Wilson Sonsini Goodrich & Rosati is pleased to present the May 2017 issue of the WSGR Fintech Update. This latest edition includes an article addressing non-U.S. fintech regulatory sandboxes and the last U.S. proposal to create a similar fintech regulatory sandbox, as well as an article addressing the Money Services Business Call Report, a new reporting tool that permits money transmitters licensed in multiple states to file a single quarterly report.

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Foreign Regulators Easing Regulatory Burdens on Fintech Companies – Will the U.S. Follow Suit?

Regulators in the United Kingdom, Hong Kong, Canada, Australia, Malaysia, and Singapore, among others, have launched regulatory sandbox (or "safe space") initiatives aimed at simplifying, for a limited period of time, the regulatory framework in which certain fintech companies operate.¹ The specifics of each initiative vary among the jurisdictions, but generally consist of the following components:

• The initiative encourages the development of innovative and technology-based financial products and services.
• Fintech companies apply to the regulator to participate in the sandbox.
• Qualifying fintech companies may be accepted to the sandbox and can test their products and services in a particular market for a limited period of time (e.g., 12 months), subject to a different (generally lighter) regulatory regime established by the regulator.
• The regulator, before the qualifying fintech company tests its products and services, may provide the company with a no-enforcement action letter or waiver from complying with certain regulations to mollify the company’s concerns of possible regulator sanctions.
• Fintech companies must maintain appropriate regulatory safeguards (e.g., informed consent, limitation on the amount an investor may invest, a fair exit strategy for an investor, and cybersecurity controls).
• Once the time period has ended, the fintech company may wish to introduce its product and/or service to a wider market, subject to a full or modified set of regulations, as determined by the regulator. After the test period, the regulator should have a better understanding of the product and/or service and its potential effect on the relevant market and market participants.

The United Kingdom was the first jurisdiction to introduce a regulatory sandbox initiative, in May 2016. Since its introduction, the Financial Conduct Authority (FCA), a regulator of financial services within the U.K., received 69 applications from businesses seeking to participate in the initiative’s first cohort, of which the FCA selected 24 to participate. Those chosen included payments companies, distributed ledger technology and blockchain companies, online securities platforms, online lenders, and online banking services companies.

The Canadian Securities Administrators (CSA) has also highlighted the types of companies that could benefit from the initiatives administered by certain Canadian provinces: crowdfunding portals, online lenders, angel investor networks, business models using artificial intelligence for trades or recommendations (e.g., a robo-adviser), and cryptocurrency or distributed ledger technology-based ventures.²

The United States has contemplated instituting its own sandbox initiative. U.S. Representative Patrick McHenry (R) of North Carolina introduced the Financial Services Innovation Act of 2016 in September 2016. The proposed bill was referred to the U.S. Subcommittee on Commodity Exchanges, Energy, and Credit, but was never approved by either the U.S. Senate or the House of Representatives (nor signed into law by the president). Although the proposed bill died in committee, a similar bill could be re-introduced in the current or a future Congress. 

If the Financial Services Innovation Act of 2016 had been enacted, the law would have created a regulatory sandbox initiative in the U.S. similar to those in other jurisdictions. Each of the following agencies would have been required to establish a Financial Services Innovation Office (FSIO) to institute a regulatory sandbox: 

• The Board of Governors of the Federal Reserve System
• The Treasury Department
• The Office of the Comptroller of the Currency
• The Federal Deposit Insurance Corporation
• The National Credit Union Administration Board
• The Consumer Financial Protection Bureau
• The Securities and Exchange Commission
• The Commodity Futures Trading Commission
• The Federal Trade Commission
• The Department of Housing and Urban Development
• The Farm Credit Administration
• The Federal Housing Finance Agency

To coordinate the actions of the various FSIOs at the 12 agencies, the bill would have required the formation of an FSIO Liaison Committee composed of the director of each FSIO and one state banking supervisor selected by the Conference of State Bank Supervisors. A fintech company granted an enforceable compliance agreement by at least one agency would have been able to operate under the agreement without fear of an enforcement action by another agency or, subject to certain conditions, by any of the states. 

For more information about regulatory sandbox initiatives or any other fintech regulatory matter, please contact Robert Rosenblum, Susan Gault-Brown, or any member of the firm's fintech regulatory practice.

Susan Gault-Brown and John Sullivan authored this article.

Developments in Uniform Reporting for Money Transmitters

Money transmitters licensed in multiple states may now benefit from a new multi-state reporting tool, the Money Services Businesses Call Report (MSB Call Report), which is sponsored by the Conference of State Bank Supervisors, a nationwide organization of state financial regulators. The MSB Call Report would permit money transmitters that file quarterly reports with regulators in the states in which they do business to file one quarterly report through the National Multistate Licensing System online registry. That filed report would then be distributed to the applicable state regulators that have adopted the MSB Call Report, saving the regulated companies the time and expense of completing and filing multiple quarterly reports for several state regulators.

Thus far, 18 state regulators have adopted the MSB Call Report, which regulated firms can begin to use for their 2017 first quarter report due no later than May 15, 2017. Some state regulators require that regulated firms use the MSB Call Report, while other state regulators make its use optional. The adoption of the uniform report should improve the level of information that certain state regulators receive, as their previous reports may not have been as comprehensive as the new report. The uniform report requires regulated entities to provide information about their financial condition, transaction activity, and investments.

For more information about the MSB Call Report or any other money transmitter regulatory matter, please contact Robert Rosenblum, Susan Gault-Brown, or any member of the firm’s fintech regulatory practice.

Susan Gault-Brown and John Sullivan authored this article.

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