State of Arizona
House of Representatives
First Regular Session
HOUSE BILL 2177
Amending sections 41-5601, 41-5603, 41-5605, 41-5606, 41-5608, 41-5609 and 41-5611, Arizona Revised Statutes; relating to the regulatory sandbox program.
(TEXT OF BILL BEGINS ON NEXT PAGE)
Be it enacted by the Legislature of the State of Arizona:
Section 1. Section 41-5601, Arizona Revised Statutes, is amended to read:
In this chapter, unless the context otherwise requires:
1. "Applicable agency" means a department or agency of this state established by law to regulate certain types of business activity in this state and persons engaged in such business, including the issuance of licenses or other types of authorization, that the attorney general determines would or may regulate a sandbox participant if the person was not a regulatory sandbox participant.
(a) Means a person that purchases or otherwise enters into a transaction or agreement to receive an innovative financial product or service for an innovation that is being tested by a sandbox participant.
(b) Does not include an agent or business partner of or an investor in a sandbox participant.
3. "Financial product or service" means a product or service that requires licensure under title 6 or title 44, chapter 2.1 or 13 or a product or service that includes a business model, delivery mechanism or element that may otherwise require a license or other authorization to act as a financial institution or enterprise or other entity that is regulated by be regulated under title 6 or title 44, chapter 2.1 or 13.
4. "Innovation" means, with respect to providing a financial product or service or a substantial component of a financial product or service, the use or incorporation of new or emerging technology or the reimagination of uses for existing technology to address a problem, provide a benefit or otherwise offer a product, service, business model or delivery mechanism that is not known by the attorney general to have a comparable widespread offering in this state.
5. "Innovative financial product or service" means a financial product or service that includes an innovation.
6. "Regulatory sandbox" means the program established by this chapter that allows a person to temporarily test innovative financial products or services an innovation on a limited basis without otherwise being licensed or authorized to act under the laws of this state.
7. "Sandbox participant" means a any person whose application to participate in the regulatory sandbox is approved pursuant to this chapter.
Sec. 2. Section 41-5603, Arizona Revised Statutes, is amended to read:
41-5603. Application process and requirements; fee
A. Any person may apply to enter the regulatory sandbox to test an innovation.
B. The attorney general must accept and review each application for entry into the regulatory sandbox on a rolling basis.
C. An application must demonstrate that an applicant both:
1. Is an entity or individual that is subject to the jurisdiction of the attorney general through incorporation, residency, presence agreement or otherwise.
2. Has established a location, whether physical or virtual, that is adequately accessible to the attorney general, from which testing will be developed and performed and where all required records, documents and data will be maintained.
D. Persons that already possess a license or other authorization under state laws that regulate a financial product or service must file an application with the attorney general to test innovative financial products or services an innovation within the regulatory sandbox for a product or service outside the scope of its license or authorization.
E. Applications must contain sufficient information to demonstrate that an applicant has an adequate understanding of the innovation and a sufficient plan to test, monitor and assess the innovation while ensuring consumers are protected from a test's failure.
F. Applications must contain the information required by a form that is developed and made publicly available by the attorney general. The information required by the form may include:
1. Relevant personal and contact information for the applicant, including full legal names, addresses, telephone numbers, e-mail addresses, website addresses and other information that the attorney general deems necessary.
2. Disclosure of any criminal convictions of the applicant or key personnel, if any.
3. A description of the innovation desired to be tested, including statements regarding all of the following:
(a) How an innovation is subject to regulation outside of the regulatory sandbox.
(b) How the innovation would benefit consumers.
(c) How the innovation is different from other financial products or services available in this state.
(d) What risks will confront consumers that use or purchase the innovative financial product or service.
(e) How entering the regulatory sandbox would enable a successful test of the innovation.
(f) A description of the proposed testing plan, including estimated time periods for market entry, market exit and the pursuit of necessary licensure or authorization.
(g) How the applicant will wind down the test and protect consumers if the test fails.
(h) How the applicant will employ cybersecurity measures to avoid breaches and protect consumer and transaction data.
G. The attorney general shall collect an application fee in an amount to be determined by the attorney general. The attorney general shall deposit, pursuant to sections 35‑146 and 35‑147, all fees collected pursuant to this subsection in the consumer protection‑consumer fraud revolving fund established by section 44‑1531.01.
H. A person shall file a separate application for each innovation sought to be tested.
I. After the information required by subsection F of this section is submitted, the attorney general may seek additional information that it deems necessary. Not later than ninety days after an application is initially submitted, the attorney general shall notify the applicant as to whether the application is approved for entry into the regulatory sandbox. The attorney general and an applicant may mutually agree to extend the time period for the attorney general to determine whether an application is approved for entry into the regulatory sandbox.
J. The attorney general may deny applications in its discretion and a denial is not an appealable agency action for the purposes of chapter 6, article 10 of this title.
Sec. 3. Section 41-5605, Arizona Revised Statutes, is amended to read:
A. If the attorney general approves an application for entry into the regulatory sandbox, the applicant is deemed a sandbox participant and both of the following apply:
1. The sandbox participant has twenty‑four months after the date of approval to test the innovative financial product or service innovation described in the sandbox participant's application.
2. The attorney general must issue the sandbox participant a registration number.
B. Innovative financial products or services that are provided Innovations tested within the regulatory sandbox are subject to the following restrictions:
1. Consumers must be residents of this state, except for transactions that involve an innovation provided by a sandbox participant testing financial products or services as a money transmitter as defined in section 6-1201 or related innovation, in which case only physical presence of the consumer in this state at the time of the transaction may be required.
2. Except as provided in subsection C of this section or section 41-5608, an innovation may not be tested with more than ten thousand consumers may transact through or enter into an agreement to use the innovation.
3. For a sandbox participant testing consumer lender loans as defined in section 6‑601, an individual consumer lender loan may be issued for up to fifteen thousand dollars $15,000, except that aggregate loans per consumer may not exceed fifty thousand dollars $50,000. All consumer lender loans issued in the regulatory sandbox, including loans in excess of ten thousand dollars $10,000, are subject to all of the following:
(a) Section 6‑114.
(b) Section 6‑632.
(c) Section 6‑635, subsections A, B and C.
(d) Section 6‑637.
4. Except as provided in subsection C of this section, for a sandbox participant testing financial products or services as a money transmitter as defined in section 6-1201, individual transactions per consumer may not exceed two thousand five hundred dollars $2,500 and aggregate transactions per consumer may not exceed twenty‑five thousand dollars $25,000.
5. For sandbox participants testing financial products or services as a sales finance company as defined in section 44‑281, all of the following apply:
(a) Section 44‑286.
(b) Section 44‑287, except not section 44‑287, subsection B, paragraph 8.
(c) Section 44‑288.
(d) Section 44‑289.
(e) Section 44‑290.
(f) Section 44‑291.
(g) Section 44‑293.
(h) Section 47‑9601.
6. For sandbox participants testing financial products or services that provide investment management that is regulated pursuant to title 44, chapter 13:
(a) Section 44-3241 applies.
(b) Each sandbox participant must make, maintain and preserve books and records in accordance with the requirements imposed on federal covered advisers under 17 Code of Federal Regulations section 275.204‑2. The sandbox participant shall file with the corporation commission a copy of any notices or written undertakings required to be filed by federal covered advisers with the securities and exchange commission under 17 Code of Federal Regulations section 275.204‑2.
(c) (b) The corporation commission rules adopted pursuant to title 44, chapter 13 apply as they relate to the following:
(i) dishonest and unethical practices.
(ii) Information required to be furnished to clients.
(iii) Custody of client funds or securities.
(iv) Disclosure of financial and disciplinary information to clients.
C. If a sandbox participant demonstrates adequate financial capitalization, risk management process and management oversight, the attorney general may allow either or both of the following:
1. Except as provided in section 41-5608, an innovation may not be tested with more than seventeen thousand five hundred consumers to transact through or enter into an agreement to use the innovation.
2. For a sandbox participant testing products or services as a money transmitter as defined in section 6‑1201, individual transactions per consumer that do not exceed fifteen thousand dollars $15,000 and aggregate transactions per consumer that do not exceed fifty thousand dollars $50,000.
D. This section does not restrict a sandbox participant who holds a license or other authorization in another jurisdiction from acting pursuant to and in accordance with that license or other authorization.
E. A sandbox participant is deemed to possess an appropriate license under the laws of this state for purposes of any provision of federal law requiring state licensure or authorization.
F. Except as otherwise provided in this chapter, a sandbox participant is not subject to state laws that establish requirements pursuant to a license or authorization issued by an applicable agency that otherwise would or may regulate a financial product or service an innovative financial product or service.
G. The attorney general may determine that certain state laws that regulate a financial product or service apply to a sandbox participant. If the attorney general makes this determination and approves an application for entry into the regulatory sandbox, the attorney general must notify the sandbox participant of the specific state regulatory laws that will apply to the sandbox participant. Pursuant to section 41-5611, the attorney general alone shall enforce the state regulatory laws applicable to sandbox participants, including the restrictions established by this section.
H. A sandbox participant may To the extent that a sandbox participant is required by this chapter to obtain, record, provide or maintain in electronic form, including as provided in section 44‑7601, any information, writing, signature, record or disclosure, that is required by this chapter the sandbox participant may do so in electronic form, including as provided in section 44-7601, or may substitute any substantially similar equivalent information, writing, signature, record or disclosure that is approved by the attorney general.
Sec. 4. Section 41-5606, Arizona Revised Statutes, is amended to read:
41-5606. Consumer protection
A. Before providing an innovative financial product or service innovation to consumers, a sandbox participant must disclose to consumers all of the following:
1. The name and contact information of the sandbox participant, including the registration number provided by the attorney general pursuant to section 41‑5605.
2. That the innovative financial product or service innovation is authorized pursuant to the regulatory sandbox and, if applicable, that the sandbox participant does not have a license or other authorization to generally provide financial products or services under state laws that regulate a financial product or service that is outside the regulatory sandbox.
3. That this state does not endorse or recommend the innovation.
4. That the innovative financial product or service innovation is a temporary test that may be discontinued at the end of the testing period, including the expected end date of the testing period.
5. That consumers may contact the attorney general to file complaints regarding the innovative financial product or service innovation being tested and provide the attorney general's telephone number and website address where complaints may be filed.
B. The notifications prescribed by subsection A of this section must be provided to consumers in a clear and conspicuous form in both English and Spanish. For internet or application-based innovative financial products or services innovation, consumers must acknowledge receipt of these notifications before completion of a transaction.
C. The attorney general may require that a sandbox participant make additional disclosures to consumers. When the attorney general approves an application for entry into the regulatory sandbox, the attorney general shall notify the sandbox participant of the additional disclosures.
Sec. 5. Section 41-5608, Arizona Revised Statutes, is amended to read:
41-5608. Discretionary allowances
A. A sandbox participant may request an extension of the regulatory sandbox testing period or an increase in the consumer cap established by section 41-5605 for the purpose of pursuing a license or other authorization required by law.
B. The attorney general may grant or deny a request for an extension pursuant to subsection A of this section by the end of the twenty‑four‑month regulatory sandbox testing period within thirty days after the request. An extension A request granted pursuant to this subsection is may not be effective for more than one year after the end of the regulatory sandbox testing period approval date.
C. A sandbox participant that obtains an extension or increase pursuant to subsection B of this section must provide the attorney general with a written report every three months that provides an update on efforts to obtain a license or other authorization, including any submitted applications for licensure or other authorization, rejected applications or issued licenses or other authorization.
D. The attorney general may deny requests made under subsection A of this section, and a denial is not an appealable agency action for the purposes of chapter 6, article 10 of this title.
Sec. 6. Section 41-5609, Arizona Revised Statutes, is amended to read:
41-5609. Recordkeeping and reporting requirements
A. A sandbox participant must retain records, documents and data produced in the ordinary course of business regarding an innovative financial product or service innovation tested in the regulatory sandbox.
B. If an innovation fails before the end of the testing period, the sandbox participant must notify the attorney general and report on actions taken to ensure consumers have not been harmed as a result of the innovation's failure.
C. A sandbox participant is subject to the requirements of section 18‑552 and must notify the attorney general of any breach as defined in section 18‑545 18-551.
Sec. 7. Section 41-5611, Arizona Revised Statutes, is amended to read:
41-5611. Reporting requirements; monitoring; enforcement; agreements
A. The attorney general may establish periodic reporting requirements on for sandbox participants.
B. The attorney general may seek records, documents and data from sandbox participants. On the attorney general's request, sandbox participants must make such records, documents and data available for inspection by the attorney general.
C. If the attorney general has reasonable cause to believe that a sandbox participant has engaged in, is engaging in or is about to engage in any practice or transaction that is in violation of this chapter, that constitutes an unlawful practice under section 44-1522 or that constitutes a violation of a state or federal criminal law, the attorney general may remove a sandbox participant from the regulatory sandbox or order a sandbox participant to exit the regulatory sandbox pursuant to section 41‑5607.
D. Removal from the regulatory sandbox is not an appealable agency action for the purposes of chapter 6, article 10 of this title.
E. Sandbox participants are subject to the consumer fraud provisions under title 44, chapter 10, article 7.
F. The attorney general may enter into agreements with state, federal or foreign regulators that allow in advancing the purpose of regulatory sandbox, which may include allowing sandbox participants to operate in other jurisdictions and allow allowing entities authorized to operate in other jurisdictions to be recognized as sandbox participants in this state.
APPROVED BY THE GOVERNOR APRIL 1, 2019.
FILED IN THE OFFICE OF THE SECRETARY OF STATE APRIL 1, 2019.