Monday, April 04, 2016

FinCEN Proposes to Include Crowdfunding Portals Within Definition of "Broker-Dealer"

By Rodney F. Tonkovic, J.D.

The Financial Crimes Enforcement Network (FinCEN) has issued a proposal that would require funding portals to comply with Bank Secrecy Act (BSA) requirements applicable to brokers or dealers. The rulemaking would amend those regulations to include crowdfunding portals within the definition of "broker-dealer" (Release No. 1506-AB29).

The release proposes amendments to the definitions of “broker or dealer in securities” and “broker-dealer” under the regulations implementing the BSA. Those definitions would be amended to explicitly include funding portals involved in the offering or selling of crowdfunding securities. As a consequence, funding portals would be required to implement policies and procedures reasonably designed to achieve compliance with the BSA requirements currently applicable to brokers or dealers in securities. Written comments on this Notice of Proposed Rulemaking must be submitted on or before June 3, 2016.

The BSA defines a "broker-dealer in securities" and "broker-dealer" as broker or dealer in securities registered, or required to be registered, with the SEC under the Exchange Act. The terms are defined in three places in the Act, but are substantively the same. In each instance, FinCEN proposes to add 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))." Other technical amendments will create one standard definition of the terms "broker or dealer in securities" and "broker-dealer" to be used throughout the regulations.

Effect of JOBS Act. The JOBS Act amended the securities laws to create a new exemption for offerings of crowdfunded securities. Among other requirements, issuers of crowdfunded securities must use as an intermediary either a broker-dealer or "funding portal," as defined in Section 3(a)(80) of the Securities Act. Funding portals, while subject to the SEC's authority, are exempt from registration as a broker-dealer.

The problem. The BSA currently requires registered broker-dealers to maintain an anti-money laundering program and to file suspicious activity reports. Since funding portals are not registered broker-dealers, they are not subject to the BSA regulations that apply to broker-dealers. The proposed rulemaking, then, will ensure that funding portals are subject to BSA regulations.

The proposing release notes that what funding portals do is essentially similar to the activities of introducing brokers and would raise at least the same degree of money laundering and counter financing of terrorism risk. There is also the potential that funding portals will facilitate offerings of microcap or low-priced securities, which pose a money laundering risk because they are often used to generate illicit assets through market manipulation, insider trading, and fraud. FinCEN believes, the release says, that funding portals are in the best position to know their customers and could play a critical role in reporting money laundering and other illicit financing.

If implemented, this rulemaking would require funding portals to comply with the full range of BSA requirements applicable to broker-dealers, including: (1) maintaining an anti-money laundering program; (2) filing suspicious activity reports; (3) having a written Customer Identification Program; (4) providing Currency Transaction Reports; (5) recordkeeping and travel rules; (6) information sharing; (7) due diligence for private banking and certain foreign accounts; (8) the prohibition on correspondent accounts for foreign shell banks; and (9) the special measures to be taken to address certain money laundering risks.

The release is No. 1506-AB29.

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