Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, November 20, 2015

FINRA asked to address shortfalls in proposed funding portal rules

By John Filar Atwood

The North American Securities Administrators Association (NASAA) is calling on the Financial Industry Regulatory Authority (FINRA) to make several adjustments to its proposed funding portal rules, including mandating that portals use the Central Registration Depository (CRD) and requiring associated persons of a portal to obtain a license. NASAA outlined what it sees as shortcomings in the proposed regulations in a comment letter to FINRA.

FINRA initially proposed regulations for funding portals, which will facilitate crowdfunding offerings, in 2013, but issued a reproposal following the SEC’s promulgation of final crowdfunding rules in October. NASAA supports the development of a regulatory framework for funding portals but believes that FINRA’s proposals do not provide adequate protection for issuers and investors. Given that the portals are a new approach to capital raising, NASAA said, it is critical that ample protections are in place from the inception of the crowdfunding framework.

Using the CRD. NASAA believes that funding portals should be required to use the CRD to file the proposed forms and related disclosures to give regulators a central location to access information regarding portal operators. In addition, using the CRD would facilitate portals’ provision of detailed disclosures about customer complaints or arbitration proceedings. In NASAA’s opinion, funding portals’ information should be publicly available through BrokerCheck and available to state regulators through the CRD.

Obtaining a license. NASAA recommended that associated persons of a funding portal be required to obtain a license. A licensing requirement would add a limited cost to funding portals, NASAA noted, but it believes the cost would be outweighed by the protection that licensing provides. In particular, it will help ensure that individuals operate in a professional manner and are accountable for any misconduct, NASAA said, adding that it will also help state regulators police bad actors.

NASAA said that at a minimum, FINRA should consider a licensing requirement for anyone with specific supervisory or compliance responsibilities under the funding portal rules. Requiring these individuals to pass a qualification examination presents a small hurdle but provides a large amount of protection, according to NASAA.

No mandatory arbitration. A third recommendation in NASAA’s comment letter is that funding portals be prohibited from placing mandatory predispute arbitration arrangements (PDAAs) in customer agreements. NASAA believes mandatory PDAAs are troubling because the small investment amounts may diminish an investor’s bargaining power. In addition, a crowdfunding investor may want to bring claims against both the funding portal and the issuer, and could be forced to bring the related claims in separate forums if the funding portal uses a PDAA requiring FINRA Dispute Resolution to be the arbitration forum.

NASAA provided this comment on the initial proposal, and FINRA said that it was outside the scope of the proposed rule. NASAA disagreed, noting that the impracticality of the FINRA Dispute Resolution fee structure will likely lead many investors to abandon meritorious claims due to increased costs. Allowing a remedy in small claims court will provide investors with a more cost-effective forum to realize their claims, NASAA said.

Other concerns. NASAA provided several more recommendations in its letter, including that FINRA enhance the funding portal conduct rule to more closely align with the conduct rules for broker-dealers. Funding portals also should be required to maintain books and records to demonstrate compliance with FINRA Rules, NASAA added. Finally, NASAA suggested that funding portals be required to maintain a fidelity bond and that they be subject to suspicious activity report filing requirements.

MainStory: TopStory NASAANews FINRANews SecuritiesOfferings NewsFeed

Back to Top

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.

A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.