Amendments to the Definition of Broker or Dealer in Securities, 19086-19094 [2016-07345]
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was not conducted in compliance with
part 58 of this chapter, a brief statement
of the reason for the noncompliance.
(x) The submission does not contain
a statement for each clinical
investigation involving human subjects
that it was conducted in compliance
with the institutional review board
regulations in part 56 of this chapter, or
was not subject to those regulations, and
that it was conducted in compliance
with the informed consent regulations
in part 50 of this chapter.
(xi) The submission does not include
financial certification or disclosure
statements, or both, as required by part
54 of this chapter, accompanying any
clinical data submitted.
(k) Withdrawal of consideration. (1)
FDA may withdraw consideration of a
TEA submission or a safety and
effectiveness data submission if:
(i) The sponsor requests that its
submission be withdrawn from
consideration, or
(ii) FDA deems the submission to be
withdrawn from consideration due to
the sponsor’s failure to act on the
submission or failure to respond to
communications from FDA.
(2) Before FDA deems a submission
withdrawn under paragraph (k)(1)(ii) of
this section, FDA will notify the sponsor
of the submission. If, within 30 days
from the date of the notice from FDA,
the sponsor requests that FDA not
withdraw consideration of the
submission, FDA will not deem the
submission to be withdrawn.
(3) If FDA withdraws consideration of
a submission under paragraph (k)(1) of
this section, FDA will post a notice of
withdrawal to the docket. Information
that has been posted to the public
docket for the TEA at the time of the
withdrawal (such as a notice of
eligibility or a safety and effectiveness
data submission that has been accepted
for filing and posted to the docket) will
remain on the public docket.
(4) If FDA withdraws consideration of
a submission under paragraph (k)(1) of
this section, the timelines under
§ 330.15(c) will no longer apply as of the
date of withdrawal, and the submission
will not be included in the metrics
under § 330.15(b).
■ 3. Add § 330.15 to subpart B to read
as follows:
§ 330.15 Timelines for FDA review and
action on time and extent applications and
safety and effectiveness data submissions.
(a) Applicability. This section applies
to the review of a condition in a time
and extent application (TEA) submitted
under § 330.14 for consideration in the
over-the-counter (OTC) drug monograph
system. This section does not apply to:
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(1) A sunscreen active ingredient or
combination of sunscreen active
ingredients, and other conditions for
such ingredients, or
(2) A non-sunscreen active ingredient
or combination of non-sunscreen active
ingredients and other conditions for
such ingredients submitted in a TEA
under § 330.14 prior to November 27,
2014, subject to section 586F(a)(1)(C) of
the Federal Food, Drug, and Cosmetic
Act.
(b) Metrics. FDA will maintain and
update annually, a publicly available
posting of metrics for the review of
TEAs and safety and effectiveness data
submissions that are subject to the
timelines in this section. The posting
will contain the following information
for tracking the extent to which the
timelines set forth in paragraph (c) of
this section were met during the
previous calendar year.
(1) Number and percent of eligibility
notices or ineligibility letters issued
within 180 days of submission of a TEA;
(2) Number and percent of filing
determinations issued within 90 days of
submission of a safety and effectiveness
data submission;
(3) If applicable, number and percent
of feedback letters issued within 730
days from the date of filing;
(4) Number and percent of notices for
proposed rulemaking issued within
1,095 days from the date of filing;
(5) Number and percent of final rules
issued within 912 days of closing of the
docket of the proposed rulemaking; and
(6) Total number of TEAs submitted
under § 330.14.
(c) Timelines for FDA review and
action. FDA will review and take an
action within the following timelines:
(1) Within 180 days of submission of
a TEA under § 330.14(c), FDA will issue
a notice of eligibility or post to the
docket a letter of ineligibility, in
accordance with § 330.14(d) and (e).
(2) Within 90 days of submission by
the sponsor of a safety and effectiveness
data submission, FDA will issue a filing
determination in accordance with
§ 330.14(j). The date of filing begins the
FDA timelines in paragraphs (c)(3) and
(4) of this section.
(3) Within 730 days from the date of
filing, if the condition is initially
determined not to be GRASE for OTC
use in the United States, FDA will
inform the sponsor and other interested
parties who have submitted data of its
determination by feedback letter in
accordance with § 330.14(g)(4).
(4) Within 1,095 days from the date of
filing of a safety and effectiveness data
submission, FDA will issue a notice of
proposed rulemaking to either:
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(i) Include the condition in an
appropriate OTC monograph(s), either
by amending an existing monograph(s)
or establishing a new monograph(s), if
necessary; or
(ii) Include the condition in § 310.502
of this chapter.
(5) Within 912 days of the closing of
the docket of the proposed rulemaking
under paragraph (c)(4) of this section,
FDA will issue a final rule.
Dated: March 29, 2016.
Leslie Kux,
Associate Commissioner for Policy.
[FR Doc. 2016–07612 Filed 4–1–16; 8:45 am]
BILLING CODE 4164–01–P
DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Parts 1010 and 1023
RIN 1506–AB29
Amendments to the Definition of
Broker or Dealer in Securities
Financial Crimes Enforcement
Network (‘‘FinCEN’’), Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
FinCEN, a bureau of the
Department of the Treasury, is
proposing amendments to the
definitions of ‘‘broker or dealer in
securities’’ and ‘‘broker-dealer’’ under
the regulations implementing the Bank
Secrecy Act. This rulemaking would
amend those definitions explicitly to
include funding portals that are
involved in the offering or selling of
crowdfunding securities pursuant to
section 4(a)(6) of the Securities Act of
1933. The consequence of those
amendments would be that funding
portals would be required to implement
policies and procedures reasonably
designed to achieve compliance with
the Bank Secrecy Act requirements
currently applicable to brokers or
dealers in securities. The proposal to
specifically require funding portals to
comply with the Bank Secrecy Act
regulations is intended to help prevent
money laundering, terrorist financing,
and other financial crimes.
DATES: Written comments on this Notice
of Proposed Rulemaking (‘‘NPRM’’)
must be submitted on or before June 3,
2016.
ADDRESSES: Comments may be
submitted, identified by Regulatory
Identification Number (RIN) 1506–
AB29, by any of the following methods:
• Federal E-rulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
SUMMARY:
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Include RIN 1506–AB29 in the
submission. Refer to Docket Number
FINCEN–2014–0005.
• Mail: FinCEN, P.O. Box 39, Vienna,
VA 22183. Include RIN 1506–AB29 in
the body of the text.
Please submit comments by one
method only. Comments submitted in
response to this NPRM will become a
matter of public record. Therefore, you
should submit only information that
you wish to make publicly available.
Inspection of comments: The public
dockets for FinCEN can be found at
Regulations.gov. Federal Register
notices published by FinCEN are
searchable by docket number, RIN, or
document title, among other things, and
the docket number, RIN, and title may
be found at the beginning of the notice.
FinCEN uses the electronic, Internetaccessible dockets at Regulations.gov as
their complete, official-record docket;
all hard copies of materials that should
be in the docket, including public
comments, are electronically scanned
and placed in the docket. In general,
FinCEN will make all comments
publicly available by posting them on
https://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
FinCEN Resource Center at 1–800–767–
2825 or 1–703–905–3591 (not a toll free
number) and select option 3 for
regulatory questions. Email inquiries
can be sent to frc@fincen.gov.
SUPPLEMENTARY INFORMATION:
I. Statutory and Regulatory Provisions
The Currency and Foreign
Transactions Reporting Act of 1970, as
amended by the Providing Appropriate
Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (Public
Law 107–56) (‘‘USA PATRIOT Act’’)
and other legislation, which legislative
framework is commonly referred to as
the Bank Secrecy Act (‘‘BSA’’),1
authorizes the Secretary of the Treasury
(‘‘Secretary’’) to require financial
institutions to keep records and file
reports that ‘‘have a high degree of
usefulness in criminal, tax, or regulatory
proceedings, or in the conduct of
intelligence or counterintelligence
activities, including analysis, to protect
against international terrorism.’’ 2 In
addition, the Secretary is authorized to
impose anti-money laundering (‘‘AML’’)
program requirements on financial
institutions.3 The Secretary has
delegated to the Director of FinCEN the
1 The BSA is codified at 12 U.S.C. 1829b and
1951–1959, and 31 U.S.C. 5311–5314 and 5316–
5332 and notes thereto, with implementing
regulations at 31 CFR Chapter X. See 31 CFR
1010.100(e).
2 31 U.S.C. 5311.
3 31 U.S.C. 5318.
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authority to implement, administer, and
enforce compliance with the BSA and
its implementing regulations.4
The BSA was amended by the
Annunzio-Wylie Anti-Money
Laundering Act of 1992 (Pub. L. 102–
550) (‘‘Annunzio-Wylie’’).5 AnnunzioWylie authorizes the Secretary to issue
regulations requiring financial
institutions to implement programs to
guard against money laundering,
maintain records considered useful in
criminal, tax, or regulatory
investigations or proceedings, and
report suspicious transactions.6 When
prescribing minimum standards for
AML programs, FinCEN must ‘‘consider
the extent to which the requirements
imposed under [the AML program
requirement] are commensurate with
the size, location, and activities of the
financial institutions to which such
regulations apply.’’ 7 Pursuant to these
authorities, FinCEN has issued
regulations requiring brokers or dealers
in securities to report suspicious
transactions and implement AML
programs.8
II. Background Information
A. The Effect of the JOBS Act and the
Securities and Exchange Commission
Crowdfunding Rule on the Scope of the
Definitions of Brokers or Dealers in
Securities and Broker-Dealers Under the
Implementing Regulations of the BSA
The Jumpstart Our Business Startups
Act (the ‘‘JOBS Act’’), enacted on April
5, 2012, establishes the foundation for a
regulatory structure for startups and
small businesses to raise funds by
offering and selling securities through
crowdfunding 9 without having to
4 Treasury
Order 180–01 (Jul. 1, 2014).
U.S.C. 5318(g) was added to the BSA by
section 1517 of the Annunzio-Wylie Act; it was
expanded by section 403 of the Money Laundering
Suppression Act of 1994 (the ‘‘Money Laundering
Suppression Act’’), Title IV of the Riegle
Community Development and Regulatory
Improvement Act of 1994, Public Law 103–325, to
require designation of a single government recipient
for reports of suspicious transactions. As amended
by the USA PATRIOT Act, subsection (g)(1) states
generally that ‘‘the Secretary may require any
financial institution, and any director, officer,
employee, or agent of any financial institution, to
report any suspicious transaction relevant to a
possible violation of law or regulation.’’
6 Annunzio-Wylie Anti-Money Laundering Act,
Title XV of the Riegle Community Development and
Regulatory Improvement Act of 1994, Public Law
103–325; See also 31 U.S.C. 5318(g).
7 See section 352(c) of Title III of the USA
PATRIOT Act of 2001, Pub. L. 107–56, 115 Stat.
272, 322 (2001) (codified at 31 U.S.C. 5318(h)).
8 31 CFR 1023.320.
9 Crowdfunding is the use of the Internet to raise
money through small contributions from a large
number of investors. Not all crowdfunding involves
the offering or selling of securities, though in some
instances it does. This NPRM is meant to address
5 31
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register the securities with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) or state
securities regulators.10 Crowdfunding is
a new and evolving method to raise
money using the Internet by seeking
small individual contributions from a
large number of people. The
crowdfunding provisions of the JOBS
Act were designed to help startups and
small businesses raise funds by making
relatively low-dollar offerings of
securities less costly. They also permit
Internet-based platforms known as
‘‘funding portals,’’ acting as
intermediaries, to facilitate the offer or
sale of securities without having to
register with the SEC as brokers.
Title III of the JOBS Act amends the
Securities Act of 1933 and the Securities
Exchange Act of 1934 to create a new
exemption for offerings of crowdfunded
securities.11 Specifically, the JOBS Act
amends section 4 of the Securities Act
of 1933 to exempt issuers from the
registration requirements of section 5 of
that Act when they offer and sell up to
$1 million in securities, provided that,
among other things, individual
investments do not exceed certain
thresholds (e.g., $2,000 to $100,000 in a
12-month period) based on the
investor’s annual income or net worth.
Additionally, issuers must use the
services of an intermediary that is either
a broker registered with the SEC or a
‘‘funding portal’’ registered with the
SEC.12
The JOBS Act also amends the
Securities Exchange Act of 1934 to
include a definition of funding portals
in section 3(a)(80).13 The JOBS Act
defines a funding portal as any person
acting as an intermediary in a
transaction involving the offer or sale of
securities for the account of others,
solely pursuant to section 4(a)(6) of the
Securities Act that does not: (i) Offer
investment advice or recommendations;
(ii) solicit purchases, sales, or offers to
buy securities offered or displayed on
its Web site or portal; (iii) compensate
employees, agents, or other persons for
such solicitation or based on the sale of
securities displayed or referenced on its
only instances in which crowdfunding involves
facilitating an offer or sale of securities to raise
money for a business pursuant to section 4(a)(6) of
the Securities Act. For example, this NPRM is not
addressing instances where crowdfunding is
utilized to solicit donations from the general public
or a targeted group.
10 Public Law 112–106, 126 Stat. 306 (2012).
11 Id. See also sections 4(a)(6) and 4A of the
Securities Act of 1933 (15 U.S.C. 77a et seq.), and
section 3(a)(80) of the Securities Exchange Act of
1934 (15 U.S.C. 78a et seq.).
12 Id.
13 See section 3(a)(80) of the Securities Exchange
Act of 1934 (15 U.S.C. 78a et seq.).
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Web site or portal; (iv) hold, manage,
possess, or otherwise handle investor
funds or securities; or (v) engage in such
other activities as the SEC, by rule,
determines appropriate.14
In addition, the JOBS Act adds new
section 3(h) to the Securities Exchange
Act of 1934, which requires the SEC to
exempt, by rule, conditionally or
unconditionally, a registered funding
portal from the requirement to register
with the SEC as a broker.15 The funding
portal would, however, remain subject
to the SEC’s examination, enforcement,
and rulemaking authority. The funding
portal also must become a member of a
national securities association that is
registered under section 15A of the
Securities Exchange Act.16 As required
by the JOBS Act, the SEC issued a notice
of proposed rulemaking
(‘‘Crowdfunding NPRM’’) on November
5, 2013 proposing the regulatory
framework for intermediaries facilitating
the offer or sales of crowdfunded
securities,17 which it finalized largely as
proposed on October 30, 2015.18
Current BSA regulations at Part 1023
of Chapter X of Title 31 of the CFR (the
Part that imposes the specific
requirements to maintain an anti-money
laundering program and to file
suspicious activity reports) define
‘‘broker-dealers’’ by reference to persons
‘‘registered, or required to be registered,
as a broker or dealer with the
Commission under the Securities
Exchange Act of 1934.’’ 19 As described
above, a registered funding portal would
not be a person required to be registered
as a broker with the Commission
because a funding portal would be
exempt from broker registration, and
thus would not be subject to BSA
regulations under the current BSA
definition of ‘‘broker-dealers.’’ In its
Crowdfunding NPRM, the SEC sought to
address this issue through its proposed
rule 403(b). Specifically, the SEC
proposed that ‘‘[n]otwithstanding [the
exemption from registration as a broker
or dealer in securities], for purposes of
31 CFR chapter X, a funding portal is
‘required to be registered’ as a broker or
dealer with the Commission under the
Exchange Act.’’ 20 At the final stage of
its Crowdfunding rulemaking, the SEC
determined ‘‘that it would be more
appropriate to work with other
regulators to develop consistent and
effective AML obligations for funding
portals,’’ and chose not to adopt
proposed rule 403(b).21 Now that the
SEC has finalized its Crowdfunding rule
exempting funding portals from having
to register as brokers or dealers in
securities, FinCEN is proposing this
rulemaking to ensure that registered
funding portals are subject to BSA
regulations.
There are good reasons to ensure that
funding portals are subject to BSA
regulations. As the SEC has recognized,
funding portals would continue to
function as brokers regardless of the
statutory provisions exempting them
from registering as brokers under the
Exchange Act.22 Specifically, although
the JOBS Act prohibits a funding portal
from holding, managing, possessing, or
handling customer funds or securities, a
funding portal’s business activity is
essentially similar to that of introducing
brokers, which typically do not accept
cash from customers or maintain
custody of customer securities,23 but yet
are subject to the BSA regulations. As
such, funding portals raise at least the
same degree of AML and counter
financing of terrorism risk as some other
broker-dealers registered with the SEC,
and should be regulated
commensurately under the BSA.
Moreover, as the SEC noted in its
November 5, 2013 Crowdfunding
NPRM, there is reason to ‘‘expect that
funding portals would often facilitate
offerings of microcap or low-priced
securities, which may be more
susceptible to fraud and market
manipulation. We believe that imposing
the monitoring and reporting
requirements of the BSA on funding
portals would establish a valuable
oversight, prevention and detection
mechanism.’’ 24 In a 2010 published
report, the Financial Action Task Force
also identified low-priced and privatelyplaced securities as potential vehicles
for laundering money.
These securities pose a money
laundering risk because they are often
used to generate illicit assets through
market manipulation, insider trading,
and fraud.25 In addition, unlawfully
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14 Id.
15 Id. Generally, a third party that operates a Web
site to effect the purchase and sale of securities for
the account of others generally would, under
existing regulations, be required to register with the
Commission as a broker-dealer and comply with the
laws and regulations applicable to broker-dealers.
16 Id.
17 See 78 FR 66428 (Nov. 5, 2013).
18 See 80 FR 71387 (Nov. 16, 2015).
19 31 CFR 1023.100.
20 See 78 FR 66428, 66484 (Nov. 5, 2013).
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21 See
80 FR 71387, 71471 (Nov. 16, 2015).
78 FR 66428, 66483–66484.
23 See infra note 20.
24 See78 FR 66428, 66490–66491 (Nov. 5, 2013).
25 Id. See also Financial Action Task Force
(‘‘FATF’’), Money Laundering and Terrorist
Financing in the Securities Sector 20–21 (Oct. 2009)
(‘‘FATF Typology’’) (discussing the money
laundering risks associated with low priced
securities, private issuers, and shell companies). As
explained in the FATF Typology, illicit actors ‘‘can
22 See
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acquired assets can be used to purchase
these securities in order to resell them
and create the appearance of
legitimately sourced funds.26 It is also
possible that issuers relying on the
exemption in section 4(a)(6) may be
shell companies, which have been
associated with a high risk of money
laundering.27 Congress recognized and
expressed concern about these money
laundering and financial crimes risks,
which is why, in part, it chose to require
that securities offered and sold in
reliance on section 4(a)(6) be sold
through a regulated intermediary.28
FinCEN believes that funding portals
could play a critical role in detecting,
preventing, and reporting money
laundering and other illicit financing,
such as market manipulation and fraud.
As described above, funding portals
should be subject to normal BSA
obligations. A funding portal, like an
introducing broker, is in the best
position to know its customers, and to
identify and monitor for suspicious and
potentially illicit activity at the
individual customer level, as compared
to other required participants in the
transaction such as the qualified third
either use existing shares that are already publicly
traded or start a shell company for the express
purpose of engaging in those illicit activities. In
addition, criminal organizations also have been
known to use illicit assets generated outside the
securities industry to engage in market
manipulation and fraud.’’
26 See 78 FR 66428, 66490–66491 (Nov. 5, 2013).
‘‘Moreover, criminal organizations can also initially
invest in a private company that they can then use
as a front company for commingling illicit and
legitimate assets. They can then take this company
public through an offering in the public securities
markets, thus creating what appear to be legitimate
offering revenues. Alternatively, criminal
organizations can acquire a publicly traded
company and use it to launder illicit assets.’’ The
FATF Typology further highlighted the risk of shell
companies that, for example, ‘‘can be established to
accept payments from criminal organizations for
non-existent services. These payments, which
appear legitimate, can be deposited into depository
or brokerage accounts and either wire transferred
out of a jurisdiction or used to purchase securities
products that are easily transferable or redeemable.’’
27 See 78 FR 66428, 66490–66491 (Nov. 5, 2013).
See also, e.g., Joint Release, Guidance on Obtaining
and Retaining Beneficial Ownership Information,
FIN–2010–G001 (Mar. 5, 2010) (noting that
criminals, money launderers, tax evaders, and
terrorists may exploit the privacy and
confidentiality surrounding some business entities,
including shell companies and other vehicles
designed to conceal the nature and purpose of illicit
transactions and the identities of the persons
associated with them); Financial Crimes
Enforcement Network, The Role of Domestic Shell
Companies in Financial Crime and Money
Laundering: Limited Liability Companies (Nov.
2006), available at https://www.fincen.gov/news_
room/rp/files/LLCAssessment_FINAL.pdf.
28 See 78 FR 66428, 66490–66491 (Nov. 5, 2013).
See also 158 Cong. Rec. S1781 (daily ed. Mar. 19,
2012) (statement of former Sen. Carl Levin) (‘‘Senior
citizens, state securities regulators, and others
worry that this will give rise to money laundering
and fraud risks.’’).
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party, which may not see such activity
given its less direct contact with
individual customers.29 FinCEN
understands that the JOBS Act was
designed to provide regulatory relief
and ease the funding gap that startups
and small businesses often face, while
providing significant investor
protections. But in addition to investor
protections, any regulatory structure for
securities-based crowdfunding through
the Internet must also address the risk
of money laundering and other financial
crimes presented by the misuse of
crowdfunding transactions. FinCEN
agrees with the SEC that a funding
portal engaging in the business of
effecting securities transactions for the
accounts of others through
crowdfunding is acting as a brokerdealer, despite the exemption from
registration under the Exchange Act that
Congress directed the SEC to
implement, and that this new type of
broker or dealer in securities should be
subject to supervision under the BSA
regulation.
For all of these reasons, in addition to
the provisions finalized in the SEC’s
Crowdfunding rulemaking, FinCEN
believes that it is further appropriate, in
response to changes in the registration
requirement in the JOBS Act, to amend
the BSA definitions of a broker or dealer
in securities and broker-dealer to
explicitly include funding portals,
registered or required to be registered as
such, with the SEC. Explicitly requiring
funding portals to comply with the
BSA’s requirements, consistent with
registered brokers or dealers in
securities, helps ensure consistent
regulation of brokers or dealers in
securities with fewer opportunities for
regulatory gaps, which could be
exploited by financial criminals.
Because the BSA and its implementing
rules are risk-based, we expect that
funding portals would design programs
commensurate with their limited
business model and not the more
comprehensive programs established by
full service broker-dealers.
29 See 78 FR 66428, 66490. See also, e.g., National
Association Of Securities Dealers (‘‘NASD’’) (n/k/a
‘‘FINRA’’), NASD Provides Guidance To Member
Firms Concerning Anti-Money Laundering
Compliance Programs Required by Federal Law,
Special Notice to Members 02–21 (Apr. 2002),
available https://www.finra.org/Industry/
Regulation/Notices/2002/p003703 (stating that
‘‘introducing brokers generally are in the best
position to ‘know the customer,’ and thus to
identify potential money laundering concerns at the
account opening stage, including verification of the
identity of the customer and deciding whether to
open an account for a customer.’’).
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B. Overview of the Current Regulatory
Provisions Regarding Brokers or Dealers
in Securities and Broker-Dealers
On October 26, 2001, the President
signed into law the USA PATRIOT Act
of 2001. Title III of the USA PATRIOT
Act makes a number of amendments to
the anti-money laundering provisions of
the BSA to promote the prevention,
detection, and prosecution of
international money laundering and the
financing of terrorism. The statutory
mandate that all financial institutions,
which include brokers or dealers in
securities, establish an AML program
and comply with the BSA regulations is
a key element in the nation’s effort to
detect and prevent money laundering
and the financing of terrorism. If
implemented, this proposal would
explicitly incorporate a funding portal’s
activities within the existing definition
of brokers or dealers in securities, and
require funding portals to comply with
the full range of requirements outlined
in 31 CFR 1023 applicable to brokerdealers, including: (1) AML program; (2)
Suspicious Activity Report; (3)
Customer Identification Program; (4)
Currency Transaction Report; (5)
Recordkeeping and Travel rules; (6)
Information Sharing (section 314); (7)
Due Diligence for Correspondent
Accounts for Foreign Financial
Institutions and Private Banking
Accounts; (8) Prohibition on
Correspondent Accounts for Foreign
Shell Banks; and (9) Special Measures
(section 311).30 The following are brief
descriptions of the regulations that
would apply to funding portals if this
rulemaking is finalized as proposed.
1. Anti-Money Laundering Program
Section 352(a) of the USA PATRIOT
Act amended section 5318(h) of the
BSA. Section 5318(h)(1) requires every
financial institution defined in 31
U.S.C. 5312(a)(2), which are also
covered in 31 CFR, to establish an AML
program that includes, at minimum, (1)
the development of internal policies,
procedures, and controls; (2) the
designation of a compliance officer; (3)
an ongoing employee training program;
and (4) an independent audit function
to test programs.31 The BSA defines the
term ‘‘financial institution’’ to include,
in part, ‘‘a broker or dealer in
securities.’’ 32 Currently, a broker or
dealer in securities that implements and
maintains an AML program that
complies with the rules, regulations, or
30 See 31 CFR 1023.210, 1023.220, 1023.310,
1023.320, 1023.410, 1023.520, 1023.610, and
1023.630.
31 31 U.S.C. 5318(h)(1)(A–D).
32 31 U.S.C. 5312(a)(2)(G).
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19089
requirements of its self-regulatory
organization (‘‘SRO’’) is deemed to
satisfy the requirement of section 5318
(h)(1) of the BSA.33
2. Suspicious Activity Report
FinCEN has promulgated Suspicious
Activity Report (‘‘SAR’’) regulations for
a number of financial institutions. These
include banks, casinos, money services
businesses, brokers or dealers in
securities, mutual funds, insurance
companies, and futures commission
merchants and introducing brokers in
commodities.34 31 CFR 1023.320
contains the rules setting forth the
obligation of broker-dealers in securities
to report suspicious transactions.
Specifically, brokers or dealers in
securities are required to report a
transaction that is conducted or
attempted by, at, or through a brokerdealer and involves or aggregates to at
least $5,000 in funds or other assets, and
the broker-dealer knows, suspects, or
has reason to suspect that the
transaction (or a pattern of transactions
of which the transaction is a part) (i)
involves funds derived from illegal
activity or is intended or conducted to
hide or disguise funds or assets derived
from illegal activity; (ii) is designed,
whether through structuring or other
means, to evade the requirements of the
BSA; (iii) has no business or apparent
lawful purpose, and the broker or dealer
in securities knows of no reasonable
explanation for the transaction after
examining the available facts; or (iv)
involves the use of the broker-dealer to
facilitate criminal activity.
3. Currency Transaction Report
The Secretary was granted authority
in 1970, with the enactment of 31 U.S.C.
5313, to require financial institutions to
report currency transactions exceeding
$10,000. The information collected on
the Currency Transaction Report is
required to be provided pursuant to 31
U.S.C. 5313. The implementing
regulation for brokers or dealers in
securities can be found at 31 CFR
1023.310.
33 31 CFR 1023.210. See also Notice of Proposed
Rulemaking—Customer Due Diligence
Requirements for Financial Institutions 79 FR
45151 (Aug. 4, 2014). Treasury proposed rules to
clarify and strengthen customer due diligence
requirements, to include a new requirement to
identify beneficial owners of legal entity customers.
The proposed changes in that notice of proposed
rulemaking may have an impact on what is
proposed in this notice.
34 See 31 CFR 1020.210, 1020.320, 1021.210,
1021.320, 1022.210, 1022.320, 1023.210, 1023.320,
1024.210, 1024.320, 1025.210, 1025.320, 1026.210,
and 1026.320, respectively.
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4. Records To Be Made and Retained by
Financial Institutions
On January 3, 1995, FinCEN and the
Board of Governors of the Federal
Reserve System (‘‘the Board’’) jointly
issued a rule that requires banks and
nonbank financial institutions to collect
and retain information on certain funds
transfers and transmittals of funds (the
‘‘recordkeeping rule’’).35 At the same
time, FinCEN issued the ‘‘travel rule,’’
which requires banks and nonbank
financial institutions to include with a
transmittal order certain information on
funds transfers and transmittals of funds
sent to other banks or nonbank financial
institutions.36
The recordkeeping and travel rules
provide uniform recordkeeping and
transmittal requirements for financial
institutions, and are intended to help
law enforcement and regulatory
authorities detect, investigate, and
prosecute money laundering and other
financial crimes by preserving an
information trail about persons sending
and receiving funds through the funds
transfer system.
In general, the recordkeeping rule
requires financial institutions to retain
certain information on transmittals of
funds of $3,000 or more, which must be
retrievable and available upon request
to FinCEN, to law enforcement, and to
regulators to whom FinCEN has
delegated the BSA compliance
examination authority. Under the travel
rule, a financial institution acting as the
transmittor’s financial institution must
obtain and include in the transmittal
order certain information on
transmittals of funds of $3,000 or more.
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5. Customer Identification Program
31 CFR 1023.220 sets forth the
customer identification program (‘‘CIP’’)
requirements for brokers or dealers in
securities, which would include
funding portals with the proposed
amendments. Under the rule published
jointly with the SEC,37 brokers or
dealers in securities must establish a
written CIP that, at a minimum,
includes procedures for: (1) Obtaining
customer identifying information from
each customer prior to account opening;
(2) verifying the identity of each
customer to the extent reasonable and
35 31 CFR 1020.410(a) (recordkeeping
requirements for banks); 31 CFR 1010.410(e)
(recordkeeping requirements for nonbank financial
institutions). The Board revised its Regulation S (12
CFR part 219) to incorporate by reference the
recordkeeping rule codified in Title 31 of the CFR,
as well as to impose a five-year record-retention
requirement with respect to the recordkeeping
requirements.
36 31 CFR 1010.410(f).
37 68 FR 25113 (May 9, 2003).
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practicable, within a reasonable time
before or after account opening; (3)
making and maintaining a record of
obtained information relating to identity
verification; (4) determining, within a
reasonable time after account opening or
earlier, whether a customer appears on
any list of known or suspected terrorist
organizations designated by Treasury;
and (5) providing each customer with
adequate notice, prior to opening an
account, that information is being
requested to verify the customer’s
identity.38 Under certain defined
circumstances, brokers or dealers in
securities may rely on the performance
of another financial institution that also
is subject to an AML compliance
program rule to fulfill some or all of the
requirements of the broker-dealer’s
CIP.39
6. Special Information Procedures To
Deter Money Laundering and Terrorist
Activity
31 CFR 1023.500 states generally that
brokers or dealers in securities are
covered by the special information
procedures to detect money laundering
and terrorist activity requirements.40
Sections 1010.520 and 1010.540
implement sections 314(a) and 314(b) of
the USA PATRIOT Act, respectively.
Under the section 314(a)
requirements, brokers or dealers in
securities must respond to requests for
information made by FinCEN on behalf
of Federal, state, and local law
enforcement agencies, or a similar
request from FinCEN on its own behalf,
on behalf of certain components of
Treasury, or on behalf of certain foreign
law enforcement agencies.41 Upon
receiving such a request, a broker or
dealer in securities is required to search
its records to determine whether it has
accounts for, or has engaged in
transactions with, any specified
individual, entity, or organization.42
Under the regulation implementing
section 314(b), brokers or dealers in
securities are authorized to share
information with one another, under a
safe harbor that offers protections from
liability, in order to better identify and
report potential money laundering or
terrorist activities.43
38 31
CFR 1023.220(a)(6).
7. Due Diligence Anti-Money
Laundering Programs for Private
Banking and Certain Foreign Accounts
31 CFR 1023.600 generally states that
brokers or dealers in securities are
subject to the special standards of
diligence, prohibitions, and special
measures requirements.44 Sections
1010.610, 1010.620, and 1010.630
implement section 312 of the USA
PATRIOT Act and generally apply to
any financial institution listed in 31
U.S.C. 5312(a)(2). Sections 1023.610 and
1023.620 require U.S. financial
institutions, including brokers or
dealers in securities, to establish riskbased due diligence policies,
procedures, and controls reasonably
designed to detect and report money
laundering through correspondent
accounts and private banking accounts
that U.S. financial institutions establish
or maintain for non-U.S. persons.
8. Prohibition on Correspondent
Accounts for Foreign Shell Banks;
Records Concerning Owners of Foreign
Banks and Agents for Service of Legal
Process
Section 313 of the USA PATRIOT Act
amended the BSA by adding subsection
(j) to 31 U.S.C. 5318. Sections 1010.630
and 1023.630 implement this provision
and set forth the requirements for
brokers and dealers in securities. The
regulations prohibit covered financial
institutions from providing
correspondent accounts in the United
States to foreign shell banks (i.e., banks
without a physical presence in any
country) and to take reasonable steps to
ensure that correspondent accounts
provided to foreign banks are not being
used to provide banking services to
foreign shell banks indirectly.45 The
statutory and regulatory definitions of
covered financial institutions include a
broker or dealer in securities.46 Brokers
and dealers in securities must comply
with this regulation with respect to any
account they provide in the United
States to a foreign bank that permits the
foreign bank to engage in securities
transactions, funds transfers, or other
financial transactions through that
account.
Section 319(b) of the USA PATRIOT
Act amended the BSA by adding
subsection (k) to 31 U.S.C. 5318, which
requires any covered financial
institution that provides a
39 Id.
40 These requirements are set forth and cross
referenced in sections 1023.520 (cross referencing
to 31 CFR 1010.520) and 1023.540 of 31 CFR (crossreferencing to 31 CFR 1010.540).
41 31 CFR 1010.520(b).
42 31 CFR 1010.520(b)(3).
43 31 CFR 1023.540.
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44 These requirements are set forth and cross
referenced in sections 1023.610 (cross referencing
to 31 CFR 1010.610), 1023.620 (cross-referencing to
31 CFR 1010.620), and 1023.630 of 31 CFR (crossreferencing to 31 CFR 1010.630).
45 See 31 CFR 1010.630.
46 See 31 U.S.C. 5318(j)(1) and 5312(a)(2).
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correspondent account to a foreign bank
to maintain records of the foreign bank’s
owners and any agent in the United
States designated to accept service of
legal process for records regarding the
correspondent account. While the rule
does not prescribe the manner in which
a covered financial institution must
obtain the required information, it does
provide a safe harbor if a covered
financial institution obtains from the
foreign bank the model certification
provided on FinCEN’s public Web
site.47 The rule requires covered
financial institutions to verify the
information previously provided by
each foreign bank for which it maintains
a correspondent account at least once
every two years.
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9. Special Measures Under Section 311
of the USA PATRIOT Act
Section 311 of the USA PATRIOT Act
(‘‘section 311’’) added section 5318A to
the BSA, granting FinCEN the authority
to require domestic financial
institutions and financial agencies to
take certain ‘‘special measures’’ upon
finding that reasonable grounds exist for
concluding that a foreign jurisdiction,
institution, class of transaction, or type
of account is of ‘‘primary money
laundering concern.’’ To address the
specific money laundering risks, section
311 provides a range of special
measures that can be imposed
individually, jointly, in any
combination, and in any sequence.48
Under 31 CFR 1010.810(a), ‘‘[o]verall
authority for enforcement and
compliance, including coordination and
direction of procedures and activities of
all other agencies exercising delegated
authority under this chapter, is
delegated [by the Secretary] to the
Director, FinCEN.’’ In turn, Federal
functional regulators have been
delegated authority to examine certain
financial institutions they oversee for
47 Certification Regarding Correspondent
Accounts for Foreign Banks, available at: https://
www.fincen.gov/forms/files/Certification%20
Regarding%20Correspondent%20
Accounts%20for%20Foreign%20Banks.pdf;
Certification Regarding Correspondent Accounts for
Foreign Banks, available at: https://www.fincen.gov/
forms/files/Recertification%20
Regarding%20Correspondent%20
Accounts%20for%20Foreign%20Banks.pdf.
48 Available special measures include requiring:
(1) Recordkeeping and reporting of certain financial
transactions; (2) collection of information relating to
beneficial ownership; (3) collection of information
relating to certain payable-through accounts; (4)
collection of information relating to certain
correspondent accounts; and (5) prohibition or
conditions on the opening or maintaining of
correspondent or payable through accounts. 31
U.S.C. 5318A(b)(l)–(5). For a complete discussion of
the range of possible countermeasures, see 68 FR
18917 (April 17, 2003) (proposing special measures
against Nauru).
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compliance with FinCEN’s regulations.
FinCEN has delegated to the SEC the
authority to examine brokers or dealers
in securities, which would include
funding portals, for compliance with
FinCEN regulations.49
III. Section-by-Section Analysis
This NPRM proposes to revise the
regulations implementing the BSA by
amending the definition of ‘‘broker or
dealer in securities’’ and its
synonymous term ‘‘broker-dealer’’ to
specifically include funding portals that
are involved in the offering or selling of
crowdfunding securities pursuant to
section 4(a)(6) of the Securities Act of
1933 (15 U.S.C. 77d(a)(6)). These terms
are defined in three different places, and
phrased slightly differently for each, but
are substantively the same:
• In 31 CFR 1010.100(h), a ‘‘broker or
dealer in securities’’ is defined as ‘‘[a]
broker or dealer in securities, registered
or required to be registered with the
Securities and Exchange Commission
under the Securities Exchange Act of
1934, except persons who register
pursuant to section 15(b)(11) of the
Securities Exchange Act of 1934.’’
• 31 CFR 1010.605(e)(1)(viii) and
(e)(2)(viii) refer to ‘‘[a] broker or dealer
in securities registered, or required to be
registered, with the Securities and
Exchange Commission under the
Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.), except persons who
register pursuant to section 15(b)(11) of
the Securities Exchange Act of 1934.’’
• In 31 CFR 1023.100(b), a ‘‘brokerdealer’’ is defined to mean ‘‘a person
registered or required to be registered as
a broker or dealer with the Commission
under the Securities Exchange Act of
1934 (15 U.S.C. 77a et seq.), except
persons who register pursuant to 15
U.S.C. 78o(b)(11).’’ 50
FinCEN proposes to amend these
definitions by adding to each the phrase
‘‘a person registered, or required to be
registered, as a funding portal with the
Securities and Exchange Commission
under section 4(a)(6) of the Securities
Act of 1933 (15 U.S.C. 77d(a)(6)).’’
FinCEN further proposes to make
technical amendments to each
definition to create one standard
definition of the terms ‘‘broker or dealer
in securities’’ and ‘‘broker-dealer’’ to be
used throughout the regulations.
IV. Request for Comment
FinCEN invites comment on any and
all aspects of the NPRM, and
49 31
CFR 1010.810(b)(6).
is also amending this section of the
rule to reflect the correct citation of 15 U.S.C. 78a
et seq. currently published as 15 U.S.C. 77a et seq.
50 FinCEN
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19091
specifically seeks comments on the
following questions:
• Is the application of all BSA
regulations currently covering brokers
or dealers in securities to funding
portals appropriate?
• Are there exceptions to the
regulations that should be granted to
funding portals? If so, why would any
such exceptions be appropriate?
V. Executive Orders 12866 and 13563
Executive Orders 12866 and 13563
direct agencies to assess all costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). Executive Order 13563
emphasizes the importance of
quantifying both costs and benefits, of
reducing costs, of harmonizing rules,
and of promoting flexibility. It has been
determined that this proposed rule is a
significant regulatory action, although
not economically significant, for
purposes of Executive Orders 12866 and
13563.
VI. Unfunded Mandates Act of 1995
Statement
Section 202 of the Unfunded
Mandates Reform Act of 1995
(‘‘Unfunded Mandates Act’’), Public
Law 104–4 (March 22, 1995), requires
that an agency prepare a budgetary
impact statement before promulgating a
rule that may result in expenditure by
the state, local, and tribal governments,
in the aggregate, or by the private sector,
of $100 million or more in any one year.
If a budgetary impact statement is
required, section 202 of the Unfunded
Mandates Act also requires an agency to
identify and consider a reasonable
number of regulatory alternatives before
promulgating a rule. Since there is no
change to the requirements imposed
under existing regulations, FinCEN has
determined that it is not required to
prepare a written statement under
section 202.
VII. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) (5 U.S.C. 601 et seq.) requires
that a regulation that has a significant
economic impact on a substantial
number of small entities, small
businesses, or small organizations must
include an initial regulatory flexibility
analysis describing the regulation’s
impact on small entities. Such an
analysis need not be undertaken if the
agency has certified that the regulation
will not have a significant economic
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impact on a substantial number of small
entities (5 U.S.C. 605(b)).
Section 601(3) of the RFA states that
the term ‘‘small business’’ has the same
meaning as the term ‘‘small business
concern’’ under section 3 of the Small
Business Act, unless an agency, after
consultation with the Office of
Advocacy of the Small Business
Administration and after opportunity
for public comment, establishes one or
more definitions of such term which are
appropriate for the activities of the
agency and publishes such definition(s)
in the Federal Register. The Small
Business Administration’s (‘‘SBA’’)
defines a broker dealer industry to be a
small entity as having ‘‘annual receipts’’
of $38.5 million.51 However, FinCEN is
concerned that using the SBA size
standard rather than the SEC size
standard may result in confusion.
Accordingly, FinCEN consulted with
the SBA’s Office of Advocacy. After
consultation, FinCEN is proposing to
define the term small entity in
accordance with definitions obtained
from SEC rules implementing the
Securities Exchange Act,52 in lieu of
using the Small Business
Administration’s definition.53 The SEC
defines an entity as a small broker or
dealer, for purposes of the RFA, if it: (1)
Had total capital (net worth plus
subordinated liabilities) of less than
$500,000 on the date in the prior fiscal
year as of which its audited financial
statements were prepared pursuant to
Rule 17a–5(d) or, if not required to file
such statements, a broker or dealer that
had total capital (net worth plus
subordinated debt) of less than $500,000
on the last business day of the preceding
fiscal year (or in the time that it has
been in business if shorter); and (2) is
not affiliated with any person (other
than a natural person) that is not a small
business or small organization as
defined in this release. The proposed
rules would define broker or dealer in
securities as: (1) A person registered, or
required to be registered, as a broker or
dealer with the Securities and Exchange
Commission under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et
seq.), except persons who register
pursuant to section 15(b)(11) of the
Securities Exchange Act of 1934 (15
U.S.C. 78o(b)(11)); or (2) a person,
registered, or required to be registered,
as a funding portal with the Securities
and Exchange Commission under
section 4(a)(6) of the Securities Act of
1933 (15 U.S.C. 77d(a)(6). Based on
FOCUS Report data, the SEC estimated
51 Id.
52 17
53 13
CFR 240.0–10c.
CFR 121.201.
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that there are 871 broker-dealers that are
classified as ‘‘small’’ entities for
purposes of the RFA.54 The SEC applied
comparable criteria to funding portals
that would register under the SEC’s
Crowdfunding rule.
Relying on the SEC’s definition has
the benefit of ensuring consistency in
the categorization of small entities for
SEC examiners, as well as providing the
broker or dealer industry with a uniform
standard. In addition, FinCEN’s
proposed use of the SEC’s definition of
small entity will have no material
impact upon the application of these
proposed rules to the broker or dealer
industry. FinCEN requests comment on
the appropriateness of using the SEC’s
definition of small entity.
The proposed changes are intended to
amend the regulatory definition of
broker or dealer in securities to include
funding portals in light of the JOBS Act
and the Final SEC Crowdfunding Rules.
While these amendments do not alter a
broker or dealer in securities existing
obligations, they will expand the BSA
regulations to create obligations for
funding portals. Accordingly, FinCEN
has prepared an initial regulatory
flexibility analysis pursuant to the
Regulatory Flexibility Act. A final
regulatory flexibility analysis will be
conducted after consideration of
comments received during the public
comment period.
1. Statement of the Need for, and
Objectives of, the Proposed Regulation
The JOBS Act creates a
comprehensive regulatory structure for
startups and small businesses to raise
capital through securities offerings
using the Internet through
crowdfunding. It also establishes the
regulation of registered funding portals
and brokers that are required to act as
intermediaries in the offer and sale of
crowdfunded securities. The JOBS Act
amends the Federal securities laws to
include certain funding portals, defined
as any person acting as an intermediary
in a transaction involving the offer or
sale of securities for the account of
others solely pursuant to section 4(a)(6)
of the Securities Act, but that is
exempted from the requirement to
register as a broker-dealer with the SEC,
and is instead required to be registered
as a funding portal with the SEC. This
proposed regulation is necessary to
expand the scope of the regulatory
definition of broker or dealer in
54 FOCUS Reports, or ‘‘Financial and Operational
Combined Uniform Single’’ Reports, are monthly,
quarterly, and annual reports that broker-dealer
generally are required to file with the SEC and or
self-regulatory organizations pursuant to Exchange
Act Rule 17a–5 (17 CFR 240.17a–5).
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securities to incorporate funding
portals, to ensure consistent
applicability of the BSA regulations to
all brokers in securities.
2. Small Entities Affected by the
Proposed Regulation
While the proposed BSA
requirements would impose burdens on
funding portals, the proposed rules
would not impose any burden on
funding portals in addition to those
already imposed on broker-dealers.
Consequently, we do not discuss those
burdens here, and we would not be
requesting any separate approval from
OMB to impose the burdens associated
with the information collection
requirements to comply with the
requirements of 31 CFR 1023, including
the BSA/AML program, CTR, SAR, CIP,
Recordkeeping and travel rules, Due
Diligence Programs for Correspondent
Accounts for Foreign Financial
Institutions and Private Bank accounts,
Prohibition on Correspondent Account
for Shell Banks, section 311, and section
314 requirements.
The requirements of this proposed
regulation, which are consistent with
the existing requirements for brokers or
dealers in securities, would include
funding portals regardless of size. Based
on SEC analysis of the estimated 50
funding portals in the first year
expected to register with the SEC, as a
result of the JOBS Act and
implementing regulations, 30 would be
classified as ‘‘small’’ entities for
purposes of the Regulatory Flexibility
Act.55
3. Compliance Requirements
Upon finalization of this proposal,
registered funding portals would be
required to comply with all of the
requirements of the BSA, including the
reporting, recordkeeping, and record
retention requirements that apply to
entities currently defined as brokers or
dealers in securities. We recognize that
the proposed rules would impose costs
on funding portals to implement AML
procedures, but we believe that the
proposed amendments and
requirements provide important
benefits. As noted in the SEC NPRM,
low-priced and privately-placed
securities pose a money laundering risk
because they are susceptible to market
manipulation and fraud.56 Requiring
funding portals to comply with BSA
regulations, in particular the
requirement to file SARs, helps identify
potentially fraudulent activity for law
enforcement and regulators. These AML
55 See
56 See
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80 FR 71387, 71533 (Nov. 16, 2015).
78 FR 66428, 66490–66491 (Nov. 5, 2013).
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requirements would therefore help to
protect market participants from illegal
activity that could potentially infiltrate
new online investment opportunities.
Requiring the implementation of AML
procedures in turn provides potential
investors with some degree of
confidence that adequate protections
against illegal activity exist for this new
fundraising approach and could
encourage more investors to participate,
thus facilitating capital formation.
The proposed regulations would
require funding portals to develop
programs reasonably designed to
comply with the BSA and to collect and
keep certain information, as well as
report suspicious activity, among other
reports. While the proposed regulations
would not change the scope of
compliance with the BSA requirements
for brokers or dealers in securities that
are not funding portals, the reporting,
recordkeeping, and other compliance
requirements of the proposed regulation
would impact small entities that decide
to register as funding portals. While the
majority of these requirements would be
performed by the funding portal’s
internal compliance personnel, some
funding portals may choose to hire
outside counsel and third-party service
providers to assist in meeting the
compliance requirements.
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4. Duplicative, Overlapping, or
Conflicting Federal Rules
FinCEN believes that there are no
Federal rules that duplicate, overlap, or
conflict with the proposed regulations
or the proposed amendments.
5. Significant Alternatives to the
Proposed Regulations
FinCEN considered whether it would
be appropriate to establish different
compliance or reporting obligations for
small funding portals in the proposal, or
whether small funding portals should be
exempt from any parts of the proposed
rules or even from the rules in their
entirety. While the proposed rules are
based on existing compliance
requirements applicable to registered
brokers or dealers in securities, FinCEN
believes that it would not be necessary,
nor would it be advisable, to establish
different requirements for small funding
portals that engage in crowdfunding.
Eliminating or issuing different
requirements for smaller funding portals
would not be the most effective means
of addressing the money laundering risk
associated with securities crowdfunding
as it would create a loophole and a path
of least resistance that money
launderers could exploit. The number of
small funding portals that would be
affected by the proposed rules would be
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limited. According to the SEC, an
industry survey of crowdfunding
platforms reported that 191 platforms
were estimated to be operating in the
United States as of 2012.57 Based on 135
participants in the survey both in the
United States and international
jurisdictions, 15% of funding portal
platforms were engaged in securitiesbased crowdfunding.58 Although the
number of intermediaries that may
ultimately register as funding portal is
uncertain, it is likely that three to four
of the crowdfunding platforms that have
the majority of market share in rewardbased and donation-based
crowdfunding would most likely obtain
the majority of market share in the
securities-based crowdfunding market
based on section 4(a)(6).59 The BSA
regulations are risk-based and are
designed so that entities that are subject
to the regulations can implement a
program that is commensurate with the
risks posed by their particular business.
FinCEN expects that a small funding
portal would implement a risk-based
compliance program that takes into
account the limited business activities
in which the business participates. For
example, a funding portal could
implement a risk-based compliance
program which reflects the fact that the
business does not accept cash or
securities from its customers. Therefore,
we believe that the proposed rules are
appropriate, and properly cover all
brokers or dealers in securities,
including funding portals. Furthermore,
FinCEN believes that having different
requirements for funding portals could
undermine the objectives of the
proposed requirements.
FinCEN welcomes comment on any
significant alternatives that would
minimize the impact of the proposal on
small funding portal entities.
VIII. Paperwork Reduction Act
The collection of information
requirements have been reviewed and
approved by the Office of Management
and Budget (‘‘OMB’’) under section
3507 of the Paperwork Reduction Act of
1995 (‘‘PRA’’) (44 U.S.C. 3507(d). (OMB
Control Number 1506–0004 for the CTR
requirement, the OMB Control Number
for the CTR report itself is 1506–0064,
OMB Control Number 1506–0019 for the
SAR regulatory requirement, the OMB
Control Number for the BSA SAR report
itself is 1506–0065, OMB Control
Number 1506–0034 for the CIP
57 See
78 FR 66428, 66516 (Nov. 5, 2013).
survey further indicated that 11% were
engaged in lending-based crowdfunding, 27% in
donation-based crowdfunding, and 47% in rewardbased crowdfunding.
59 See 78 FR 66428, 66516 (Nov. 5, 2013).
58 The
PO 00000
Frm 00034
Fmt 4702
Sfmt 4702
19093
requirement, OMB Control Number
1506–0043 for the Prohibitions on
Correspondent Accounts for Foreign
Shell Banks requirement, OMB Control
Number 1506–0049 for the section 314
requirement, and OMB Control Number
1506–0053 for the Recordkeeping and
travel rules requirements). Under the
PRA, an agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid OMB
control number. Certain provisions of
the proposed rules contain ‘‘collection
of information’’ requirements within the
meaning of the PRA. This proposal
intends to expand the scope of financial
institutions subject to the BSA
regulations FinCEN issued for brokers or
dealers in securities to include funding
portals. The collections of information
included under OMB Control Number
1506–0004 for the CTR requirement,
OMB Control Number 1506–0019 for the
SAR requirement, OMB Control Number
1506–0034 for the CIP requirement,
OMB Control Number 1506–0043 for the
Prohibitions on Correspondent
Accounts for Shell Banks requirement,
OMB Control Number 1506–0049 for the
section 314 requirement, and OMB
control number 1506–0053 for the
Recordkeeping and travel rules
requirements, respectively would be
amended to reflect related burdens
under the proposed rules.
1. Description of Affected Financial
Institutions
Funding portals registered or required
to be registered with the SEC.
2. Estimated Number of Affected
Financial Institutions
According to the SEC, as of 2014,
there are approximately 200 U.S.-based
crowdfunding portals in existence.
Approximately 15% of these
crowdfunding portals would participate
in securities-based crowdfunding. The
SEC estimates that the number of
crowdfunding portals would grow at
60% per year over the next three years
and that approximately 50 entities
would register as funding portals
annually.60
For purposes of this analysis it should
be noted that the actual number of
funding portals that would participate
in securities-based crowdfunding
transactions is uncertain, as the rules
governing securities-based
crowdfunding transactions through
funding portals have only recently been
passed. Based on registration
information currently available, the SEC
estimates that approximately 10
60 See
E:\FR\FM\04APP1.SGM
80 FR 71387, 71523 (Nov. 16, 2015).
04APP1
19094
Federal Register / Vol. 81, No. 64 / Monday, April 4, 2016 / Proposed Rules
intermediaries that are currently
registered with the SEC may choose to
register as brokers to act as
intermediaries for transactions made in
reliance on section 4(a)(6). In addition,
approximately 50 intermediaries per
year that are registered as brokers with
the SEC would choose to add to their
service offerings by also becoming
crowdfunding intermediaries or funding
portals.
3. Estimated Average Annual Burden
Hours Per Affected Financial
Institutions, Estimated Total Annual
Burden
As this is a new requirement, the
estimated average burden associated
with the recordkeeping requirement in
this proposed rule is three hours for
development of a written program. A
one hour per year burden is recognized
for annual maintenance and update.
FinCEN believes funding portals would
establish policies and procedures to
achieve compliance with the BSA
requirements at the same time as it is
establishing policies and procedures to
comply with the JOBS Act. This would
reduce the overall burden on funding
portals as all issues concerning the
establishment of policies and
procedures could be addressed
simultaneously. Nevertheless, the
proposed rules would not impose any
additional burden on funding portals to
those currently imposed on brokers or
dealers. Therefore, the burden on
funding portals would be the same as
the existing burden for broker-dealers,
and would be included within those
estimates FinCEN provided to OMB for
brokers or dealers.
List of Subjects in 31 CFR Parts 1010
and 1023
Authority delegations (Government
agencies), Banks and banking, Currency,
Investigations, Law enforcement,
Reporting and recordkeeping
requirements.
Authority and Issuance
mstockstill on DSK4VPTVN1PROD with PROPOSALS
For the reasons set forth in the
preamble, parts 1010 and 1023 of
Chapter X of title 31 of the Code of
Federal Regulations are proposed to be
amended as follows:
PART 1010—GENERAL PROVISIONS
1. The authority citation for part 1010
continues to read as follows:
■
Authority: 12 U.S.C. 1829b and 1951–
1959; 31 U.S.C. 5311–5314, 5316–5332; title
III, section 314, Pub. L. 107–56, 115 Stat. 307.
2. Amend § 1010.100 by revising
paragraph (h) to read as follows:
■
VerDate Sep<11>2014
18:23 Apr 01, 2016
Jkt 238001
§ 1010.100
General definitions.
*
*
*
*
*
(h) Broker or dealer in securities. A
broker or dealer in securities means:
(1) A person registered, or required to
be registered, as a broker or dealer with
the Securities and Exchange
Commission under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et
seq.), except persons who register
pursuant to section 15(b)(11) of the
Securities Exchange Act of 1934 (15
U.S.C. 78o(b)(11)); or
(2) A person registered, or required to
be registered, as a funding portal with
the Securities and Exchange
Commission under section 4(a)(6) of the
Securities Act of 1933 (15 U.S.C.
77d(a)(6));
*
*
*
*
*
■ 3. Amend § 1010.605 by revising
paragraphs (e)(1)(viii) and (e)(2)(viii) to
read as follows:
§ 1010.605
Definitions.
*
*
*
*
*
(e) * * *
(1) * * *
(viii) A broker or dealer in securities
means:
(A) A person registered, or required to
be registered, as a broker or dealer with
the Securities and Exchange
Commission under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et
seq.), except persons who register
pursuant to section 15(b)(11) of the
Securities Exchange Act of 1934 (15
U.S.C. 78o(b)(11)); or
(B) A person registered, or required to
be registered, as a funding portal with
the Securities and Exchange
Commission under section 4(a)(6) of the
Securities Act of 1933 (15 U.S.C.
77d(a)(6));
*
*
*
*
*
(2) * * *
(viii) A broker or dealer in securities
means:
(A) A person registered, or required to
be registered, as a broker or dealer with
the Securities and Exchange
Commission under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et
seq.), except persons who register
pursuant to section 15(b)(11) of the
Securities Exchange Act of 1934 (15
U.S.C. 78o(b)(11)); or
(B) A person registered, or required to
be registered, as a funding portal with
the Securities and Exchange
Commission under section 4(a)(6) of the
Securities Act of 1933 (15 U.S.C.
77d(a)(6)).
*
*
*
*
*
PO 00000
Frm 00035
Fmt 4702
Sfmt 4702
PART 1023—RULES FOR BROKERS
OR DEALERS IN SECURITIES
4. The authority citation for part 1023
continues to read as follows:
■
Authority: 12 U.S.C. 1829b and 1951–
1959; 31 U.S.C. 5311–5314, 5316–5332; title
III, section 314, Pub. L. 107–56, 115 Stat. 307.
5. Amend § 1023.100 by revising
paragraph (b) to read as follows:
■
§ 1023.100
Definitions.
*
*
*
*
*
(b) Broker or dealer in securities or
broker-dealer means:
(1) A person registered, or required to
be registered, as a broker or dealer with
the Securities and Exchange
Commission under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et
seq.), except persons who register
pursuant to section 15(b)(11) of the
Securities Exchange Act of 1934 (15
U.S.C. 78o(b)(11)); or
(2) A person registered, or required to
be registered, as a funding portal with
the Securities and Exchange
Commission under section 4(a)(6) of the
Securities Act of 1933 (15 U.S.C.
77d(a)(6)).
Jennifer Shasky Calvery,
Director, Financial Crimes Enforcement
Network.
[FR Doc. 2016–07345 Filed 4–1–16; 8:45 am]
BILLING CODE 4810–02–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 117
[Docket No. USCG–2014–1057]
RIN 1625–AA09
Drawbridge Operation Regulation;
Norwalk River, Norwalk, CT
Coast Guard, DHS.
Supplemental Notice of
proposed rulemaking.
AGENCY:
ACTION:
The Coast Guard proposes to
modify the operating schedule that
governs the Metro-North WALK Bridge
across the Norwalk River, mile 0.1, at
Norwalk, Connecticut. The bridge
owner submitted a request to require a
greater advance notice for bridge
openings and to increase time periods
the bridge remains in the closed
position during the weekday morning
and evening rush hours. It is expected
that this change to the regulations will
create efficiency in drawbridge
operations while continuing to meet the
reasonable needs of navigation.
SUMMARY:
E:\FR\FM\04APP1.SGM
04APP1
]]>Agencies
[Federal Register Volume 81, Number 64 (Monday, April 4, 2016)]
[Proposed Rules]
[Pages 19086-19094]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07345]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Parts 1010 and 1023
RIN 1506-AB29
Amendments to the Definition of Broker or Dealer in Securities
AGENCY: Financial Crimes Enforcement Network (``FinCEN''), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: FinCEN, a bureau of the Department of the Treasury, is
proposing amendments to the definitions of ``broker or dealer in
securities'' and ``broker-dealer'' under the regulations implementing
the Bank Secrecy Act. This rulemaking would amend those definitions
explicitly to include funding portals that are involved in the offering
or selling of crowdfunding securities pursuant to section 4(a)(6) of
the Securities Act of 1933. The consequence of those amendments would
be that funding portals would be required to implement policies and
procedures reasonably designed to achieve compliance with the Bank
Secrecy Act requirements currently applicable to brokers or dealers in
securities. The proposal to specifically require funding portals to
comply with the Bank Secrecy Act regulations is intended to help
prevent money laundering, terrorist financing, and other financial
crimes.
DATES: Written comments on this Notice of Proposed Rulemaking
(``NPRM'') must be submitted on or before June 3, 2016.
ADDRESSES: Comments may be submitted, identified by Regulatory
Identification Number (RIN) 1506-AB29, by any of the following methods:
Federal E-rulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
[[Page 19087]]
Include RIN 1506-AB29 in the submission. Refer to Docket Number FINCEN-
2014-0005.
Mail: FinCEN, P.O. Box 39, Vienna, VA 22183. Include RIN
1506-AB29 in the body of the text.
Please submit comments by one method only. Comments submitted in
response to this NPRM will become a matter of public record. Therefore,
you should submit only information that you wish to make publicly
available.
Inspection of comments: The public dockets for FinCEN can be found
at Regulations.gov. Federal Register notices published by FinCEN are
searchable by docket number, RIN, or document title, among other
things, and the docket number, RIN, and title may be found at the
beginning of the notice. FinCEN uses the electronic, Internet-
accessible dockets at Regulations.gov as their complete, official-
record docket; all hard copies of materials that should be in the
docket, including public comments, are electronically scanned and
placed in the docket. In general, FinCEN will make all comments
publicly available by posting them on https://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: FinCEN Resource Center at 1-800-767-
2825 or 1-703-905-3591 (not a toll free number) and select option 3 for
regulatory questions. Email inquiries can be sent to frc@fincen.gov.
SUPPLEMENTARY INFORMATION:
I. Statutory and Regulatory Provisions
The Currency and Foreign Transactions Reporting Act of 1970, as
amended by the Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (Public Law 107-56) (``USA PATRIOT
Act'') and other legislation, which legislative framework is commonly
referred to as the Bank Secrecy Act (``BSA''),\1\ authorizes the
Secretary of the Treasury (``Secretary'') to require financial
institutions to keep records and file reports that ``have a high degree
of usefulness in criminal, tax, or regulatory proceedings, or in the
conduct of intelligence or counterintelligence activities, including
analysis, to protect against international terrorism.'' \2\ In
addition, the Secretary is authorized to impose anti-money laundering
(``AML'') program requirements on financial institutions.\3\ The
Secretary has delegated to the Director of FinCEN the authority to
implement, administer, and enforce compliance with the BSA and its
implementing regulations.\4\
---------------------------------------------------------------------------
\1\ The BSA is codified at 12 U.S.C. 1829b and 1951-1959, and 31
U.S.C. 5311-5314 and 5316-5332 and notes thereto, with implementing
regulations at 31 CFR Chapter X. See 31 CFR 1010.100(e).
\2\ 31 U.S.C. 5311.
\3\ 31 U.S.C. 5318.
\4\ Treasury Order 180-01 (Jul. 1, 2014).
---------------------------------------------------------------------------
The BSA was amended by the Annunzio-Wylie Anti-Money Laundering Act
of 1992 (Pub. L. 102-550) (``Annunzio-Wylie'').\5\ Annunzio-Wylie
authorizes the Secretary to issue regulations requiring financial
institutions to implement programs to guard against money laundering,
maintain records considered useful in criminal, tax, or regulatory
investigations or proceedings, and report suspicious transactions.\6\
When prescribing minimum standards for AML programs, FinCEN must
``consider the extent to which the requirements imposed under [the AML
program requirement] are commensurate with the size, location, and
activities of the financial institutions to which such regulations
apply.'' \7\ Pursuant to these authorities, FinCEN has issued
regulations requiring brokers or dealers in securities to report
suspicious transactions and implement AML programs.\8\
---------------------------------------------------------------------------
\5\ 31 U.S.C. 5318(g) was added to the BSA by section 1517 of
the Annunzio-Wylie Act; it was expanded by section 403 of the Money
Laundering Suppression Act of 1994 (the ``Money Laundering
Suppression Act''), Title IV of the Riegle Community Development and
Regulatory Improvement Act of 1994, Public Law 103-325, to require
designation of a single government recipient for reports of
suspicious transactions. As amended by the USA PATRIOT Act,
subsection (g)(1) states generally that ``the Secretary may require
any financial institution, and any director, officer, employee, or
agent of any financial institution, to report any suspicious
transaction relevant to a possible violation of law or regulation.''
\6\ Annunzio-Wylie Anti-Money Laundering Act, Title XV of the
Riegle Community Development and Regulatory Improvement Act of 1994,
Public Law 103-325; See also 31 U.S.C. 5318(g).
\7\ See section 352(c) of Title III of the USA PATRIOT Act of
2001, Pub. L. 107-56, 115 Stat. 272, 322 (2001) (codified at 31
U.S.C. 5318(h)).
\8\ 31 CFR 1023.320.
---------------------------------------------------------------------------
II. Background Information
A. The Effect of the JOBS Act and the Securities and Exchange
Commission Crowdfunding Rule on the Scope of the Definitions of Brokers
or Dealers in Securities and Broker-Dealers Under the Implementing
Regulations of the BSA
The Jumpstart Our Business Startups Act (the ``JOBS Act''), enacted
on April 5, 2012, establishes the foundation for a regulatory structure
for startups and small businesses to raise funds by offering and
selling securities through crowdfunding \9\ without having to register
the securities with the Securities and Exchange Commission (``SEC'' or
``Commission'') or state securities regulators.\10\ Crowdfunding is a
new and evolving method to raise money using the Internet by seeking
small individual contributions from a large number of people. The
crowdfunding provisions of the JOBS Act were designed to help startups
and small businesses raise funds by making relatively low-dollar
offerings of securities less costly. They also permit Internet-based
platforms known as ``funding portals,'' acting as intermediaries, to
facilitate the offer or sale of securities without having to register
with the SEC as brokers.
---------------------------------------------------------------------------
\9\ Crowdfunding is the use of the Internet to raise money
through small contributions from a large number of investors. Not
all crowdfunding involves the offering or selling of securities,
though in some instances it does. This NPRM is meant to address only
instances in which crowdfunding involves facilitating an offer or
sale of securities to raise money for a business pursuant to section
4(a)(6) of the Securities Act. For example, this NPRM is not
addressing instances where crowdfunding is utilized to solicit
donations from the general public or a targeted group.
\10\ Public Law 112-106, 126 Stat. 306 (2012).
---------------------------------------------------------------------------
Title III of the JOBS Act amends the Securities Act of 1933 and the
Securities Exchange Act of 1934 to create a new exemption for offerings
of crowdfunded securities.\11\ Specifically, the JOBS Act amends
section 4 of the Securities Act of 1933 to exempt issuers from the
registration requirements of section 5 of that Act when they offer and
sell up to $1 million in securities, provided that, among other things,
individual investments do not exceed certain thresholds (e.g., $2,000
to $100,000 in a 12-month period) based on the investor's annual income
or net worth. Additionally, issuers must use the services of an
intermediary that is either a broker registered with the SEC or a
``funding portal'' registered with the SEC.\12\
---------------------------------------------------------------------------
\11\ Id. See also sections 4(a)(6) and 4A of the Securities Act
of 1933 (15 U.S.C. 77a et seq.), and section 3(a)(80) of the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).
\12\ Id.
---------------------------------------------------------------------------
The JOBS Act also amends the Securities Exchange Act of 1934 to
include a definition of funding portals in section 3(a)(80).\13\ The
JOBS Act defines a funding portal as any person acting as an
intermediary in a transaction involving the offer or sale of securities
for the account of others, solely pursuant to section 4(a)(6) of the
Securities Act that does not: (i) Offer investment advice or
recommendations; (ii) solicit purchases, sales, or offers to buy
securities offered or displayed on its Web site or portal; (iii)
compensate employees, agents, or other persons for such solicitation or
based on the sale of securities displayed or referenced on its
[[Page 19088]]
Web site or portal; (iv) hold, manage, possess, or otherwise handle
investor funds or securities; or (v) engage in such other activities as
the SEC, by rule, determines appropriate.\14\
---------------------------------------------------------------------------
\13\ See section 3(a)(80) of the Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.).
\14\ Id.
---------------------------------------------------------------------------
In addition, the JOBS Act adds new section 3(h) to the Securities
Exchange Act of 1934, which requires the SEC to exempt, by rule,
conditionally or unconditionally, a registered funding portal from the
requirement to register with the SEC as a broker.\15\ The funding
portal would, however, remain subject to the SEC's examination,
enforcement, and rulemaking authority. The funding portal also must
become a member of a national securities association that is registered
under section 15A of the Securities Exchange Act.\16\ As required by
the JOBS Act, the SEC issued a notice of proposed rulemaking
(``Crowdfunding NPRM'') on November 5, 2013 proposing the regulatory
framework for intermediaries facilitating the offer or sales of
crowdfunded securities,\17\ which it finalized largely as proposed on
October 30, 2015.\18\
---------------------------------------------------------------------------
\15\ Id. Generally, a third party that operates a Web site to
effect the purchase and sale of securities for the account of others
generally would, under existing regulations, be required to register
with the Commission as a broker-dealer and comply with the laws and
regulations applicable to broker-dealers.
\16\ Id.
\17\ See 78 FR 66428 (Nov. 5, 2013).
\18\ See 80 FR 71387 (Nov. 16, 2015).
---------------------------------------------------------------------------
Current BSA regulations at Part 1023 of Chapter X of Title 31 of
the CFR (the Part that imposes the specific requirements to maintain an
anti-money laundering program and to file suspicious activity reports)
define ``broker-dealers'' by reference to persons ``registered, or
required to be registered, as a broker or dealer with the Commission
under the Securities Exchange Act of 1934.'' \19\ As described above, a
registered funding portal would not be a person required to be
registered as a broker with the Commission because a funding portal
would be exempt from broker registration, and thus would not be subject
to BSA regulations under the current BSA definition of ``broker-
dealers.'' In its Crowdfunding NPRM, the SEC sought to address this
issue through its proposed rule 403(b). Specifically, the SEC proposed
that ``[n]otwithstanding [the exemption from registration as a broker
or dealer in securities], for purposes of 31 CFR chapter X, a funding
portal is `required to be registered' as a broker or dealer with the
Commission under the Exchange Act.'' \20\ At the final stage of its
Crowdfunding rulemaking, the SEC determined ``that it would be more
appropriate to work with other regulators to develop consistent and
effective AML obligations for funding portals,'' and chose not to adopt
proposed rule 403(b).\21\ Now that the SEC has finalized its
Crowdfunding rule exempting funding portals from having to register as
brokers or dealers in securities, FinCEN is proposing this rulemaking
to ensure that registered funding portals are subject to BSA
regulations.
---------------------------------------------------------------------------
\19\ 31 CFR 1023.100.
\20\ See 78 FR 66428, 66484 (Nov. 5, 2013).
\21\ See 80 FR 71387, 71471 (Nov. 16, 2015).
---------------------------------------------------------------------------
There are good reasons to ensure that funding portals are subject
to BSA regulations. As the SEC has recognized, funding portals would
continue to function as brokers regardless of the statutory provisions
exempting them from registering as brokers under the Exchange Act.\22\
Specifically, although the JOBS Act prohibits a funding portal from
holding, managing, possessing, or handling customer funds or
securities, a funding portal's business activity is essentially similar
to that of introducing brokers, which typically do not accept cash from
customers or maintain custody of customer securities,\23\ but yet are
subject to the BSA regulations. As such, funding portals raise at least
the same degree of AML and counter financing of terrorism risk as some
other broker-dealers registered with the SEC, and should be regulated
commensurately under the BSA.
---------------------------------------------------------------------------
\22\ See 78 FR 66428, 66483-66484.
\23\ See infra note 20.
---------------------------------------------------------------------------
Moreover, as the SEC noted in its November 5, 2013 Crowdfunding
NPRM, there is reason to ``expect that funding portals would often
facilitate offerings of microcap or low-priced securities, which may be
more susceptible to fraud and market manipulation. We believe that
imposing the monitoring and reporting requirements of the BSA on
funding portals would establish a valuable oversight, prevention and
detection mechanism.'' \24\ In a 2010 published report, the Financial
Action Task Force also identified low-priced and privately-placed
securities as potential vehicles for laundering money.
---------------------------------------------------------------------------
\24\ See78 FR 66428, 66490-66491 (Nov. 5, 2013).
---------------------------------------------------------------------------
These securities pose a money laundering risk because they are
often used to generate illicit assets through market manipulation,
insider trading, and fraud.\25\ In addition, unlawfully acquired assets
can be used to purchase these securities in order to resell them and
create the appearance of legitimately sourced funds.\26\ It is also
possible that issuers relying on the exemption in section 4(a)(6) may
be shell companies, which have been associated with a high risk of
money laundering.\27\ Congress recognized and expressed concern about
these money laundering and financial crimes risks, which is why, in
part, it chose to require that securities offered and sold in reliance
on section 4(a)(6) be sold through a regulated intermediary.\28\
---------------------------------------------------------------------------
\25\ Id. See also Financial Action Task Force (``FATF''), Money
Laundering and Terrorist Financing in the Securities Sector 20-21
(Oct. 2009) (``FATF Typology'') (discussing the money laundering
risks associated with low priced securities, private issuers, and
shell companies). As explained in the FATF Typology, illicit actors
``can either use existing shares that are already publicly traded or
start a shell company for the express purpose of engaging in those
illicit activities. In addition, criminal organizations also have
been known to use illicit assets generated outside the securities
industry to engage in market manipulation and fraud.''
\26\ See 78 FR 66428, 66490-66491 (Nov. 5, 2013). ``Moreover,
criminal organizations can also initially invest in a private
company that they can then use as a front company for commingling
illicit and legitimate assets. They can then take this company
public through an offering in the public securities markets, thus
creating what appear to be legitimate offering revenues.
Alternatively, criminal organizations can acquire a publicly traded
company and use it to launder illicit assets.'' The FATF Typology
further highlighted the risk of shell companies that, for example,
``can be established to accept payments from criminal organizations
for non-existent services. These payments, which appear legitimate,
can be deposited into depository or brokerage accounts and either
wire transferred out of a jurisdiction or used to purchase
securities products that are easily transferable or redeemable.''
\27\ See 78 FR 66428, 66490-66491 (Nov. 5, 2013). See also,
e.g., Joint Release, Guidance on Obtaining and Retaining Beneficial
Ownership Information, FIN-2010-G001 (Mar. 5, 2010) (noting that
criminals, money launderers, tax evaders, and terrorists may exploit
the privacy and confidentiality surrounding some business entities,
including shell companies and other vehicles designed to conceal the
nature and purpose of illicit transactions and the identities of the
persons associated with them); Financial Crimes Enforcement Network,
The Role of Domestic Shell Companies in Financial Crime and Money
Laundering: Limited Liability Companies (Nov. 2006), available at
https://www.fincen.gov/news_room/rp/files/LLCAssessment_FINAL.pdf.
\28\ See 78 FR 66428, 66490-66491 (Nov. 5, 2013). See also 158
Cong. Rec. S1781 (daily ed. Mar. 19, 2012) (statement of former Sen.
Carl Levin) (``Senior citizens, state securities regulators, and
others worry that this will give rise to money laundering and fraud
risks.'').
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FinCEN believes that funding portals could play a critical role in
detecting, preventing, and reporting money laundering and other illicit
financing, such as market manipulation and fraud. As described above,
funding portals should be subject to normal BSA obligations. A funding
portal, like an introducing broker, is in the best position to know its
customers, and to identify and monitor for suspicious and potentially
illicit activity at the individual customer level, as compared to other
required participants in the transaction such as the qualified third
[[Page 19089]]
party, which may not see such activity given its less direct contact
with individual customers.\29\ FinCEN understands that the JOBS Act was
designed to provide regulatory relief and ease the funding gap that
startups and small businesses often face, while providing significant
investor protections. But in addition to investor protections, any
regulatory structure for securities-based crowdfunding through the
Internet must also address the risk of money laundering and other
financial crimes presented by the misuse of crowdfunding transactions.
FinCEN agrees with the SEC that a funding portal engaging in the
business of effecting securities transactions for the accounts of
others through crowdfunding is acting as a broker-dealer, despite the
exemption from registration under the Exchange Act that Congress
directed the SEC to implement, and that this new type of broker or
dealer in securities should be subject to supervision under the BSA
regulation.
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\29\ See 78 FR 66428, 66490. See also, e.g., National
Association Of Securities Dealers (``NASD'') (n/k/a ``FINRA''), NASD
Provides Guidance To Member Firms Concerning Anti-Money Laundering
Compliance Programs Required by Federal Law, Special Notice to
Members 02-21 (Apr. 2002), available https://www.finra.org/Industry/Regulation/Notices/2002/p003703 (stating that ``introducing brokers
generally are in the best position to `know the customer,' and thus
to identify potential money laundering concerns at the account
opening stage, including verification of the identity of the
customer and deciding whether to open an account for a customer.'').
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For all of these reasons, in addition to the provisions finalized
in the SEC's Crowdfunding rulemaking, FinCEN believes that it is
further appropriate, in response to changes in the registration
requirement in the JOBS Act, to amend the BSA definitions of a broker
or dealer in securities and broker-dealer to explicitly include funding
portals, registered or required to be registered as such, with the SEC.
Explicitly requiring funding portals to comply with the BSA's
requirements, consistent with registered brokers or dealers in
securities, helps ensure consistent regulation of brokers or dealers in
securities with fewer opportunities for regulatory gaps, which could be
exploited by financial criminals. Because the BSA and its implementing
rules are risk-based, we expect that funding portals would design
programs commensurate with their limited business model and not the
more comprehensive programs established by full service broker-dealers.
B. Overview of the Current Regulatory Provisions Regarding Brokers or
Dealers in Securities and Broker-Dealers
On October 26, 2001, the President signed into law the USA PATRIOT
Act of 2001. Title III of the USA PATRIOT Act makes a number of
amendments to the anti-money laundering provisions of the BSA to
promote the prevention, detection, and prosecution of international
money laundering and the financing of terrorism. The statutory mandate
that all financial institutions, which include brokers or dealers in
securities, establish an AML program and comply with the BSA
regulations is a key element in the nation's effort to detect and
prevent money laundering and the financing of terrorism. If
implemented, this proposal would explicitly incorporate a funding
portal's activities within the existing definition of brokers or
dealers in securities, and require funding portals to comply with the
full range of requirements outlined in 31 CFR 1023 applicable to
broker-dealers, including: (1) AML program; (2) Suspicious Activity
Report; (3) Customer Identification Program; (4) Currency Transaction
Report; (5) Recordkeeping and Travel rules; (6) Information Sharing
(section 314); (7) Due Diligence for Correspondent Accounts for Foreign
Financial Institutions and Private Banking Accounts; (8) Prohibition on
Correspondent Accounts for Foreign Shell Banks; and (9) Special
Measures (section 311).\30\ The following are brief descriptions of the
regulations that would apply to funding portals if this rulemaking is
finalized as proposed.
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\30\ See 31 CFR 1023.210, 1023.220, 1023.310, 1023.320,
1023.410, 1023.520, 1023.610, and 1023.630.
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1. Anti-Money Laundering Program
Section 352(a) of the USA PATRIOT Act amended section 5318(h) of
the BSA. Section 5318(h)(1) requires every financial institution
defined in 31 U.S.C. 5312(a)(2), which are also covered in 31 CFR, to
establish an AML program that includes, at minimum, (1) the development
of internal policies, procedures, and controls; (2) the designation of
a compliance officer; (3) an ongoing employee training program; and (4)
an independent audit function to test programs.\31\ The BSA defines the
term ``financial institution'' to include, in part, ``a broker or
dealer in securities.'' \32\ Currently, a broker or dealer in
securities that implements and maintains an AML program that complies
with the rules, regulations, or requirements of its self-regulatory
organization (``SRO'') is deemed to satisfy the requirement of section
5318 (h)(1) of the BSA.\33\
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\31\ 31 U.S.C. 5318(h)(1)(A-D).
\32\ 31 U.S.C. 5312(a)(2)(G).
\33\ 31 CFR 1023.210. See also Notice of Proposed Rulemaking--
Customer Due Diligence Requirements for Financial Institutions 79 FR
45151 (Aug. 4, 2014). Treasury proposed rules to clarify and
strengthen customer due diligence requirements, to include a new
requirement to identify beneficial owners of legal entity customers.
The proposed changes in that notice of proposed rulemaking may have
an impact on what is proposed in this notice.
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2. Suspicious Activity Report
FinCEN has promulgated Suspicious Activity Report (``SAR'')
regulations for a number of financial institutions. These include
banks, casinos, money services businesses, brokers or dealers in
securities, mutual funds, insurance companies, and futures commission
merchants and introducing brokers in commodities.\34\ 31 CFR 1023.320
contains the rules setting forth the obligation of broker-dealers in
securities to report suspicious transactions. Specifically, brokers or
dealers in securities are required to report a transaction that is
conducted or attempted by, at, or through a broker-dealer and involves
or aggregates to at least $5,000 in funds or other assets, and the
broker-dealer knows, suspects, or has reason to suspect that the
transaction (or a pattern of transactions of which the transaction is a
part) (i) involves funds derived from illegal activity or is intended
or conducted to hide or disguise funds or assets derived from illegal
activity; (ii) is designed, whether through structuring or other means,
to evade the requirements of the BSA; (iii) has no business or apparent
lawful purpose, and the broker or dealer in securities knows of no
reasonable explanation for the transaction after examining the
available facts; or (iv) involves the use of the broker-dealer to
facilitate criminal activity.
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\34\ See 31 CFR 1020.210, 1020.320, 1021.210, 1021.320,
1022.210, 1022.320, 1023.210, 1023.320, 1024.210, 1024.320,
1025.210, 1025.320, 1026.210, and 1026.320, respectively.
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3. Currency Transaction Report
The Secretary was granted authority in 1970, with the enactment of
31 U.S.C. 5313, to require financial institutions to report currency
transactions exceeding $10,000. The information collected on the
Currency Transaction Report is required to be provided pursuant to 31
U.S.C. 5313. The implementing regulation for brokers or dealers in
securities can be found at 31 CFR 1023.310.
[[Page 19090]]
4. Records To Be Made and Retained by Financial Institutions
On January 3, 1995, FinCEN and the Board of Governors of the
Federal Reserve System (``the Board'') jointly issued a rule that
requires banks and nonbank financial institutions to collect and retain
information on certain funds transfers and transmittals of funds (the
``recordkeeping rule'').\35\ At the same time, FinCEN issued the
``travel rule,'' which requires banks and nonbank financial
institutions to include with a transmittal order certain information on
funds transfers and transmittals of funds sent to other banks or
nonbank financial institutions.\36\
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\35\ 31 CFR 1020.410(a) (recordkeeping requirements for banks);
31 CFR 1010.410(e) (recordkeeping requirements for nonbank financial
institutions). The Board revised its Regulation S (12 CFR part 219)
to incorporate by reference the recordkeeping rule codified in Title
31 of the CFR, as well as to impose a five-year record-retention
requirement with respect to the recordkeeping requirements.
\36\ 31 CFR 1010.410(f).
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The recordkeeping and travel rules provide uniform recordkeeping
and transmittal requirements for financial institutions, and are
intended to help law enforcement and regulatory authorities detect,
investigate, and prosecute money laundering and other financial crimes
by preserving an information trail about persons sending and receiving
funds through the funds transfer system.
In general, the recordkeeping rule requires financial institutions
to retain certain information on transmittals of funds of $3,000 or
more, which must be retrievable and available upon request to FinCEN,
to law enforcement, and to regulators to whom FinCEN has delegated the
BSA compliance examination authority. Under the travel rule, a
financial institution acting as the transmittor's financial institution
must obtain and include in the transmittal order certain information on
transmittals of funds of $3,000 or more.
5. Customer Identification Program
31 CFR 1023.220 sets forth the customer identification program
(``CIP'') requirements for brokers or dealers in securities, which
would include funding portals with the proposed amendments. Under the
rule published jointly with the SEC,\37\ brokers or dealers in
securities must establish a written CIP that, at a minimum, includes
procedures for: (1) Obtaining customer identifying information from
each customer prior to account opening; (2) verifying the identity of
each customer to the extent reasonable and practicable, within a
reasonable time before or after account opening; (3) making and
maintaining a record of obtained information relating to identity
verification; (4) determining, within a reasonable time after account
opening or earlier, whether a customer appears on any list of known or
suspected terrorist organizations designated by Treasury; and (5)
providing each customer with adequate notice, prior to opening an
account, that information is being requested to verify the customer's
identity.\38\ Under certain defined circumstances, brokers or dealers
in securities may rely on the performance of another financial
institution that also is subject to an AML compliance program rule to
fulfill some or all of the requirements of the broker-dealer's CIP.\39\
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\37\ 68 FR 25113 (May 9, 2003).
\38\ 31 CFR 1023.220(a)(6).
\39\ Id.
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6. Special Information Procedures To Deter Money Laundering and
Terrorist Activity
31 CFR 1023.500 states generally that brokers or dealers in
securities are covered by the special information procedures to detect
money laundering and terrorist activity requirements.\40\ Sections
1010.520 and 1010.540 implement sections 314(a) and 314(b) of the USA
PATRIOT Act, respectively.
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\40\ These requirements are set forth and cross referenced in
sections 1023.520 (cross referencing to 31 CFR 1010.520) and
1023.540 of 31 CFR (cross-referencing to 31 CFR 1010.540).
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Under the section 314(a) requirements, brokers or dealers in
securities must respond to requests for information made by FinCEN on
behalf of Federal, state, and local law enforcement agencies, or a
similar request from FinCEN on its own behalf, on behalf of certain
components of Treasury, or on behalf of certain foreign law enforcement
agencies.\41\ Upon receiving such a request, a broker or dealer in
securities is required to search its records to determine whether it
has accounts for, or has engaged in transactions with, any specified
individual, entity, or organization.\42\ Under the regulation
implementing section 314(b), brokers or dealers in securities are
authorized to share information with one another, under a safe harbor
that offers protections from liability, in order to better identify and
report potential money laundering or terrorist activities.\43\
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\41\ 31 CFR 1010.520(b).
\42\ 31 CFR 1010.520(b)(3).
\43\ 31 CFR 1023.540.
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7. Due Diligence Anti-Money Laundering Programs for Private Banking and
Certain Foreign Accounts
31 CFR 1023.600 generally states that brokers or dealers in
securities are subject to the special standards of diligence,
prohibitions, and special measures requirements.\44\ Sections 1010.610,
1010.620, and 1010.630 implement section 312 of the USA PATRIOT Act and
generally apply to any financial institution listed in 31 U.S.C.
5312(a)(2). Sections 1023.610 and 1023.620 require U.S. financial
institutions, including brokers or dealers in securities, to establish
risk-based due diligence policies, procedures, and controls reasonably
designed to detect and report money laundering through correspondent
accounts and private banking accounts that U.S. financial institutions
establish or maintain for non-U.S. persons.
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\44\ These requirements are set forth and cross referenced in
sections 1023.610 (cross referencing to 31 CFR 1010.610), 1023.620
(cross-referencing to 31 CFR 1010.620), and 1023.630 of 31 CFR
(cross-referencing to 31 CFR 1010.630).
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8. Prohibition on Correspondent Accounts for Foreign Shell Banks;
Records Concerning Owners of Foreign Banks and Agents for Service of
Legal Process
Section 313 of the USA PATRIOT Act amended the BSA by adding
subsection (j) to 31 U.S.C. 5318. Sections 1010.630 and 1023.630
implement this provision and set forth the requirements for brokers and
dealers in securities. The regulations prohibit covered financial
institutions from providing correspondent accounts in the United States
to foreign shell banks (i.e., banks without a physical presence in any
country) and to take reasonable steps to ensure that correspondent
accounts provided to foreign banks are not being used to provide
banking services to foreign shell banks indirectly.\45\ The statutory
and regulatory definitions of covered financial institutions include a
broker or dealer in securities.\46\ Brokers and dealers in securities
must comply with this regulation with respect to any account they
provide in the United States to a foreign bank that permits the foreign
bank to engage in securities transactions, funds transfers, or other
financial transactions through that account.
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\45\ See 31 CFR 1010.630.
\46\ See 31 U.S.C. 5318(j)(1) and 5312(a)(2).
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Section 319(b) of the USA PATRIOT Act amended the BSA by adding
subsection (k) to 31 U.S.C. 5318, which requires any covered financial
institution that provides a
[[Page 19091]]
correspondent account to a foreign bank to maintain records of the
foreign bank's owners and any agent in the United States designated to
accept service of legal process for records regarding the correspondent
account. While the rule does not prescribe the manner in which a
covered financial institution must obtain the required information, it
does provide a safe harbor if a covered financial institution obtains
from the foreign bank the model certification provided on FinCEN's
public Web site.\47\ The rule requires covered financial institutions
to verify the information previously provided by each foreign bank for
which it maintains a correspondent account at least once every two
years.
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\47\ Certification Regarding Correspondent Accounts for Foreign
Banks, available at: https://www.fincen.gov/forms/files/Certification%20Regarding%20Correspondent%20Accounts%20for%20Foreign%20Banks.pdf; Certification Regarding Correspondent Accounts for
Foreign Banks, available at: https://www.fincen.gov/forms/files/Recertification%20Regarding%20Correspondent%20Accounts%20for%20Foreign%20Banks.pdf.
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9. Special Measures Under Section 311 of the USA PATRIOT Act
Section 311 of the USA PATRIOT Act (``section 311'') added section
5318A to the BSA, granting FinCEN the authority to require domestic
financial institutions and financial agencies to take certain ``special
measures'' upon finding that reasonable grounds exist for concluding
that a foreign jurisdiction, institution, class of transaction, or type
of account is of ``primary money laundering concern.'' To address the
specific money laundering risks, section 311 provides a range of
special measures that can be imposed individually, jointly, in any
combination, and in any sequence.\48\
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\48\ Available special measures include requiring: (1)
Recordkeeping and reporting of certain financial transactions; (2)
collection of information relating to beneficial ownership; (3)
collection of information relating to certain payable-through
accounts; (4) collection of information relating to certain
correspondent accounts; and (5) prohibition or conditions on the
opening or maintaining of correspondent or payable through accounts.
31 U.S.C. 5318A(b)(l)-(5). For a complete discussion of the range of
possible countermeasures, see 68 FR 18917 (April 17, 2003)
(proposing special measures against Nauru).
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Under 31 CFR 1010.810(a), ``[o]verall authority for enforcement and
compliance, including coordination and direction of procedures and
activities of all other agencies exercising delegated authority under
this chapter, is delegated [by the Secretary] to the Director,
FinCEN.'' In turn, Federal functional regulators have been delegated
authority to examine certain financial institutions they oversee for
compliance with FinCEN's regulations. FinCEN has delegated to the SEC
the authority to examine brokers or dealers in securities, which would
include funding portals, for compliance with FinCEN regulations.\49\
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\49\ 31 CFR 1010.810(b)(6).
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III. Section-by-Section Analysis
This NPRM proposes to revise the regulations implementing the BSA
by amending the definition of ``broker or dealer in securities'' and
its synonymous term ``broker-dealer'' to specifically include funding
portals that are involved in the offering or selling of crowdfunding
securities pursuant to section 4(a)(6) of the Securities Act of 1933
(15 U.S.C. 77d(a)(6)). These terms are defined in three different
places, and phrased slightly differently for each, but are
substantively the same:
In 31 CFR 1010.100(h), a ``broker or dealer in
securities'' is defined as ``[a] broker or dealer in securities,
registered or required to be registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, except
persons who register pursuant to section 15(b)(11) of the Securities
Exchange Act of 1934.''
31 CFR 1010.605(e)(1)(viii) and (e)(2)(viii) refer to
``[a] broker or dealer in securities registered, or required to be
registered, with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), except persons
who register pursuant to section 15(b)(11) of the Securities Exchange
Act of 1934.''
In 31 CFR 1023.100(b), a ``broker-dealer'' is defined to
mean ``a person registered or required to be registered as a broker or
dealer with the Commission under the Securities Exchange Act of 1934
(15 U.S.C. 77a et seq.), except persons who register pursuant to 15
U.S.C. 78o(b)(11).'' \50\
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\50\ FinCEN is also amending this section of the rule to reflect
the correct citation of 15 U.S.C. 78a et seq. currently published as
15 U.S.C. 77a et seq.
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FinCEN proposes to amend these definitions by adding to each the
phrase ``a person registered, or required to be registered, as a
funding portal with the Securities and Exchange Commission under
section 4(a)(6) of the Securities Act of 1933 (15 U.S.C. 77d(a)(6)).''
FinCEN further proposes to make technical amendments to each definition
to create one standard definition of the terms ``broker or dealer in
securities'' and ``broker-dealer'' to be used throughout the
regulations.
IV. Request for Comment
FinCEN invites comment on any and all aspects of the NPRM, and
specifically seeks comments on the following questions:
Is the application of all BSA regulations currently
covering brokers or dealers in securities to funding portals
appropriate?
Are there exceptions to the regulations that should be
granted to funding portals? If so, why would any such exceptions be
appropriate?
V. Executive Orders 12866 and 13563
Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility. It has been determined that this proposed rule is a
significant regulatory action, although not economically significant,
for purposes of Executive Orders 12866 and 13563.
VI. Unfunded Mandates Act of 1995 Statement
Section 202 of the Unfunded Mandates Reform Act of 1995 (``Unfunded
Mandates Act''), Public Law 104-4 (March 22, 1995), requires that an
agency prepare a budgetary impact statement before promulgating a rule
that may result in expenditure by the state, local, and tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 202 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. Since there is no change to
the requirements imposed under existing regulations, FinCEN has
determined that it is not required to prepare a written statement under
section 202.
VII. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') (5 U.S.C. 601 et seq.)
requires that a regulation that has a significant economic impact on a
substantial number of small entities, small businesses, or small
organizations must include an initial regulatory flexibility analysis
describing the regulation's impact on small entities. Such an analysis
need not be undertaken if the agency has certified that the regulation
will not have a significant economic
[[Page 19092]]
impact on a substantial number of small entities (5 U.S.C. 605(b)).
Section 601(3) of the RFA states that the term ``small business''
has the same meaning as the term ``small business concern'' under
section 3 of the Small Business Act, unless an agency, after
consultation with the Office of Advocacy of the Small Business
Administration and after opportunity for public comment, establishes
one or more definitions of such term which are appropriate for the
activities of the agency and publishes such definition(s) in the
Federal Register. The Small Business Administration's (``SBA'') defines
a broker dealer industry to be a small entity as having ``annual
receipts'' of $38.5 million.\51\ However, FinCEN is concerned that
using the SBA size standard rather than the SEC size standard may
result in confusion. Accordingly, FinCEN consulted with the SBA's
Office of Advocacy. After consultation, FinCEN is proposing to define
the term small entity in accordance with definitions obtained from SEC
rules implementing the Securities Exchange Act,\52\ in lieu of using
the Small Business Administration's definition.\53\ The SEC defines an
entity as a small broker or dealer, for purposes of the RFA, if it: (1)
Had total capital (net worth plus subordinated liabilities) of less
than $500,000 on the date in the prior fiscal year as of which its
audited financial statements were prepared pursuant to Rule 17a-5(d)
or, if not required to file such statements, a broker or dealer that
had total capital (net worth plus subordinated debt) of less than
$500,000 on the last business day of the preceding fiscal year (or in
the time that it has been in business if shorter); and (2) is not
affiliated with any person (other than a natural person) that is not a
small business or small organization as defined in this release. The
proposed rules would define broker or dealer in securities as: (1) A
person registered, or required to be registered, as a broker or dealer
with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et seq.), except persons who
register pursuant to section 15(b)(11) of the Securities Exchange Act
of 1934 (15 U.S.C. 78o(b)(11)); or (2) a person, registered, or
required to be registered, as a funding portal with the Securities and
Exchange Commission under section 4(a)(6) of the Securities Act of 1933
(15 U.S.C. 77d(a)(6). Based on FOCUS Report data, the SEC estimated
that there are 871 broker-dealers that are classified as ``small''
entities for purposes of the RFA.\54\ The SEC applied comparable
criteria to funding portals that would register under the SEC's
Crowdfunding rule.
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\51\ Id.
\52\ 17 CFR 240.0-10c.
\53\ 13 CFR 121.201.
\54\ FOCUS Reports, or ``Financial and Operational Combined
Uniform Single'' Reports, are monthly, quarterly, and annual reports
that broker-dealer generally are required to file with the SEC and
or self-regulatory organizations pursuant to Exchange Act Rule 17a-5
(17 CFR 240.17a-5).
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Relying on the SEC's definition has the benefit of ensuring
consistency in the categorization of small entities for SEC examiners,
as well as providing the broker or dealer industry with a uniform
standard. In addition, FinCEN's proposed use of the SEC's definition of
small entity will have no material impact upon the application of these
proposed rules to the broker or dealer industry. FinCEN requests
comment on the appropriateness of using the SEC's definition of small
entity.
The proposed changes are intended to amend the regulatory
definition of broker or dealer in securities to include funding portals
in light of the JOBS Act and the Final SEC Crowdfunding Rules. While
these amendments do not alter a broker or dealer in securities existing
obligations, they will expand the BSA regulations to create obligations
for funding portals. Accordingly, FinCEN has prepared an initial
regulatory flexibility analysis pursuant to the Regulatory Flexibility
Act. A final regulatory flexibility analysis will be conducted after
consideration of comments received during the public comment period.
1. Statement of the Need for, and Objectives of, the Proposed
Regulation
The JOBS Act creates a comprehensive regulatory structure for
startups and small businesses to raise capital through securities
offerings using the Internet through crowdfunding. It also establishes
the regulation of registered funding portals and brokers that are
required to act as intermediaries in the offer and sale of crowdfunded
securities. The JOBS Act amends the Federal securities laws to include
certain funding portals, defined as any person acting as an
intermediary in a transaction involving the offer or sale of securities
for the account of others solely pursuant to section 4(a)(6) of the
Securities Act, but that is exempted from the requirement to register
as a broker-dealer with the SEC, and is instead required to be
registered as a funding portal with the SEC. This proposed regulation
is necessary to expand the scope of the regulatory definition of broker
or dealer in securities to incorporate funding portals, to ensure
consistent applicability of the BSA regulations to all brokers in
securities.
2. Small Entities Affected by the Proposed Regulation
While the proposed BSA requirements would impose burdens on funding
portals, the proposed rules would not impose any burden on funding
portals in addition to those already imposed on broker-dealers.
Consequently, we do not discuss those burdens here, and we would not be
requesting any separate approval from OMB to impose the burdens
associated with the information collection requirements to comply with
the requirements of 31 CFR 1023, including the BSA/AML program, CTR,
SAR, CIP, Recordkeeping and travel rules, Due Diligence Programs for
Correspondent Accounts for Foreign Financial Institutions and Private
Bank accounts, Prohibition on Correspondent Account for Shell Banks,
section 311, and section 314 requirements.
The requirements of this proposed regulation, which are consistent
with the existing requirements for brokers or dealers in securities,
would include funding portals regardless of size. Based on SEC analysis
of the estimated 50 funding portals in the first year expected to
register with the SEC, as a result of the JOBS Act and implementing
regulations, 30 would be classified as ``small'' entities for purposes
of the Regulatory Flexibility Act.\55\
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\55\ See 80 FR 71387, 71533 (Nov. 16, 2015).
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3. Compliance Requirements
Upon finalization of this proposal, registered funding portals
would be required to comply with all of the requirements of the BSA,
including the reporting, recordkeeping, and record retention
requirements that apply to entities currently defined as brokers or
dealers in securities. We recognize that the proposed rules would
impose costs on funding portals to implement AML procedures, but we
believe that the proposed amendments and requirements provide important
benefits. As noted in the SEC NPRM, low-priced and privately-placed
securities pose a money laundering risk because they are susceptible to
market manipulation and fraud.\56\ Requiring funding portals to comply
with BSA regulations, in particular the requirement to file SARs, helps
identify potentially fraudulent activity for law enforcement and
regulators. These AML
[[Page 19093]]
requirements would therefore help to protect market participants from
illegal activity that could potentially infiltrate new online
investment opportunities. Requiring the implementation of AML
procedures in turn provides potential investors with some degree of
confidence that adequate protections against illegal activity exist for
this new fundraising approach and could encourage more investors to
participate, thus facilitating capital formation.
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\56\ See 78 FR 66428, 66490-66491 (Nov. 5, 2013).
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The proposed regulations would require funding portals to develop
programs reasonably designed to comply with the BSA and to collect and
keep certain information, as well as report suspicious activity, among
other reports. While the proposed regulations would not change the
scope of compliance with the BSA requirements for brokers or dealers in
securities that are not funding portals, the reporting, recordkeeping,
and other compliance requirements of the proposed regulation would
impact small entities that decide to register as funding portals. While
the majority of these requirements would be performed by the funding
portal's internal compliance personnel, some funding portals may choose
to hire outside counsel and third-party service providers to assist in
meeting the compliance requirements.
4. Duplicative, Overlapping, or Conflicting Federal Rules
FinCEN believes that there are no Federal rules that duplicate,
overlap, or conflict with the proposed regulations or the proposed
amendments.
5. Significant Alternatives to the Proposed Regulations
FinCEN considered whether it would be appropriate to establish
different compliance or reporting obligations for small funding portals
in the proposal, or whether small funding portals should be exempt from
any parts of the proposed rules or even from the rules in their
entirety. While the proposed rules are based on existing compliance
requirements applicable to registered brokers or dealers in securities,
FinCEN believes that it would not be necessary, nor would it be
advisable, to establish different requirements for small funding
portals that engage in crowdfunding. Eliminating or issuing different
requirements for smaller funding portals would not be the most
effective means of addressing the money laundering risk associated with
securities crowdfunding as it would create a loophole and a path of
least resistance that money launderers could exploit. The number of
small funding portals that would be affected by the proposed rules
would be limited. According to the SEC, an industry survey of
crowdfunding platforms reported that 191 platforms were estimated to be
operating in the United States as of 2012.\57\ Based on 135
participants in the survey both in the United States and international
jurisdictions, 15% of funding portal platforms were engaged in
securities-based crowdfunding.\58\ Although the number of
intermediaries that may ultimately register as funding portal is
uncertain, it is likely that three to four of the crowdfunding
platforms that have the majority of market share in reward-based and
donation-based crowdfunding would most likely obtain the majority of
market share in the securities-based crowdfunding market based on
section 4(a)(6).\59\ The BSA regulations are risk-based and are
designed so that entities that are subject to the regulations can
implement a program that is commensurate with the risks posed by their
particular business. FinCEN expects that a small funding portal would
implement a risk-based compliance program that takes into account the
limited business activities in which the business participates. For
example, a funding portal could implement a risk-based compliance
program which reflects the fact that the business does not accept cash
or securities from its customers. Therefore, we believe that the
proposed rules are appropriate, and properly cover all brokers or
dealers in securities, including funding portals. Furthermore, FinCEN
believes that having different requirements for funding portals could
undermine the objectives of the proposed requirements.
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\57\ See 78 FR 66428, 66516 (Nov. 5, 2013).
\58\ The survey further indicated that 11% were engaged in
lending-based crowdfunding, 27% in donation-based crowdfunding, and
47% in reward-based crowdfunding.
\59\ See 78 FR 66428, 66516 (Nov. 5, 2013).
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FinCEN welcomes comment on any significant alternatives that would
minimize the impact of the proposal on small funding portal entities.
VIII. Paperwork Reduction Act
The collection of information requirements have been reviewed and
approved by the Office of Management and Budget (``OMB'') under section
3507 of the Paperwork Reduction Act of 1995 (``PRA'') (44 U.S.C.
3507(d). (OMB Control Number 1506-0004 for the CTR requirement, the OMB
Control Number for the CTR report itself is 1506-0064, OMB Control
Number 1506-0019 for the SAR regulatory requirement, the OMB Control
Number for the BSA SAR report itself is 1506-0065, OMB Control Number
1506-0034 for the CIP requirement, OMB Control Number 1506-0043 for the
Prohibitions on Correspondent Accounts for Foreign Shell Banks
requirement, OMB Control Number 1506-0049 for the section 314
requirement, and OMB Control Number 1506-0053 for the Recordkeeping and
travel rules requirements). Under the PRA, an agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid OMB control number.
Certain provisions of the proposed rules contain ``collection of
information'' requirements within the meaning of the PRA. This proposal
intends to expand the scope of financial institutions subject to the
BSA regulations FinCEN issued for brokers or dealers in securities to
include funding portals. The collections of information included under
OMB Control Number 1506-0004 for the CTR requirement, OMB Control
Number 1506-0019 for the SAR requirement, OMB Control Number 1506-0034
for the CIP requirement, OMB Control Number 1506-0043 for the
Prohibitions on Correspondent Accounts for Shell Banks requirement, OMB
Control Number 1506-0049 for the section 314 requirement, and OMB
control number 1506-0053 for the Recordkeeping and travel rules
requirements, respectively would be amended to reflect related burdens
under the proposed rules.
1. Description of Affected Financial Institutions
Funding portals registered or required to be registered with the
SEC.
2. Estimated Number of Affected Financial Institutions
According to the SEC, as of 2014, there are approximately 200 U.S.-
based crowdfunding portals in existence. Approximately 15% of these
crowdfunding portals would participate in securities-based
crowdfunding. The SEC estimates that the number of crowdfunding portals
would grow at 60% per year over the next three years and that
approximately 50 entities would register as funding portals
annually.\60\
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\60\ See 80 FR 71387, 71523 (Nov. 16, 2015).
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For purposes of this analysis it should be noted that the actual
number of funding portals that would participate in securities-based
crowdfunding transactions is uncertain, as the rules governing
securities-based crowdfunding transactions through funding portals have
only recently been passed. Based on registration information currently
available, the SEC estimates that approximately 10
[[Page 19094]]
intermediaries that are currently registered with the SEC may choose to
register as brokers to act as intermediaries for transactions made in
reliance on section 4(a)(6). In addition, approximately 50
intermediaries per year that are registered as brokers with the SEC
would choose to add to their service offerings by also becoming
crowdfunding intermediaries or funding portals.
3. Estimated Average Annual Burden Hours Per Affected Financial
Institutions, Estimated Total Annual Burden
As this is a new requirement, the estimated average burden
associated with the recordkeeping requirement in this proposed rule is
three hours for development of a written program. A one hour per year
burden is recognized for annual maintenance and update. FinCEN believes
funding portals would establish policies and procedures to achieve
compliance with the BSA requirements at the same time as it is
establishing policies and procedures to comply with the JOBS Act. This
would reduce the overall burden on funding portals as all issues
concerning the establishment of policies and procedures could be
addressed simultaneously. Nevertheless, the proposed rules would not
impose any additional burden on funding portals to those currently
imposed on brokers or dealers. Therefore, the burden on funding portals
would be the same as the existing burden for broker-dealers, and would
be included within those estimates FinCEN provided to OMB for brokers
or dealers.
List of Subjects in 31 CFR Parts 1010 and 1023
Authority delegations (Government agencies), Banks and banking,
Currency, Investigations, Law enforcement, Reporting and recordkeeping
requirements.
Authority and Issuance
For the reasons set forth in the preamble, parts 1010 and 1023 of
Chapter X of title 31 of the Code of Federal Regulations are proposed
to be amended as follows:
PART 1010--GENERAL PROVISIONS
0
1. The authority citation for part 1010 continues to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314,
5316-5332; title III, section 314, Pub. L. 107-56, 115 Stat. 307.
0
2. Amend Sec. 1010.100 by revising paragraph (h) to read as follows:
Sec. 1010.100 General definitions.
* * * * *
(h) Broker or dealer in securities. A broker or dealer in
securities means:
(1) A person registered, or required to be registered, as a broker
or dealer with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), except persons
who register pursuant to section 15(b)(11) of the Securities Exchange
Act of 1934 (15 U.S.C. 78o(b)(11)); or
(2) A person registered, or required to be registered, as a funding
portal with the Securities and Exchange Commission under section
4(a)(6) of the Securities Act of 1933 (15 U.S.C. 77d(a)(6));
* * * * *
0
3. Amend Sec. 1010.605 by revising paragraphs (e)(1)(viii) and
(e)(2)(viii) to read as follows:
Sec. 1010.605 Definitions.
* * * * *
(e) * * *
(1) * * *
(viii) A broker or dealer in securities means:
(A) A person registered, or required to be registered, as a broker
or dealer with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), except persons
who register pursuant to section 15(b)(11) of the Securities Exchange
Act of 1934 (15 U.S.C. 78o(b)(11)); or
(B) A person registered, or required to be registered, as a funding
portal with the Securities and Exchange Commission under section
4(a)(6) of the Securities Act of 1933 (15 U.S.C. 77d(a)(6));
* * * * *
(2) * * *
(viii) A broker or dealer in securities means:
(A) A person registered, or required to be registered, as a broker
or dealer with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), except persons
who register pursuant to section 15(b)(11) of the Securities Exchange
Act of 1934 (15 U.S.C. 78o(b)(11)); or
(B) A person registered, or required to be registered, as a funding
portal with the Securities and Exchange Commission under section
4(a)(6) of the Securities Act of 1933 (15 U.S.C. 77d(a)(6)).
* * * * *
PART 1023--RULES FOR BROKERS OR DEALERS IN SECURITIES
0
4. The authority citation for part 1023 continues to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314,
5316-5332; title III, section 314, Pub. L. 107-56, 115 Stat. 307.
0
5. Amend Sec. 1023.100 by revising paragraph (b) to read as follows:
Sec. 1023.100 Definitions.
* * * * *
(b) Broker or dealer in securities or broker-dealer means:
(1) A person registered, or required to be registered, as a broker
or dealer with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), except persons
who register pursuant to section 15(b)(11) of the Securities Exchange
Act of 1934 (15 U.S.C. 78o(b)(11)); or
(2) A person registered, or required to be registered, as a funding
portal with the Securities and Exchange Commission under section
4(a)(6) of the Securities Act of 1933 (15 U.S.C. 77d(a)(6)).
Jennifer Shasky Calvery,
Director, Financial Crimes Enforcement Network.
[FR Doc. 2016-07345 Filed 4-1-16; 8:45 am]
BILLING CODE 4810-02-P
