Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt the Funding Portal Rules and Related Forms and FINRA Rule 4518, 66348-66370 [2015-27370]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 80, Number 208 (Wednesday, October 28, 2015)]
[Notices]
[Pages 66348-66370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-27370]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76239; File No. SR-FINRA-2015-040]


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

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

    FINRA is proposing to adopt 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 text of the proposed rule change is available on FINRA's Web 
site at https://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

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

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

[[Page 66349]]

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

1. Purpose
    Title III of the Jumpstart Our Business Startups (``JOBS'') Act,\3\ 
enacted in 2012 with the goal of increasing American job creation and 
economic growth, contains key provisions relating to securities offered 
or sold through ``crowdfunding.'' \4\ Under Section 302 of the JOBS 
Act, a crowdfunding intermediary that engages in crowdfunding on behalf 
of issuers relying on the JOBS Act's ``crowdfunding exemption'' \5\ is 
required to register with the SEC as a ``funding portal'' \6\ or broker 
and to register with an applicable self-regulatory organization.\7\
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    \3\ Pub. L. 112-106, 126 Stat. 306 (2012).
    \4\ Crowdfunding generally refers to the use of the Internet by 
small businesses to raise capital through limited investments from a 
large number of investors.
    \5\ See new Section 4(a)(6) of the Securities Act of 1933 (the 
``Securities Act'') (15 U.S.C. 77d(a)(6)), as amended by the JOBS 
Act. The crowdfunding exemption creates an exemption from 
registration under the Securities Act for securities offered by 
issuers pursuant to Title III of the JOBS Act.
    \6\ Section 3(a)(80) of the Act (15 U.S.C. 78c(a)(80)), as 
amended by Title III of the JOBS Act, provides that the term 
``funding portal'' means any person acting as an intermediary in a 
transaction involving the offer or sale of securities for the 
account of others, solely pursuant to Securities Act Section 4(a)(6) 
(15 U.S.C. 77d(a)(6)), that does not: (1) offer investment advice or 
recommendations; (2) solicit purchases, sales, or offers to buy the 
securities offered or displayed on its Web site or portal; (3) 
compensate employees, agents, or other persons for such solicitation 
or based on the sale of securities displayed or referenced on its 
Web site or portal; (4) hold, manage, possess, or otherwise handle 
investor funds or securities; or (5) engage in such other activities 
as the Commission, by rule, determines appropriate. (The JOBS Act 
inadvertently created two Sections 3(a)(80) in the Act, the other 
being the definition of ``emerging growth company,'' added by 
Section 101(b) of Title I of the JOBS Act. All references in this 
filing to Section 3(a)(80) of the Act are to the definition of 
``funding portal'' under Title III of the JOBS Act.)
    \7\ See Sections 4A(a)(1) and (2) of the Securities Act (15 
U.S.C. 77d-1(a)(1) and (2)).
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    In October 2013, the SEC proposed Regulation Crowdfunding to 
require registration of funding portals and to implement the provisions 
of Title III of the JOBS Act.\8\ Prospective funding portal operators 
have stated that they intend to register with the SEC pursuant to 
Regulation Crowdfunding if adopted by the SEC and to apply for FINRA 
membership. Section 3(h)(2) of the Act,\9\ as amended by the JOBS Act, 
requires that FINRA only examine for and enforce against registered 
funding portals rules that FINRA has written specifically for 
registered funding portals. Further, FINRA has stated that its 
rulemaking would be informed by the SEC's rulemaking.\10\ Accordingly, 
FINRA is proposing the Funding Portal Rules and related forms that 
would apply to SEC-registered funding portals that become FINRA members 
pursuant to the JOBS Act and the SEC's Regulation Crowdfunding. The 
proposed Funding Portal Rules reflect Regulation Crowdfunding as 
proposed by the SEC and would implement, under FINRA rules, the 
provisions of Title III of the JOBS Act. FINRA has streamlined the 
proposed rules to reflect the limited scope of activity permitted by 
funding portals \11\ while also maintaining investor protection. FINRA 
has written the proposed rules specifically for funding portals.\12\
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    \8\ See Securities Exchange Act Release No. 70741 (October 23, 
2013), 78 FR 66428 (November 5, 2013) (Crowdfunding; Proposed Rules) 
(the ``Regulation Crowdfunding Proposal''). The SEC's proposed Rule 
400(a) under Regulation Crowdfunding requires in part that a funding 
portal must register with the Commission and become a member of 
FINRA or any other applicable national securities association 
registered under SEA Section 15A. FINRA is the only registered 
national securities association.
    \9\ 15 U.S.C. 78c(h)(2).
    \10\ See Securities Exchange Act Release No. 68633 (January 11, 
2013), 78 FR 4186 (January 18, 2013) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change To Adopt Interim Form for 
Funding Portals Under the Jumpstart Our Business Startups Act; File 
No. SR-FINRA-2013-005).
    \11\ See note 6 supra. Proposed Rule 300(c)(2) under Regulation 
Crowdfunding reflects the definition of funding portal as set forth 
in Section 3(a)(80) of the Act (15 U.S.C. 78c(a)(80)).
    \12\ FINRA also has submitted a companion filing to adopt 
Section 15 of Schedule A to the FINRA By-Laws governing the fees for 
funding portals that are FINRA members. See SR-FINRA-2015-041.
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    In developing the proposed Funding Portal Rules, FINRA has 
considered comments that were received in response to Regulatory Notice 
13-34 (October 2013) (FINRA Requests Comment on Proposed Funding Portal 
Rules and Related Forms) (the ``Notice'').\13\ The proposed Funding 
Portal Rules and forms as set forth in this filing are largely as 
published in the Notice. FINRA has made clarifying revisions and a 
number of additions to the proposal for administrative purposes. 
Further, as discussed below, FINRA has revised the proposal vis-
[agrave]-vis the version published in the Notice to better align the 
provisions governing the right to appeal and hearing under the proposed 
membership application and eligibility rules with existing provisions 
for broker-dealer members. In addition, FINRA is not proposing at this 
time the proposed rule that would have required funding portal members 
to maintain fidelity bond coverage.\14\ Further, FINRA is not proposing 
at this time the rule that would have required funding portal members 
to develop and implement a written anti-money laundering program.\15\
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    \13\ Comments are discussed in Item II.C of this filing.
    \14\ FINRA is monitoring the development of funding portal 
business and will determine at a later time whether a rulemaking 
with respect to fidelity bonds or other financial responsibility 
requirements is merited. See also Item II.C.1 of this filing.
    \15\ Pursuant to the Bank Secrecy Act (``BSA'') (31 U.S.C. 5311, 
et seq.) and implementing regulations thereunder (31 CFR Chapter X), 
brokers and dealers in securities that are registered or required to 
be registered with the Commission must among other things establish 
and maintain an effective anti-money laundering program. The BSA and 
implementing regulations thereunder do not apply to funding portals 
at this time. See also Item II.C.2 of this filing.
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    As set forth in this filing, the proposed Funding Portal Rules 
consist of a set of seven rules (Funding Portal Rules 100, 110, 200, 
300, 800, 900 and 1200) and related forms (Form FP-NMA, Form FP-CMA, 
Funding Portal Rule 300(c) Form, and Form FP-Statement of Revenue). In 
addition, as part of the proposed rule change, FINRA is proposing to 
adopt new FINRA Rule 4518 (Notification to FINRA in Connection with the 
JOBS Act) in the FINRA rulebook. New FINRA Rule 4518 would apply to 
registered broker members. The proposed requirements of the Funding 
Portal Rules and related forms and FINRA Rule 4518 are set forth below.

A. Proposed Funding Portal Rule 100 (General Standards)

    Proposed Funding Portal Rule 100 (General Standards), similar to 
the FINRA Rule 0100 Series, sets forth basic standards and definitions 
for purposes of the Funding Portal Rules. Paragraph (a) under 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,\16\ unless the context requires otherwise, and the 
Funding Portal Rules. The rule 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. For purposes of 
Section 1(a) of Article III of the FINRA By-Laws, the proposed rule 
provides that a registered broker or dealer shall include a registered 
funding portal.
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    \16\ FINRA has revised the proposed rule vis-[agrave]-vis the 
version published in the Notice to add ``and FINRA Regulation By-
Laws'' to clarify that funding portal members will also be subject 
to the FINRA Regulation By-Laws.
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    The proposed rule provides that the terms used in the Funding 
Portal Rules, if defined in the FINRA By-Laws, shall have the meaning 
as defined in the FINRA By-Laws, unless a term is

[[Page 66350]]

defined differently in a Funding Portal Rule, or unless the context of 
the term within a Funding Portal Rule requires a different meaning.
    The proposed definitions contained in the rule are set forth under 
paragraph (b). The proposed definitions are largely based on 
definitions under current FINRA rules, modified as appropriate to apply 
to funding portal members. The proposed rule provides that, when used 
in the Funding Portal Rules, unless the context otherwise requires, the 
terms below have the following meanings:
     Associated person of a funding portal member or person 
associated with a funding portal member: The term ``associated person 
of a funding portal member'' or ``person associated with a funding 
portal member'' means 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 funding portal 
member, or any employee of a funding portal member.
     By-Laws: The term ``By-Laws'' means the By-Laws of the 
Corporation or the FINRA By-Laws.
     Exchange Act or SEA: The term ``Exchange Act'' or ``SEA'' 
means the Securities Exchange Act of 1934, as amended.
     FINRA: The term ``FINRA'' means, collectively, FINRA, 
Inc., FINRA Regulation, Inc. and FINRA Dispute Resolution, Inc.
     Funding Portal: The term ``funding portal'' is as defined 
pursuant to proposed Rule 300(c)(2) of SEC Regulation Crowdfunding.
     Funding Portal Member: The term ``funding portal member'' 
means any funding portal admitted to membership in FINRA.
     Funding Portal Rules: The term ``Funding Portal Rules'' 
means Funding Portal Rules 100 through 1200.
     Investor: The term ``investor'' does not include a broker, 
dealer or funding portal.
     Person: The term ``person'' includes any natural person, 
partnership, corporation, association, or other legal entity (provided, 
however, that for purposes of the definition of associated person of a 
funding portal member as set forth under the rule, the term ``person'' 
shall solely include a natural person).
     SEC: The term ``SEC'' means the Securities and Exchange 
Commission.
     Securities Act: The term ``Securities Act'' means the 
Securities Act of 1933, as amended.

B. Proposed Funding Portal Rule 110 (Funding Portal Application)

1. Proposed Funding Portal Rule 110(a) (Member Application Process)
    Proposed Funding Portal Rule 110(a) addresses the membership 
application process (``MAP'') for funding portals (referred to in the 
rule as ``FP Applicants''). The MAP will enable FINRA to assess whether 
funding portals are capable of complying with applicable federal 
securities laws, the rules and regulations thereunder, and the Funding 
Portal Rules. The proposed rule is based on the current NASD Rule 1010 
Series membership rules that apply to broker-dealers. However, as 
discussed below, FINRA has simplified the MAP for funding portals to 
reflect the limited nature of their business. The proposed rule 
requirements are set forth below.

 Definitions (Proposed Funding Portal Rule 110(a)(1))

    Paragraph (a)(1) of the proposed rule sets forth a set of 
definitions that apply solely for purposes of MAP. Specifically:
    [cir] Associated Person: The rule provides that, solely for 
purposes of paragraph (a) of Funding Portal Rule 110, the term 
``associated person'' means 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.
    [cir] FP Applicant: The term ``FP Applicant'' means 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.\17\
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    \17\ Proposed Funding Portal Rule 110(a)(3) and Rule 110(a)(4) 
are discussed below.
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    [cir] Day: The term ``day'' means calendar day. The rule provides 
that, solely for purposes of paragraph (a) of Funding Portal Rule 110, 
in calculating a period of time, the day of the act (e.g., filing of 
application, service of notice) from which the period of time 
designated begins to run shall not be included, provided, however, that 
where the last day of a period so calculated is a Saturday, Sunday or 
day on which FINRA is otherwise closed, the period shall run until the 
end of the next business day.\18\
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    \18\ As proposed in the Notice, the proposed definition of 
``day'' for purposes of the MAP for funding portals did not address 
situations where the last day of a period calculated is a Saturday, 
Sunday or day on which FINRA is closed. FINRA has added this 
language in the interest of clarity.
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    [cir] Department: The term ``Department'' means the Department of 
Member Regulation of FINRA.
    [cir] District: The term ``district'' means a district established 
by the FINRA Regulation Board.

 Service or Filing Date (Proposed Funding Portal Rule 
110(a)(2))

    Proposed Funding Portal Rule 110(a)(2)(A) provides that FINRA shall 
serve a notice or decision issued under paragraph (a) of the rule by 
electronic delivery. Paragraph (a)(2)(B) of the rule provides that, for 
purposes of Funding Portal Rule 110(a), service by FINRA or filing by 
an FP Applicant shall be deemed complete on the date recorded by 
FINRA's electronic systems for electronic communications or by other 
means of verification prescribed by FINRA.

 Application To Be a Funding Portal Member (Proposed Funding 
Portal Rule 110(a)(3))

    Proposed Funding Portal Rule 110(a)(3)(A) provides that an FP 
Applicant for FINRA membership must submit its application to the 
Department by filing a Form FP-NMA \19\ in the manner prescribed by 
FINRA and an application fee. Proposed Funding Portal Rule 110(a)(3)(B) 
provides that, at the time an FP Applicant for FINRA membership submits 
its application pursuant to paragraph (a)(3)(A) of the rule, 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 Act.\20\ The 
FP Applicant must keep this information current and must update such 
information promptly, but

[[Page 66351]]

in any event not later than 10 days following any change in such 
information.
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    \19\ Proposed Form FP-NMA is set forth in Exhibit 3a. FINRA has 
modified the proposed form vis-[agrave]-vis the version published in 
the Notice to reflect the removal of the proposed anti-money 
laundering and fidelity bond requirements as had been set forth in 
the Notice and to make other clarifications. Consistent with the 
limited scope of business to be conducted by funding portals, the 
proposed form requires significantly less information than the Form 
NMA for broker-dealer applicants.
    \20\ 15 U.S.C. 78c(a)(39). Section 3(a)(39) of the Act sets 
forth the definition of ``statutory disqualification.''

 Application for Approval of a Change in Ownership or Control 
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(Proposed Funding Portal Rule 110(a)(4))

    Proposed Funding Portal Rule 110(a)(4)(A) provides that a funding 
portal member must file an application for prior approval of any 
change:
    [cir] 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
    [cir] 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.
    Paragraph (a)(4)(B) of the rule provides that a funding portal 
member must submit its application for prior approval of any of the 
changes described in Funding Portal Rule 110(a)(4)(A) to the Department 
by filing a Form FP-CMA \21\ in the manner prescribed by FINRA and an 
application fee.
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    \21\ Proposed Form FP-CMA is set forth in Exhibit 3b. FINRA has 
made clarifying revisions to the form vis-[agrave]-vis the version 
published in the Notice. Consistent with the limited scope of 
business to be conducted by funding portals, the proposed form 
requires significantly less information than is required for broker-
dealer applicants.

 Rejection of Application That Is Not Complete (Proposed 
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Funding Portal Rule 110(a)(5))

    Proposed Funding Portal Rule 110(a)(6) provides that, within 14 
days after the filing of an application filed pursuant to paragraphs 
(a)(3) or (a)(4) of the rule, the Department shall serve an initial 
request for any additional information or documents necessary to render 
a decision on the application, and the FP Applicant must file any 
additional information and documents with the Department within 14 days 
after service of the Department's initial request. The rule provides 
that the Department may serve subsequent requests for additional 
information or documents at any time during the membership application 
process. Unless otherwise agreed by the Department and the FP 
Applicant, the FP Applicant must file any additional information and 
documents with the Department within seven days after service of any 
subsequent request.

 Withdrawal of Application (Proposed Funding Portal Rule 
110(a)(7))

    Proposed Funding Portal Rule 110(a)(7) provides that, if an FP 
Applicant withdraws an application filed pursuant to paragraphs (a)(3) 
or (a)(4) of the rule within 14 days after filing the application, 
FINRA shall refund the application fee, less a processing fee which 
shall be retained by FINRA. The rule provides that if the FP Applicant 
determines to again seek funding portal membership or approval of a 
change in ownership or control, the FP Applicant must submit a new 
application and fee pursuant to paragraphs (a)(3) or (a)(4) of the 
rule.

 Lapse of Application (Proposed Funding Portal Rule 110(a)(8))

    Proposed Funding Portal Rule 110(a)(8) is an addition to the 
proposal vis-[agrave]-vis the proposed rules as published in the 
Notice. The provision, based largely on NASD Rule 1012(b), is designed 
to ensure that the provisions governing lapse of an application filed 
pursuant to paragraphs (a)(3) or (a)(4) of the rule better align with 
existing provisions for broker-dealer members, while also reflecting 
the more streamlined application process provided for funding portal 
members in light of their limited permissible activities and the 
related shorter time frames in which the Department must act on an 
application. Proposed Funding Portal Rule 110(a)(8)(A) provides that, 
absent a showing of good cause, an application filed under paragraphs 
(a)(3) or (a)(4) of the rule shall lapse if an FP Applicant fails to:
    [cir] Respond fully within 14 days after service of an initial 
written request, or within seven days after service of a subsequent 
written request, for information or documents under paragraph (a)(6) of 
the rule, or within such other time period as agreed to by the 
Department and the FP Applicant;
    [cir] appear at or otherwise participate in a scheduled membership 
interview pursuant to paragraph (a)(9) of the rule, as discussed below; 
or
    [cir] file an executed membership agreement under paragraph (a)(11) 
of the rule, as discussed below, within seven days after service of the 
agreement, or within such other period as agreed to by the Department 
and the FP Applicant.
    Proposed Funding Portal Rule 110(a)(8)(B) provides that if an FP 
Applicant wishes to again seek membership or approval of a change in 
ownership or control subsequent to the lapse of an application pursuant 
to paragraph (a)(8)(A) of this Rule, then the FP Applicant shall be 
required to submit a new application in the manner prescribed in 
paragraph (a)(3) or (a)(4) of the rule, respectively, including the 
timely submission of an application fee pursuant to Schedule A to the 
FINRA By-Laws. The rule provides that FINRA shall not refund any fee 
for a lapsed application.

 Membership Interview (Proposed Funding Portal Rule 110(a)(9))

    Proposed Funding Portal Rule 110(a)(9)(A) provides that, before the 
Department serves its decision on an application for new membership in 
FINRA, the Department shall conduct one or more membership interviews 
with a representative or representatives of the FP Applicant. The 
membership interview(s) may be conducted by video conference or such 
other means as FINRA may specify. Paragraph 110(a)(9)(B) of the rule 
provides that, at least five days before a membership interview, the 
Department shall serve on the FP Applicant a written notice that 
specifies the date and time of the interview and the representative or 
representatives of the FP Applicant who are required to participate in 
the interview. The rule provides that the Department shall serve the 
notice in a manner consistent with proposed Funding Portal Rule 
110(a)(2). The rule further provides that the FP Applicant and the 
Department may agree to a shorter or longer period for notice or a 
different method of service. Paragraph 110(a)(9)(C) of the rule 
provides that, unless the Department directs otherwise for good cause 
shown, a membership interview shall be scheduled to occur within 30 
days after the filing of an application or within 14 days after the 
filing of all additional information or documents requested, whichever 
is later.

 Standards for Granting or Denying Application (Proposed 
Funding Portal Rule 110(a)(10))

    Proposed Funding Portal Rule 110(a)(10) provides that, after 
considering an application filed pursuant to paragraphs (a)(3) or 
(a)(4) of the rule, 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, the Department shall determine whether the FP

[[Page 66352]]

Applicant meets each of the following five standards, as applicable: 
\22\
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    \22\ The five standards that FINRA is proposing are streamlined 
and consolidated vis-[agrave]-vis 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.
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    [cir] 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 shall take into consideration all information in its 
possession, including information regarding whether an FP Applicant or 
its associated persons: \23\
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    \23\ See proposed Funding Portal Rule 110(a)(10)(A) in Exhibit 
5.
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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.
    [cir] 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.\24\
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    \24\ See proposed Funding Portal Rule 110(a)(10)(B) in Exhibit 
5.
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    [cir] 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.\25\
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    \25\ See proposed Funding Portal Rule 110(a)(10)(C) in Exhibit 
5.
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    [cir] The FP Applicant has fully disclosed and established through 
documentation all direct and indirect sources of funding.\26\
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    \26\ See proposed Funding Portal Rule 110(a)(10)(D) in Exhibit 
5.
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    [cir] The FP Applicant has a recordkeeping system that enables the 
FP Applicant to comply with federal, state, and self-regulatory 
organization recordkeeping requirements.\27\
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    \27\ See proposed Funding Portal Rule 110(a)(10)(E) in Exhibit 
5.

 Granting or Denying Application (Proposed Funding Portal Rule 
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110(a)(11))

    Proposed Funding Portal Rule 110(a)(11)(A) provides that, if the 
Department determines that the FP Applicant meets each of the 
applicable standards in paragraph (a)(10) of the rule, the Department 
shall grant the application filed pursuant to proposed Funding Portal 
Rule 110(a)(3) or (a)(4). The rule provides that the FP Applicant's 
approval for membership shall be contingent upon the FP Applicant's 
filing of an executed written membership agreement. Paragraph 
(a)(11)(B) of the rule provides that, if the Department determines that 
the FP Applicant does not meet one or more of the applicable standards 
in proposed Funding Portal Rule 110(a)(10), the Department shall deny 
the application.

 Decision (Proposed Funding Portal Rule 110(a)(12))

    Proposed Funding Portal Rule 110(a)(12) provides that the 
Department shall serve a written decision on the application filed 
pursuant to paragraphs (a)(3) or (a)(4) of the rule within 60 days 
after the filing of the application or such later date as the 
Department and the FP Applicant have agreed in writing.\28\ The rule 
provides that if the Department denies the application, the decision 
shall explain in detail the reason for denial, referencing the 
applicable standard or standards in paragraph (a)(10) of the rule. The 
rule provides that a decision that denies the application shall become 
effective upon service. The Department shall serve its decision and, as 
applicable, the membership agreement on the FP Applicant in accordance 
with paragraph (a)(2) of the rule.
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    \28\ The proposed 60 day time frame is shorter than the 180 day 
time frame that applies to broker-dealer applicants under NASD Rule 
1014(c). FINRA believes that the 60 day time frame for funding 
portals is appropriate to reflect the limited nature of funding 
portal business. The provision ``or such later date as the 
Department and the FP Applicant have agreed in writing'' is an 
addition to the proposal vis-[agrave]-vis the proposed rules as 
published in the Notice and is intended, based in large part on NASD 
Rule 1014(c), to better align the rule with existing provisions for 
broker-dealer members. In addition, FINRA has made other conforming 
revisions.

 Appeal of Department's Decision (Proposed Funding Portal Rule 
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110(a)(13))

    Proposed Funding Portal Rule 110(a)(13) addresses an appeal of the 
Department's decision. FINRA has revised the proposed rule vis-
[agrave]-vis the proposal as published in the Notice so that the appeal 
process, based in large part on NASD Rules 1015 and 1016, better aligns 
with existing provisions for broker-dealer applicants. As revised, the 
proposed rule among other things: (1) Permits the FP Applicant to file 
a written request for review of the Department's decision with the full 
National Adjudicatory Council; (2) provides for the National 
Adjudicatory Council or the Review Subcommittee as defined in FINRA 
Rule 9120 to appoint a Subcommittee to participate in the review; (3) 
allows either the FP Applicant to request or the Subcommittee to direct 
a hearing: and (4) sets forth hearing procedures. In addition, FINRA 
has made other conforming revisions. The specific requirements of the 
proposed rule as revised are set forth below.

    [cir] Request for Review; Final Action

    Paragraph (a)(13)(A)(i) of the rule provides that, within 14 days 
after service of a decision under paragraph (a)(12) of the rule, an FP 
Applicant may file a written request for review with the National 
Adjudicatory Council. A request for review must state with specificity 
why the FP Applicant believes that the Department's decision is 
inconsistent with the applicable standards set forth in paragraph 
(a)(10) of the rule or otherwise should be set aside, and state whether 
a hearing is requested. An FP Applicant may withdraw its notice of 
appeal at any time by filing a written notice of withdrawal of appeal 
with the National Adjudicatory Council. Paragraph (a)(13)(A)(ii) of the 
rule provides that, if the FP Applicant does not file a request for a 
review, abandons its appeal or withdraws its notice of appeal, the 
Department's decision shall constitute final action by FINRA.

[cir] Transmission of Documents

    Paragraph (a)(13)(B) of the rule provides that, within 14 days 
after the filing of a request for review, the Department shall: 
Transmit to the National Adjudicatory Council copies of all documents 
that were considered in connection with the Department's decision and 
an index to the documents; and serve on the FP Applicant a copy of such 
documents (other than those documents originally submitted by the FP 
Applicant) and a copy of the index.

[cir] Appointment of Subcommittee

    Paragraph (a)(13)(C) of the rule provides that the National 
Adjudicatory Council or the Review Subcommittee as defined in FINRA 
Rule 9120 shall appoint a Subcommittee to participate

[[Page 66353]]

in the review.\29\ Paragraph (a)(13)(C) further provides that the 
Subcommittee shall be composed of two or more persons who shall be 
current or past members of the National Adjudicatory Council or former 
Directors or Governors.
---------------------------------------------------------------------------

    \29\ FINRA Rule 9120 among other things defines ``Review 
Subcommittee'' to mean a body appointed by the National Adjudicatory 
Council pursuant to the FINRA Regulation By-Laws.

---------------------------------------------------------------------------
[cir] Powers of Subcommittee

    Paragraph (a)(13)(D) of the proposed rule provides that, if a 
hearing is requested, the Subcommittee shall conduct the hearing. If a 
hearing is not requested, the Subcommittee may serve a notice directing 
that a hearing be held. The rule provides that if a hearing is not 
requested or directed, the Subcommittee shall conduct its review on the 
basis of the record developed before the Department and any written 
submissions made by the FP Applicant or the Department in connection 
with the request for review.

[cir] Hearing

    Paragraph (a)(13)(E) of the rule addresses the hearing:
    [rtarr8] Notice: Paragraph (a)(13)(E)(i) provides that, if a 
hearing is requested or directed, the hearing shall be held within 45 
days after the filing of the request with the National Adjudicatory 
Council or service of the notice by the Subcommittee. The rule provides 
that the National Adjudicatory Council shall serve written notice of 
the date and time of the hearing to the FP Applicant by email, 
facsimile or overnight courier not later than 14 days before the 
hearing;
    [rtarr8] Counsel: Paragraph (a)(13)(E)(ii) provides that the FP 
Applicant and the Department may be represented by counsel at a hearing 
conducted pursuant to the rule;
    [rtarr8] Evidence: Paragraph (a)(13)(E)(iii) provides that formal 
rules of evidence shall not apply to a hearing under the rule. Not 
later than five days before the hearing, the FP Applicant and the 
Department shall exchange copies of their proposed hearing exhibits and 
witness lists and provide copies of the same to the National 
Adjudicatory Council. The rule provides that if the FP Applicant or the 
Department fails to provide copies of its proposed hearing exhibits or 
witness list within such time, the Subcommittee shall exclude the 
evidence or witnesses from the proceeding, unless the Subcommittee 
determines that good cause is shown for failure to comply with the 
production date set forth in this subparagraph;
    [rtarr8] Transcript: Paragraph (a)(13)(E)(iv) of the proposed rule 
provides that the hearing shall be recorded and a transcript prepared 
by a court reporter. The rule provides that a transcript of the hearing 
shall be available for purchase from the court reporter at prescribed 
rates. The FP Applicant, the Department, or a witness may seek to 
correct the transcript. The rule further provides that, upon notice to 
the FP Applicant and the Department, the Subcommittee may direct the 
correction to the transcript as requested or sua sponte.

[cir] Additional Information, Briefs

    Paragraph (a)(13)(F) of the rule provides that, at any time during 
its consideration, the Subcommittee or the National Adjudicatory 
Council may direct the FP Applicant or the Department to file 
additional information or briefs. The rule provides that any additional 
information or brief filed shall be provided to all parties before the 
National Adjudicatory Council renders its decision.

[cir] Subcommittee Recommendation

    Paragraph (a)(13)(G) of the rule provides that the Subcommittee 
shall present a recommended decision in writing to the National 
Adjudicatory Council within 60 days after the date of the hearing held 
pursuant to paragraph (a)(13)(E) of the rule.

[cir] Decision

    Paragraph (a)(13)(H) of the rule provides that, after considering 
all matters presented in the review and the Subcommittee's recommended 
written decision, the National Adjudicatory Council may affirm, modify, 
or reverse the Department's decision or remand the membership 
proceeding with instructions.

[cir] Discretionary Review by the FINRA Board

    Paragraph (a)(13)(I)(i) of the rule provides that the National 
Adjudicatory Council shall provide a copy of its decision to the Board. 
Alternatively, the National Adjudicatory Council may remand the 
membership proceeding with instructions. If the Board does not call the 
decision for review under paragraph (a)(13)(I)(ii) of the rule, as 
discussed below, the National Adjudicatory Council shall issue the 
written decision after the expiration of the Board call for review 
period, and the decision shall constitute final FINRA action.
    Paragraph (a)(13)(I)(ii) of the rule provides that a Governor may 
call a membership proceeding for review by the Board at the next 
meeting of the Board that is at least 15 days after the date on which 
the Board received the decision. If a call for review is made, the 
Board shall review the membership proceeding not later than the next 
meeting of the Board. The rule provides that the Board shall issue a 
written decision affirming, modifying or reversing the National 
Adjudicatory Council's decision and setting forth its findings and 
conclusions. Alternatively, the Board may remand the membership 
proceeding with instructions. The rule provides that the decision shall 
constitute final FINRA action, unless the Board remands the membership 
proceeding.

 Application to the SEC for Review (Proposed Funding Portal 
Rule 110(a)(14))

    Proposed 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 
Act.\30\ 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.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78s(d)(2).

 Filing of Misleading Information as to Membership or 
---------------------------------------------------------------------------
Registration (Proposed Funding Portal Rule 110(a)(15))

    Proposed 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. Proposed Funding Portal Rule 200 (Funding Portal Conduct)

    Based in large part on FINRA Rule 2010 (Standards of Commercial 
Honor and Principles of Trade), proposed Funding Portal Rule 200(a) 
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.
    Based in large part on FINRA Rule 2020 (Use of Manipulative, 
Deceptive or Other Fraudulent Devices), proposed Funding Portal Rule 
200(b) 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.
    Proposed Funding Portal Rule 200(c) (Communications with the 
Public) is aimed at prohibiting false and misleading statements. The 
proposed rule is a streamlined version of FINRA Rule 2210 
(Communications with the

[[Page 66354]]

Public) and sets forth the following requirements: \31\
---------------------------------------------------------------------------

    \31\ FINRA has further streamlined the rule vis-[agrave]-vis the 
version published in the Notice to reflect the limited scope of 
activity permitted by funding portals. See note 6 supra.
---------------------------------------------------------------------------

     Paragraph 200(c)(1) of 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.
     Paragraph 200(c)(2) of the rule addresses content 
standards. Paragraph 200(c)(2)(A) provides that no funding portal 
communication may:
    [cir] Include any false, exaggerated, unwarranted, promissory or 
misleading statement or claim;
    [cir] 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;
    [cir] 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
    [cir] 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. Paragraph (c)(2)(C) of 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.
     Paragraph 200(c)(3) of the rule addresses issuer 
communications. Specifically, the rule provides that the content 
standards of paragraphs (c)(2)(A) and (B) 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.

D. Proposed Funding Portal Rule 300 (Funding Portal Compliance)

1. Proposed Funding Portal Rule 300(a) (Supervisory System)
    Proposed 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. Paragraph (a)(1) of 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. The rule 
provides that a funding portal member's supervisory system must 
provide, at a minimum, for:
     The establishment and maintenance of written procedures to 
supervise the activities of the funding portal and its associated 
persons;
     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.
    Paragraph (a)(2) of the rule is designed to align in large part 
with the inspections and examinations provisions of proposed Rule 
403(c) under Regulation Crowdfunding. Proposed 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. Proposed Funding Portal Rule 300(b) (Executive Representative)
    As discussed above, the General Standards under proposed Funding 
Portal Rule 100 provide in part that all funding portal members and 
persons associated with funding portal members shall be subject to the 
FINRA By-Laws and FINRA Regulation By-Laws, unless the context requires 
otherwise. Article IV, Section 3 of the FINRA By-Laws requires, in 
brief, that each FINRA member appoint and certify to FINRA an executive 
representative to represent, vote, and act for the member in FINRA 
affairs. Consistent with FINRA Rule 4517(b),\32\ proposed Funding 
Portal Rule 300(b) requires each funding portal member to designate to 
FINRA, for purposes of Article IV, Section 3 of the FINRA By-Laws, an 
executive representative. The rule requires that each funding portal 
member must update its executive representative designation in the 
manner prescribed by proposed Funding Portal Rule 300(d), as discussed 
below.
---------------------------------------------------------------------------

    \32\ The executive representative requirement is an addition to 
the proposal vis-[agrave]-vis the proposed rules as published in the 
Notice. FINRA believes it is helpful to prospective funding portal 
members to add this administrative requirement to the Funding Portal 
Rules for purposes of clarity.
---------------------------------------------------------------------------

3. Proposed Funding Portal Rule 300(c) (Reporting Requirements)
    Proposed Funding Portal Rule 300(c) 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.\33\ The rule is largely based on current 
FINRA Rule 4530 (Reporting Requirements). Specifically, the rule sets 
forth the following requirements.
---------------------------------------------------------------------------

    \33\ Funding portal members would use the Funding Portal Rule 
300(c) Form for their reporting requirements pursuant to the rule. 
See Exhibit 3c of this filing.
---------------------------------------------------------------------------

     Paragraph (c)(1) of the rule requires each funding portal 
member to 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 any of the following:
    [cir] The funding portal member or an associated person of the 
funding portal member: \34\
---------------------------------------------------------------------------

    \34\ See proposed Funding Portal Rule 300(c)(1)(A) in Exhibit 5.
---------------------------------------------------------------------------

    [rtarr8] Is named as a defendant or respondent in any regulatory 
proceeding, whether foreign or domestic, involving an alleged violation 
of any securities-, insurance-, commodities-, financial- or investment-
related laws, rules, regulations, standards of conduct or by-laws, or 
has been found by a regulatory body or self-regulatory organization, 
whether foreign or domestic, to have violated any securities-, 
insurance-, commodities-, financial- or investment-related laws, rules, 
regulations or standards of conduct; \35\
---------------------------------------------------------------------------

    \35\ See proposed Funding Portal Rule 300(c)(1)(A)(i) in Exhibit 
5.
---------------------------------------------------------------------------

    [rtarr8] is the subject of any written complaint involving 
allegations of fraudulent conduct or misuse or misappropriation of 
funds or assets; \36\
---------------------------------------------------------------------------

    \36\ See proposed Funding Portal Rule 300(c)(1)(A)(ii) in 
Exhibit 5.

---------------------------------------------------------------------------

[[Page 66355]]

    [rtarr8] is denied registration or is expelled, enjoined, directed 
to cease and desist, suspended or otherwise disciplined by any 
securities-, insurance-, commodities-, financial- or investment-related 
regulatory body or self-regulatory organization, whether foreign or 
domestic, or is denied membership or continued membership in any such 
self-regulatory organization; or is barred from becoming associated 
with any member of any such self-regulatory organization; \37\
---------------------------------------------------------------------------

    \37\ See proposed Funding Portal Rule 300(c)(1)(A)(iii) in 
Exhibit 5.
---------------------------------------------------------------------------

    [rtarr8] is indicted, or convicted of, or pleads guilty to, or 
pleads no contest to, any felony; or any misdemeanor that involves the 
purchase or sale of any security, the taking of a false oath, the 
making of a false report, bribery, perjury, burglary, larceny, theft, 
robbery, extortion, forgery, counterfeiting, fraudulent concealment, 
embezzlement, fraudulent conversion, or misappropriation of funds, or 
securities, or a conspiracy to commit any of these offenses, or 
substantially equivalent activity in a domestic, military or foreign 
court; \38\
---------------------------------------------------------------------------

    \38\ See proposed Funding Portal Rule 300(c)(1)(A)(iv) in 
Exhibit 5.
---------------------------------------------------------------------------

    [rtarr8] is a director, controlling stockholder, partner, officer 
or sole proprietor of, or an associated person with, a broker, dealer, 
investment company, investment advisor, funding portal, underwriter or 
insurance company that was suspended, expelled or had its registration 
denied or revoked by any regulatory body, jurisdiction or organization, 
whether foreign or domestic, or is associated in such a capacity with a 
bank, trust company or other financial institution that was convicted 
of or pleaded no contest to, any felony or misdemeanor in a foreign or 
domestic court; \39\
---------------------------------------------------------------------------

    \39\ See proposed Funding Portal Rule 300(c)(1)(A)(v) in Exhibit 
5.
---------------------------------------------------------------------------

    [rtarr8] is a defendant or respondent in any securities- or 
commodities-related civil litigation or arbitration, is a defendant or 
respondent in any financial-related insurance civil litigation or 
arbitration, or is the subject of any claim for damages by an investor, 
broker, dealer or funding portal member that relates to the provision 
of financial services or relates to a financial transaction, and such 
civil litigation, arbitration or claim for damages has been disposed of 
by judgment, award or settlement for an amount exceeding $15,000. 
However, when the funding portal member is the defendant or respondent 
or is the subject of any claim for damages by an investor, broker, 
dealer or funding portal member, then the reporting to FINRA shall be 
required only when such judgment, award or settlement is for an amount 
exceeding $25,000; \40\
---------------------------------------------------------------------------

    \40\ See proposed Funding Portal Rule 300(c)(1)(A)(vi) in 
Exhibit 5.
---------------------------------------------------------------------------

    [rtarr8] is, or is involved in the sale of any financial 
instrument, the provision of any investment advice or the financing of 
any such activities with any person who is, subject to a ``statutory 
disqualification'' as that term is defined in the Exchange Act, 
provided, however, that this requirement shall not apply to activities 
with a member or an associated person that has been approved (or is 
otherwise permitted pursuant to FINRA rules and the federal securities 
laws) to be a member or to be associated with a member. The report 
shall include the name of the person subject to the statutory 
disqualification and details concerning the disqualification; \41\ or
---------------------------------------------------------------------------

    \41\ See proposed Funding Portal Rule 300(c)(1)(A)(vii) in 
Exhibit 5.
---------------------------------------------------------------------------

    [cir] an associated person of the funding portal member is the 
subject of any disciplinary action taken by the funding portal member 
involving suspension, termination, the withholding of compensation or 
of any other remuneration in excess of $2,500, the imposition of fines 
in excess of $2,500 or is otherwise disciplined in any manner that 
would have a significant limitation on the individual's activities on a 
temporary or permanent basis.\42\
---------------------------------------------------------------------------

    \42\ See proposed Funding Portal Rule 300(c)(1)(B) in Exhibit 5.
---------------------------------------------------------------------------

     Paragraph (c)(2) of the rule provides that each funding 
portal member shall 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.
     Paragraph (c)(3) of the rule provides each person 
associated with a funding portal member must promptly report to the 
funding portal member the existence of any of the events set forth in 
paragraph (c)(1)(A) of the rule.
     Paragraph (c)(4) of the rule provides that nothing 
contained in the rule shall eliminate, reduce or otherwise abrogate 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. The rule provides that, in 
addition, a member need not 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 proposed Funding Portal Rule 
800(b)(2).\43\
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    \43\ As further discussed below, proposed Funding Portal Rule 
800(b) addresses the public disclosure of information on funding 
portals by FINRA and requires, among other things, that funding 
portal members provide and update information regarding statutory 
disqualifications.
---------------------------------------------------------------------------

     Paragraph (c)(5) of the rule provides that, for purposes 
of the rule, Supplementary Material .01 through .07, .09 and .10 of 
FINRA Rule 4530 (the ``Supplementary Material'') shall apply,\44\ 
provided, however, that, as the context requires:
---------------------------------------------------------------------------

    \44\ The Supplementary Materials provide additional guidance as 
to specified requirements under the rule. Supplementary Materials 
.01 and .02 address members' conclusions of violative conduct. 
Supplementary Material .03 addresses the meaning of the term 
``found'' as used in the specified provisions of the rule. 
Supplementary Material .04 addresses the meaning of the term 
``regulatory body'' for purposes of the rule. Supplementary Material 
.05 provides additional guidance as to reporting of individual and 
related events. Supplemental Material .06 addresses the calculation 
of monetary thresholds. Supplementary Material .07 addresses former 
associated persons. Supplementary Material .09 defines the meaning 
of the term ``financial related'' for purposes of the rule. 
Supplementary Material .10 provides guidance as to findings and 
actions by FINRA.
---------------------------------------------------------------------------

    [cir] the term ``member'' as used in the Supplementary Material 
shall mean ``funding portal member'' as defined pursuant to proposed 
Funding Portal Rule 100(b);
    [cir] the term ``associated person'' as used in the Supplementary 
Material shall mean ``associated person of a funding portal member'' or 
``person associated with a funding portal member'' as defined pursuant 
to proposed Funding Portal Rule 100(b);
    [cir] Supplementary Material .01 shall apply to paragraphs 
(c)(1)(B) and (c)(2) of proposed Funding Portal Rule 300;
    [cir] Supplementary Material .02 and .03 shall apply to paragraphs 
(c)(1)(A)(i) and (c)(2) of the rule;
    [cir] Supplementary Material .05 and .07 shall apply to paragraphs 
(c)(1) and (c)(2) of the rule;
    [cir] Supplementary Material .06 shall apply to paragraph 
(c)(1)(A)(vi) of the rule; and
    [cir] Supplementary Material .10 shall apply to paragraphs 
(c)(1)(A)(i) and (c)(1)(A)(iii) of the rule.

[[Page 66356]]

4. Proposed Funding Portal Rule 300(d) (Contact Information 
Requirements)
    Proposed Funding Portal Rule 300(d), based in large part on the 
contact information requirements set forth in FINRA Rule 4517(c), is 
designed to require funding portal members to report to FINRA specified 
contact information. Specifically, the rule provides:
     Each funding portal member must report to FINRA all 
contact information required by FINRA through such means as FINRA may 
specify.
     Each funding portal member must promptly update its 
required contact information (including its executive representative 
designation and contact information as required by Article IV, Section 
3 of the FINRA By-Laws), but in any event not later than 30 days 
following any change in such information. In addition, each member 
shall review and, if necessary, update its required contact 
information, through such means as FINRA may specify, within 17 
business days after the end of each calendar year.
     Each funding portal member must comply with any FINRA 
request for such information promptly, but in any event not later than 
15 days following the request, or such longer period that may be agreed 
to by FINRA staff.
5. Proposed Funding Portal Rule 300(e) (Statement of Gross Revenue)
    Proposed 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.\45\ The rule 
requires that the statement of gross revenue must be prepared in 
accordance with U.S. Generally Accepted Accounting Principles.
---------------------------------------------------------------------------

    \45\ The requirement to submit the Statement of Gross Revenue 
using Form FP-Statement of Revenue is an addition to the proposal 
vis-[agrave]-vis the proposed rules as published in the Notice. 
Proposed Form FP-Statement of Revenue is set forth in Exhibit 3d of 
this filing. 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 note 12 supra.
---------------------------------------------------------------------------

6. Proposed Funding Portal Rule 300(f) (Record of Associated Persons of 
the Funding Portal Member)
    Proposed Funding Portal Rule 300(f) is based in large part on SEA 
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.\46\ The rule 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. 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, which 
aligns with the retention period that the SEC has prescribed for 
records that funding portals would have to make and preserve pursuant 
to proposed Rule 404 under Regulation Crowdfunding.
---------------------------------------------------------------------------

    \46\ Proposed Funding Portal Rule 300(f) is an addition to the 
proposal vis-[agrave]-vis the proposed rules as published in the 
Notice. FINRA believes the requirement is a useful complement to 
proposed Rule 404 under the SEC's Regulation Crowdfunding, which 
sets forth specified records requirements for funding portals but 
does not include the requirement as to listing associated persons of 
the funding portal.
---------------------------------------------------------------------------

E. Proposed Funding Portal Rule 800 (Investigations and Sanctions)

1. Proposed Funding Portal Rule 800(a) (Application of FINRA Rule 8000 
Series (Investigations and Sanctions) to Funding Portals)
    Proposed Funding Portal Rule 800(a) is designed to provide that 
funding portal members will be subject to specified FINRA rules 
governing investigations and sanctions. 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),\47\ all funding portal members shall be subject to the 
FINRA Rule 8000 Series, unless the context requires otherwise, 
provided, however, that:
---------------------------------------------------------------------------

    \47\ FINRA does not propose to apply FINRA Rule 8110 as part of 
the Funding Portal Rules as the rule addresses availability of the 
complete FINRA Manual and FINRA is not proposing to apply the 
complete Manual to funding portal members. FINRA Rules 8211 and 8213 
address trading data and are not applicable to funding portals by 
virtue of the limited nature of their business. With respect to 
FINRA Rule 8312, as discussed below, FINRA is proposing Funding 
Portal Rule 800(b) as a streamlined version of the rule to apply to 
funding portal members.
---------------------------------------------------------------------------

     The term ``member'' as used in the FINRA Rule 8000 Series 
shall mean ``funding portal member'' as defined pursuant to Funding 
Portal Rule 100(b);
     the term ``associated person'' as used in the FINRA Rule 
8000 Series shall mean ``associated person of a funding portal member'' 
or ``person associated with a funding portal member'' as defined 
pursuant to Funding Portal Rule 100(b);
     the terms ``rules'' and ``FINRA rules'' as used in the 
FINRA Rule 8000 Series shall include the Funding Portal Rules;
     for purposes of FINRA Rule 8210(d): \48\
---------------------------------------------------------------------------

    \48\ FINRA Rule 8210(d) addresses notices mailed or otherwise 
transmitted under the rule.
---------------------------------------------------------------------------

    [cir] a notice under FINRA Rule 8210 shall be deemed received by 
the funding portal member to whom it is directed by mailing or 
otherwise transmitting the notice to the last known business address of 
the funding portal member as reflected in the SEC Form Funding Portal. 
With respect to a person who is currently associated with a funding 
portal member, the rule provides that a notice under FINRA Rule 8210 
shall be deemed received by the person by mailing or otherwise 
transmitting the notice to the last known business address of the 
funding portal member as reflected in the SEC Form Funding Portal. With 
respect to a person subject to FINRA's jurisdiction who was formerly 
associated with a funding portal member, the rule provides that a 
notice under FINRA Rule 8210 shall be deemed received by the person 
upon personal service, as set forth in FINRA Rule 9134(a)(1).\49\ The 
rule further provides that if the Adjudicator or FINRA staff 
responsible for mailing or otherwise transmitting the notice to the 
funding portal member or person currently associated with the funding 
portal member has actual knowledge that the funding portal member's 
address in the SEC Form Funding Portal is out of date or inaccurate, 
then a copy of the notice shall be mailed or otherwise transmitted to:
---------------------------------------------------------------------------

    \49\ FINRA Rule 9134 addresses methods of and procedures for 
service for purposes of the Rule 9000 Series.
---------------------------------------------------------------------------

    (i) the last known business address of the funding portal member as 
reflected in the SEC Form Funding Portal; and
    (ii) any other more current address of the funding portal member or 
the person currently associated with the funding portal member known to 
the Adjudicator or FINRA staff who is responsible for mailing or 
otherwise transmitting the notice; and

[[Page 66357]]

    [cir] if the Adjudicator or FINRA staff responsible for mailing or 
otherwise transmitting the notice to the funding portal member or 
person knows that the funding portal member or person is represented by 
counsel regarding the investigation, complaint, examination, or 
proceeding that is the subject of the notice, then the notice shall be 
served upon counsel by mailing or otherwise transmitting the notice to 
the counsel in lieu of the funding portal member or person, and any 
notice served upon counsel shall be deemed received by the funding 
portal member or person.
2. Proposed Funding Portal Rule 800(b) (Public Disclosure of 
Information on Funding Portals)
    Proposed Funding Portal Rule 800(b) is a streamlined version of 
FINRA Rule 8312 (FINRA BrokerCheck Disclosure) and addresses specified 
information that FINRA shall make available to the public.\50\ 
Specifically, paragraph (b)(1) of the rule provides that FINRA may 
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. 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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    \50\ FINRA has further streamlined the proposed rule vis-
[agrave]-vis the version published in the Notice in the interest of 
clarity.
---------------------------------------------------------------------------

    Paragraph (b)(2) of the rule provides that FINRA shall 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. 
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.
    Paragraph (b)(3) of the rule 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. The rule provides that FINRA reserves the right to exclude, on a 
case-by-case 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.

F. Code of Procedure (Proposed Funding Portal Rule 900)

1. Proposed Funding Portal Rule 900(a) (Application of FINRA Rule 9000 
Series (Code of Procedure) to Funding Portals)
    Proposed 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. Specifically, except for the FINRA 
Rule 9520 Series, FINRA Rule 9557, and the FINRA Rule 9700 Series,\51\ 
the rule provides that all funding portal members shall be subject to 
the FINRA Rule 9000 Series, unless the context requires otherwise, 
provided, however, that:
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    \51\ 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, 
Rule 9557 would not be applicable. Similarly, 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. Accordingly FINRA does not propose 
to apply the Rule 9700 Series to funding portals.
---------------------------------------------------------------------------

     The term ``member'' as used in the FINRA Rule 9000 Series 
shall mean ``funding portal member'' as defined pursuant to Funding 
Portal Rule 100(b);
     the term ``associated person'' as used in the FINRA Rule 
9000 Series shall mean ``associated person of a funding portal member'' 
or ``person associated with a funding portal member'' as defined 
pursuant to Funding Portal Rule 100(b);
     the terms ``rules'' and ``FINRA rules'' as used in the 
FINRA Rule 9000 Series shall include the Funding Portal Rules;
     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: \52\
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    \52\ 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 SEA 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.
---------------------------------------------------------------------------

    [cir] failure to timely submit amendments to SEC Form Funding 
Portal;
    [cir] Funding Portal Rule 200(c) (Communications with the Public);
    [cir] Funding Portal Rule 300(a)--failure to maintain adequate 
written supervisory procedures where the underlying conduct is subject 
to Rule 9217;
    [cir] Funding Portal Rule 300(c)--failure to timely file reports;
    [cir] failure to provide or update contact information as required 
by Funding Portal Rule 300(d);
    [cir] Rule 303(f) of SEC Regulation Crowdfunding--confirmation of 
transactions; and
    [cir] 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;
     for purposes of FINRA Rules 9134(b)(1) and 9134(b)(2), the 
residential or business address, as applicable, as reflected in SEC 
Form Funding Portal, in lieu of the Central Registration Depository, 
shall be acceptable;
     for purposes of FINRA Rule 9134(b)(2), service on a 
contact employee, or United States agent for service of process, as set 
forth in SEC Form Funding Portal, in lieu of Form BD, shall be 
acceptable;
     for purposes of FINRA Rule 9551(a),\53\ 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);
---------------------------------------------------------------------------

    \53\ FINRA Rule 9551 addresses expedited proceedings by FINRA 
for failure to comply with public communication standards.
---------------------------------------------------------------------------

     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;

[[Page 66358]]

     for purposes of proceedings pursuant to FINRA Rule 
9810(a),\54\ proceedings may be initiated with respect to alleged 
violations of Section 10(b) of the Exchange Act (15 U.S.C. 78j(b)) and 
SEA 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).
---------------------------------------------------------------------------

    \54\ FINRA Rule 9810 addresses initiation of cease and desist 
proceedings by FINRA for specified violations.
---------------------------------------------------------------------------

2. Proposed Funding Portal Rule 900(b) (Eligibility Proceedings)
    Proposed Funding Portal Rule 900(b) is a streamlined version of the 
current FINRA Rule 9520 Series. 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. Such actions hereinafter 
are referred to as ``eligibility proceedings.'' The rule requirements 
are set forth below.

 Definitions (Proposed Funding Portal Rule 900(b)(2))

    Paragraph (b)(2) of the rule sets forth the following definitions:
    [cir] The term ``Application'' means FINRA's Form MC-400 for 
individuals or Form MC-400A for funding portal members, filed with the 
Department of Registration and Disclosure (``RAD'').
    [cir] The term ``disqualified funding portal member'' means a 
funding portal member that is or becomes subject to a disqualification 
or is otherwise ineligible for membership under Article III, Section 3 
of the FINRA By-Laws.
    [cir] The term ``disqualified person'' means an associated person 
of a funding portal member or person seeking to become an associated 
person of a funding portal member who is or becomes subject to a 
disqualification or is otherwise ineligible for association under 
Article III, Section 3 of the FINRA By-Laws.
    [cir] The term ``sponsoring funding portal member'' means the 
funding portal member or applicant for membership pursuant to Funding 
Portal Rule 110(a) that is sponsoring the association or continued 
association of a disqualified person to be admitted, readmitted, or 
permitted to continue in association.

 Initiation of Eligibility Proceeding; Department of Member 
Regulation Consideration (Proposed Funding Portal Rule 900(b)(3))

    Proposed Funding Portal Rule 900(b)(3)(A) addresses initiation of 
eligibility proceedings.

[cir] Issuance of Notice of Disqualification or Ineligibility

    Proposed Funding Portal Rule 900(b)(3)(A)(i) provides that if FINRA 
staff has reason to believe that a disqualification exists or that a 
funding portal member or person associated with a funding portal member 
otherwise fails to meet the eligibility requirements of FINRA, FINRA 
staff shall issue a written notice to the funding portal member or 
applicant for funding portal membership under proposed Funding Portal 
Rule 110(a). The rule provides that the notice shall specify the 
grounds for such disqualification or ineligibility. FINRA staff shall 
not issue such written notice to funding portal members or applicants 
for funding portal membership when no Application is required pursuant 
to proposed Funding Portal Rule 900(b)(7), as discussed below.

[cir] Notice Regarding a Funding Portal Member

    Proposed Funding Portal Rule 900(b)(3)(A)(ii) provides that a 
notice issued to a disqualified funding portal member shall state that 
the disqualified funding portal member may apply for relief by filing 
an Application or, in the case of a matter set forth in proposed 
Funding Portal Rule 900(b)(8)(A), as discussed below, a written request 
for relief, within 10 business days after service of the notice. The 
rule provides that if the funding portal member fails to file the 
Application or, where appropriate, the written request for relief, 
within the 10-day period, the membership of the funding portal member 
shall be canceled, unless the Department of Member Regulation grants an 
extension for good cause shown.

[cir] Notice Regarding an Associated Person

    Proposed Funding Portal Rule 900(b)(3)(A)(iii) provides that a 
notice issued regarding a disqualified person to a funding portal 
member or applicant for funding portal membership under Funding Portal 
Rule 110(a) shall state that such funding portal member or applicant 
for funding portal membership may file an Application on behalf of 
itself and such person or, in the case of a matter set forth in Funding 
Portal Rule 900(b)(8)(A) a written request for relief, within 10 
business days after service of the notice. The rule provides that if 
the funding portal member fails to file the Application or, where 
appropriate, the written request for relief, within the 10-day period, 
the funding portal member may not associate or continue to associate 
with the disqualified person, unless the Department of Member 
Regulation grants an extension for good cause shown.

[cir] Service

    Paragraph (b)(3)(A)(iv) of the proposed rule provides that a notice 
issued under paragraph (b)(3)(A) of the rule shall be served by 
facsimile or electronic mail, or pursuant to FINRA Rules 9131 \55\ and 
9134, as adopted pursuant to proposed Funding Portal Rule 900(a).

    \55\ FINRA Rule 9131 addresses service of a complaint by FINRA 
for purposes of the Rule 9000 Series.
---------------------------------------------------------------------------

 Obligation of Funding Portal Member To Initiate Eligibility 
Proceeding (Proposed Funding Portal Rule 900(b)(4))

    Proposed Funding Portal Rule 900(b)(4)(A) addresses the obligation 
of a funding portal member to initiate eligibility proceedings. 
Specifically, the rule provides that a funding portal member must file 
an Application or, in the case of a matter set forth in proposed 
Funding Portal Rule 900(b)(8)(A) a written request for relief, with 
RAD, if the funding portal member determines prior to receiving a 
notice under paragraph (b)(3)(A) of this Rule that:
    [cir] It has become a disqualified funding portal member;
    [cir] A person associated with such funding portal member or whose 
association is proposed by an applicant for funding portal membership 
under Funding Portal Rule 110(a) has become a disqualified person; or
    [cir] The funding portal member or applicant for funding portal 
membership under Funding Portal Rule 110(a) wishes to sponsor the 
association of a person who is a disqualified person.

 Withdrawal of Application or Written Request for Relief 
(Proposed Funding Portal Rule 900(b)(5))

    Proposed Funding Portal Rule 900(b)(5)(A) provides that a funding 
portal member may withdraw its Application or, as set forth in proposed 
Funding Portal Rule 900(b)(8)(A) its written request for relief, at any 
time prior to an appeal by filing a written notice with the Department 
of Member Regulation and RAD pursuant to FINRA Rules 9135 (Filing of 
Papers with Adjudicator: Procedure), 9136 (Filing of Papers: Form), and 
9137 (Filing of

[[Page 66359]]

Papers: Signature Requirement and Effect), as adopted pursuant to 
Funding Portal Rule 900(a). The rule provides that a funding portal 
member may withdraw its Application after the start of an appeal but 
prior to the issuance of a decision by the National Adjudicatory 
Council by filing a written notice with the Department of Member 
Regulation and the Office of General Counsel pursuant to FINRA Rules 
9135, 9136, and 9137, as adopted pursuant to Funding Portal Rule 
900(a).

 Ex Parte Communications (Proposed Funding Portal Rule 
900(b)(6))

    Proposed Funding Portal Rule 900(b)(6) provides that the 
prohibitions against ex parte communications set forth in FINRA Rule 
9143, as adopted pursuant to Funding Portal Rule 900(a), shall become 
effective under Funding Portal Rule 900(b) when FINRA staff has 
initiated the eligibility proceeding and FINRA staff has knowledge that 
a funding portal member intends to file an Application or written 
request for relief pursuant to Funding Portal Rule 900(b).

 Relief From Eligibility Proceedings (Proposed Funding Portal 
Rule 900(b)(7))

    Proposed Funding Portal Rule 900(b)(7) provides that a funding 
portal member is not required to file an Application if: \56\
---------------------------------------------------------------------------

    \56\ The disqualifications set forth under paragraph (b)(7) of 
the rule reflect the three additional categories of disqualification 
that FINRA addressed in 2009, specifically, willful violations of 
the federal securities or commodities laws, grounds for statutory 
disqualification that were enacted by the Sarbanes-Oxley Act, and 
associations with specified other persons subject to statutory 
disqualification. See Regulatory Notice 09-19 (Eligibility 
Proceedings) (April 2009). See also Securities Exchange Act Release 
No. 59586 (March 17, 2009), 74 FR 12166 (March 23, 2009) (Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1; File 
No. SR-FINRA-2008-045); Securities Exchange Act Release No. 59722 
(April 7, 2009), 74 FR 17267 (April 14, 2009) (Notice of Filing and 
Order Granting Accelerated Approval of Proposed Rule Change; File 
No. SR-FINRA-2009-022).
---------------------------------------------------------------------------

    [cir] The disqualification arises solely from findings in Exchange 
Act Section 15(b)(4)(D) or (E) by the SEC, the Commodity Futures 
Trading Commission or a self-regulatory organization, and the sanction 
is no longer in effect.\57\
---------------------------------------------------------------------------

    \57\ See proposed Funding Portal Rule 900(b)(7)(A) in Exhibit 5.
---------------------------------------------------------------------------

    [cir] The disqualification arises solely from a final order 
specified in Exchange Act Section 15(b)(4)(H)(i), and the bar is no 
longer in effect, provided that there is no final order specified in 
Exchange Act Section 15(b)(4)(H)(ii), in which case paragraph (b)(7)(C) 
of the rule, as discussed below, applies.\58\
---------------------------------------------------------------------------

    \58\ See proposed Funding Portal Rule 900(b)(7)(B) in Exhibit 5.
---------------------------------------------------------------------------

    [cir] The disqualification arises solely from a final order 
specified in Exchange Act Section 15(b)(4)(H)(ii), and:
    [rtarr8] the sanctions do not involve licensing or registration 
revocation or suspension (or analogous sanctions), and the sanctions 
are no longer in effect; or
    [rtarr8] the sanctions do involve licensing or registration 
revocation or suspension (or analogous sanctions), the sanctions are no 
longer in effect, and the order was entered ten or more years ago.\59\
---------------------------------------------------------------------------

    \59\ See proposed Funding Portal Rule 900(b)(7)(C) in Exhibit 5.
---------------------------------------------------------------------------

    [cir] The disqualification arises solely under Exchange Act Section 
3(a)(39)(E), and the disqualified funding portal member or person is 
subject to the disqualification solely because the member or person has 
associated with it any person who is known, or in the exercise of 
reasonable care should be known, to the disqualified member or person 
to be a person described by subparagraph (A), (B), (C), or (D) of 
Exchange Act Section 3(a)(39), unless the associated person controls 
such disqualified member or person, or is a general partner or officer 
(or person occupying a similar status or performing similar functions) 
of such disqualified member.\60\
---------------------------------------------------------------------------

    \60\ See proposed Funding Portal Rule 900(b)(7)(D) in Exhibit 5.

 Matters That May Be Approved After the Filing of an 
Application or Written Request for Relief (Proposed Funding Portal Rule 
---------------------------------------------------------------------------
900(b)(8))

    Paragraph (b)(8)(A) of the proposed rule provides that the 
Department of Member Regulation, as it deems consistent with the public 
interest and the protection of investors, is authorized to approve a 
written request for relief from the eligibility requirements by a 
disqualified funding portal member or a sponsoring funding portal 
member without the filing of an Application by such disqualified 
funding portal member or sponsoring funding portal member if a 
disqualified funding portal member or disqualified person is subject to 
one or more of the following conditions, but is not otherwise subject 
to disqualification:
    [cir] An injunction as described in Section 15(b)(4)(C) of the 
Exchange Act that was entered ten or more years prior to the proposed 
admission or continuance; or
    [cir] a request to change the supervisor of a disqualified person.
    Paragraph (b)(8)(B) of the rule provides that the Department of 
Member Regulation, as it deems consistent with the public interest and 
the protection of investors, may approve, upon the filing of an 
Application by a disqualified funding portal member or a sponsoring 
funding portal member and written consent to a heightened supervisory 
plan, all Applications seeking relief from disqualifications arising 
under Section 3(a)(39) of the Exchange Act.
    Paragraph (b)(8)(B)(i) of the rule provides that, by the submission 
of a written consent to a heightened supervisory plan, the disqualified 
funding portal member, sponsoring funding portal member and 
disqualified person waive:
    [cir] The right of appeal to the National Adjudicatory Council, the 
SEC, and the courts, or otherwise challenge the validity of the 
supervisory plan, if the supervisory plan is accepted;
    [cir] any right of the disqualified funding portal member, 
sponsoring funding portal member, and disqualified person to claim bias 
or prejudgment by the Department of Member Regulation, the General 
Counsel, the National Adjudicatory Council, or any member of the 
National Adjudicatory Council, in connection with such person's or 
body's participation in discussions regarding the terms and conditions 
of the Department of Member Regulation's approval or the supervisory 
plan, or other consideration of the approval or supervisory plan, 
including acceptance or rejection of such approval or supervisory plan; 
and
    [cir] any right of the disqualified funding portal member, 
sponsoring funding portal member, and disqualified person to claim that 
a person violated the ex parte prohibitions of FINRA Rule 9143 or the 
separation of functions prohibitions of FINRA Rule 9144, as adopted 
pursuant to Funding Portal Rule 900(a), in connection with such 
person's or body's participation in discussions regarding the terms and 
conditions of the approval or supervisory plan, or other consideration 
of the approval or supervisory plan, including acceptance or rejection 
of such approval or supervisory plan.
    Paragraph (b)(8)(B)(ii) of the rule provides that if the heightened 
supervisory plan is rejected, the disqualified funding portal member, 
sponsoring funding portal member, or disqualified person shall be bound 
by the waivers made under paragraph (b)(8)(B)(i) of the rule for 
conduct by persons or bodies occurring during the period beginning on 
the date the heightened supervisory plan was submitted and ending upon 
the rejection of the heightened supervisory plan and shall have the 
right to appeal such decision pursuant to proposed Funding Portal Rule 
900(b)(11), as discussed below.


[[Page 66360]]


 Department of Member Regulation Consideration of Applications 
for New Funding Portal Members (Proposed Funding Portal Rule 900(b)(9))

    Proposed Funding Portal Rule 900(b)(9) provides that in all 
instances where FINRA receives a Form MC-400 or Form MC-400A under this 
rule, and such Application is submitted on behalf of an applicant for 
membership as a funding portal member under Funding Portal Rule 110(a), 
the Department of Member Regulation shall defer a decision on such Form 
MC-400 or Form MC-400A until such time as FINRA has issued a 
determination on the application submitted pursuant to Funding Portal 
Rule 110(a).

 Rights of Disqualified Funding Portal Member, Sponsoring 
Funding Portal Member, Disqualified Person, and Department of Member 
Regulation (Proposed Funding Portal Rule 900(b)(10))

    Proposed Funding Portal Rule 900(b)(10)(A) provides that in the 
event the Department of Member Regulation does not approve a written 
request for relief from the eligibility requirements pursuant to 
Funding Portal Rule 900(b)(8)(A), the disqualified funding portal 
member or sponsoring funding portal member may file an Application 
under Funding Portal Rule 900(b)(8)(B). The rule provides that the 
Department of Member Regulation may require a disqualified funding 
portal member or sponsoring funding portal member to file an 
Application with RAD, notwithstanding the provisions of proposed 
Funding Portal Rule 900(b)(8)(A).
    FINRA has revised paragraph (b)(10)(B) of the rule vis-[agrave]-vis 
the proposal as published in the Notice so as to better align the rule 
with existing provisions for broker-dealer members. Based in large part 
on FINRA Rule 9522(e)(3), proposed Funding Portal Rule 900(b)(10)(B), 
as revised, provides that, in the event the Department of Member 
Regulation does not approve an Application pursuant to Funding Portal 
Rule 900(b)(8)(B), the Department of Member Regulation shall inform the 
disqualified funding portal member or sponsoring funding portal member 
of its decision in writing. Further, as revised, the rule provides that 
the decision shall explain in detail the reason for denial. The rule 
states that the disqualified funding portal member or sponsoring 
funding portal member shall have the right to appeal such decision 
pursuant to proposed Funding Portal Rule 900(b)(11), as discussed 
below. If not timely appealed pursuant to paragraph (b)(11) of the 
rule, the decision issued by the Department of Member Regulation shall 
constitute final action of FINRA and shall become effective 
immediately.

 Appeal of Department of Member Regulation's Decision To Deny 
an Application or a Written Request for Relief (Proposed Funding Portal 
Rule 900(b)(11))

    Paragraph (b)(11) of the proposed rule addresses appeal of the 
Department of Member Regulation's decision to deny an application or a 
written request for relief. Based in large part on FINRA Rules 9524 and 
9525, FINRA has revised the proposed rule vis-[agrave]-vis the proposal 
as published in the Notice so as to better align the rule with existing 
provisions for broker-dealer members. As revised, the proposed rule 
sets forth among other things procedures for a hearing when one is 
requested, including notice of the hearing, the rights of parties at 
the hearing, transmission of documents, extensions of time, 
postponements and adjournments, and requirements as to the hearing 
record. In addition, FINRA has made other conforming revisions. The 
specific requirements of the proposed rule as revised are set forth 
below.

    [cir] Notice (Proposed Funding Portal Rule 900(b)(11)(A))

    Paragraph (b)(11)(A) of the proposed rule provides that a funding 
portal member or sponsoring funding portal member may file a written 
notice of appeal within 14 days after service of a decision issued 
under Funding Portal Rule 900(b). The rule provides that the notice of 
appeal shall be filed with the Office of General Counsel, with a copy 
to the Department of Member Regulation. The notice of appeal shall 
state with specificity why the appellant believes the Department of 
Member Regulation's decision is not consistent with the public interest 
or should otherwise be set aside, and shall state whether a hearing is 
requested. The notice of appeal shall be signed by the appellant.

[cir] Stay of Decision (Proposed Funding Portal Rule 900(b)(11)(B))

    Paragraph (b)(11)(B) of the proposed rule provides that an appeal 
of the Department of Member Regulation's decision to deny an 
Application or a written request for relief shall operate as a stay of 
that decision while the appeal is pending.

[cir] Subcommittee (Proposed Funding Portal Rule 900(b)(11)(C))

    Paragraph (b)(11)(C) of the proposed rule provides that after an 
appellant files a timely appeal, the National Adjudicatory Council or 
the Statutory Disqualification Committee shall appoint two or more 
members, who shall be current or former members of the National 
Adjudicatory Council, Statutory Disqualification Committee, or former 
Directors or Governors, to form a subcommittee. The rule provides that 
the subcommittee shall conduct a hearing when one is requested, review 
the appeal, and recommend a decision to the Statutory Disqualification 
Committee.

[cir] Notice of Hearing and Rights of Parties at Hearing (Proposed 
Funding Portal Rule 900(b)(11)(D))

    Paragraph (b)(11)(D) of the proposed rule provides that, if a 
hearing is requested, the hearing shall be held no later than 90 days 
after the filing of a notice of appeal unless the subcommittee 
determines that there is good cause shown for extending the time 
period. The rule provides that the appellant and the Department of 
Member Regulation shall be notified via mail, email, facsimile, or 
overnight courier of the location, time, and date of the hearing not 
less than 14 business days before the hearing, unless the parties agree 
to shorten the time period or where good cause has been shown for an 
expedited proceeding under paragraph (b)(11)(F) of the rule as 
discussed further below. The appellant and the Department of Member 
Regulation shall be entitled to be heard in person at a hearing, to be 
represented by an attorney, and to submit any relevant evidence.

[cir] Withdrawal or Abandonment (Proposed Funding Portal Rule 
900(b)(11)(E))

    Paragraph (b)(11)(E) of the proposed rule provides that, if an 
appellant abandons or withdraws the Application, the Department of 
Member Regulation's decision shall constitute final action by FINRA.

[cir] Expedited Review (Proposed Funding Portal Rule 900(b)(11)(F))

    Paragraph 900(b)(11)(F) of the proposed rule provides that where 
the failure to promptly review a decision to deny an Application would 
unduly or unfairly harm the funding portal member or sponsoring funding 
portal member, the subcommittee shall provide an expedited hearing upon 
a showing of good cause. The subcommittee would have the authority to 
set deadlines to prepare for the expedited hearing that would be 
shorter than the dates for a non-expedited review under Funding Portal 
Rule 900(b)(11)(G).


[[Page 66361]]


[cir] Transmission of Documents (Proposed Funding Portal Rule 
900(b)(11)(G))

    Paragraph (b)(11)(G)(i) of the proposed rule provides that, within 
14 days after the filing of a notice of appeal, the Department of 
Member Regulation shall transmit to the Office of General Counsel, and 
serve on the appellant to the extent that any such documents have not 
been previously provided, copies of all documents that were considered 
in connection with the Department of Member Regulation's decision to 
deny the Application and an index to the documents.
    Paragraph (b)(11)(G)(ii) of the proposed rule provides that, not 
less than 10 business days before the hearing, the Department of Member 
Regulation and the appellant shall serve proposed exhibit and witness 
lists on each other and the Office of General Counsel. The rule 
provides that the exhibit and witness lists shall be served by email, 
facsimile or overnight courier.
    Paragraph (b)(11)(G)(iii) of the proposed rule provides that, at 
any time prior to the issuance of its recommendation, the subcommittee 
may order the parties to supplement the record with any additional 
information that the subcommittee deems necessary. The rule provides 
that the subcommittee may also order the appellant and the Department 
of Member Regulation to file legal briefs.

[cir] Extensions of Time, Postponements, and Adjournments (Proposed 
Funding Portal Rule 900(b)(11)(H))

    Paragraph (b)(11)(H) of the proposed rule provides that the 
subcommittee may shorten any time limits prescribed by these rules for 
the filing of any papers after obtaining consent of all the parties, 
and may postpone or adjourn any hearing. The rule provides that the 
subcommittee may extend any time limits prescribed by these rules for 
the filing of any papers.

[cir] Recordation of Hearing (Proposed Funding Portal Rule 
900(b)(11)(I))

    Paragraph (b)(11)(I) of the proposed rule provides that the hearing 
shall be recorded and a transcript prepared by a court reporter.

[cir] Record (Proposed Funding Portal Rule 900(b)(11)(J))

    Paragraph (b)(11)(J) of the proposed rule provides that the record 
shall consist of:
    [rtarr8] the decision issued under Funding Portal Rule 900(b); \61\
---------------------------------------------------------------------------

    \61\ See proposed Funding Portal Rule 900(b)(11)(J)(i) in 
Exhibit 5.
---------------------------------------------------------------------------

    [rtarr8] all documents relied upon in issuing the decision issued 
under Funding Portal Rule 900(b); \62\
---------------------------------------------------------------------------

    \62\ See proposed Funding Portal Rule 900(b)(11)(J)(ii) in 
Exhibit 5.
---------------------------------------------------------------------------

    [rtarr8] the notice of appeal; \63\
---------------------------------------------------------------------------

    \63\ See proposed Funding Portal Rule 900(b)(11)(J)(iii) in 
Exhibit 5.
---------------------------------------------------------------------------

    [rtarr8] any other submissions by the appellant and the Department 
of Member Regulation; \64\
---------------------------------------------------------------------------

    \64\ See proposed Funding Portal Rule 900(b)(11)(J)(iv) in 
Exhibit 5.
---------------------------------------------------------------------------

    [rtarr8] any evidence considered at the hearing; \65\ and
---------------------------------------------------------------------------

    \65\ See proposed Funding Portal Rule 900(b)(11)(J)(v) in 
Exhibit 5.
---------------------------------------------------------------------------

    [rtarr8] the transcript of the hearing and any corrections 
thereto.\66\
---------------------------------------------------------------------------

    \66\ See proposed Funding Portal Rule 900(b)(11)(J)(vi) in 
Exhibit 5.

    [cir] Evidence Not Admitted (Proposed Funding Portal Rule 
---------------------------------------------------------------------------
900(b)(11)(K))

    Paragraph (b)(11)(K) of the proposed rule provides that evidence 
that is proffered but not admitted during the hearing shall not be part 
of the record, but shall be retained by the Office of General Counsel, 
as custodian of the record, until the date when FINRA's decision 
becomes final or, if applicable, upon the conclusion of any review by 
the SEC or the federal courts.

[cir] Recommendation (Proposed Funding Portal Rule 900(b)(11)(L))

    Paragraph (b)(11)(L) of the proposed rule provides that, on the 
basis of the record, the subcommittee shall present a recommended 
decision in writing on the request for relief to the Statutory 
Disqualification Committee. After considering the record and 
recommendation of the subcommittee, the Statutory Disqualification 
Committee shall present its recommended decision in writing to the 
National Adjudicatory Council.

[cir] Decision (Proposed Funding Portal Rule 900(b)(11)(M))

    Paragraph (b)(11)(M) of the proposed rule provides that, after 
considering all the matters presented in the request for relief, the 
Statutory Disqualification Committee's recommendation, the public 
interest and the protection of investors, the National Adjudicatory 
Council may affirm, modify, or reverse in writing the Department of 
Member Regulation's decision. The rule provides that the National 
Adjudicatory Council shall provide its proposed decision to the FINRA 
Board. If the FINRA Board does not call the decision for review, the 
decision shall be served pursuant to Funding Portal Rule 
900(b)(3)(A)(iv) and shall constitute final action of FINRA. A decision 
to affirm the Department of Member Regulation's decision shall be 
effective immediately. A decision to approve the Application shall be 
effective after the SEC issues an order or acknowledgement letter, as 
the case may be.

 Discretionary Review by the FINRA Board (Proposed Funding 
Portal Rule 900(b)(12))

[cir] Call for Review by the FINRA Board (Proposed Funding Portal Rule 
900(b)(12)(A))

    Paragraph (b)(12)(A) of the proposed rule provides that a Governor 
may call a proposed National Adjudicatory Council decision regarding an 
eligibility proceeding for review by the FINRA Board if the call for 
review is made within the period prescribed in paragraph (b)(12)(B) of 
the rule, as discussed below.

[cir] 15 Day Period; Waiver (Proposed Funding Portal Rule 
900(b)(12)(B))

    Paragraph (b)(12)(B) of the proposed rule provides that a Governor 
shall make his or her call for review not later than the next meeting 
of the FINRA Board that is at least 15 days after the date on which the 
FINRA Board receives the proposed written decision of the National 
Adjudicatory Council. The rule provides that by a unanimous vote of the 
FINRA Board, the FINRA Board may shorten the period to less than 15 
days. By an affirmative vote of the majority of the FINRA Board then in 
office, the FINRA Board may, during the 15 day period, vote to extend 
the period to more than 15 days.

[cir] Review at Next Meeting (Proposed Funding Portal Rule 
900(b)(12)(C))

    Paragraph (b)(12)(C) of the proposed rule provides that if a 
Governor calls an eligibility proceeding for review within the period 
prescribed in paragraph (b)(12)(B) of the rule, the FINRA Board shall 
review the eligibility proceeding not later than the next meeting of 
the FINRA Board. The FINRA Board may order the filing of briefs in 
connection with its review proceedings pursuant to this Rule.

[cir] Decision of FINRA Board, Including Remand (Proposed Funding 
Portal Rule 900(b)(12)(D))

    Paragraph (b)(12)(D) of the rule provides that, after review, the 
FINRA Board may affirm, modify, or reverse the proposed written 
decision of the National Adjudicatory Council. Alternatively, the FINRA 
Board may remand the eligibility proceeding with instructions.

[cir] Issuance of Decision (Proposed Funding Portal Rule 900(b)(12)(E))

    Paragraph (b)(12)(E) of the proposed rule provides that the FINRA 
Board

[[Page 66362]]

shall issue and serve its written decision on the disqualified funding 
portal member, sponsoring funding portal member, or disqualified 
person, and the Department of Member Regulation pursuant to FINRA Rules 
9132 and 9134, as adopted pursuant to proposed Funding Portal Rule 
900(a). The rule provides that the decision shall constitute the final 
action of FINRA, unless the FINRA Board remands the proceeding. A 
decision to deny re-entry or continued association shall be effective 
immediately. The rule provides that a decision to approve shall be 
effective after the SEC issues an acknowledgment letter or, in cases 
involving SEC-ordered sanctions, an order.

 Application to SEC for Review (Proposed Funding Portal Rule 
900(b)(13))

    Proposed Funding Portal Rule 900(b)(13) provides that the right to 
have any action taken pursuant to this Rule Series reviewed by the SEC 
is governed by Section 19 of the Exchange Act. The rule provides that 
filing of an application for review shall not stay the effectiveness of 
final action by FINRA, unless the SEC otherwise orders.
G. Arbitration and Mediation (Proposed Funding Portal Rule 1200)
    Proposed Funding Portal Rule 1200(a) is designed to provide 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. The rule provides that:
     the term ``member'' as used in the FINRA Rule 12000 
Series, FINRA Rule 13000 Series and FINRA Rule 14000 Series shall mean 
``funding portal member'' as defined pursuant to Funding Portal Rule 
100(b);
     the term ``associated person'' as used in the FINRA Rule 
12000 Series, FINRA Rule 13000 Series and FINRA Rule 14000 Series shall 
mean ``associated person of a funding portal member'' or ``person 
associated with a funding portal member'' as defined pursuant to 
Funding Portal Rule 100(b);
     the terms ``rules'' and ``FINRA rules'' as used in the 
FINRA Rule 12000, FINRA Rule 13000 Series and FINRA Rule 14000 Series 
shall include the Funding Portal Rules; and
     the term ``customer'' as used in the FINRA Rule 12000, 
FINRA Rule 13000 Series and FINRA Rule 14000 Series shall include 
investors as such term is used throughout the Funding Portal Rules.
    Paragraph (b) of the rule addresses predispute arbitration 
agreements for investor accounts. The rule is a streamlined version of 
current FINRA Rule 2268 (Requirements When Using Predispute Arbitration 
Agreements for Customer Agreements). Paragraph (b)(1) of the rule 
provides that any predispute arbitration clause must be highlighted and 
must be immediately preceded by the following language in outline form:
    ``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.''
    Paragraph (b)(2)(A) of the rule provides that, in any agreement 
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;
     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.''

[[Page 66363]]

H. Notification to FINRA in Connection With the JOBS Act (Proposed 
Funding Portal Rule 4518)

    As discussed earlier, under Section 302 of the JOBS Act, an 
intermediary that engages in transactions involving the offer or sale 
of securities pursuant to the crowdfunding exemption is required to 
register with the SEC as a funding portal or broker and to register 
with an applicable self-regulatory organization.\67\ As such, the 
statute contemplates activity by registered brokers pursuant to Title 
III of the JOBS Act, subject to specified conditions. In anticipation 
that registered broker members of FINRA may intend to act as 
intermediaries for transactions in connection with the crowdfunding 
exemption, FINRA is proposing to adopt, as part of the FINRA rulebook, 
new FINRA Rule 4518. The rule would apply to registered broker members. 
The rule provides that a FINRA member shall notify FINRA, in a manner 
prescribed by FINRA:
---------------------------------------------------------------------------

    \67\ See Sections 4A(a)(1) and (2) of the Securities Act (15 
U.S.C. 77d-1(a)(1) and (2)).
---------------------------------------------------------------------------

     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.
    Proposed FINRA Rule 4518 is an addition to the proposal vis-
[agrave]-vis the proposed rule change as published in the Notice. FINRA 
believes the requirement is a useful complement to the Funding Portal 
Rules, given that it would enable FINRA to keep accurate track as to 
which of its registered broker members, if any, are engaging in 
activity in connection with Title III of the JOBS Act and thereby 
assist FINRA in carrying out its regulatory responsibilities.
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 90 days following Commission 
approval. The effective date will be no later than 365 days following 
Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\68\ which requires, among 
other things, that FINRA rules must 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. The Act, as amended by the JOBS Act, defines the 
permissible business activities of funding portals and requires that 
funding portals must become members of a national securities 
association. FINRA is the only registered national securities 
association. The Act requires that FINRA examine for and enforce 
against registered funding portals rules written specifically for 
registered funding portals.
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    FINRA believes that the proposal is consistent with the Act because 
FINRA has written the proposed rules specifically for funding portals, 
seeking to streamline the rules or otherwise appropriately modify them 
to reflect the limited nature of funding portal business, as set forth 
in the Act.
    The proposed rules address general standards applicable to funding 
portals (Funding Portal Rule 100), the member application process for 
funding portals (Funding Portal Rule 110(a)), and business conduct, 
including standards of commercial honor and principles of trade 
(Funding Portal Rule 200(a)), prohibitions against the use of 
manipulative, deceptive or other fraudulent devices (Funding Portal 
Rule 200(b)) and communications with the public (Funding Portal Rule 
200(c)). The proposed rules further address supervisory systems 
(Funding Portal Rule 300(a)), designation of an executive 
representative (Funding Portal Rule 300(b)), reporting requirements 
(Funding Portal Rule 300(c)), contact information requirements (Funding 
Portal Rule (300(d)), submission of revenue statements to FINRA 
(Funding Portal Rule 300(e) and requirements as to making and keeping 
current records listing associated persons of the funding portal 
(Funding Portal Rule 300(f)). In addition, the rules address the 
application of FINRA's investigations and sanctions procedures to 
funding portals (Funding Portal Rule 800(a)), public disclosure by 
FINRA of information on funding portals (Funding Portal Rule 800(b)), 
the application of FINRA's Code of Procedure to funding portals 
(Funding Portal Rule 900(a)), eligibility proceedings in connection 
with statutory disqualifications under the Act (Funding Portal Rule 
900(b)), the application of FINRA's Arbitration and Mediation 
Procedures to funding portals (Funding Portal Rule 1200(a) and rules 
governing predispute arbitration agreements for investor accounts 
(Funding Portal Rule 1200(b)).
    Consistent with the Act, the proposed rules prohibit fraudulent and 
manipulative acts and practices and require that funding portal members 
observe just and equitable principles of trade, thereby conducing to 
the protection of investors. The proposal is consistent with the public 
interest because the streamlined requirements as set forth in the 
proposal, considered in combination with and in view of the 
restrictions imposed on funding portal business by the Act, are 
consistent with the Congressional intent of the JOBS Act, which sought 
to minimize regulatory burdens on funding portals and thereby enable 
them to play a role in increasing American job creation and economic 
growth through the new capital raising methods of crowdfunding.

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

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Act, as amended by the JOBS 
Act, limits the permissible business activities of funding portals and 
requires that funding portals must become members of a national 
securities association. FINRA is the only registered national 
securities association. The Act requires that FINRA examine for and 
enforce against registered funding portals rules written specifically 
for funding portals. As such, FINRA has designed the proposed rules to 
streamline or otherwise appropriately modify existing FINRA rules to 
reflect the limited scope of business activity permitted to funding 
portals under the JOBS Act.
    FINRA believes that the streamlined approach should minimize the 
potential costs and burdens on prospective funding portal members at 
this early stage of development of funding portal business, thereby 
helping to effectuate the Congressional intent to enable funding 
portals to play a role in increasing American job creation and economic 
growth through the new capital raising methods of crowdfunding. 
Further, FINRA believes the streamlined approach is appropriate given 
that regulatory experience with funding portals is at an early stage. 
Following are several requirements that FINRA has streamlined for 
funding portals vis-[agrave]-vis requirements that currently apply to 
broker-dealers:
     The proposed membership application process (MAP) under 
Funding Portal Rule 110(a) shortens the time frame for the Department 
of Member Regulation to provide a

[[Page 66364]]

decision on a funding portal MAP to 60 days, versus 180 days under the 
broker-dealer MAP rules. FINRA believes that this shortened time frame 
is appropriate both in view of the limited nature of funding portal 
business and in the interest of enabling funding portals to begin their 
operations expeditiously, thereby supporting a basic purpose of the 
JOBS Act.
     The proposed MAP streamlines and consolidates, from 14 to 
five, the NASD Rule 1010 Series standards for granting or denying a 
funding portal's membership application. FINRA believes that this is 
consistent with the rationale underlying the shortened time frame for 
the funding portal MAP, as discussed above, which should ameliorate 
potential burdens on funding portal members.
     The proposed Form FP-NMA and Form FP-CMA require 
significantly less information than the broker-dealer counterpart 
forms, which FINRA believes is consistent with the limited scope of 
business to be conducted by funding portals. FINRA believes that, 
similar to the shortened MAP time frame and streamlined standards for 
granting or denying an application, this again ameliorates potential 
burdens on funding portal members.
     The proposal imposes no broker-dealer equivalent licensing 
or examination requirement on associated persons of funding portal 
members. FINRA believes that imposing examination and licensing 
requirements on funding portal members at this stage is not necessary 
in light of the limited activities of funding portals. However, as 
FINRA gains experience under the proposed rules, FINRA will consider 
whether additional rulemaking with respect to examination and licensing 
requirements is merited.
     The proposal as set forth in Regulatory Notice 13-34 would 
have required funding portal members to maintain fidelity bond 
coverage. As discussed earlier, FINRA is not proposing at this time a 
fidelity bond requirement. FINRA will monitor developments in this area 
and determine whether a subsequent rulemaking is merited.
     FINRA is not proposing at this time net capital or similar 
financial responsibility requirements for funding portals. FINRA 
believes that this approach is appropriate at this time in view of the 
limited nature of funding portal business, in particular the JOBS Act 
prohibition against funding portals holding, managing, possessing, or 
otherwise handling investor funds and securities. Again, however, FINRA 
will monitor developments in this area and determine whether a 
subsequent rulemaking is merited.
    FINRA has undertaken an economic impact assessment, as set forth 
below, to further analyze the need for the proposed rules, the 
regulatory objective of the rulemaking, the economic baseline of 
analysis, and the economic impacts.

A. Need for the Rules

    Section 3(h)(2) of the Exchange Act,\69\ as amended by the JOBS 
Act, requires that FINRA only examine for and enforce against 
registered funding portals rules that FINRA has written specifically 
for registered funding portals.
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78c(h)(2).
---------------------------------------------------------------------------

    Under Title III of the JOBS Act, a funding portal is a new type of 
intermediary the business activities of which are of limited scope, as 
defined by the JOBS Act, relative to entities that register as brokers. 
Among other things, the JOBS Act adds Section 4(a)(6) to the Securities 
Act,\70\ which creates an exemption (the ``crowdfunding exemption'') 
from registration requirements under the Securities Act for securities 
offered and sold pursuant to the crowdfunding exemption. Broadly, the 
crowdfunding exemption permits an issuer to offer and sell up to $1 
million in securities over a 12-month period. The amount of any such 
security sold to an investor by an issuer is not permitted to exceed 
specified thresholds. Further, the issuer must comply with other 
specified requirements under the JOBS Act and Commission rules. Any 
offering pursuant to the crowdfunding exemption must be conducted 
through a broker or a funding portal that is registered with the SEC.
---------------------------------------------------------------------------

    \70\ 15 U.S.C. 77d(a)(6).
---------------------------------------------------------------------------

    Under the JOBS Act, a funding portal must become a member of a 
national securities association that is registered under Section 15A of 
the Exchange Act. FINRA is the only national securities association 
that is registered under Section 15A of the Exchange Act.
    On October 23, 2013, the SEC proposed rules \71\ to require 
registration of funding portals and to implement the provisions of 
Title III of the JOBS Act. Prospective funding portal operators have 
stated that they intend to register with the SEC pursuant to Regulation 
Crowdfunding as adopted by the SEC and to apply for FINRA membership.
---------------------------------------------------------------------------

    \71\ See note 8 supra.
---------------------------------------------------------------------------

B. Regulatory Objective

    The crowdfunding exemption is designed to help provide startups and 
small businesses with capital by making relatively low dollar offerings 
of securities less costly. The exemption creates a regulatory pathway 
for funding portals to facilitate the offer and sale of securities, as 
registered funding portals, without being required to register with the 
SEC as brokers,\72\ provided they comply with specified limitations on 
their business activity.\73\
---------------------------------------------------------------------------

    \72\ Exchange Act Section 3(h)(1) (15 U.S.C. 78c(h)(1)) directs 
the Commission by rule to exempt, conditionally or unconditionally, 
a registered funding portal from the requirement to register as a 
broker or dealer under Exchange Act Section 15(a)(1) (15 U.S.C. 
78o(a)(1)), provided that the funding portal: (1) remains subject to 
the examination, enforcement and other rulemaking authority of the 
Commission; (2) is a member of a registered national securities 
association; and (3) is subject to other requirements that the 
Commission determines appropriate.
    \73\ See note 6 supra.
---------------------------------------------------------------------------

    FINRA's proposal aims to create a streamlined set of regulations 
for funding portals with rules that reflect the limited scope of 
activity permitted by funding portals while also maintaining investor 
protection.

C. Economic Baseline

    In the absence of FINRA's Funding Portal Rules, intermediaries 
intending to facilitate securities-based crowdfunding transactions in 
reliance on the crowdfunding exemption would be required to register 
with the SEC as brokers. The FINRA rules for registered brokers are 
intended to address a wider range of activities than is permissible to 
funding portals, and would place restrictions and costs not associated 
with such firms' crowdfunding activities. If all crowdfunding 
intermediaries were subject to the full requirements that apply to 
registered brokers, there might be several unintended consequences. 
First, the regulatory costs to operate the crowdfunding intermediary 
would likely be high, potentially restricting the number of registered 
crowdfunding intermediaries. These costs would include, but are not 
limited to, capital requirements, compliance costs and other 
restrictions on activities. Second, and relatedly, higher compliance 
costs may limit the activities of those crowdfunding intermediaries 
that do choose to register as these may restrict financial and other 
available resources. Third, limited numbers of registered crowdfunding 
intermediaries may reduce competition in the crowdfunding market and 
lead to less efficient capital allocation.
    In addition to crowdfunding intermediaries, the absence of the 
proposed rules may also have an impact on: issuers, typically startups 
and small

[[Page 66365]]

businesses seeking to raise capital by issuing securities; investors 
that purchase or may consider purchasing securities in such offerings; 
and other capital providers, broker-dealers and finders that currently 
participate in private offerings.
    For the issuers seeking to raise capital through securities-based 
crowdfunding in reliance on the crowdfunding exemption, limited numbers 
of registered crowdfunding intermediaries may result in higher capital 
raising costs, decreased opportunities for selling securities through a 
given registered funding portal, or an aggregate reduction in the 
capacity of registered crowdfunding intermediaries. Higher regulatory 
costs to registered intermediaries may also be passed on to issuers. 
All of these impacts would collectively make it more difficult for 
startups and small businesses to efficiently find capital for their 
operations.
    Limited numbers of registered intermediaries may also limit 
investor access to securities-based crowdfunding offerings. In 
addition, higher capital raising costs to issuers and higher regulatory 
costs to registered intermediaries could be passed on to potential 
investors.
    The absence of the proposed Funding Portal Rules also might have an 
effect on broker-dealers and finders participating in private 
offerings. As discussed above, in the absence of FINRA's Funding Portal 
Rules, issuers intending to raise capital in reliance on the 
crowdfunding exemption may face higher costs. Some of these issuers may 
instead choose to raise capital through private offerings with the 
assistance of broker-dealers and finders. This could increase the 
revenue of finders and broker-dealers in the market for private 
offerings, but less competition in the fundraising market and greater 
restrictions on participation of investors may lead to less efficient 
allocation of capital.

D. Economic Impacts

    The proposed rules are intended to provide investors with 
appropriate protections by applying the relevant controls and oversight 
to the limited activities of funding portals. FINRA recognizes that 
there are potential costs associated with compliance with the proposed 
rules. Prospective funding portal members will need to become members 
of FINRA and establish compliance procedures to comply with the 
proposed rules, both on an initial and ongoing basis. The proposed 
rules may also have an impact on other market participants such as 
issuers and investors. Benefits of the proposed rules may include 
greater competition among crowdfunding intermediaries, better market 
oversight, and investor protection for those investing in offerings 
made through funding portals. Costs and benefits associated with 
FINRA's proposed rules are only a subset of the costs and benefits 
associated with securities-based crowdfunding regulations. Regulatory 
outcomes will depend on many other factors including the SEC rules.
1. The SEC's Economic Analysis
    The SEC's Regulation Crowdfunding Proposal \74\ includes a detailed 
economic analysis that estimates the potential costs and benefits to 
various market participants. However, the scope of the SEC's proposed 
Regulation Crowdfunding is broader than the scope of FINRA's proposed 
rules. Regulation Crowdfunding, as proposed, prescribes rules governing 
the offer and sale of securities under the new crowdfunding provisions. 
It also provides a framework for the regulation of registered funding 
portals and brokers that issuers are required to use as intermediaries. 
In addition, it exempts securities sold pursuant to the crowdfunding 
exemption from registration requirements under the Securities Act. As a 
result, the SEC's economic analysis examines the impacts of securities-
based crowdfunding in reliance on the crowdfunding exemption as a new 
fundraising channel. For example, it estimates the costs for registered 
brokers, and brokers that prospectively would register, to comply with 
the various requirements to engage in securities-based crowdfunding 
transactions. The SEC's economic analysis also estimates the costs for 
an intermediary to develop a platform to engage in such transactions.
---------------------------------------------------------------------------

    \74\ See note 8 supra.
---------------------------------------------------------------------------

    In contrast, FINRA has written the proposed rules specifically for 
funding portals. In the absence of FINRA's Funding Portal Rules, 
securities-based crowdfunding in reliance on the crowdfunding exemption 
is still possible under the SEC rules, though intermediaries intending 
to facilitate such transactions would need to register as brokers.
2. Benefits
    FINRA's proposed Funding Portal Rules will make it possible for 
intermediaries intending to facilitate securities-based crowdfunding 
transactions in reliance on the crowdfunding exemption to register as 
funding portals, which is a lower cost alternative to registering as 
brokers. The proposed rules encourage funding portals to become members 
of FINRA as they provide a streamlined set of regulations that are 
tailored to the activities of funding portals and avoid the imposition 
of burdens and costs not associated with permissible funding portal 
activity. The proposed rules will likely increase the number of 
registered crowdfunding intermediaries, promote competition, and in 
turn potentially reduce costs to issuers and investors.
    Because funding portals will be required to comply with both the 
SEC's and FINRA's rules if adopted, FINRA's Funding Portal Rules will 
create additional regulatory oversight of registered funding portals 
and improve the SEC's ability to effectively regulate registered 
funding portals' activities. FINRA believes that the proposed rules 
will reduce the risk of misconduct and fraud and help create a healthy 
marketplace in which issuers are more comfortable using securities-
based crowdfunding to raise capital and investors are more willing to 
participate.
3. Costs to Funding Portals
    FINRA recognizes that there will be costs to prospective funding 
portal members associated with each major set of provisions below. 
Because the proposed Funding Portal Rules have been streamlined to 
reflect the limited scope of activity permitted to funding portals, the 
compliance costs would be higher in the absence of the proposed rules 
where crowdfunding intermediaries would have to register as broker-
dealers.
a. Registration and Other Costs
    Certain costs to prospective funding portals are estimated in the 
economic impact analysis of FINRA's proposed rule change to adopt 
Section 15 of Schedule A to the FINRA By-Laws governing fees for 
funding portal members.\75\
---------------------------------------------------------------------------

    \75\ See note 12 supra.
---------------------------------------------------------------------------

b. Other Compliance Costs: Major Sets of Provisions
Funding Portal Conduct
    Under proposed Funding Portal Rule 200, prospective funding portal 
members would need to develop and implement policies and processes 
designed to meet high standards of commercial honor and principles of 
trade, prevent use of manipulative, deceptive or other fraudulent 
devices, and comply with the specified proposed requirements on 
communications with the public.

[[Page 66366]]

Funding Portal Compliance
    Proposed Funding Portal Rule 300(a) 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.
    Proposed Funding Portal Rule 300(b) requires that each funding 
portal member must designate to FINRA an executive representative.
    Proposed Funding Portal Rule 300(c) 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. Funding portal members would need to 
establish policies and processes to detect the events that are required 
to be reported and ensure prompt reporting of the events.
    Proposed Funding Portal Rule 300(d) is designed to require funding 
portal members to report to FINRA all contact information required by 
FINRA through such means as FINRA may specify.
    Proposed Funding Portal Rule 300(e) requires each funding portal 
member to report to FINRA the member's gross revenue on Form FP-
Statement of Revenue.
    Proposed 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. The rule requires a 
funding portal member to preserve all records made pursuant to the rule 
for five years, the first two in an easily accessible place.
    The proposal would not require funding portals to implement an 
anti-money laundering program at this time. Alternatively, broker-
dealers that operate a platform under the proposed rules would continue 
to have anti-money laundering program obligations, and those 
obligations would extend to any platform that they operate. While this 
represents an additional cost to registered broker-dealers over new 
entrants that register strictly as funding portals, these costs are 
likely small because broker-dealers are already required to have in 
place all the requirements for an anti-money laundering program.
Investigations and Sanctions
    Proposed Funding Portal Rule 800(a) provides that except for FINRA 
Rules 8110, 8211, 8213 and 8312, all funding portal members shall be 
subject to the FINRA Rule 8000 Series unless the context requires 
otherwise.
    Proposed Funding Portal Rule 800(b) addresses specified information 
that FINRA shall make available to the public. Proposed Funding Portal 
Rule 800(b)(2) provides that FINRA shall make available to the public 
information filed by a funding portal member 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) \76\ of the 
Exchange Act, and 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.
---------------------------------------------------------------------------

    \76\ 15 U.S.C. 78c(a)(39). Section 3(a)(39) of the Act sets 
forth the definition of ``statutory disqualification.''
---------------------------------------------------------------------------

Application of FINRA Rule 9000 Series to Funding Portals
    Proposed Funding Portal Rule 900(a) provides that except for the 
FINRA Rule 9520 Series, FINRA Rule 9557, and the FINRA Rule 9700 
Series, all funding portal members shall be subject to the FINRA Rule 
9000 Series unless the context requires otherwise.
    Proposed Funding Portal Rule 900(b) 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.
Arbitration and Mediation
    Proposed Funding Portal Rule 1200(a) is designed to provide that 
funding portal members will be subject to the FINRA Rule 12000 Series, 
FINRA Rule 13000 Series and FINRA Rule 14000 Series, unless the context 
requires otherwise. Proposed Funding Portal Rule 1200(b) addresses 
predispute arbitration agreements for investor accounts.
c. Estimate of Costs
    FINRA understands that the staffing and scope of the organization 
necessary to provide crowdfunding services may be comparable to that of 
a small broker-dealer. As such, FINRA looks to its experience with a 
sample of smaller broker-dealers to estimate the potential costs 
associated with the proposed rules. The sample firms do not appear to 
have a heavy investment in dedicated compliance infrastructure. For 
example, the designated contacts of these firms for FINRA tend to be a 
managing principal, who often serves several other roles such as 
executive representative, anti-money laundering representative, and 
continuing education representative. Required, routine compliance 
activities (such as annual certifications, email review, employee 
trading account reviews, etc.) are generally performed by these 
principals. In several instances, a firm will rely on a third-party 
compliance consulting firm to help with its general compliance 
functions. Several of the sample firms employ a model where their 
financial and operations principals are employed off-site, work part 
time or hold multiple registrations with different member firms. FINRA 
estimates that less than 50% of one internal person's time is typically 
spent on compliance activities at each of these firms. FINRA 
understands from a small sample of these firms that they currently pay 
$1,000 to $1,500 per month for compliance consulting services.
    FINRA also understands that there are a few member firms that 
already offer private placement platforms for accredited investors. 
FINRA understands from various reports that these types of firms may 
have two full-time compliance officers and spend about $100,000 to 
$150,000 annually on ensuring that all regulations are followed. FINRA 
believes these estimates are likely for the full scope of broker-dealer 
activity and include the costs associated with compliance activities 
not covered by the rule proposal, and thus reflects compliance costs 
for activities beyond the scope of the permitted business activities of 
funding portals.
4. Costs to FINRA
    FINRA has identified costs that it would likely incur as a result 
of the proposed rules. Specifically, FINRA needs to adapt its current 
regulatory infrastructure to manage regulatory processes for funding 
portals, including regulatory support to members and potential 
challenges to its decisions. To minimize these burdens, FINRA intends 
to use as much as possible of its in-place systems and processes.

[[Page 66367]]

5. Impact on Competition
    In the absence of FINRA's Funding Portal Rules, intermediaries 
intending to facilitate securities-based crowdfunding transactions in 
reliance on the crowdfunding exemption are required to register with 
the SEC as brokers. As shown by the SEC's economic analysis in the 
Regulation Crowdfunding Proposal, the compliance cost associated with 
broker registration is expected to exceed the compliance cost 
associated with funding portal registration. By appropriately limiting 
the rule set and attendant compliance costs to match the permitted 
business activities of funding portals, FINRA's Funding Portal Rules 
will likely allow more registered intermediaries in the market and 
promote competition in the provision of crowdfunding services among 
funding portals and broker-dealers.
    As noted above, funding portals may serve as a substitute for some 
private offerings currently offered through broker-dealers under other 
exemptions from registration, such as Regulation D (17 CFR 230.500 
through 230.508). By enabling prospective funding portals to become 
members of FINRA and thereby engage in funding portal business, the 
proposed rules may provide a more efficient form of capital raising by 
issuers, resulting in a loss of underwriting business in these other 
private offering platforms. FINRA first notes that these private 
offerings serve only as a limited substitute for offerings pursuant to 
the crowdfunding exemption, as they have significant limitations on 
investor participation that make them inappropriate for many of the 
investments that could be made available under the crowdfunding 
exemption. Secondly, FINRA notes that any competitive impacts that 
might arise from substitution across platforms is mitigated by the 
ability of any broker-dealer to offer a crowdfunding platform or 
register a funding portal affiliate, and thus compete to retain the 
business.
    Increasing competition among financial intermediaries who might 
assist startups and small businesses in obtaining capital will likely 
lead to lower costs for some issuers, which may enable more startups 
and small businesses to rely on securities-based crowdfunding as a new 
source of capital. An increased number of issuers in the fundraising 
market may promote competition and efficient allocation of capital 
among crowdfunding issuers.
    Increased competition among crowdfunding intermediaries and issuers 
should also lead to more investment opportunities and lower costs for 
investors. More investors and thus more capital may be made available 
to startups and small businesses, helping to achieve the regulatory 
objective of the crowdfunding provisions of the JOBS Act.
6. Alternatives
    As discussed above, FINRA understands that under the SEC's proposed 
rules, securities-based crowdfunding pursuant to the crowdfunding 
exemption can occur in brokers that are members of a self-regulatory 
organization. As such, FINRA considered applying its full rule set to 
intermediaries providing crowdfunding services. FINRA determined that 
this approach would impose costs not associated with the activities of 
the intermediaries and would likely have negative consequences for 
market efficiency and competition. FINRA also considered the 
alternative of requiring persons associated with funding portal members 
to register with FINRA and decided it would not be necessary at this 
early stage in light of the limited activities of funding portals. As 
FINRA gains experience in regulating funding portal member activities, 
FINRA will reassess the alternative based on the nature and scope of 
the business activities of funding portals.

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

    The proposed rule change was published for comment in Regulatory 
Notice 13-34 (October 2013) (the ``Notice''). Seven comments were 
received in response to the Notice. A copy of the Notice is attached as 
Exhibit 2a. A list of commenters \77\ is attached as Exhibit 2b. Copies 
of the comment letters received in response to the Notice are attached 
as Exhibit 2c.
---------------------------------------------------------------------------

    \77\ All references to commenters are to the commenters as 
listed in Exhibit 2b.
---------------------------------------------------------------------------

    Some commenters expressed concerns that the rules as proposed in 
the Notice would impose too many requirements and, in combination with 
the requirements set forth in the SEC's Regulation Crowdfunding 
Proposal, would be costly and burdensome for prospective funding 
portals.\78\ In contrast, other commenters expressed concern that the 
proposal should impose more requirements such as those that apply to 
current broker-dealer members or should include other requirements or 
specified guidelines for purposes of oversight of funding portal 
activities.\79\ Commenters' specific suggestions are discussed below.
---------------------------------------------------------------------------

    \78\ CyberIssues, Heritage and Polanco.
    \79\ FSA Institute, FSI, NASAA and Wulff.
---------------------------------------------------------------------------

1. Fidelity Bond
    As discussed earlier, the proposal as published in the Notice would 
have required that funding portal members maintain fidelity bond 
coverage. Two commenters suggested that FINRA should eliminate or 
tailor the proposed rule.\80\ One of the commenters suggested that, 
because the JOBS Act prohibits funding portals from holding, managing, 
possessing or otherwise handling investor funds or securities, funding 
portals pose limited risk in this area and the fidelity bond 
requirement would impose an unnecessary cost on funding portals.\81\ 
One of the commenters suggested that, to help save on premiums for 
prospective funding portals, fidelity bond coverage should not be 
required until a funding portal member's membership application is 
approved.\82\ On the other hand, two commenters suggested greater 
stringency in this area.\83\ One commenter suggested that the proposed 
fidelity bond requirement would not be sufficient for purposes of 
oversight and that the proposed requirement should include financial 
responsibility requirements.\84\ One commenter suggested that the 
proposal should be revised to include fines for failure to maintain 
adequate fidelity bonds.\85\
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    \80\ CyberIssues and Heritage.
    \81\ Heritage.
    \82\ CyberIssues.
    \83\ NASAA and Wulff.
    \84\ Wulff.
    \85\ NASAA.
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    In response, as discussed earlier, FINRA is not proposing the 
fidelity bond requirement as part of this rulemaking. FINRA 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.\86\
---------------------------------------------------------------------------

    \86\ Similarly, given the limited nature of funding portal 
business, in particular the prohibition against funding portals 
holding, managing, possessing or otherwise handling investor funds 
or securities, and given that funding portal business is at an early 
stage of development, FINRA is not proposing net capital or similar 
financial responsibility requirements for funding portal members at 
this time. As discussed earlier, FINRA will monitor the development 
of this area and determine whether a subsequent rulemaking regarding 
fidelity bonds or other financial responsibility requirements is 
merited.

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[[Page 66368]]

2. Anti-Money Laundering Program
    As discussed earlier, the proposal as published in the Notice 
included a proposed requirement that funding portal members implement a 
written anti-money laundering program. Two commenters opposed the 
proposed requirement.\87\ One suggested that the anti-money laundering 
rules are too complex and expensive to comply with, and that the rule 
is unnecessary because funding portals are prohibited from holding, 
managing, possessing or otherwise handling investor funds or securities 
and are thereby not in a position to facilitate money laundering.\88\ 
One commenter suggested that imposing the requirement on funding 
portals would be duplicative of functions already performed for 
instance by institutions where investor funds would be held in 
escrow.\89\ On the other hand, one commenter expressed support for the 
proposed requirement.\90\
---------------------------------------------------------------------------

    \87\ CyberIssues and Heritage.
    \88\ Heritage.
    \89\ CyberIssues.
    \90\ CFA Institute.
---------------------------------------------------------------------------

    In response, as discussed earlier, the BSA and the implementing 
regulations thereunder apply to brokers and dealers in securities that 
are registered or required to be registered with the Commission. The 
BSA does not apply to funding portals at this time. Accordingly, FINRA 
is not proposing an anti-money laundering requirement at this time.
3. Additional Specific Comments
a. Central Registration Depository
    One commenter suggested that the proposal should expressly mandate 
that funding portal members file the SEC's Form Funding Portal and all 
related forms through the Central Registration Depository, similar to 
current FINRA Rule 1010(a).\91\ In response, FINRA believes that it is 
sufficient, and consistent with the need for regulatory flexibility, 
that the proposal provides for submission of specified information by 
means and format prescribed by FINRA.\92\ FINRA is in the process of 
developing systems for submission of specified information tailored to 
prospective funding portal members which, consistent with the Funding 
Portal Rules, FINRA will prescribe prior to the implementation of the 
proposal.
---------------------------------------------------------------------------

    \91\ NASAA.
    \92\ See, e.g., proposed Funding Portal Rule 110(a)(3)(A), 
regarding submission of Form FP-NMA, and proposed Funding Portal 
Rule 110(a)(4)(B), regarding submission of Form FP-CMA.
---------------------------------------------------------------------------

b. Associated Persons of a Funding Portal Member
    One commenter suggested that FINRA should narrow the proposed 
definition of associated person of a funding portal member as set forth 
under proposed Funding Portal Rule 100(b).\93\ The commenter suggested 
excluding from the definition employees of a funding portal whose 
functions exclusively relate to providing various services to issuers. 
In response, FINRA notes that the proposed definition is largely based 
on the current definition under the FINRA By-Laws that applies to 
broker-dealers and is meant to ensure among other things that the 
specified persons are subject to FINRA rules. FINRA notes that services 
that funding portals provide to issuers will potentially be an 
important component of the business model of many funding portals. 
Accordingly, FINRA does not propose to modify the definition.
---------------------------------------------------------------------------

    \93\ CyberIssues.
---------------------------------------------------------------------------

    Two commenters suggested that FINRA should institute examination 
and licensing requirements for at least some associated persons of 
funding portal members.\94\ In response, FINRA notes that the funding 
portal business is at an early stage of development. Further, as 
discussed earlier, FINRA notes that the scope of activities permitted 
to funding portals is limited under the JOBS Act. Accordingly, FINRA is 
not imposing examination and licensing requirements on associated 
persons of funding portals at this time. However, as FINRA gains 
experience under the proposed rules, FINRA will consider whether 
additional rulemaking with respect to examination and licensing 
requirements is merited.
---------------------------------------------------------------------------

    \94\ NASAA and Wulff.
---------------------------------------------------------------------------

c. Application of Additional Rules
    Two commenters suggested that FINRA should apply to funding portal 
members additional rules from the FINRA rulebook that currently apply 
to broker-dealer members or that FINRA should duplicate, within the 
proposed Funding Portal Rules, standards adopted by the SEC in 
Regulation Crowdfunding.\95\ One commenter proffered several current 
FINRA rules governing broker-dealer members that the commenter 
suggested should be replicated within the proposed Funding Portal Rules 
to address potential conflicts of interest, such as the prohibition 
against guarantees and sharing in accounts under FINRA Rule 2150, as 
well as elements under FINRA Rule 2210 (Communications with the 
Public), FINRA Rule 3220 (Influencing or Rewarding Employees of 
Others), FINRA Rule 3240 (Borrowing From or Lending to Customers), 
FINRA Rule 5230 (Payments Involving Publications that Influence the 
Market Price of a Security), and FINRA Rule 5110 (Corporate Financing 
Rule--Underwriting Terms and Arrangements).\96\ The commenter further 
suggested that FINRA should adopt a distinct recordkeeping rule for 
funding portal members over and above the recordkeeping rule for 
funding portals adopted by the SEC.\97\ One commenter suggested that 
the proposed Funding Portal Rules should duplicate rule language in the 
SEC's Regulation Crowdfunding aimed at limiting, in conformity with 
requirements of Title III of the JOBS Act,\98\ the activities of 
funding portals, such as prohibiting funding portals from offering 
investment advice or recommendations.
---------------------------------------------------------------------------

    \95\ CFA Institute and NASAA.
    \96\ NASAA.
    \97\ See proposed Regulation Crowdfunding Rule 404.
    \98\ See note 6 supra.
---------------------------------------------------------------------------

    In response, FINRA has stated in the Notice and in this filing its 
intent to streamline the proposed rules to the extent possible to 
reflect the limited scope of activity permitted by funding portals 
while also maintaining investor protection. Further, FINRA will enforce 
any rules for funding portals adopted by the SEC. As such, FINRA has 
indicated that its rules should not duplicate any rules adopted by the 
SEC in this area.\99\ Title III of the JOBS Act sets specified limits 
on the activities of funding portals, for example, by expressly 
prohibiting funding portals from offering investment advice or 
recommendations and by prohibiting funding portals from holding, 
managing, possessing or otherwise handling investor funds or 
securities, which the SEC proposed to implement by rule.\100\ The SEC 
has proposed to address such investor protection issues as measures to 
reduce the risk of fraud,\101\ account opening,\102\ requirements with 
respect to investor transactions,\103\ payments to third parties,\104\ 
and permissible communication channels.\105\ All funding portal members 
of FINRA will be subject to these rules if they are

[[Page 66369]]

adopted by the SEC. Further, as discussed earlier, FINRA is proposing 
specified conduct and compliance rules, also aimed at investor 
protection.\106\ FINRA does not believe that it serves a regulatory 
purpose to reduplicate in the Funding Portal Rules standards that the 
SEC has proposed to address in its rulemaking, or to otherwise 
duplicate in multiple iterations prohibitions against specified 
activities already set forth under applicable statutes, proposed SEC 
rules or the proposed FINRA Funding Portal Rules. As such, FINRA is not 
proposing at this time the additional suggested rules and standards. 
However, FINRA may propose additional requirements at a later time 
should FINRA determine that such requirements, based on the development 
of funding portal business under the FINRA Funding Portal Rules, and 
any other applicable rules, are merited.
---------------------------------------------------------------------------

    \99\ See Regulatory Notice 12-34 (July 2012).
    \100\ See proposed Regulation Crowdfunding Rule 300(c)(2).
    \101\ See proposed Regulation Crowdfunding Rule 301.
    \102\ See proposed Regulation Crowdfunding Rule 302.
    \103\ See proposed Regulation Crowdfunding Rule 303.
    \104\ See proposed Regulation Crowdfunding Rule 305.
    \105\ See proposed Regulation Crowdfunding Rule 402.
    \106\ See, e.g., proposed Funding Portal Rule 200 and Rule 300 
in Exhibit 5.
---------------------------------------------------------------------------

d. Miscellaneous
    One commenter proffered suggestions to amend FINRA's arbitration 
procedures.\107\ While the comment is outside the scope of the proposed 
rule change, FINRA notes that proposed Funding Portal Rule 1200 
addresses arbitration issues for the purpose of ensuring that funding 
portal members shall be subject to the existing FINRA rules in this 
area, unless the context requires otherwise, and for streamlining the 
existing predispute arbitration rule (FINRA Rule 2268) as appropriate 
for funding portals.
---------------------------------------------------------------------------

    \107\ NASAA.
---------------------------------------------------------------------------

    One commenter suggested that FINRA should provide guidance 
regarding the scope of liability for firms and advisors when clients 
make inquiries regarding investments in crowdfunding offerings.\108\ 
The commenter suggested the SEC and FINRA should provide waiver of 
liability language for advisors and an educational Web site on 
crowdfunding, and that FINRA should undertake a retrospective review of 
the Funding Portal Rules. In response, FINRA welcomes retrospective 
review of rules and has committed to such review.\109\ Further, FINRA 
notes that it makes substantial commitments to investor education and 
has a robust and vigorous investor education program. FINRA welcomes 
further dialogue on these issues as funding portal business develops 
under any rules implemented by the SEC and the FINRA Funding Portal 
Rules. FINRA does not propose at this time to provide waiver of 
liability language as outside the scope of the proposed rule change.
---------------------------------------------------------------------------

    \108\ FSI Institute.
    \109\ See, e.g., Regulatory Notice 14-14 (April 2014) (seeking 
comment in connection with retrospective review of the 
Communications with the Public rules); Regulatory Notice 14-15 
(April 2014) (seeking comment in connection with retrospective 
review of the gifts and gratuities and non-cash compensation rules); 
and Regulatory Notice 15-10 (March 2015) (seeking comment in 
connection with retrospective review of FINRA's membership 
application rules).
---------------------------------------------------------------------------

    One commenter requested that FINRA provide a template for 
supervisory systems for funding portal members to follow.\110\ In 
response, FINRA notes that under the proposed rules, it is the 
responsibility of a funding portal member to 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. Funding portal members will be expected to be mindful of 
their supervisory obligations under the FINRA Funding Portal Rules and 
other applicable rules to establish and maintain a supervisory system 
accordingly.
---------------------------------------------------------------------------

    \110\ CyberIssues.
---------------------------------------------------------------------------

    One commenter suggested that Form FP-NMA should not require FP 
Applicants to submit copies of contracts or agreements relating to 
business activities of the FP Applicant.\111\ FINRA disagrees, as such 
information is directly relevant to assessing an FP Applicant for 
purposes of FINRA membership. Further, FINRA notes that the MAP as set 
forth under proposed Funding Portal Rule 110 already reflects extensive 
streamlining so as to tailor requirements to the permitted business of 
funding portal members. Accordingly, FINRA does not propose to make the 
suggested change. The same commenter sought clarification as to 
whether, under proposed Funding Portal Rule 1200(b), funding portal 
members are required to use predispute arbitration agreements with 
investors. FINRA notes that neither proposed Funding Portal Rule 
1200(b), nor the FINRA rule upon which it is based (FINRA Rule 2268), 
impose such requirements.
---------------------------------------------------------------------------

    \111\ CyberIssues.
---------------------------------------------------------------------------

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (https://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 (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2015-040 and

[[Page 66370]]

should be submitted on or before November 18, 2015.
---------------------------------------------------------------------------

    \112\ 17 CFR 200.30-3(a)(12).


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\112\
Brent J. Fields,
Secretary.G
[FR Doc. 2015-27370 Filed 10-27-15; 8:45 am]
 BILLING CODE 8011-01-P