Document ID: SEC-2016-0159-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-01-28T05:00Z

[Federal Register Volume 81, Number 18 (Thursday, January 28, 2016)]
[Notices]
[Pages 4931-4942]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01672]

[[Page 4931]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76970; File No. SR-FINRA-2015-040]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Amendment No. 1 and Order Granting 
Accelerated Approval to a Proposed Rule Change, as Modified by 
Amendment No. 1, to Adopt the Funding Portal Rules and Related Forms 
and Rule 4518

January 22, 2016.

I. Introduction

    On October 9, 2015, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt Funding Portal Rules 
100, 110, 200, 300, 800, 900 and 1200 (collectively, the ``Funding 
Portal Rules'') and related forms. In addition, as part of the proposed 
rule change, FINRA proposes to adopt new FINRA Rule 4518 (Notification 
to FINRA in Connection with the JOBS Act) in the FINRA rulebook. The 
proposed rule change was published for comment in the Federal Register 
on October 28, 2015.\3\ The Commission received three comment letters 
on the proposed rule change.\4\ On December 9, 2015, FINRA extended the 
time period for Commission action on this proposed rule change until 
January 26, 2016. On January 21, 2016, FINRA filed an amendment to the 
proposed rule change (``Amendment No. 1'').\5\ FINRA responded to the 
comment letters on January 21, 2016.\6\ The Commission is publishing 
this Notice and Order to solicit comment on Amendment No. 1 and to 
approve the proposed rule change, as modified by
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 76239 (Oct. 28, 2015), 80 FR 
66348 (``Notice'').
    \4\ See letters from Judith Shaw, President, North American 
Securities Administrators Association, Inc., dated November 19, 2015 
(``NASAA Letter''); Hugh D. Berkson, President, Public Investors 
Arbitration Bar Association, dated November 18, 2015 (``PIABA 
Letter''); Chris Tyrrell, Chair, CrowdFund Intermediary Regulatory 
Advocates, dated November 18, 2015 (``CFIRA Letter'').
    \5\ See Partial Amendment No. 1, SR-FINRA-2015-040 (Jan. 21, 
2016) (``Amendment No. 1''). Amendment No. 1 revised the proposal to 
include ``for purposes of FINRA Rule 8210 any other person listed in 
Schedule A of Form Funding Portal of a member'' to the definition of 
``associated person of a funding portal member'' or ``person 
associated with a funding portal member'' in Funding Portal Rule 
100(b)(1). See Amendment No. 1 at 3. Amendment No. 1 is available in 
the public comment file for SR-FINRA-2015-040 on the Commission's 
Web site. Amendment No. 1 also revised the proposal to make certain 
technical changes to Funding Portal Rules 300(a)(1)(A), 
900(a)(4)(C), 900(a)(4)(F), 1200(a)(3), 1200(a)(4) and 
1200(b)(4)(C). See Amendment No. 1 at 3-4. These changes are 
discussed in more detail below.
    \6\ See letter from Adam Arkel, Associate General Counsel, 
FINRA, dated January 21, 2016 (``FINRA Letter'').
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    Amendment No. 1, on an accelerated basis.

II. Description of the Rule Change and Amendment No. 1 \7\
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    \7\ The Notice contains a more detailed discussion of the rules. 
In addition, the entire text of the rules, including the amendments, 
can be found in Exhibit 5 of Amendment No. 1.
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    On October 30, 2015, the Commission adopted Regulation 
Crowdfunding,\8\ which implements provisions of Title III of the JOBS 
Act, including those relating to registration and membership 
requirements of a new type of entity called a funding portal.\9\ 
Pursuant to Section 3(h)(1)(B) of the Exchange Act and Regulation 
Crowdfunding, funding portals are required to become members of a 
national securities association registered under Section 15A of the 
Exchange Act in order to function as intermediaries in certain 
crowdfunding transactions.\10\ In addition, Section 3(h)(2) of the 
Exchange Act requires that the national securities association only 
examine for and enforce against registered funding portals rules that 
the national securities association has written specifically for 
registered funding portals.\11\ Accordingly, FINRA, a national 
securities association registered under Section 15A of the Exchange 
Act, proposed Funding Portal Rules 100 (General Standards), 110 
(Funding Portal Application), 200 (Funding Portal Conduct), 300 
(Funding Portal Compliance), 800 (Investigations and Sanctions), 900 
(Code of Procedure) and 1200 (Arbitration and Mediation), as well as 
Form FP-NMA (for new membership applications), Form FP-CMA (for 
continuing membership applications), Funding Portal Rule 300(c) Form 
(for reporting disclosure events as required by Funding Portal Rule 
300(c)) and Form FP--Statement of Revenue (for reporting gross revenue 
as required by Funding Portal Rule 300(e)). FINRA proposed to apply the 
Funding Portal Rules and related forms to SEC-registered funding 
portals that become FINRA members.\12\ FINRA also proposed to adopt new 
FINRA Rule 4518 (Notification to FINRA in Connection with the JOBS Act) 
to implement notification requirements for FINRA broker-dealer members 
that engage in certain crowdfunding transactions or enter into control 
relationships with funding portals.
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    \8\ See Exchange Act Release No. 76324, 80 FR 71387 (Nov. 16, 
2015).
    \9\ See Securities Act of 1933 (``Securities Act'') Section 
4A(a)(1)-(2); Exchange Act Section 3(h)(1)(B). A funding portal is 
defined in Regulation Crowdfunding as ``a broker acting as an 
intermediary in a transaction involving the offer or sale of 
securities in reliance on Section 4(a)(6) of the Securities Act (15 
U.S.C. 77d(a)(6)), that does not: (i) Offer investment advice or 
recommendations; (ii) Solicit purchases, sales or offers to buy the 
securities displayed on its platform; (iii) Compensate employees, 
agents, or other persons for such solicitation or based on the sale 
of securities displayed or referenced on its platform; or (iv) Hold, 
manage, possess, or otherwise handle investor funds or securities.'' 
Rule 300(c)(2) of the SEC's Regulation Crowdfunding. See also 
Section 3(a)(80) of the Exchange Act.
    \10\ See Section 3(h)(1)(B) of the Exchange Act (requiring, as a 
condition of the exemption from broker registration, that a funding 
portal be a members of a national securities association that is 
registered with the Commission under Section 15A of the Exchange 
Act); Regulation Crowdfunding Rule 300(a)(2) (requiring an 
intermediary in transactions relying on the crowdfunding exemption 
to be a member of a national securities association registered under 
Section 15A of the Exchange Act); Regulation Crowdfunding Rule 400 
et seq. (containing the registration requirements for funding 
portals). See also Securities Act Section 4A(a)(2). FINRA is 
currently the only registered national securities association.
    \11\ 15 U.S.C. 78c(h)(2) (``[A] national securities association 
shall only examine for and enforce against a registered funding 
portal rules of such national securities association written 
specifically for registered funding portals.'').
    \12\ FINRA separately proposed Section 15 of Schedule A to the 
FINRA By-Laws governing the fees for funding portals that are FINRA 
members on October 9, 2015. The proposal became effective upon 
receipt of the filing by the Commission. See Exchange Act Release 
No. 76238, 80 FR 66341 (Oct. 28, 2015).
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A. General Standards

    Funding Portal Rule 100 sets forth basic standards and definitions 
for purposes of the Funding Portal Rules. The rule provides 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.\13\ The rule also provides that persons associated with a 
funding portal member shall have the same duties and obligations as a 
funding portal member under the Funding Portal Rules. The term 
``associated person of a funding portal member'' or ``person associated 
with a funding portal member'' is defined in the rule as ``any sole 
proprietor, partner, officer, director or manager of a funding portal, 
or other natural person occupying a similar status or performing 
similar functions, or any natural person directly or indirectly 
controlling or controlled by a

[[Page 4932]]

funding portal member, or any employee of a funding portal member.'' 
\14\
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    \13\ See Funding Portal Rule 100(a).
    \14\ Funding Portal Rule 100(b)(1).
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B. FINRA Membership

    Funding Portal Rule 110(a) addresses the membership application 
process (``MAP'') for funding portal applicants (``FP 
Applicants'').\15\
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    \15\ ``FP Applicant'' is defined as ``a person that applies for 
admission to FINRA as a funding portal member under paragraph (a)(3) 
of Funding Portal Rule 110 or a funding portal member that files an 
application for approval of a change in ownership or control under 
paragraph (a)(4) of the rule.'' Funding Portal Rule 110(a)(1)(B).
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1. MAP for Initial Membership or Change in Ownership or Control
    Funding Portal Rule 110(a)(3)(A) provides that an FP Applicant for 
FINRA membership must submit its application to FINRA's Department of 
Member Regulation (``Department'') by filing a Form FP-NMA \16\ in the 
manner prescribed by FINRA and an application fee. In addition, at the 
time an FP Applicant for FINRA membership submits its application, the 
FP Applicant must submit information, in a format to be prescribed by 
FINRA, indicating whether the FP Applicant or any associated person (as 
defined in Funding Portal Rule 100(b)(1)) of the FP Applicant is 
subject to an event described in Section 3(a)(39) of the Exchange 
Act.\17\ The FP Applicant must keep this information current and must 
update such information promptly, but in any event not later than 10 
days following any change in such information.
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    \16\ Form FP-NMA is set forth in Exhibit 3a.
    \17\ See Funding Portal Rule 110(a)(3)(B). See also 15 U.S.C. 
78c(a)(39). Section 3(a)(39) of the Exchange Act sets forth the 
definition of ``statutory disqualification.'' Funding Portal Rule 
110(a)(1)(A) includes a different definition of ``associated 
person'' solely for purposes of the MAP. Under Funding Portal Rule 
110(a)(1)(A), ``associated person'' is defined as ``any: (1) sole 
proprietor, partner, officer, director or manager of a funding 
portal, or other natural person occupying a similar status or 
performing similar functions; (2) natural person directly or 
indirectly controlling or controlled by such funding portal, or any 
employee of a funding portal, except that any person associated with 
a funding portal whose functions are solely clerical or ministerial 
shall not be included in the meaning of such term; or (3) 
partnership, corporation, association, or other legal entity 
controlled by or controlling the FP Applicant as defined in Funding 
Portal Rule 110(a)(1)(B).''
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    The rule requires a funding portal member to submit its application 
on Form FP-CMA \18\ for prior approval of a change:
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    \18\ Form FP-CMA is set forth in Exhibit 3b.
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     In the equity ownership or partnership capital, LLC 
membership interest, or other ownership interest of the funding portal 
member that results in one person or entity directly or indirectly 
owning or controlling 25 percent or more of the equity or partnership 
capital, LLC membership interest, or other ownership interest; or
     of control persons of the funding portal member, other 
than the appointment or election of a natural person as an officer or 
director of the funding portal member in the normal course of business, 
regardless of whether such change occurred as a result of a direct or 
indirect change in the equity ownership, partnership capital, LLC 
membership interest, or other ownership interest in the funding portal 
member.\19\
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    \19\ See Funding Portal Rule 110(a)(4)(A)-(B).
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    After receiving an application, the rules provide that FINRA may 
make requests for additional documents or information and will hold one 
or more membership interviews.\20\ The Funding Portal Rules also 
provide processes for rejection by FINRA due to an incomplete 
application,\21\ withdrawal of an initial or continued membership 
application by a FP Applicant,\22\ and lapse of application due to 
certain types of inaction by the FP Applicant.\23\
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    \20\ See Funding Portal Rule 110(a)(6), 110(a)(9). See also 
Notice, 80 FR at 66351. Under the rules, the membership interview(s) 
may be conducted by video conference or such other means as FINRA 
may specify.
    \21\ See Funding Portal Rule 110(a)(5). See also Notice, 80 FR 
at 66351.
    \22\ See Funding Portal Rule 110(a)(7). See also Notice, 80 FR 
at 66351.
    \23\ See Funding Portal Rule 110(a)(8). See also Notice, 80 FR 
at 66351.
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2. Granting or Denying the Application
    Funding Portal Rule 110(a)(10) requires the Department to consider 
the application for initial membership or change of ownership or 
control, other information and documents provided by the FP Applicant 
during the application process, other information and documents 
obtained by the Department, and the public interest and the protection 
of investors. After considering this information, the Department is 
required to determine whether the FP Applicant meets each of the 
following five standards, as applicable: \24\
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    \24\ According to FINRA, the five standards are streamlined and 
consolidated in comparison to the 14 standards that apply to broker-
dealer applications under NASD Rule 1014(a). FINRA believes that the 
streamlined, consolidated approach is appropriate to reflect the 
limited nature of funding portal business. See Notice, 80 FR at 
66352, n. 22.
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     The FP Applicant and its associated persons are capable of 
complying with applicable federal securities laws, the rules and 
regulations thereunder, and the Funding Portal Rules, including 
observing high standards of commercial honor and just and equitable 
principles of trade. In determining whether this standard is met, the 
Department is required to take into consideration all information in 
its possession, including information regarding whether an FP Applicant 
or its associated persons: \25\
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    \25\ See Funding Portal Rule 110(a)(10)(A).
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    [rtarr8] is subject to an event described in Section 3(a)(39) of 
the Exchange Act; and
    [rtarr8] is the subject of a pending, adjudicated, or settled 
regulatory action or investigation by the SEC, the Commodity Futures 
Trading Commission, a federal, state, or foreign regulatory agency, or 
a self-regulatory organization; an adjudicated or settled investment-
related private civil action for damages or an injunction; or a 
criminal action (other than a minor traffic violation) that is pending, 
adjudicated, or that has resulted in a guilty or no contest plea of an 
FP Applicant or its associated persons.
     The FP Applicant has established all contractual or other 
arrangements and business relationships with banks, broker-dealers, 
clearing corporations, service bureaus, escrow agents, transfer agents, 
technology service providers, or others necessary to initiate the 
operations described in the FP Applicant's Form FP-NMA.\26\
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    \26\ See Funding Portal Rule 110(a)(10)(B).
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     The FP Applicant has a supervisory system that is 
reasonably designed to achieve compliance with applicable federal 
securities laws, the rules and regulations thereunder, and the Funding 
Portal Rules.\27\
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    \27\ See Funding Portal Rule 110(a)(10)(C).
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     The FP Applicant has fully disclosed and established 
through documentation all direct and indirect sources of funding.\28\
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    \28\ See Funding Portal Rule 110(a)(10)(D).
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     The FP Applicant has a recordkeeping system that enables 
the FP Applicant to comply with federal, state, and self-regulatory 
organization recordkeeping requirements.\29\
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    \29\ See Funding Portal Rule 110(a)(10)(E).
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    Under the rules, if the Department determines that the FP Applicant 
meets each of the applicable standards set forth above, it is required 
to grant an application for initial membership or change of ownership 
or control.\30\ However, if the Department determines that the FP 
Applicant does not meet one or more of the applicable standards, the 
Department is required to deny the application.\31\ The rules further 
provide that the FP Applicant's approval for

[[Page 4933]]

membership shall be contingent upon the FP Applicant's filing of an 
executed written membership agreement.
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    \30\ See Funding Portal Rule 110(a)(11)(A).
    \31\ See Funding Portal Rule 110(a)(11)(B).
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    Funding Portal Rule 110(a)(12) requires that the Department serve a 
written decision on the application for initial membership or change of 
ownership or control within 60 days after the filing of the application 
or such later date as the Department and the FP Applicant have agreed 
in writing. If the Department denies the application, it is required to 
explain in detail the reason for denial, referencing the applicable 
standard(s). A funding portal may appeal the Department's decision 
under the process set forth in Funding Portal Rule 110(a)(13), which is 
described in more detail in the Notice.\32\
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    \32\ See Notice, 80 FR at 66352-53.
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3. Application to the SEC for Review
    Funding Portal Rule 110(a)(14) provides that a person aggrieved by 
final action of FINRA under paragraph (a) of the rule may apply for 
review by the SEC pursuant to Section 19(d)(2) of the Exchange Act.\33\ 
The filing of an application for review shall not stay the 
effectiveness of a decision constituting final action of FINRA, unless 
the SEC otherwise orders.
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    \33\ 15 U.S.C. 78s(d)(2).
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4. Filing of Misleading Information as to Membership or Registration
    Funding Portal Rule 110(a)(15) provides that no funding portal 
member or person associated with a funding portal member shall file 
with FINRA information with respect to membership or registration that 
is incomplete or inaccurate so as to be misleading, or that could in 
any way tend to mislead, or shall fail to correct such filing after 
notice thereof.

C. Funding Portal Conduct

    Funding Portal Rule 200(a) is based in large part on FINRA Rule 
2010 (Standards of Commercial Honor and Principles of Trade).\34\ The 
rule provides that a funding portal member, in the conduct of its 
business, shall observe high standards of commercial honor and just and 
equitable principles of trade.
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    \34\ See Notice, 80 FR at 66353.
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    Funding Portal Rule 200(b) is based in large part on FINRA Rule 
2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices).\35\ 
The rule provides that no funding portal member shall effect any 
transaction in, or induce the purchase or sale of, any security by 
means of, or by aiding or abetting, any manipulative, deceptive or 
other fraudulent device or contrivance.
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    \35\ See Notice, 80 FR at 66353.
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    Funding Portal Rule 200(c) (Communications with the Public) is 
aimed at prohibiting false and misleading statements.\36\ The rule 
defines the term ``funding portal communication'' to mean any 
electronic or other written communication that is distributed or made 
available by a funding portal member to one or more investors.\37\ 
Paragraph 200(c)(2) of the rule addresses content standards.\38\ 
Paragraph 200(c)(2)(A) of the rule provides that no funding portal 
communication may:
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    \36\ See Notice, 80 FR at 66353.
    \37\ See Funding Portal Rule 200(c)(1).
    \38\ See Funding Portal Rule 200(c)(2).
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     Include any false, exaggerated, unwarranted, promissory or 
misleading statement or claim;
     Omit any material fact or qualification if the omission, 
in light of the context of the material presented, would cause the 
communication to be misleading; state or imply that FINRA, or any other 
corporate name or facility owned by FINRA, or any other regulatory 
organization endorses, indemnifies, or guarantees the funding portal 
member's business practices; or
     Predict or project performance, imply that past 
performance will recur or make any exaggerated or unwarranted claim, 
opinion or forecast. A hypothetical illustration of mathematical 
principles is permitted, provided that it does not predict or project 
the performance of an investment.
    Further, paragraph (c)(2)(B) of the rule provides that all funding 
portal member communications must be based on principles of fair 
dealing and good faith and must be fair and balanced.\39\ In addition, 
the rule provides that all funding portal member communications must 
prominently disclose the name of the funding portal member, or the name 
under which the funding portal member primarily conducts business as 
disclosed on the member's Form FP-NMA.\40\ Finally, paragraph 200(c)(3) 
of the rule addresses issuer communications and provides that the 
content standards of the rule shall not apply to any communication on 
the funding portal member's Web site that is prepared solely by an 
issuer; provided, however, that no funding portal member may include on 
its Web site any issuer communication that the funding portal member 
knows or has reason to know contains any untrue statement of a material 
fact or is otherwise false or misleading.\41\
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    \39\ See Funding Portal Rule 200(c)(2)(B).
    \40\ See Funding Portal Rule 200(c)(2)(C).
    \41\ See Funding Portal Rule 200(c)(3).
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D. Funding Portal Compliance

1. Supervisory System
    Funding Portal Rule 300(a) is a streamlined version of FINRA's 
supervision rules and is designed to permit funding portal members 
flexibility to tailor their supervisory systems to their business 
models.\42\ The rule requires that each funding portal member establish 
and maintain a system to supervise the activities of each associated 
person of the funding portal member that is reasonably designed to 
achieve compliance with applicable securities laws and regulations, and 
with the Funding Portal Rules.\43\ The rule provides that a funding 
portal member's supervisory system must provide, at a minimum, for:
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    \42\ See Notice, 80 FR at 66354.
    \43\ See Funding Portal Rule 300(a)(1).
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     The establishment and maintenance of written procedures to 
supervise the activities of the funding portal and its associated 
persons; \44\
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    \44\ In Amendment No. 1, FINRA is proposing to revise the 
language in this portion of Rule 300(a)(1) reading ``funding portal 
and its associated persons'' to ``funding portal member and its 
associated persons.'' See Amendment No. 1 at 3-4.
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     the designation of a person with authority to carry out 
the supervisory responsibilities of the funding portal member; and
     reasonable efforts to determine that all supervisory 
personnel are qualified by virtue of experience or training to carry 
out their assigned responsibilities.
    Funding Portal Rule 300(a)(2) provides that a funding portal member 
must permit the examination and inspection of all of its businesses and 
business operations that relate to its activities as a funding portal, 
such as its premises, systems, platforms and records, by 
representatives of FINRA and the Commission, and must cooperate with 
the examination, inspection or investigation of any persons directly or 
indirectly using its platform.
2. Reporting Requirements
    Funding Portal Rule 300(c), which is discussed in further detail in 
the Notice, requires funding portal members to report to FINRA (and 
sets forth the obligations of such members' associated persons to 
report to the member) regulatory proceedings, disciplinary and other 
events.\45\ The rule requires that

[[Page 4934]]

funding portals promptly report to FINRA, within 30 calendar days, 
through such means as FINRA may specify, after the member knows or 
should have known of the existence of the event.\46\ The rule is 
largely based on current FINRA Rule 4530 (Reporting Requirements).\47\ 
The rule indicates that nothing contained in the rule eliminates, 
reduces or otherwise abrogates the responsibilities of a funding portal 
member to promptly disclose required information on SEC Form Funding 
Portal as applicable, to make any other required filings or to respond 
to FINRA with respect to any investor complaint, examination or 
inquiry.\48\ In addition, the rule provides that a funding portal 
member is not required to report an event otherwise required to be 
reported under paragraph (c)(1)(A) of the rule if the member discloses 
the event on SEC Form Funding Portal, consistent with the requirements 
of that form, or as required pursuant to Funding Portal Rule 800(b)(2), 
which is discussed in more detail below.\49\
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    \45\ See Funding Portal Rule 300(c)(1)(A) (discussing the events 
requiring reporting). See also Notice, 80 FR at 66354-55. Each 
associated person of a funding portal is also required to promptly 
report the existence of an event in Rule 300(c)(1)(A) to the funding 
portal. See Funding Portal Rule 300(c)(3). In addition to the events 
specified in Rule 300(c)(1)(A), each funding portal member is 
required to promptly report to FINRA, within 30 calendar days, 
through such means as FINRA may specify, after the funding portal 
member has concluded or reasonably should have concluded that an 
associated person of the funding portal member or the funding portal 
member itself has violated any securities-, commodities-, financial-
or investment-related laws, rules, regulations or standards of 
conduct of any foreign or domestic regulatory body or self-
regulatory organization. See Funding Portal Rule 300(c)(2). Funding 
portal members will use the Funding Portal Rule 300(c) Form for 
their reporting requirements pursuant to the rule. See Funding 
Portal Rule 300(c) Form.
    \46\ See Funding Portal Rule 300(c)(1).
    \47\ See Notice, 80 FR at 66354.
    \48\ See Funding Portal Rule 300(c)(4).
    \49\ See id.
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4. Statement of Gross Revenue
    Funding Portal Rule 300(e) requires each funding portal member each 
year to report to FINRA, in the manner prescribed by FINRA, the 
member's gross revenue on Form FP-Statement of Revenue, no later than 
60 calendar days following each calendar year-end.\50\ The rule 
requires that the statement of gross revenue must be prepared in 
accordance with U.S. Generally Accepted Accounting Principles.
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    \50\ According to FINRA, the Statement of Gross Revenue will be 
used to determine a funding portal member's annual fees, which FINRA 
is establishing as part of a separate rulemaking. See supra note 12.
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6. Record of Associated Persons of the Funding Portal Member
    Funding Portal Rule 300(f) requires each funding portal member to 
make and keep current a record listing every associated person of the 
funding portal member that shows, for each such associated person, 
every office of the funding portal member where the associated person 
regularly conducts any business for the funding portal member, and any 
registration number, if any, to be prescribed by FINRA, and every 
identification number or code assigned to the associated person by the 
funding portal member.\51\ The rule requires each funding portal member 
to preserve all records made pursuant to the rule for five years, the 
first two in an easily accessible place.
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    \51\ According to FINRA, the rule is based in large part on 
Exchange Act Rule 17a-3(a)(12)(ii) (17 CFR 240.17a-3(a)(12)(ii)), 
which requires broker-dealers to make and keep current a record 
listing every associated person of the broker-dealer. FINRA believes 
that requiring funding portals to keep such a record is prudent both 
for supervisory and regulatory oversight purposes. See Notice, 80 FR 
at 66356.
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    FINRA is also proposing in Amendment No. 1 to include for purposes 
of FINRA Rule 8210 any other person listed in Schedule A of Form 
Funding Portal of a member to the definition of associated person.\52\ 
FINRA Rule 8210 authorizes it to require associated persons of broker-
dealers to provide information and testimony, and to inspect and copy 
certain books and records, among other things. Adding this language 
will more closely align the rule to the definition of associated person 
that it applies to associated persons of broker-dealers. Therefore, 
FINRA will be able to obtain information and testimony from persons 
listed in Schedule A of a funding portal's Form Funding Portal in the 
same manner that it may from persons listed in Schedule A of a broker-
dealer's Form BD.\53\
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    \52\ See supra note 5.
    \53\ A funding portal is required to list its direct owners and 
executive officers on Schedule A of Form Funding Portal and, 
therefore, the amendment will allow FINRA to obtain information and 
testimony from these persons.
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E. Investigations and Sanctions

1. Application of the FINRA Rule 8000 Series (Investigations and 
Sanctions)
    Funding Portal Rule 800(a) is designed to provide that funding 
portal members will be subject to specified FINRA rules governing 
investigations and sanctions.\54\ Specifically, the rule provides that, 
except for FINRA Rules 8110 (Availability of Manual to Customers), 8211 
(Automated Submission of Trading Data Requested by FINRA), 8213 
(Automated Submission of Trading Data for Non-Exchange-Listed 
Securities Requested by FINRA) and 8312 (FINRA BrokerCheck 
Disclosure),\55\ all funding portal members shall be subject to the 
FINRA Rule 8000 Series, unless the context requires otherwise.\56\
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    \54\ See Notice, 80 FR at 66356.
    \55\ With respect to FINRA Rule 8312, as discussed below, FINRA 
proposed Funding Portal Rule 800(b) as a streamlined version of the 
rule to apply to funding portal members. See Notice, 80 FR at 66356, 
n. 47.
    \56\ There are a few additional changes from the Rule 8000 
series, which are discussed in the Notice. See Notice, 80 FR at 
66356-66357.
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2. Public Disclosure of Information on Funding Portals
    Funding Portal Rule 800(b) is a streamlined version of FINRA Rule 
8312 (FINRA BrokerCheck Disclosure) and addresses specific information 
that FINRA is required to make available to the public.\57\ The rule 
authorizes FINRA to provide access to the public, via an appropriate 
link on the FINRA Web site, to a funding portal member's current SEC 
Form Funding Portal, including amendments and registration withdrawal 
requests, as filed with the SEC pursuant to SEC Regulation 
Crowdfunding, in the form made publicly available by the SEC.\58\ The 
rule provides that, with respect to a former funding portal member, 
FINRA may provide similar access to the public to the former funding 
portal member's most recent SEC Form Funding Portal, and any amendments 
and registration withdrawal requests, as filed with the SEC.
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    \57\ See Notice, 80 FR at 66357.
    \58\ See Funding Portal Rule 800(b)(1).
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    The rule also requires FINRA to make available to the public 
information filed by a funding portal member, in a format to be 
prescribed by FINRA, indicating whether the funding portal member or 
any associated person of the funding portal member is subject to an 
event described in Section 3(a)(39) of the Exchange Act.\59\ The rule 
provides that the funding portal member must keep this information 
current and must update such information promptly, but in any event not 
later than 10 days following any change in such information.\60\
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    \59\ See Funding Portal Rule 800(b)(2).
    \60\ See Funding Portal Rule 800(b)(2).
---------------------------------------------------------------------------

    The rule also provides that, with respect to the information 
provided pursuant to paragraph (b)(2) of the rule, FINRA shall not make 
available information reported as a social security number, information 
that FINRA is otherwise prohibited from releasing under Federal law, or 
information that is provided solely for use by FINRA.\61\ The rule 
provides that FINRA reserves the right to exclude, on a case-by-case

[[Page 4935]]

basis, information that contains confidential customer information, 
offensive or potentially defamatory language or information that raises 
significant identity theft, personal safety or privacy concerns that 
are not outweighed by investor protection concerns or information that 
was reported in error by a funding portal member.\62\
---------------------------------------------------------------------------

    \61\ See Funding Portal Rule 800(b)(3).
    \62\ See Funding Portal Rule 800(b)(3).
---------------------------------------------------------------------------

F. Code of Procedure

1. Application of FINRA Rule 9000 Series (Code of Procedure)
    Funding Portal Rule 900(a) is designed to provide that funding 
portal members will be subject to specified FINRA rules setting forth 
FINRA's Code of Procedure.\63\ Specifically, except for the FINRA Rule 
9520 Series, FINRA Rule 9557, and the FINRA Rule 9700 Series,\64\ the 
rule provides that all funding portal members shall be subject to the 
FINRA Rule 9000 Series, unless the context requires otherwise. The rule 
provides that for purposes of FINRA Rule 9217, a funding portal member 
may be subject to a fine under FINRA Rule 9216(b) with respect to any 
of the following: \65\
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    \63\ See Notice, 80 FR at 66357.
    \64\ The FINRA Rule 9520 Series addresses ``eligibility 
proceedings'' in the context of statutory qualifications which, as 
discussed further below, FINRA is proposing to address under Funding 
Portal Rule 900(b). FINRA Rule 9557 addresses service of notice to 
members that are experiencing financial or operational difficulties 
under net capital or similar financial responsibility requirements. 
Because funding portals would not be subject to such requirements, 
FINRA indicated that Rule 9557 would not be applicable. Similarly, 
FINRA indicated that it did not propose to apply the Rule 9700 
Series to funding portals because the FINRA Rule 9700 Series 
addresses the automated quotation, execution or communication 
systems owned or operated by FINRA, which are outside the scope of 
funding portal business activity. See Notice, 80 FR at 66357.
    \65\ FINRA Rule 9216(b) sets forth procedures for disposition of 
specified rule violations designated as minor rule violations 
pursuant to a plan (referred to as an ``MRVP'') declared effective 
by the SEC in accordance with Exchange Act Section 19(d)(1) (15 
U.S.C. 78s(d)(1)) and Rule 19d-1(c)(2) (17 CFR 240.19d-1(c)(2)) 
thereunder. FINRA Rule 9217 sets forth the rules that are eligible 
for such disposition. FINRA's MRVP allows FINRA to impose a fine of 
up to $2,500 on any firm it regulates or person associated with a 
FINRA regulated firm for a minor violation of an eligible rule.
---------------------------------------------------------------------------

     Failure to timely submit amendments to SEC Form Funding 
Portal;
     Funding Portal Rule 200(c) (Communications with the 
Public);
     Funding Portal Rule 300(a)--Failure to maintain adequate 
written supervisory procedures where the underlying conduct is subject 
to Rule 9217; \66\
---------------------------------------------------------------------------

    \66\ In Amendment No. 1, FINRA proposes to change the 
``Failure'' to ``failure'' and add ``FINRA'' before ``Rule 9217'' in 
Funding Portal Rule 900(a)(4)(C). See Amendment No. 1 at 4.
---------------------------------------------------------------------------

     Funding Portal Rule 300(c)--failure to timely file 
reports;
     failure to provide or update contact information as 
required by Funding Portal Rule 300(d);
     Rule 303(f) of SEC Regulation Crowdfunding--Confirmation 
of Transactions; \67\ and
---------------------------------------------------------------------------

    \67\ In Amendment No. 1, FINRA proposes to change ``Confirmation 
of Transactions'' to ``confirmation of transactions'' in Funding 
Portal Rule 900(a)(4)(F). See Amendment No. 1 at 4.
---------------------------------------------------------------------------

     Rule 404 of SEC Regulation Crowdfunding--failure to make 
and preserve records in conformance with all applicable laws, rules, 
regulations and statements of policy promulgated thereunder, and with 
the Funding Portal Rules.
    The rule also provides that for purposes of FINRA Rule 9551(a),\68\ 
FINRA staff may issue a written notice requiring a funding portal 
member to file communications with the FINRA Advertising Regulation 
Department at least ten days prior to use if FINRA staff determines 
that the member has departed from the standards of Funding Portal Rule 
200(c).\69\ In addition, the rule provides that for purposes of FINRA 
Rule 9551(d), the pre-use filing requirement referenced in a notice 
issued and served under FINRA Rule 9551 shall become effective 21 days 
after service of the notice, unless stayed by a request for a hearing 
pursuant to FINRA Rule 9559.\70\ The rule further provides that for 
purposes of proceedings pursuant to FINRA Rule 9810(a),\71\ proceedings 
may be initiated with respect to alleged violations of Section 10(b) of 
the Exchange Act (15 U.S.C. 78j(b)) and Exchange Act Rule 10b-5 (17 CFR 
240.10b-5), Funding Portal Rule 200(a) (if the alleged violation is 
misuse of investor funds or assets, or based on violations of Section 
17(a) of the Securities Act (15 U.S.C. 77q(a)) and Funding Portal Rule 
200(b).\72\
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    \68\ FINRA Rule 9551 addresses expedited proceedings by FINRA 
for failure to comply with public communication standards.
    \69\ See Funding Portal Rule 900(a)(7).
    \70\ See Funding Portal Rule 900(a)(8).
    \71\ FINRA Rule 9810 addresses initiation of cease and desist 
proceedings by FINRA for specified violations.
    \72\ See Funding Portal Rule 900(a)(9).
---------------------------------------------------------------------------

2. Eligibility Proceedings
    Funding Portal Rule 900(b) is a streamlined version of the current 
FINRA Rule 9520 Series.\73\ The rule 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.
---------------------------------------------------------------------------

    \73\ See Notice, 80 FR at 66358.
---------------------------------------------------------------------------

G. Arbitration and Mediation

    Funding Portal Rule 1200(a) provides that funding portal members 
will be subject to the FINRA Rule 12000 Series (Code of Arbitration 
Procedure for Customer Disputes), FINRA Rule 13000 Series (Code of 
Arbitration Procedure for Industry Disputes) and FINRA Rule 14000 
Series (Code of Mediation Procedure), unless the context requires 
otherwise.\74\ The rule addresses predispute arbitration agreements for 
investor accounts.\75\ The rule provides that any predispute 
arbitration clause must be highlighted and must be immediately preceded 
by the following language in outline form:
---------------------------------------------------------------------------

    \74\ In Amendment No. 1, FINRA is proposing to amend Funding 
Portal Rules 1200(a)(3) and 1200(a)(4) to add the word ``Series'' 
after FINRA Rule 1200. See Amendment No. 1 at 4.
    \75\ See Notice, 80 FR at 66362. According to FINRA, the rule is 
a streamlined version of current FINRA Rule 2268 (Requirements When 
Using Predispute Arbitration Agreements for Customer Agreements).

    ``This agreement contains a predispute arbitration clause. By 
signing an arbitration agreement the parties agree as follows:
    (A) All parties to this agreement are giving up the right to sue 
each other in court, including the right to a trial by jury, except 
as provided by the rules of the arbitration forum in which a claim 
is filed.
    (B) Arbitration awards are generally final and binding; a 
party's ability to have a court reverse or modify an arbitration 
award is very limited.
    (C) The ability of the parties to obtain documents, witness 
statements and other discovery is generally more limited in 
arbitration than in court proceedings.
    (D) The arbitrators do not have to explain the reason(s) for 
their award unless, in an eligible case, a joint request for an 
explained decision has been submitted by all parties to the panel at 
least 20 days prior to the first scheduled hearing date.
    (E) The panel of arbitrators may include a minority of 
arbitrators who were or are affiliated with the securities industry.
    (F) The rules of some arbitration forums may impose time limits 
for bringing a claim in arbitration. In some cases, a claim that is 
ineligible for arbitration may be brought in court.
    (G) The rules of the arbitration forum in which the claim is 
filed, and any amendments thereto, shall be incorporated into this 
agreement.'' \76\
---------------------------------------------------------------------------

    \76\ See Funding Portal Rule 1200(b)(1).

    Paragraph (b)(2)(A) of the rule provides that, in any agreement

[[Page 4936]]

containing a predispute arbitration agreement, there must be a 
highlighted statement immediately preceding any signature line or other 
place for indicating agreement that states that the agreement contains 
a predispute arbitration clause. The statement must also indicate at 
what page and paragraph the arbitration clause is located. Paragraph 
(b)(2)(B) provides that, within 30 days of signing, a copy of the 
agreement containing any such clause must be given to the investor and 
the funding portal member must retain proof of delivery or of the 
investor's acknowledgement of receipt.
    Paragraph (b)(3)(A) of the rule provides that, within ten business 
days of receipt of the investor's request, a funding portal member must 
provide an investor with a copy of any predispute arbitration clause or 
investor agreement executed between the investor and the funding portal 
member. Paragraph (b)(3)(B) provides that, upon request by an investor, 
a funding portal member must provide the investor with the names of, 
and information on how to contact or obtain the rules of, all 
arbitration forums in which a claim may be filed under the agreement.
    Paragraph (b)(4) of the rule provides that no predispute 
arbitration agreement shall include any condition that:
     Limits or contradicts the rules of any self-regulatory 
organization;
     limits the ability of a party to file any claim in 
arbitration;
     limits the ability of a party to file any claim in court 
permitted to be filed in court under the rules of the forums in which a 
claim may be filed under the agreement; \77\
---------------------------------------------------------------------------

    \77\ In Amendment No. 1, FINRA is proposing to amend Funding 
Portal Rule 1200(b)(4)(C) to change ``may be filed under the 
agreement;'' to ``may be filed under the agreement; or''. See 
Amendment No. 1 at 4.
---------------------------------------------------------------------------

     limits the ability of arbitrators to make any award.
    Paragraph (b)(5) of the rule provides that, if an investor files a 
complaint in court against a funding portal member that contains claims 
that are subject to arbitration pursuant to a predispute arbitration 
agreement between the funding portal member and the investor, the 
funding portal member may seek to compel arbitration of the claims that 
are subject to arbitration. If the funding portal member seeks to 
compel arbitration of such claims, the funding portal member must agree 
to arbitrate all of the claims contained in the complaint if the 
investor so requests.
    Paragraph (b)(6) of the rule provides that all agreements must 
include a statement that ``No person shall bring a putative or 
certified class action to arbitration, nor seek to enforce any pre-
dispute arbitration agreement against any person who has initiated in 
court a putative class action; or who is a member of a putative class 
who has not opted out of the class with respect to any claims 
encompassed by the putative class action until: (i) The class 
certification is denied; or (ii) the class is decertified; or (iii) the 
investor is excluded from the class by the court. Such forbearance to 
enforce an agreement to arbitrate shall not constitute a waiver of any 
rights under this agreement except to the extent stated herein.''

H. Notification to FINRA in Connection With the JOBS Act

    FINRA also proposed new FINRA Rule 4518. The rule, which would 
apply to registered broker members, provides that a FINRA member shall 
notify FINRA, in a manner prescribed by FINRA: Prior to engaging, for 
the first time, in a transaction involving the offer or sale of 
securities in reliance on Section 4(a)(6) of the Securities Act; or 
within 30 days of directly or indirectly controlling, or being 
controlled by or under common control with, a funding portal as defined 
pursuant to Rule 300(c)(2) of SEC Regulation Crowdfunding.

III. Summary of Comment Letters and FINRA's Response to Comments

    Commenters generally supported FINRA's proposal. As discussed 
below, some commenters recommended that the proposal be expanded and 
include additional requirements or explanations in certain aspects. One 
of these commenters, while not necessarily opposing the proposed rules, 
also suggested that the Commission reject, and require FINRA to 
resubmit, the rule proposal. One commenter, while appreciating FINRA's 
willingness to address potential issues through subsequent rulemakings, 
encouraged FINRA to address potential shortfalls now before any 
investors lose money.\78\
---------------------------------------------------------------------------

    \78\ See NASAA Letter at 2.
---------------------------------------------------------------------------

A. Timing

    One commenter suggested that FINRA and the public should review and 
evaluate FINRA's proposed Funding Portal Rules, related forms and Rule 
4518 (the broker-dealer crowdfunding notification requirement) in light 
of Regulation Crowdfunding.\79\ The commenter further suggested that 
the Commission should reject FINRA's rule proposal at this time, 
require FINRA to resubmit its rules after it has conducted a review and 
analysis of Regulation Crowdfunding and extend the comment period.\80\ 
FINRA, however, notes that: (1) Its proposal has been informed by the 
Commission's rulemaking; \81\ (2) its Funding Portal Rules have been in 
preparation for a considerable time; and (3) it has received public 
input.\82\ According to FINRA, the proposal is intended to create the 
means for registered funding portals to become FINRA members and is 
consistent with the JOBS Act and Regulation Crowdfunding.\83\ FINRA 
further notes that it is important that FINRA should be in a position 
to timely implement the Funding Portal Rules so that funding portals 
that plan to register with the SEC and seek FINRA membership may avail 
themselves of Regulation Crowdfunding as it becomes effective.\84\ 
Finally, FINRA points out that it noted in the proposal that it will 
consider the merit of future rulemakings as regulators gain more 
experience with funding portals.\85\
---------------------------------------------------------------------------

    \79\ See PIABA Letter at 2.
    \80\ Id. at 7.
    \81\ See FINRA Letter at 2 (citing Notice, 80 FR at 66349).
    \82\ See id. at 2. FINRA cites, for example, Regulatory Notice 
12-34 (July 2012) (FINRA Requests Comment on Proposed Regulation of 
Crowdfunding Activities) and Regulatory Notice 13-34). FINRA also 
cites to the discussion in the Notice regarding Regulatory Notice 
13-34 and the comments it received for the Regulatory Notice. See 
id. at 2, n. 9 (citing also to the Notice, 80 FR at 66367).
    \83\ See id. at 2.
    \84\ Id. at 3.
    \85\ See id. at 3. See also Notice, 80 FR at 66349 and 66369.
---------------------------------------------------------------------------

B. General Standards

    One commenter suggested omitting the language of ``unless the 
context requires otherwise'' in proposed Funding Portal Rule 100 
regarding the application of FINRA by-Laws and FINRA Regulation By-Laws 
to funding portal members and their associated persons because the 
commenter believes it is unclear when the exception will apply.\86\ In 
response, FINRA notes that it intends the phrase ``unless the context 
requires otherwise'' to provide clarity and ensure that funding portals 
will not be subject to terms under the FINRA By-Laws and FINRA 
Regulation By-Laws that could not relate to them by virtue of their 
distinct status and limited permissible business activities under the 
JOBS Act and Regulation Crowdfunding.\87\ FINRA also notes that the 
phrase is used in other portions in the FINRA rulebook, such as FINRA

[[Page 4937]]

Rule 0160(b),\88\ and that it is not aware of any ambiguity that has 
arisen from the use of the phrase.\89\ Finally, FINRA indicates that it 
is open to further discussion of any specific interpretive issues.\90\
---------------------------------------------------------------------------

    \86\ See PIABA Letter at 2. The commenter also noted that 
similar limiting language referencing ``context'' is unclear in 
several other places in the rules, but did not identify any specific 
rules. See id.
    \87\ FINRA Letter at 3.
    \88\ FINRA Rule 0160(b) sets forth definitions for the FINRA 
Rules.
    \89\ See FINRA Letter at 3-4.
    \90\ See id. at 4.
---------------------------------------------------------------------------

C. Definition of Associated Person

    As described above, Funding Portal Rule 110(a)(1)(A) includes a 
different definition of associated person solely for purposes of the 
MAP, which excludes persons whose functions are solely clerical or 
ministerial.\91\ One commenter suggested the exception for such persons 
from the definition of ``associated person'' should be extended to the 
rest of the funding portal rules (i.e., the definition in Funding 
Portal Rule 100(b)(1) under the General Standards).\92\ The commenter 
noted that employees that are not listed as associated persons in the 
funding portal's membership application will become associated persons 
once FINRA approves the funding portal for membership.\93\
---------------------------------------------------------------------------

    \91\ See supra note 17.
    \92\ See CFIRA Letter at 2.
    \93\ See id.
---------------------------------------------------------------------------

    In response, FINRA notes that the two different definitions of 
associated person in the rules are tailored to different purposes.\94\ 
FINRA indicates that the language in Funding Portal Rule 110(a)(1)(A) 
excepting persons that have ``solely clerical and ministerial'' 
functions is based on longstanding usage under NASD Rule 1011(b), which 
sets forth the definition of ``associated person'' for purposes of 
membership proceedings for broker-dealers.\95\ According to FINRA, the 
definition of ``associated person'' in Rule 110(a)(1)(A) will perform a 
similar function for funding portals applying for FINRA membership.\96\ 
FINRA points out that it noted in the proposal that Funding Portal Rule 
110(a) is intended to be based on the current broker-dealer membership 
rules, but FINRA simplified the MAP for funding portals to reflect the 
limited natured of their businesses.\97\
---------------------------------------------------------------------------

    \94\ See FINRA Letter at 4.
    \95\ See id. at 4-5 (citing Securities Exchange Act Release No. 
48969 (December 22, 2003), 68 FR 75681 (December 31, 2003) (Notice 
of Order Granting Approval of Proposed Rule Change; File No. SR-
NASD-2003-007)).
    \96\ See FINRA Letter at 5.
    \97\ See id. See also Notice, 80 FR at 66350.
---------------------------------------------------------------------------

    FINRA further notes that, in contrast, it intended the definition 
under Funding Portal Rule 100(b)(1) to be for general application to 
funding portal members, in a similar manner to the definition of 
associated persons of broker-dealers under paragraph (rr) under Article 
I of the FINRA By-Laws.\98\ According to FINRA, the purpose of the 
general definition of associated person in Funding Portal Rule 
100(b)(1) is to ensure that all associated persons of the funding 
portal are subject to the regulatory framework.\99\
---------------------------------------------------------------------------

    \98\ See FINRA Letter at 5.
    \99\ See id.
---------------------------------------------------------------------------

D. Fidelity Bond

    As discussed in the Notice, FINRA has determined not to propose at 
this time a fidelity bond requirement for funding portals.\100\ One 
commenter conveyed its support for FINRA's approach.\101\ Two 
commenters, however, suggested including a fidelity bond requirement 
for funding portals.\102\ One commenter stated its view that there is 
``minimal regulation of associated persons working for funding 
portals'' and that a fidelity bond would protect funding portals 
against potential losses due to acts of the employees.\103\ The 
commenter further stated its view that a streamlined fidelity bond 
requirement that accounts for a funding portal's limited scope of 
activity is an economically feasible alternative given the risk that 
will otherwise exist for funding portals.\104\ Another commenter 
suggested that, in light of a funding portal's responsibilities and 
potential liability, it would be ``prudent'' for a funding portal to be 
required to have fidelity bond (or some other type) of insurance.\105\
---------------------------------------------------------------------------

    \100\ See Notice, 80 FR 66348, 66349.
    \101\ See CFIRA Letter at 1. That commenter also indicated that 
the new member application for funding portals still includes a 
provision to attach the bond. However, the Form FP-NMA, as proposed 
by FINRA, does not include such a requirement. See Exhibit 3a of the 
proposal.
    \102\ See NASAA Letter at 5; PIABA Letter at 3.
    \103\ See NASAA Letter at 5. The commenter also noted that 
funding portals will not be members of the Securities Investor 
Protection Corporation (``SIPC'') and that their customers will not 
receive SIPC protection. See id.
    \104\ Id.
    \105\ See PIABA Letter at 3. In addition, the commenter 
suggested that funding portals should be required to clearly 
disclose to investors what the bond does and does not cover. Id. The 
commenter also suggested that the Commission should impose a 
fidelity bond requirement on funding portals and issuers. Id. at n. 
5.
---------------------------------------------------------------------------

    In response, FINRA indicates that it is not proposing a fidelity 
bond at this time, stating that as discussed in the proposal, it 
believes that this approach is appropriate in the interest of reducing 
potential burdens on prospective funding portal members given the 
limited nature of funding portal business and given that regulatory 
experience with funding portals is developing.\106\ FINRA also notes 
that the Commission considered and determined not to adopt a fidelity 
bond requirement for funding portals when it adopted Regulation 
Crowdfunding.\107\ FINRA indicates that it has determined to monitor 
the development of the funding portal business and determine whether 
future rulemaking regarding fidelity bonds or other financial 
responsibility requirements is merited.\108\
---------------------------------------------------------------------------

    \106\ See id. at 5-6 (citing Notice, 80 FR at 66349, 66367).
    \107\ See FINRA Letter at 6 (citing language in the Commission's 
adopting release). See also Crowdfunding, Exchange Act Release No. 
76324, 80 FR 71388, 71458 (Nov. 16, 2015).
    \108\ See FINRA Letter at 6; Notice, 80 FR at 66349, n. 14 and 
66367, n. 86.
---------------------------------------------------------------------------

E. Communications With the Public

    FINRA indicates that it noted in the proposal that the proposed 
rule is a streamlined version of FINRA Rule 2210 (Communications with 
the Public) and is aimed at prohibiting false and misleading 
statements.\109\ One commenter suggested that Funding Portal Rule 200 
should include a requirement that funding portal member communications 
provide a sound basis for evaluating the facts in regard to any 
particular security or type of security, industry or service, which is 
language that FINRA had originally proposed in Regulatory Notice 13-
34.\110\ In response, FINRA notes that the rule reflects the limited 
scope of activity permitted to funding portals.\111\ Although FINRA had 
originally included the language suggested by the commenter in 
Regulatory Notice 13-34, it indicates that, upon further consideration, 
it determined not to include such language in the proposal because it 
believes the language could potentially suggest the activity of 
offering investment advice or recommendations to investors, which is 
prohibited as a funding portal business activity.\112\
---------------------------------------------------------------------------

    \109\ See FINRA Letter at 6.
    \110\ See PIABA Letter at 4. See also Regulatory Notice 13-34 
(Oct. 2013) (FINRA Requests Comment on Proposed Funding Portal Rules 
and Related Forms).
    \111\ See FINRA Letter at 6-7.
    \112\ See id. at 7.
---------------------------------------------------------------------------

F. Reporting Requirements

    One commenter suggested that funding portals should be required to 
report misconduct in 10 days rather than 30 days as proposed under 
Funding Portal Rules 300(c)(1) and 300 (c)(2).\113\ The commenter also 
suggested that Funding Portal Rule 300(c)(1)(A)(ii) should be revised 
to align with FINRA Rule 4530(a)(1)(B), which requires that

[[Page 4938]]

a broker-dealer member report to FINRA when it or one of its associated 
persons ``is the subject of any written customer complaint involving 
allegations of theft or misappropriation of funds or securities or of 
forgery.'' \114\ Funding Portal Rule 300(c)(1)(A)(ii), as proposed, 
would require a funding portal to report when the funding portal member 
or an associated person of the funding portal member ``is subject to 
any written complaint involving allegations of fraudulent conduct or 
misuse or misappropriation of funds or assets.'' \115\ The commenter 
further suggested that funding portals members, like broker-dealer 
members, should be required to (1) report quarterly statistical and 
summary information related to written customer complaints and (2) 
provide copies of source documents for the reportable information.\116\
---------------------------------------------------------------------------

    \113\ See PIABA Letter at 4.
    \114\ See id. at 4-5. See also FINRA Rule 4530(a)(1)(B).
    \115\ See Funding Portal Rule 300(c)(1)(A)(ii).
    \116\ See PIABA Letter at 5. See also FINRA Rule 4530(d) and 
(f).
---------------------------------------------------------------------------

    In response, FINRA indicates that the 30 calendar day requirement, 
which is consistent with the corresponding requirement for broker-
dealer members under FINRA Rule 4530, strikes the appropriate balance 
between prompt regulatory reporting for purpose of risk oversight and 
providing firms sufficient time to assess reportable events and submit 
complete and accurate reports.\117\ FINRA also notes that funding 
portal's permissible business activities are limited in scope relative 
to other FINRA members.\118\ In addition, FINRA notes that funding 
portal members would have a shorter amount of time to report statutory 
disqualification events under Rules 110(a)(3)(B) and 800(b)(2) because 
of the significant regulatory implications of such events as compared 
to other reportable events.\119\
---------------------------------------------------------------------------

    \117\ See FINRA Letter at 7.
    \118\ See id. at 8.
    \119\ See id. Both rules, which are discussed above, require 
funding portals to update information about statutory 
disqualification events ``promptly, but in any event not later than 
10 days following any change in such information.'' See Funding 
Portal Rules 110(a)(3)(B) and 800(b)(2).
---------------------------------------------------------------------------

    In response to the comment about the types of written complaints 
that should be reported, FINRA notes its belief that the rule is 
consistent with its goal of tailoring the rule language to the limited 
permissible activities in which funding portals may engage.\120\ FINRA 
states that it does not believe it is necessary to single out theft and 
forgery for purposes of this particular provision, especially given 
that funding portals are prohibited in the first place from holding, 
managing, possessing or otherwise handling investor funds or 
securities.\121\ However, FINRA also noted its belief that the language 
of Funding Portal Rule 300(c)(1)(A)(ii) is sufficiently broad to 
encompass such fraudulent conduct, or misuse or misappropriation of 
funds or assets, as would be involved in an act of theft or 
forgery.\122\ FINRA also indicates that the rule is broader than FINRA 
Rule 4530(a)(1)(B)--the rule specifies ``any written complaint'' rather 
than ``any written customer complaint.'' \123\ In response to the 
commenter's other suggestions regarding requirements for statistical 
and summary information, and the filing of copies of the specified 
documents, FINRA cites to the proposal where it noted its intent to 
minimize the initial potential costs and burdens to the development of 
the funding portal business.\124\ FINRA, however, indicates that it may 
revisit this issue in a future rulemaking after regulators gain more 
experience in connection with funding portals.\125\
---------------------------------------------------------------------------

    \120\ See FINRA Letter at 8.
    \121\ See id.
    \122\ See id.
    \123\ See id.
    \124\ See id. (citing the Notice, 80 FR at 66363).
    \125\ See id.
---------------------------------------------------------------------------

G. Disclosure

    As discussed in more detail above, Funding Portal Rule 800(b)(1) 
will allow FINRA to provide the public with access to a funding portal 
member's current SEC Form Funding Portal, including amendments and 
registration withdrawal requests via a link to the Commission's Web 
site. One commenter expressed concern about the permissive nature of 
Funding Portal Rule 800(b)(1).\126\ The commenter suggested that the 
proposed rules should require that FINRA provide investors with most 
(if not all) of the information required to be submitted to FINRA under 
Funding Portal Rule 300(c).\127\ In response, FINRA notes that it 
intends to exercise its authority under Funding Portal Rule 800(b)(1), 
which it states is designed to provide FINRA sufficient flexibility as 
to carrying out the specified disclosures.\128\ FINRA also notes that 
Funding Portal Rule 800(b)(2), which is discussed in more detail above, 
requires FINRA to make public information indicating whether the 
funding portal member or any associated person of the funding portal 
member is subject to an event described in Section 3(a)(39) of the 
Exchange Act (i.e., a statutory disqualification event).\129\
---------------------------------------------------------------------------

    \126\ See PIABA Letter at 6.
    \127\ See id.
    \128\ See FINRA Letter at 12.
    \129\ See id.
---------------------------------------------------------------------------

H. Central Registration Depository (``CRD'')

    One commenter suggested that funding portals should be required to 
use CRD to register and make ongoing disclosures.\130\ The commenter 
stated its view that mandatory use of CRD by funding portals would 
create a central location for regulators to easily access information 
about the portals at a reasonable expense to the entities.\131\ The 
commenter also expressed concern about whether information about 
funding portals and their associated persons would be made available to 
the public or other regulators.\132\ Another commenter, however, 
supported the decision not to use CRD, stating its view that the system 
is excessively complex for the limited scope of activity of funding 
portals, and using alternative systems will likely lead to compliance 
cost savings for portals.\133\
---------------------------------------------------------------------------

    \130\ See NASAA Letter at 2. Broker-dealers register using CRD.
    \131\ See id.at 2.
    \132\ See id. at 3.
    \133\ CFIRA Letter at 2.
---------------------------------------------------------------------------

    In response, FINRA indicates that it is not at this time requiring 
funding portals to use CRD.\134\ FINRA notes that the rules provide for 
the submission of certain information by funding portals in a manner 
and format prescribed by FINRA.\135\ FINRA indicates that it is 
developing systems for the submission of such information and it 
believes the systems will be appropriate to the limited permissible 
activities of funding portals.\136\
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    \134\ See FINRA Letter at 9.
    \135\ See id. For example, FINRA notes the requirements under 
Funding Portal Rules 110(a)(3)(A), 110(a)(4)(B) and 800(b), which 
are described in more detail above. See id. See also Notice, 80 FR 
at 66368.
    \136\ See FINRA Letter at 9.
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I. Licensing and Examination

    FINRA has not included any licensing or examination requirements in 
its Funding Portal Rules. One commenter expressed support for this 
approach, noting its belief that such an approach would result in cost 
savings for funding portals and would likely lead to greater 
flexibility and innovation in the roles and responsibilities of funding 
portal operators and employees.\137\ Two commenters, however, suggested 
licensing requirements for associated persons of funding portals.\138\ 
One of these commenters suggested licensing requirements for all 
associated persons of funding portals or, at a minimum, licensing 
requirements for any person

[[Page 4939]]

with specific responsibilities under the funding portal rules, such as 
supervisory or compliance personnel.\139\ The other commenter suggested 
that compliance personnel should be required to pass a licensing 
test.\140\
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    \137\ See CFIRA Letter at 2.
    \138\ See PIABA Letter at 3, n. 4; NASAA Letter at 3.
    \139\ See NASAA Letter at 3.
    \140\ See PIABA Letter at 3, n. 4.
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    In response, FINRA notes that it will consider whether additional 
rulemaking with respect to examination and licensing requirements is 
needed as it gains experience regulating funding portals.\141\
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    \141\ See FINRA Letter at 9. See also Notice, 80 FR at 66368.
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J. Suspicious Activity Reporting

    Broker-dealers registered or required to be registered with the 
Commission are required to comply with anti-money laundering (``AML'') 
regulations promulgated by the Department of Treasury under the Bank 
Secrecy Act (``BSA''),\142\ including a requirement to file suspicious 
activity reports with the Financial Crimes Enforcement Network 
(``FinCEN'').\143\ FINRA requires its broker-dealer members to develop 
and implement AML programs reasonably designed to achieve and monitor 
their compliance with the requirements of the BSA and the Department of 
Treasury's implementing regulations thereunder, including a requirement 
to file suspicious activity reports.\144\ One commenter suggested that 
funding portals should also be subject to suspicious activity reporting 
requirements.\145\ In response, FINRA indicates that it noted in its 
proposal that the BSA and its implementing regulations do not currently 
apply to funding portals.\146\ FINRA, therefore, indicates that it is 
not imposing a requirement at this time for funding portals to develop 
and implement an AML program, pending further action by the primary 
regulators in this area.\147\
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    \142\ 31 CFR Chapter X. See also 31 CFR 1023.100 (``Broker-
dealer means a person registered or required to be registered as a 
broker or dealer with the Commission under the Securities Exchange 
Act of 1934 (15 U.S.C. 77a et seq.), except persons who register 
pursuant to 15 U.S.C. 78o(b)(11).'').
    \143\ See 31 CFR 1023.320.
    \144\ See FINRA Rule 3310.
    \145\ See NASAA Letter at 5.
    \146\ See FINRA Letter at 11 (citing Notice, 80 FR at 66349).
    \147\ See id. at 12. See also Crowdfunding, Exchange Act Release 
No. 76324, 80 FR 71378, 71471, n. 1098 (Nov. 16, 2015) (``FinCEN 
within the Department of Treasury has primary regulatory 
responsibility for administering the BSA. We note that FinCEN has 
included in the Unified Agenda and Regulatory Plan an item that 
states: ``FinCEN . . . is proposing amendments to the regulatory 
definitions of `broker or dealer in securities' under the 
regulations implementing the Bank Secrecy Act. The proposed changes 
are intended to expand the current scope of the definitions to 
include funding portals. In addition, these amendments would require 
funding portals to implement policies and procedures reasonably 
designed to achieve compliance with all of the Bank Secrecy Act 
requirements that are currently applicable to brokers or dealers in 
securities.'') (citing Office of Mgmt. & Budget, Exec. Office of the 
President, Office of Info. & Regulatory Affairs, Amendments of the 
Definition of Broker or Dealer in Securities, RIN 1506-AB29, 
available at http://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201504&RIN=1506- AB29).
---------------------------------------------------------------------------

K. Arbitration and Mediation

    Two commenters suggested that crowdfunding investors should be able 
to opt out of arbitration agreements and pursue their claims in 
court.\148\ The commenters also expressed concern with investors having 
to bring claims in multiple forums against funding portals and 
issuers.\149\ One commenter suggested that if investors are not 
provided the right to choose their forum, at a minimum, FINRA should 
bar arbitration agreements that would preclude an investor from joining 
a class action against a funding portal member.\150\ Another commenter, 
however, generally supported proposed Rule 1200.\151\
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    \148\ See PIABA Letter at 6; NASAA Letter at 4.
    \149\ See PIABA Letter at 7 (suggesting that an investor should 
be permitted to include claims against funding portal members and 
issuers in the same FINRA arbitration); NASAA Letter at 4 
(expressing concern that investors wishing to bring claims against a 
funding portal member and issuer will have to bring the related 
claims in separate forums if a funding portal uses a pre-dispute 
arbitration agreement).
    \150\ See PIABA Letter at 7.
    \151\ See CFIRA Letter at 2.
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    In response, FINRA notes that the purpose of Funding Portal Rule 
1200 is to ensure in part that funding portal members shall be subject 
to the existing rules in this area, unless the context requires 
otherwise.\152\ FINRA also expresses its belief that the proffered 
changes to the arbitration rules raise issues for the securities 
industry in general that are beyond the scope of the proposal.\153\ 
Finally, FINRA states that as to the current rules in this area, FINRA 
has previously noted that investors experience substantial savings in 
arbitration compared to litigation and that the benefits and cost 
savings of arbitration make filing an arbitration claim a less costly 
option for investors.\154\
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    \152\ See FINRA Letter at 13. See also Notice, 80 FR at 66369.
    \153\ See id.
    \154\ See id. (citing Exchange Act Release No. 73245 (September 
29, 2014), 79 FR 59876 (October 3, 2014) (Order Approving Proposed 
Rule Change; File No. SR-FINRA-2014-026).
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L. Application of Additional Rules

    One commenter suggested that the following conduct rules for 
FINRA's broker-dealer members should be applied to funding portal 
members: The prohibition against guarantees and sharing in accounts 
under FINRA Rule 2150 (Improper Use of Customers' Securities or Funds; 
Prohibition Against Guarantees and Sharing in Accounts); Rule 2210 
(Communications with the Public); Rule 3220 (Influencing or Rewarding 
Employees of Others); Rule 3240 (Borrowing From or Lending to 
Customers); Rule 5230 (Payments Involving Publications that Influence 
the Market Price of a Security); and Rule 5110 (Corporate Financing 
Rule--Underwriting Terms and Arrangements).\155\ The commenter also 
acknowledged that FINRA may not want to duplicate the recordkeeping 
rule under Rule 404 of Regulation Crowdfunding, but suggested that 
FINRA should ``reiterate the importance of sound recordkeeping 
practices'' of funding portals.\156\
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    \155\ See NASAA Letter at 4. The commenter also suggested that 
FINRA Rule 2210 (Communications with the Public) should be applied 
to funding portals. See id. As explained in further detail above, 
FINRA indicates that Funding Portal Rule 200 is a streamlined 
version of FINRA Rule 2210 that reflects the limited scope of 
activity permitted to funding portals.
    \156\ See NASAA Letter at 5.
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    In response, FINRA notes that it sought to streamline the Funding 
Portal Rules to the extent possible to reflect the limited scope of 
permissible funding portal activities while also maintaining investor 
protection.\157\ FINRA further notes that its Funding Portal Rules 
include rules to address fraud and standards of commercial honor and 
just and equitable principles of trade (Funding Portal Rules 200(a) and 
200(b), which are explained in more detail above).\158\ In addition, 
FINRA notes that

[[Page 4940]]

Regulation Crowdfunding contains rules to addresses investor 
protection.\159\ FINRA believes that Regulation Crowdfunding and 
FINRA's Funding Portal Rules, in combination, are robust enough to 
address a wide range of potential concerns that may arise from conduct 
by funding portals.\160\ As an example, FINRA indicates that, depending 
on the facts, it may apply Funding Portal Rule 200(a) in situations in 
which a funding portal charged a commission or fee that is clearly 
unreasonable under the circumstances.\161\ FINRA further notes that it 
will enforce the rules for funding portals under Regulation 
Crowdfunding and that it does not intend for its rules to duplicate 
Regulation Crowdfunding.\162\ FINRA also indicates that it may impose 
additional requirements on funding portals in the future should FINRA 
determine that such requirements are merited based on the development 
of funding portal business under applicable rules.\163\
---------------------------------------------------------------------------

    \157\ See FINRA Letter at 10. See also Notice, 80 FR at 66368. 
FINRA also indicates that it is not proposing to apply to funding 
portals, at this time, certain rules based on its belief that they 
do not appear to be tailored to the limited activities of such 
entities. As an example, FINRA cites FINRA Rule 4370, which contains 
business continuity plan (``BCP'') requirements for its broker-
dealer members. According to FINRA, it is not requiring a funding 
portal to maintain a BCP, given that, among other things, a funding 
portal may not hold, manage possess or otherwise handle investor 
funds or securities. FINRA, however, stated that it: recognizes that 
funding portals are Internet-based businesses and, as part of 
FINRA's membership application process, [it] will request access to 
a funding portal's platform; [FINRA] will also monitor, as part of 
FINRA's examination and surveillance process, the development of 
funding portal business to identify emergency or business 
disruptions at funding portal members that affect the ability of the 
members to meet their existing obligations to investors and issuers 
or for investors to access their securities positions. These efforts 
will assist in assessing whether additional rulemaking in this area 
is required.
     See id. FINRA Letter at 10, n. 34.
    \158\ See FINRA Letter at 10-11.
    \159\ See id. at 11.
    \160\ See id.
    \161\ See id.
    \162\ See FINRA Letter at 10. See also Notice, 80 FR at 66368-
66369.
    \163\ See FINRA Letter at 11.
---------------------------------------------------------------------------

M. FINRA Manual

    One commenter suggested FINRA should require funding portals to 
make a current copy of the FINRA Manual available to customers for 
examination, which it requires of broker-dealers members.\164\ In 
response, FINRA notes that it is seeking to streamline the requirements 
for funding portals and, therefore, not proposing to apply this 
requirement to such entities.\165\ FINRA indicates, however, that any 
approved Funding Portal Rules will be fully available on the FINRA Web 
site for public access.\166\
---------------------------------------------------------------------------

    \164\ See PIABA Letter at 5-6.
    \165\ See FINRA Letter at 14.
    \166\ See id.
---------------------------------------------------------------------------

N. Broker-Dealers: Rule 4518

    One commenter requested additional guidance regarding Rule 4518, 
which as discussed in more detail above, requires broker-dealers 
members to provide a notification to FINRA prior to engaging in certain 
crowdfunding transactions or within 30 days of entering into certain 
control relationships with a funding portal.\167\ In response, FINRA 
indicates that it will issue a Regulatory Notice providing further 
guidance in this area.\168\
---------------------------------------------------------------------------

    \167\ See CFIRA Letter at 3.
    \168\ See FINRA Letter at 13.
---------------------------------------------------------------------------

O. Private Placements

    One commenter requested guidance regarding whether offerings 
relying on the exemption under Section 4(a)(6) will be subject to the 
filing requirements of FINRA Rule 5123.\169\ In response, FINRA states 
that it will not require that members selling securities in such 
offerings to submit filings pursuant to FINRA Rule 5123.\170\
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    \169\ See CFIRA Letter at 3.
    \170\ See FINRA Letter at 13. FINRA cites to its Private 
Placement Frequently Asked Questions (FAQ), available at http://www.finra.org/industry/faq-private-placement- frequently-asked-
questions-faq. (``FINRA will not require member firms that 
participate in crowdfunding offerings (under the JOBS Act) to make a 
filing pursuant to Rule 5123.'').
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After careful review of the proposed rule change, the comment 
letters, and FINRA's response to the comments, the Commission finds 
that the proposal, as modified by Amendment No. 1, is consistent with 
the requirements of the Exchange Act and the rules and regulations 
thereunder that are applicable to a national securities 
association.\171\ Specifically, the Commission finds that the rule 
change is consistent with Section 15A(b)(6) of the Exchange Act,\172\ 
which requires, among other things, that FINRA rules be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest.
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    \171\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \172\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The Commission received three comment letters and FINRA's response 
to the comment letters. The Commission notes the commenters were 
generally supportive of the proposal but had suggestions regarding 
areas where certain aspects of the proposal could be expanded or 
further explained. The Commission has considered the commenters' 
suggestions and believes that FINRA has responded adequately to their 
concerns and that the rules are consistent with the Exchange Act.
    As discussed above, some commenters expressed concern that FINRA 
has determined not to impose certain requirements that it imposes on 
its broker-dealer members to funding portal members.\173\ Although one 
of these commenters suggested additions to FINRA's funding portal 
rules, it also indicated that it generally supported the proposed rules 
because it ``knows that investors need protection against unscrupulous 
brokers, issuers and intermediaries in the crowdfunding space.'' \174\ 
In addition, FINRA indicated that the rules have been tailored to 
reflect the limited scope of permissible activities in which funding 
portals may engage, while also maintaining investor protection.\175\
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    \173\ For example, FINRA determined not to include a fidelity 
bond or any AML requirements for funding portal members in the 
proposal despite the fact that it had proposed such requirements in 
its initial Regulatory Notice to its members. FINRA also determined 
not to include licensing or examination requirements and to include 
a streamlined version of its communications with the public 
requirements.
    \174\ See PIABA Letter at 2. See also CFIRA Letter at 1 
(supporting certain changes that FINRA made from the Regulatory 
Notice as ``reflect[ing] the reality that funding portals will have 
limited permissible activities, and these changes are in line with 
creating a cost-efficient marketplace for small securities 
offerings.'').
    \175\ See FINRA Letter at 1 (citing Notice, 80 FR at 66349).
---------------------------------------------------------------------------

    Taking into consideration the comments and FINRA's response, we 
believe that the proposal is consistent with the Exchange Act. In 
particular, we believe that the Funding Portal Rules are appropriately 
designed to take into account the limited permissible activities of 
funding portals, while still maintaining investor protection. We 
believe that FINRA's response, as discussed in more detail above, 
appropriately addressed the reasons for not including certain 
requirements in the proposal. We note that FINRA, in its response, 
indicates that Rule 200(a), which requires funding portal members to 
observe high standards of commercial honor and just and equitable 
principles of trade in the conduct of their business, and Rule 200(b), 
which prohibits the use of manipulative, deceptive or other fraudulent 
devices, may be used to address misconduct by funding portals not 
specifically addressed in the rules. We also note that FINRA has 
represented that it will monitor how the funding portal business 
develops under the rules as well as other rules applicable to such 
entities, and assess whether changes to the rules are appropriate or 
necessary. Taken together, we believe that this approach is appropriate 
and designed to protect investors and the public interest, consistent 
with Section 15A(b)(6) of the Exchange Act.
    The Commission also believes that FINRA's response, which is 
discussed in more detail above, appropriately addressed the commenter's 
concern regarding the timing of the proposal. In particular, FINRA 
notes that its rules have been in preparation for a considerable amount 
of time with public input, and the proposal is intended to provide the 
means for

[[Page 4941]]

funding portals to become FINRA members consistent with the JOBS Act 
and Regulation Crowdfunding.\176\
---------------------------------------------------------------------------

    \176\ See FINRA Letter at 2.
---------------------------------------------------------------------------

    In addition, the Commission also believes that the proposal is 
designed to provide for an appropriate amount of information to be 
reported to FINRA. FINRA stated that its goal is to develop rules for 
funding portal members that are tailored to the limited permissible 
activities in which funding portals may engage, and to minimize the 
initial potential costs and burdens to the development of the funding 
portal business. The Commission believes that FINRA's reporting rules 
are tailored to funding portal activities. For example, FINRA's Funding 
Portal Rule 300(c) requires funding portal members to report regulatory 
proceedings, disciplinary and other events.\177\ The rule also requires 
funding portal members to respond to FINRA with respect to any investor 
complaint, examination or inquiry,\178\ and states that a funding 
portal's reporting obligations under SEC rules are not abrogated by the 
FINRA rules. In addition, the rule contains a 30 calendar day reporting 
requirement, which FINRA believes strikes the appropriate balance 
between prompt regulatory reporting for purpose of risk oversight and 
providing firms sufficient time to assess reportable events and submit 
complete and accurate reports. The Commission believes FINRA's 
reporting obligations for funding portal members are appropriate 
because a funding portal's permissible business activities are limited 
in scope.
---------------------------------------------------------------------------

    \177\ See Funding Portal Rule 300(c).
    \178\ See Funding Portal Rule 300(c)(4).
---------------------------------------------------------------------------

    Further, the Commission believes that the proposal is designed to 
provide for an appropriate level of public disclosure of information 
relating to funding portals. The Commission notes that FINRA indicates 
that it intends to exercise its authority under its rules and provide 
the public with access to a funding portal member's current SEC Form 
Funding Portal through a link to the Commission's Web site. Form 
Funding Portal, which is also publicly available through the 
Commission's EDGAR system, provides certain disclosure information 
about funding portals and their associated persons. In addition, FINRA 
stated its intention to make public information indicating whether the 
funding portal member or any associated person of the funding portal 
member is subject to a statutory disqualification event.
    Accordingly, the Commission believes that the rule change is 
reasonably designed to designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
and, in general, to protect investors and the public interest.\179\
---------------------------------------------------------------------------

    \179\ See 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    For the reasons stated above, the Commission finds that the rule 
change, as modified by Amendment No. 1, is consistent with the Exchange 
Act and the rules and regulations thereunder.

V. Accelerated Approval of Proposal, as Modified by Amendment No. 1

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Exchange Act \180\ for approving the proposal, as modified by 
Amendment No. 1, prior to the 30th day after publication of Amendment 
No. 1 in the Federal Register.
---------------------------------------------------------------------------

    \180\ See 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    Amendment No. 1 revised the proposal to include ``for purposes of 
FINRA Rule 8210 any other person listed in Schedule A of Form Funding 
Portal of a member'' to the definition of ``associated person of a 
funding portal member'' or ``person associated with a funding portal 
member'' in Funding Portal Rule 100(b)(1). This change will help to 
ensure that FINRA is capable of using its Rule 8210 authority with 
regard to key persons controlling the funding portal. The Commission 
also believes the amendment is consistent with FINRA's obligation in 
Section 19(g) of the Exchange Act to effectively enforce its rules. The 
Commission also believes that Amendment No. 1's amended definition of 
associated person does not raise any novel regulatory issues because 
the change more closely aligns the definition with the definition of 
associated person applicable to FINRA's broker-dealer members.
    Amendment No. 1 also revised the proposal to make technical changes 
to the language of Funding Portal Rules 300(a)(1)(A), 900(a)(4)(C), 
900(a)(4)(F), 1200(a)(3), 1200(a)(4) and 1200(b)(4)(C). The Commission 
does not believe that these changes raise any novel regulatory issues, 
but rather are technical changes that do not change the substance of 
the rules.
    Accordingly, the Commission finds that good cause exists to approve 
the proposal, as modified by Amendment No. 1, on an accelerated basis.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the rule change, 
as modified by Amendment No. 1, 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-2015-040 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-2015-040. 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 rule change that are filed with 
the Commission, and all written communications relating to the 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 10:00 a.m. and 
3:00 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-2015-040, and should be submitted 
on or before February 18, 2016.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\181\ that the rule change (SR-FINRA-2015-040), as modified by 
Amendment No. 1, be, and hereby is, approved on an accelerated basis.
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    \181\ 15 U.S.C. 78s(b)(2).

[[Page 4942]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\182\
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    \182\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-01672 Filed 1-27-16; 8:45 am]
 BILLING CODE 8011-01-P