Wednesday, January 27, 2016

SEC Approves, Seeks Comments on Amended FINRA Funding Portal Rules

By Mark S. Nelson, J.D.

Securities-based crowdfunding is getting closer to reality now that the Commission has approved rule changes proposed by FINRA to oversee funding portals. The approval was done on an accelerated basis, but the public will still be able to comment on the rule change, as modified by an amendment submitted by FINRA, within 21 days after the release appears in the Federal Register (Release No. 34-76970, January 22, 2016).

Regulation Crowdfunding, adopted by the Commission last October, will enable securities-based crowdfunding through broker-dealers and a new entity called a funding portal. These crowdfunding intermediaries are required to become members of a national securities association, for which the only option currently available is FINRA.

FINRA proposed a number of rules and forms to ensure that it has the tools needed to police funding portal activities, including rules for new member applications, funding portal conduct, investigations and sanctions, and arbitration and mediation. FINRA also proposed a new rule providing for notice to FINRA of its broker-dealer members’ engagement in transactions and other relationships with funding portals. The amendment seeks to align the meaning of “associated person” in the funding portal context to its meaning regarding broker-dealer members, but otherwise makes technical revisions.

According to the Commission’s order, the few commenters on FINRA’s proposal were generally supportive, although some of them raised issues about timing and other aspects of the proposed rules. The Commission said FINRA adequately dealt with these concerns and noted the broker-dealer regulator had spent lots of time developing its funding portal rules.

Final Regulation Crowdfunding is effective May 16, 2016, but some of the provisions for funding portals will be effective January 29, 2016, in order to allow time for these entities to prepare for the effectiveness of the entire regulation.

The release is No. 34-76970.

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