, to FINRA, plus any other charge that may be imposed by the 
United States Department of Justice for processing each set of 
fingerprints.
    (h) Request for Data and Publications. Where there is no provision 
elsewhere in the By-Laws for specific fees, the corporation may impose 
and collect compensatory charges for data from its records or for its 
publications.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared

[[Page 66343]]

summaries, set forth in sections A, B, and C below, of the most 
significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Title III of the Jumpstart Our Business Startups (``JOBS'') Act,\5\ 
enacted in 2012 with the goal of increasing American job creation and 
economic growth, contains key provisions relating to securities offered 
or sold through ``crowdfunding.'' \6\ Under Section 302 of the JOBS 
Act, a crowdfunding intermediary that engages in crowdfunding on behalf 
of issuers relying on the JOBS Act's ``crowdfunding exemption'' \7\ is 
required to register with the SEC as a ``funding portal'' \8\ or broker 
and to register with an applicable self-regulatory organization.\9\
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    \5\ Pub. L. 112-106, 126 Stat. 306 (2012).
    \6\ Crowdfunding generally refers to the use of the Internet by 
small businesses to raise capital through limited investments from a 
large number of investors.
    \7\ See new Section 4(a)(6) of the Securities Act of 1933 (the 
``Securities Act'') (15 U.S.C. 77d(a)(6)), as amended by the JOBS 
Act. The crowdfunding exemption creates an exemption from 
registration under the Securities Act for securities offered by 
issuers pursuant to Title III of the JOBS Act.
    \8\ Section 3(a)(80) of the Act (15 U.S.C. 78c(a)(80)), as 
amended by Title III of the JOBS Act, provides that the term 
``funding portal'' means any person acting as an intermediary in a 
transaction involving the offer or sale of securities for the 
account of others, solely pursuant to Securities Act Section 4(a)(6) 
(15 U.S.C. 77d(a)(6)), that does not: (1) Offer investment advice or 
recommendations; (2) solicit purchases, sales, or offers to buy the 
securities offered or displayed on its Web site or portal; (3) 
compensate employees, agents, or other persons for such solicitation 
or based on the sale of securities displayed or referenced on its 
Web site or portal; (4) hold, manage, possess, or otherwise handle 
investor funds or securities; or (5) engage in such other activities 
as the Commission, by rule, determines appropriate.
    \9\ See Sections 4A(a)(1) and (2) of the Securities Act (15 
U.S.C. 77d-1(a)(1) and (2)).
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    In October 2013, the SEC proposed rules to require registration of 
funding portals and to implement the provisions of Title III of the 
JOBS Act.\10\ Prospective funding portal operators have stated that 
they intend to register with the SEC pursuant to Regulation 
Crowdfunding if adopted by the SEC and to apply for FINRA membership. 
Section 3(h)(2) of the Act,\11\ as amended by the JOBS Act, requires 
that FINRA only examine for and enforce against registered funding 
portals rules that FINRA has written specifically for registered 
funding portals. FINRA has submitted a companion filing to adopt the 
Funding Portal Rules and related forms.\12\ This proposed rule change 
would adopt the fees applicable to funding portal members. FINRA has 
written the proposed rule change specifically for funding portals.
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    \10\ See Securities Exchange Act Release No. 70741 (October 23, 
2013), 78 FR 66428 (November 5, 2013) (Crowdfunding; Proposed Rules) 
(the ``Regulation Crowdfunding Proposal''). The SEC's proposed Rule 
400(a) under Regulation Crowdfunding requires in part that a funding 
portal must register with the Commission and become a member of 
FINRA or any other applicable national securities association 
registered under SEA Section 15A (15 U.S.C. 78o-3). FINRA is the 
only registered national securities association.
    \11\ 15 U.S.C. 78c(h)(2).
    \12\ Specifically, FINRA has submitted a companion filing to 
adopt Funding Portal Rules 100, 110, 200, 300, 800, 900 and 1200 
(collectively, the ``Funding Portal Rules''), and related forms 
(Form FP-NMA, Form FP-CMA, Funding Portal Rule 300(c) Form, and Form 
FP-Statement of Revenue), regarding the regulation of funding portal 
member activities. See SR-FINRA-2015-040.
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    Proposed Funding Portal Rule 100 provides in part that ``All 
funding portal members and persons associated with funding portal 
members shall be subject to the FINRA By-Laws and FINRA Regulation By-
Laws, unless the context requires otherwise, and the Funding Portal 
Rules.'' Member regulatory fees are set forth in Schedule A to the By-
Laws of the Corporation. FINRA proposes to amend Schedule A by adding 
Section 15, Funding Portal Member Fees.
    Many of the fees charged to broker-dealer members pursuant to 
Schedule A to the By-Laws have no application to funding portal members 
due to the limited scope of funding portal activities.\13\ Proposed 
Section 15, Funding Portal Fees, would establish the fees described 
below for funding portals that are FINRA members.
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    \13\ See, e.g., Schedule A, Section 1(b) (Trading Activity 
Fees), Section 3 (Regulatory Transaction Fees), Section 4(a) (Branch 
Office Fees), and Sections 4(b) and 4(c) (Registration and Testing 
Fees).
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Initial Membership Application
    The proposed rule change would impose a membership application fee 
of $2,700 charged at the time Form FP-NMA (new member application) is 
filed pursuant to proposed Funding Portal Rule 110(a)(3). These fees 
reflect the anticipated resource demands associated with processing and 
reviewing funding portal membership applications to determine whether 
the applicant meets the standards for membership set forth in proposed 
Funding Portal Rule 110.
Approval of Change in Ownership or Control
    The proposed rule change would impose a continuing membership 
application fee of $500 charged at the time Form FP-CMA (continuing 
membership application) is filed pursuant to proposed Funding Portal 
Rule 110(a)(4). Proposed Funding Portal Rule 110(a)(4) provides that a 
funding portal member must file an application for approval of 
specified changes in ownership or control. The membership program 
incurs costs in reviewing continuing membership application materials 
and assessing whether the application meets the required standards set 
forth in proposed Funding Portal Rule 110.
Refunds for Incomplete or Withdrawn Applications
    If an application on proposed Form FP-NMA or Form FP-CMA is 
rejected as incomplete within 14 days in accordance with proposed 
Funding Portal Rule 110(a)(5) or withdrawn by the applicant within 14 
days in accordance with proposed Funding Portal Rule 110(a)(7), the 
application fee would be refunded less $250, which would be retained by 
FINRA as a processing fee.
Gross Income Assessment
    FINRA's gross income assessment is a key element of its primary 
pricing structure. The fee is used to fund FINRA's regulatory 
activities, including its examination and enforcement programs. Section 
1(c) of Schedule A of the By-Laws establishes a seven-tier rate 
structure under which each member pays a gross income assessment. 
Section 15 would impose this requirement on funding portal members. 
Under this rate structure, a funding portal with annual gross revenue 
of $1 million or less would pay a $1,200 annual fee. As proposed by 
FINRA, funding portals would be required to report their gross revenue 
on Form FP-Statement of Revenue.\14\
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    \14\ Article VI, Section 2 of FINRA's By-laws provides that 
``Each member, issuer, or other person shall promptly furnish all 
information or reports requested by the Corporation in connection 
with the determination of the amount of admission fees, dues, 
assessments, or other charges.'' FINRA has proposed that funding 
portal members be required to submit Form FP-Statement of Revenue 
each year. See note 12 supra.
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Nonresident Funding Portals
    Section 15 would include a provision similar to NASD Rule 1090(b), 
and would require nonresident funding portals to reimburse FINRA for 
any expenses incurred in connection with examinations of the member to 
the extent that such expenses exceed the cost of examining a member 
located within the continental United States in the geographic location 
most distant

[[Page 66344]]

from the District Office of appropriate jurisdiction.
Late Filings
    Pursuant to proposed Funding Portal Rule 800(b)(2), funding portals 
would be required to keep statutory disqualification information 
current and to update the information promptly, but in any event not 
later than 10 days following any change in such information. Section 15 
would assess a funding portal member a fee of $100 on the first day and 
$25 for each subsequent day, up to a maximum of $1,575, if statutory 
disqualification information is not provided or updated pursuant to 
proposed Funding Portal Rule 800(b)(2) within the prescribed 10 
days.\15\ FINRA proposes to impose this late fee, which is based on 
existing Section 4(h) of Schedule A of the By-Laws, as an additional 
mechanism to help ensure that funding portal members make required 
disclosures under proposed Funding Portal Rule 800(b)(2) in a timely 
manner.\16\ FINRA also may bring disciplinary actions for failure to 
timely file or update the required disclosures under proposed Funding 
Portal Rule 800(b)(2), and would exercise discretion to bring such 
actions based on the facts and circumstances of individual cases 
notwithstanding the establishment of the late fee.
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    \15\ Pursuant to proposed Funding Portal Rule 300(c) (Reporting 
Requirements), funding portal members also would be required to file 
a Funding Portal Rule 300(c) Form within 30 calendar days of 
specified disclosure events, including specified statutory 
disqualifications. The proposed rule change, however, would not 
impose a late filing fee on filings pursuant to Funding Portal Rule 
300(c).
    \16\ FINRA recognizes that funding portal members may be 
prevented from filing timely disclosures if their associated persons 
fail to advise them of some events resulting in a statutory 
disqualification to which the associated persons, and not the 
members, are privy. In such cases, FINRA will consider the facts and 
circumstances in determining whether it is appropriate to impose the 
late fee.
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Relief From Statutory Disqualification or Other Ineligibility 
Provisions
    Section 15 would impose a fee of $1,500 upon filing of an 
application by a funding portal to continue to employ a person that is 
subject to a statutory disqualification or is otherwise ineligible 
under FINRA rules from association with the funding portal. Any funding 
portal whose application results in a full hearing for eligibility 
pursuant to Funding Portal Rule 900(b) also would have to pay FINRA an 
additional fee of $2,500. In addition, Section 15 would provide that 
any portal that continues to employ as an associated person any 
individual subject to disqualification shall pay FINRA an annual fee of 
$1,500 when the individual is classified as a Tier 1 statutorily 
disqualified individual, and a fee of $1,000 when the individual is 
classified as a Tier 2 statutorily disqualified individual. The purpose 
of these fees is to assist FINRA in recovering the costs associated 
with processing applications submitted by firms seeking to associate 
with persons subject to a statutory or other disqualification.\17\ 
Moreover, the proposed rule change would impose an annual fee on 
funding portal members that are approved to associate with an 
individual that is subject to a statutory disqualification, in light of 
the additional costs FINRA incurs for related oversight and 
examinations. For purposes of oversight, persons subject to a statutory 
disqualification are classified into one of three tiers, and the level 
of continuing examination varies among the tiers.
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    \17\ FINRA has proposed to adopt Funding Portal Rule 900(b), 
which sets forth procedures for a person to become or remain 
associated with a funding portal member, notwithstanding the 
existence of a statutory disqualification as defined in Article III, 
Section 4 of the FINRA By-Laws, and for a funding portal member or 
person associated with a funding portal member to obtain relief from 
the eligibility or qualification requirements of the FINRA By-Laws 
and Funding Portal Rules. See note 12 supra.
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Fingerprint Fees
    Section 15 would provide that each funding portal member shall pay 
$15 for processing and posting to the CRD system each set of 
fingerprints submitted electronically by the funding portal member, or 
$30 if submitted in non-electronic format, to FINRA, plus any other 
charge that may be imposed by the United States Department of Justice 
for processing each set of fingerprints. FINRA processes fingerprints 
submitted by member firms on behalf of their associated persons who are 
required to be fingerprinted pursuant to SEA Section 17(f)(2) (15 
U.S.C. 78q(f)(2)) and SEA Rule 17f-2 (17 CFR 240.17f-2). Proposed 
Regulation Crowdfunding provides that associated persons of 
intermediaries engaging in transactions in reliance on Securities Act 
Section 4(a)(6) must comply with SEA Rule 17f-2, relating to the 
fingerprinting of securities industry personnel.\18\
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    \18\ See Regulation Crowdfunding Proposal at 78 FR 66507.
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Data and Publications
    Section 15 would provide that if there is no provision in the By-
Laws for specific fees, FINRA may collect compensatory charges for data 
from its records or for its publications. This provision would be 
identical to Section 10 of Schedule A of the By-Laws, applicable to 
broker-dealer members.
    FINRA has filed the proposed rule change for immediate 
effectiveness. FINRA is proposing that the implementation date of the 
proposed rule change will be the implementation date of FINRA's 
proposed Funding Portal Rules, in whole or in part.\19\
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    \19\ See note 12 supra.
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\20\ which requires, among 
other things, that FINRA rules provide for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system that FINRA operates or 
controls. FINRA believes that the proposed fees are reasonable based on 
the limited permissible activities of funding portal members, the 
nature and scope of FINRA's regulatory program that will apply to such 
members, and the related estimated costs of establishing and 
maintaining the program. The proposed fees also would contribute to the 
general funding of FINRA's overall regulatory program and serve to 
ensure that FINRA is sufficiently capitalized to meet its regulatory 
responsibilities.
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    \20\ 15 U.S.C. 78o-3(b)(5).
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    FINRA also believes that the proposed fees are equitably allocated 
among funding portal members and funding portal applicants for 
membership. All funding portal members would incur the same proposed 
fee for membership and continuing membership applications, with both 
fees being lower than the fees charged to broker-dealer members in 
light of the limited activities of funding portal members and the 
streamlined application forms. In contrast, the proposed gross income 
assessment would be calculated using the same rate structure used for 
broker-dealer members, with those funding portal members having a 
higher annual gross income paying a larger assessment for regulatory 
purposes. As further discussed below, the proposed rule change also 
would impose late filing fees, fees related to eligibility proceedings 
and examinations of statutorily disqualified persons, and 
fingerprinting processing fees that are identical to those charged to 
broker-dealer members.

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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA believes that the fees as 
set forth in this proposed rule change are reasonable based on the 
limited permissible activities of funding portal members, the nature 
and scope of FINRA's regulatory program that will apply to such 
members, and the related estimated costs of establishing and 
maintaining the program. Because funding portals are entities newly-
created by the JOBS Act, FINRA has yet to implement its proposed 
regulatory program for these entities. As such, the proposed rule 
change reflects FINRA's efforts to estimate the costs of funding portal 
oversight and to recover those incremental costs.\21\
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    \21\ As FINRA gains experience in regulating funding portal 
member activities, FINRA will periodically review funding portal fee 
revenues in conjunction with these costs to determine applicable 
fees and rates.
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Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth 
below, to further analyze the need for the proposed rulemaking, the 
regulatory objective of the rulemaking, the economic baseline of 
analysis, and the economic impacts.
1. Need for the Rules
    Section 3(h)(2) of the Exchange Act,\22\ as amended by the JOBS 
Act, requires that FINRA only examine for and enforce against 
registered funding portals rules that FINRA has written specifically 
for registered funding portals.
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    \22\ 15 U.S.C. 78c(h)(2).
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    Under Title III of the JOBS Act, a funding portal is a new type of 
intermediary the business activities of which are of limited scope, as 
defined by the JOBS Act, relative to entities that register as brokers. 
Among other things, the JOBS Act adds Section 4(a)(6) to the Securities 
Act,\23\ which creates an exemption (the ``crowdfunding exemption'') 
from registration requirements under the Securities Act for securities 
offered and sold pursuant to the crowdfunding exemption. Broadly, the 
crowdfunding exemption permits an issuer to offer and sell up to $1 
million in securities over a 12-month period. The amount of any such 
security sold to an investor by an issuer is not permitted to exceed 
specified thresholds. Further, the issuer must comply with other 
specified requirements under the JOBS Act and Commission rules. Any 
offering pursuant to the crowdfunding exemption must be conducted 
through a broker or a funding portal that is registered with the SEC.
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    \23\ 15 U.S.C. 77d(a)(6).
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    Under the JOBS Act, a funding portal must become a member of a 
national securities association that is registered under Section 15A of 
the Exchange Act (15 U.S.C. 78o-3). FINRA is the only national 
securities association that is registered under Section 15A of the 
Exchange Act.
    Prospective funding portal operators have stated that they intend 
to register with the SEC pursuant to Regulation Crowdfunding if it is 
adopted by the SEC and to apply for FINRA membership.
    The proposed rule change would adopt the fees applicable to funding 
portal members. FINRA has separately filed a proposed rule change to 
establish a set of Funding Portal Rules and related forms for funding 
portals.\24\
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    \24\ See note 12 supra.
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2. Regulatory Objective
    The crowdfunding exemption is designed to help provide startups and 
small businesses with capital by making relatively low dollar offerings 
of securities less costly. The exemption creates a regulatory pathway 
for funding portals to facilitate the offer and sale of securities, as 
registered funding portals, without being required to register with the 
SEC as brokers, provided they comply with specified limitations on 
their business activity.
    The proposed rule change aims to establish a fee regime for 
membership that adequately reflects the regulatory costs of review, 
aligns regulatory costs with those imposed on other FINRA members and 
minimizes the burden imposed on funding portal members by setting forth 
regulatory fees that reflect the limited scope of activities of funding 
portals while also maintaining investor protection.
3. Economic Baseline
    Funding Portal Rule 100(a), as proposed in SR-FINRA-2015-040, 
provides in part that all funding portal members shall be subject to 
the FINRA By-Laws and FINRA Regulation By-Laws, unless the context 
requires otherwise, and the Funding Portal Rules. Member regulatory 
fees are set forth in Schedule A to the By-Laws of the Corporation. 
FINRA proposes to amend Schedule A by adding Section 15, Funding Portal 
Member Fees.
    In the absence of the proposed rule change, funding portals would 
need to register as brokers and would thereby be subject to the fees 
charged to broker-dealer members. However, many of the fees charged to 
broker-dealer members pursuant to Schedule A to the By-Laws, such as 
Trading Activity Fees, Regulatory Transaction Fees and Branch Office 
Fees, have no application to funding portal members due to the limited 
scope of funding portal activities. For the fees that are applicable to 
funding portals, the fees currently charged to broker-dealer members 
are generally higher than the fees set forth in the proposed rule 
change.
    Therefore, if funding portals were subject to the fees charged to 
broker-dealer members, there might be several unintended consequences. 
First, there may be confusion among funding portal members as some of 
the fees are not applicable to funding portals, which may increase 
compliance costs. Second, higher fees may potentially restrict the 
number of registered funding portals and thus reduce competition in the 
crowdfunding intermediary market. Third, higher fees may also limit the 
activities of those funding portals that do choose to become funding 
portal members, for instance because higher costs to membership may 
restrict capital available for business purposes.
    In addition to prospective funding portals, the absence of the 
proposed rules may also have an impact on: Issuers, typically startups 
and small businesses seeking to raise capital by issuing securities; 
investors that purchase or may consider purchasing securities in such 
offerings; and other capital providers, broker-dealers and finders that 
currently participate in private offerings.
    For the issuers seeking to raise capital through securities-based 
crowdfunding in reliance on the crowdfunding exemption, limited numbers 
of registered funding portals due to higher fees may result in higher 
capital raising costs, decreased opportunities for selling securities 
through a given registered funding portal, or an aggregate reduction in 
the capacity of registered funding portals. Higher fees to registered 
funding portals may also be passed on to issuers. All of these impacts 
would collectively make it more difficult for startups and small 
businesses to efficiently find capital for their operations.
    Limited numbers of registered funding portals may also limit 
investor access to securities-based crowdfunding offerings. In 
addition, higher capital raising costs to issuers and higher fees

[[Page 66346]]

to registered funding portals could be passed on to potential 
investors.
    The absence of the proposed rule change also might have an effect 
on broker-dealers and finders participating in private offerings. If 
issuers intending to raise capital in reliance on the crowdfunding 
exemption face higher costs due to the fees charged to funding portals, 
some may instead choose to raise capital through private offerings with 
the assistance of broker-dealers and finders. This could increase the 
revenue of finders and broker-dealers in the market for private 
offerings, but less competition in the fundraising market may lead to 
less efficient allocation of capital.
4. Economic Impacts
a. Benefits
    The proposed rule change sets forth regulatory fees for prospective 
funding portal members. It facilitates the purposes of the proposed 
Funding Portal Rules by: Providing a mechanism by which funding portals 
can become funding portal members of FINRA and thereby comply with the 
JOBS Act; providing certainty with respect to the membership process; 
establishing a fee structure that is broadly consistent with FINRA's 
fees to its current members for similar activities; and, aligning the 
costs of membership with the expenditure of regulatory resources that 
would be necessary for review of funding portal membership 
applications.
b. Costs to Funding Portals
    The proposed rule change sets forth the fees that would apply to 
funding portals. The costs associated with the provisions of the 
proposed rule change are discussed below. The proposed fees are 
generally lower than the fees that are charged to broker-dealer members 
under current rules. As such, the fees that would be charged to funding 
portal members would be generally higher in the absence of the proposed 
rule change.
c. Initial Membership Application
    The SEC estimates that approximately 50 entities per year would 
choose to register as funding portals during the first three years 
following effectiveness of the SEC's proposed rules.\25\ The SEC also 
estimates that two out of the 50 funding portals would be nonresident 
funding portals.\26\ FINRA is proposing an initial membership 
application fee of $2,700 per funding portal. Therefore, FINRA 
estimates the total membership application fee across all funding 
portals to be $135,000 per year ($2,700/funding portal x 50 funding 
portals). The SEC estimates that the two nonresident intermediaries 
would face an additional cost of $25,130 to complete Schedule C, retain 
an agent for the service and provide an opinion of counsel to register 
as a nonresident funding portal.\27\
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    \25\ See Regulation Crowdfunding Proposal at 78 FR 66539.
    \26\ See Regulation Crowdfunding Proposal at 78 FR 66540.
    \27\ See Regulation Crowdfunding Proposal at 78 FR 66542.
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    The SEC assumes that 90% of the funding portals would employ an 
outside party to assist in the membership process and that a third 
party would charge $25,000 on average.\28\ Thus the total costs charged 
by the outside parties to funding portals are estimated to be 
approximately $1,125,000 ($25,000/third party x 45 funding portals) per 
year.
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    \28\ See Regulation Crowdfunding Proposal at 78 FR 66542.
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    While the proposed rule change does not require funding portal 
members to appoint a dedicated Chief Compliance Officer, FINRA expects 
that funding portals generally will have designated employees 
responsible for compliance activities. As such, FINRA estimates certain 
compliance costs based on the assumption of the appointment of a Chief 
Compliance Officer or person in a similar position. To the extent that 
the funding portal member designates an employee who is not a Chief 
Compliance Officer to fulfill this responsibility, the estimate below 
is conservative. The SEC assumes that a funding portal's Chief 
Compliance Officer or person in a similar position would spend 110 
hours assisting in the membership process or 55 hours if an outside 
party is hired.\29\ The hourly rate for a Chief Compliance Office is 
estimated to be $441.\30\ Therefore, the total annual costs associated 
with Chief Compliance Officers are estimated to be $1,334,025 ($441/
hour x 110 hours x 5 funding portals + $441/hour x 55 hours x 45 
funding portals).
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    \29\ See Regulation Crowdfunding Proposal at 78 FR 66542.
    \30\ See Regulation Crowdfunding Proposal at 78 FR 66543.
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    In sum, the total costs to complete initial funding portal 
membership processes with FINRA are estimated to be $2,644,285 
($135,000 + $25,130 x 2 + $1,125,000 + $1,334,025) per year across all 
funding portals for the first three years following effectiveness of 
the SEC's proposed rules.
    FINRA also proposes to conduct one or more membership interviews 
with a representative or representatives of a funding portal applicant 
prior to FINRA's decision on the application. FINRA does not expect the 
costs associated with membership interviews to be material. In case of 
an application denial, the applicant may appeal FINRA's decision and 
may apply for review by the SEC if aggrieved by the final action of 
FINRA. The direct costs associated with an appeal of FINRA's decision 
or an application to SEC for review may include expenses to file the 
application and legal fees. Indirect costs may include the time 
involved to pursue the appeal and the lost revenues while the appeal is 
pending. These costs may vary significantly and are difficult to 
quantify.
d. Approval of Change in Ownership or Control
    The proposed rule change would impose a continuing membership 
application fee of $500 charged at the time Form FP-CMA is filed 
pursuant to proposed Funding Portal Rule 110(a)(4). Based on FINRA 
staff experience with member applications, approximately 3.8% of the 
member firms file a change in ownership or control each year. Assuming 
the same rate for funding portals, the SEC's assumption of 50 funding 
portals per year indicates that approximately 11 (50 x 3.8% + 100 x 
3.8% + 150 x 3.8%) Form FP-CMAs would be filed in the first three 
years. This represents $5,500 in fees to be paid.
e. Refunds for Incomplete or Withdrawn Applications
    Under the proposed rule change, if a Form FP-NMA or Form FP-CMA 
application is rejected as incomplete within 14 days in accordance with 
proposed Funding Portal Rule 110(a)(5) or withdrawn by the applicant 
within 14 days in accordance with proposed Funding Portal Rule 
110(a)(7), the application fee would be refunded less $250. To estimate 
the number of applications that would qualify for a refund, FINRA looks 
to its experience with broker-dealer membership applications. Since 
March 2013, when the refund processing fee for full broker-dealer 
applications withdrawn in the first 30 days was put into place, 1,067 
full Form CMAs have been filed through July 31, 2015, including 48 CMAs 
that were incomplete or withdrawn and were charged the refund 
processing fees, representing a 4.5% rate of refund processing fee 
charges. Assuming 150 total Form FP-NMAs and 11 total Form FP-CMAs in 
the first three years, using the same rate of 4.5% leads to the 
estimate that approximately seven Form FP-NMAs and one Form FP-CMA 
would be subject to the $250 processing fee in lieu of the overall 
Forms FP-NMA

[[Page 66347]]

and FP-CMA fees (of $2,700 or $500 each, respectively).
f. Gross Income Assessment
    Under the proposed rule change, a funding portal with annual gross 
revenue of $1 million or less would pay a $1,200 annual fee. Assuming 
that all funding portals will have an annual gross income of $1 million 
or less, the total costs to remain a member of FINRA are estimated to 
be $60,000 ($1,200/portal x 50 funding portals) in the first year 
following effectiveness of the SEC rules, $120,000 ($1,200/portal x 100 
funding portals) in the second year, and $180,000 ($1,200/portal x 150 
funding portals) per year going forward.
g. Nonresident Funding Portals
    Nonresident funding portals would be required to reimburse FINRA 
for any expenses incurred in connection with examinations of the member 
to the extent that such expenses exceed the cost of examining a member 
located within the continental United States in the geographic location 
most distant from the District Office of appropriate jurisdiction. The 
SEC estimates that two out of the 50 funding portals per year would be 
nonresident. FINRA does not expect the reimbursement to be material. 
The SEC also estimates that the two nonresident funding portals would 
be subject to an additional annual cost of $130 to maintain an agent 
for service of process in the United States.\31\
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    \31\ See Regulation Crowdfunding Proposal at 78 FR 66543.
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h. Late Filings
    Proposed Section 15 would assess a funding portal member a fee of 
$100 on the first day and $25 for each subsequent day, up to a maximum 
of $1,575, if statutory disqualification information is not provided or 
updated pursuant to proposed Funding Portal Rule 800(b)(2) within the 
prescribed 10 days. Given the limited scope of the proposed disclosure 
requirements for funding portal members, FINRA does not expect to 
receive a significant number of late filings.
i. Relief From Statutory Disqualification or Other Ineligibility 
Provisions
    Section 15 would impose a fee of $1,500 upon filing of an 
application by a funding portal to continue to employ a person that is 
subject to a statutory disqualification or is otherwise ineligible 
under FINRA rules from association with the funding portal. The rule 
provides that any funding portal whose application results in a full 
hearing for eligibility also would have to pay FINRA an additional fee 
of $2,500. In addition, Section 15 would provide that any funding 
portal that continues to employ as an associated person any individual 
subject to disqualification shall pay FINRA an annual fee of $1,500 
when the individual is classified as a Tier 1 statutorily disqualified 
individual, and a fee of $1,000 when the individual is classified as a 
Tier 2 statutorily disqualified individual.
    Based upon historical data ascertained over the past five years, 
FINRA performed statutory qualification reviews on an average of 
0.4209% of the total membership per year, and 0.0342% were deemed 
statutorily disqualified. Out of the statutory disqualifications, 22.5% 
(or 0.0077% of the total membership) elected to file an application to 
initiate the eligibility proceedings. Given the limited number of 
expected funding portals and the likely small size of the funding 
portals as compared to broker-dealers, FINRA expects the volume of 
eligibility proceeding applications to be immaterial.
    In case a funding portal member elects to file an application, it 
needs to complete FINRA's Form MC-400 for an individual or Form MC-400A 
for the funding portal member. A Form MC-400 or MC-400A is estimated to 
take a Chief Compliance Officer or person in a similar position 20 
hours to complete. Assuming an hourly rate of $441 for a Chief 
Compliance Officer, the estimated cost for a funding portal to file an 
application would be $8,820.
    Based upon its experience with member firms, FINRA expects that a 
small percentage of applications will be appealed to the SEC for 
review. The direct cost in connection with an appeal to the SEC of a 
statutory disqualification denial will be legal fees to pursue the 
appeal if the party is represented, which can vary significantly. The 
indirect costs may include the time involved to pursue an appeal and 
the lost revenue or income while an appeal is pending if the member is 
not already a member of FINRA, which are difficult to quantify.
j. Fingerprint Fees
    Section 15 would provide that each funding portal member shall pay 
$15 for processing and posting to the CRD system each set of 
fingerprints submitted electronically by the funding portal member, or 
$30 if submitted in non-electronic format, to FINRA, plus any other 
charge that may be imposed by the United States Department of Justice 
for processing each set of fingerprints. Effective February 1, 2015, 
the United States Department of Justice charges $12.75 for each set of 
fingerprints.\32\ Assuming that on average five persons will be 
required to be fingerprinted per funding portal, FINRA estimates that 
250 persons will be fingerprinted per year. If half of the fingerprints 
will be submitted electronically, the total payments for fingerprints 
are estimated to be $8,812.5 (($15 + $12.75) x 125 + ($30 + $12.75) x 
125) per year.
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    \32\ See Department of Justice, Federal Bureau of Investigation 
(``FBI''): FBI Criminal Justice Information Services Division Fee 
Schedule, 79 FR 63943 (October 27, 2014).
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k. Data and Publications
    Section 15 would provide that if there is no provision in the By-
Laws for specific fees, FINRA may collect compensatory charges for data 
from its records or for its publications. FINRA believes that the total 
charges would be immaterial.
l. Impact on Competition
    As discussed earlier, under the JOBS Act, an intermediary that 
engages in crowdfunding on behalf of issuers must register with the SEC 
as a funding portal or broker and register with an applicable self-
regulatory organization.\33\ The proposed rule change would establish a 
fee schedule imposed equally on all prospective funding portal 
registrants. As such, it creates no competitive benefit or cost to any 
set of registrants seeking to become a funding portal member. Broker-
dealer members that seek to engage in crowdfunding business may do so, 
but may be subject to the fees associated with an application for 
approval of change in business operations pursuant to NASD Rule 1017. 
FINRA believes that it has mitigated impacts on competition among 
broker-dealers by relying on the membership application process and fee 
schedule that is already in place for such members. This approach would 
treat the potential extension of a broker-dealer's business to 
crowdfunding services just as it would any potential change in the 
business activity of a broker-dealer and therefore creates no new 
obligations or impacts.
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    \33\ See note 9 supra.
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    To the extent that the proposed fees for funding portals create 
incentives to conduct crowdfunding services through a funding portal 
rather than through an existing broker-dealer, FINRA notes that any 
broker-dealer can opt to offer such services through a funding portal 
affiliate. In doing so, the broker-dealer would face the same fees as 
any other funding portal registrant.
    As discussed earlier, in the absence of the proposed rule change, 
funding

[[Page 66348]]

portals would need to register as brokers and the fees charged to 
funding portals would be the higher fees currently charged to broker-
dealer members. FINRA's intent to establish a fee structure that 
minimizes the burden imposed on funding portal members by attempting to 
set the fees at the minimum necessary to recover FINRA's expected costs 
may encourage more entrants into crowdfunding activity. As such, the 
proposed rule change may promote competition in the market for 
crowdfunding services among funding portals and broker-dealers, 
increase the provision of capital to startups and small businesses, and 
lower the costs of capital-raising to these firms. In this way, the 
proposed rule change may enhance competition for the goods and services 
provided by those seeking funding from investors through funding 
portals.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \34\ and paragraph (f)(2) of Rule 19b-4 
thereunder.\35\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act. If 
the Commission takes such action, the Commission shall institute 
proceedings to determine whether the proposed rule should be approved 
or disapproved.
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    \34\ 15 U.S.C. 78s(b)(3)(A).
    \35\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2015-041 on the subject line.

Paper Comments

     Send paper comments in triplicate to Robert W. Errett, 
Deputy Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2015-041. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.
    All submissions should refer to File Number SR-FINRA-2015-041 and 
should be submitted on or before November 18, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-27371 Filed 10-27-15; 8:45 am]
BILLING CODE 8011-01-P