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MARK BRNOVICH

ATTORNEY GENERAL
OFFICE OF THE ARIZONA ATTORNEY GENERAL

DRAFT LEGISLATIVE PROPOSAL OF ARIZONA ATTORNEY GENERAL MARK


BRNOVICH TO ESTABLSIH A FINTECH REGULATORY SANDBOX IN ARIZONA

QUESTIONS REGARDING THIS PROPOSAL SHOULD BE DIRECTED TO:

Paul Watkins
Chief Counsel, Civil Litigation Division
(602) 542-0189
Paul.Watkins@azag.gov
______________________________________________________________________________

An Act
Amending Title 6, Arizona Revised Statutes, By Adding Chapter 18; Relation to the
Creation of a Financial Products and Services Regulatory Sandbox

Be it enacted by the Legislature of the State of Arizona:


Section 1. Title 6, Arizona Revised Statutes, is amended by adding chapter 18, to read:
CHAPTER 18
REGULATORY SANDBOX
ARTICLE 1. GENERAL PROVISIONS

6-1801. Definitions
In this chapter, unless the context otherwise requires:
1. Consumer means a person who purchased or otherwise entered into a
transaction or agreement to receive an innovative financial product or service being tested by a
person participating in the regulatory sandbox.
2. Department means the Department of Financial Institutions.
3. Financial product or service means a product or service that falls under the
departments regulatory jurisdiction or a product or service that includes elements that may
otherwise require a permit, license, certification, or recognition as a financial institution or
enterprise regulated by the department.
4. Innovative financial product or service means a financial product or service
that includes an innovation.
5. Innovation means, with respect to a product or service, that which uses or
incorporates new or emerging technology, or reimagines uses for existing technology, to address
a problem, provide a benefit, or otherwise offer a product, service, business model, or delivery
mechanism that has no comparable widespread offering in the marketplace regulated by the
department.
6. Person means any legal person.
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7. Regulatory Sandbox means the program established by this chapter that allows
a person to temporarily test innovative financial products, services, business models, or delivery
mechanisms on a limited basis without being required to first obtain full status as a regulated
financial institution or enterprise.
8. Test means to provide products and services as allowed by this chapter.

6-1802. Purpose of the Regulatory Sandbox


The purpose of the regulatory sandbox is to enable persons and business entities to obtain
limited access to the Arizona market in order to test innovations in financial products or services.
The regulatory sandbox exists to enable innovation testing without a person having to first obtain
full status as a financial institution, enterprise, or other entity regulated by the department.

6-1803. Application Process and Requirements


A. Any person may apply to enter the regulatory sandbox to test an
innovation.
B. The department must accept and review each application for entry into the
regulatory sandbox on a rolling basis.
C. Applications must demonstrate that persons not located in Arizona have
established:
1. An Arizona business entity or, if an individual person, an Arizona
residence, and;
2. A location, whether physical or virtual, that is easily accessible to
the department from which testing will be developed and performed and where all
required records, documents, and data will be maintained.
D. Financial institutions and enterprises already regulated by the department
must file an application to test products or services that are outside the scope of their
permit, license or authorization to act.
E. Applications should contain sufficient information to demonstrate to the
department that a person possesses an adequate understanding of its innovation and a
sufficient plan to test, monitor, and assess its innovation while ensuring consumers are
protected from a tests failure.
F. Applications must contain the information required by a form developed
and made publicly available by the department. The form must include:
1. Relevant personal and contact information for the applicant,
including full legal names, addresses, phone numbers, email addresses, website
URLs, and other information as the department deems necessary.
2. Disclosure of criminal convictions for the applicant or key
personnel, if any.
3. A description of the innovation(s) desired to be tested, including
statements regarding:
i. How an innovation currently would be subject to the
departments regulation apart from being allowed into the regulatory
sandbox;
ii. How the innovation would benefit consumers;
iii. How the innovation is different from other products or
services available in Arizona;
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iv. What risks will confront consumers that use or purchase the
innovative product or service;
v. How entering the regulatory sandbox would enable a
successful test of the innovation;
vi. A description of the proposed testing plan, including
estimated time periods for market entry, exit, and pursuit of necessary
permits or licensure; and
vii. How the person will wind down the test and protect
consumers in the event the test fails.
G. The department must collect an application fee of not less than five
hundred dollars per application.
H. A separate application must be filed for each innovation sought to be
tested.
I. After the information required by paragraph F is submitted, the
department may seek additional information it deems necessary. No later than 90 days
after an application is initially submitted, the department must notify applicants as to
whether an application has been approved for entry into the regulatory sandbox. The
department and an applicant may mutually agree to extend the time for the department to
determine whether an application can be approved for entry into the regulatory sandbox.
J. The department may deny applications in its sole discretion and any such
denial is not appealable.

6-1804. Regulatory Sandbox Scope


A. Upon the department approving an application for entry into the regulatory
sandbox, the applicant person or business shall have 12 months from the date of
acceptance to test its innovative financial product or service.
B. Upon approving an application for entry into the regulatory sandbox, the
department must issue a numeric designation to each person in the sandbox.
C. Innovative financial products or services provided within the regulatory
sandbox are subject to the following restrictions:
1. Consumers must be Arizona residents;
2. No greater than 5,000 consumers may transact through or enter
into an agreement to use the innovation;
3. For consumer lender loans as defined in section 6-601, individual
transactions per consumer may be for a sum no greater than $5,000 and aggregate
transactions per consumer in an amount no greater than $50,000
4. For money transmissions, individual transactions per consumer
may be for a sum no greater than $2,500 and aggregate transactions per consumer
in an amount no greater than $25,000

6-1805. Consumer Protection Requirements


A. Before providing a tested product or service to consumers, persons or
business entities testing a financial product or service within the regulatory sandbox must
disclose to consumers:
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1. The name and contact information of the person providing the


Innovative product or service, including the numeric designation provided by the
department.
2. If applicable, that the person providing the innovative product or
service does not possess a permit or license to generally provide financial
products or services outside the regulatory sandbox.
3. That the Innovative product or service is authorized pursuant to the
regulatory sandbox.
4. That the State of Arizona does not endorse or recommend the
innovation.
5. That the innovative product or service is a temporary test that may
be discontinued at the end of the test period, including the expected end date of
the test period.
6. That consumers may contact the department to file complaints
regarding the Innovative financial product or service being tested and include the
departments telephone number and website address where complaints may be
filed.
B. The notifications required in paragraph A must be provided to consumers
in a clear and conspicuous form. For internet or application-based products or services,
consumers must acknowledge receipt of these notifications before being allowed to
proceed with a transaction.
C. Any failure to comply with this section is an unlawful act or practice
under section 44-1522.

6-1806. Exit Requirements


A. At the end of its respective 12 month period, a person testing an
innovation in the regulatory sandbox must exit the regulatory sandbox and wind down
operation of the innovation within 60 days, except as provided in section 6-1807.
B. By the end of the 12 month regulatory sandbox testing period, the person
in the regulatory sandbox must either:
1. Notify the department it intends to wind down its innovation;
2. Seek a one-time test period extension; or
3. Seek an extension to pursue a license, permit, certification, or any
other recognition required by this Title.
C. If the department receives no notification pursuant to paragraph C, the
regulatory sandbox period must end without any extensions and the person must cease
operation of the innovation within 90 days.

6-1807. Extension of the Regulatory Sandbox Period


A. Persons in the regulatory sandbox may request a one-time extension of the
regulatory sandbox test period. Such requests must be made no later than by the end of
month 11 of the initial 12 month test period. The request for an extension must specify
how long the requestor believes will be necessary to produce a conclusive test and state
specific reasons for why an extension is necessary.
B. The department may grant a one-time extension of up to 6 months for the
regulatory sandbox test period. The department must grant or deny a request for one-
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time test period extension before the end of the initial 12 month test period. Denials of an
extension request are within the departments sole discretion and any such denial is not
appealable.
C. Persons in the regulatory sandbox may request an extension of the
regulatory sandbox period to pursue a license, permit, certification, or any other
recognition as required by this Title. Such requests must be made no later than 30 days
before the end of the regulatory sandbox test period.
D. The department must grant or deny a request for an extension to pursue a
license permit, certification, or other recognition by the end of the regulatory sandbox test
period. In no event shall an extension to pursue a license, permit, certification, or other
recognition be effective for more than one year from the end of the regulatory sandbox
test period.

6-1808. Records and Reporting Requirements


A. Persons in the regulatory sandbox must retain records and documents
produced in the ordinary course of business regarding an innovative financial product or
service tested in the regulatory sandbox.
B. Persons in the regulatory sandbox acting as a money transmitter as defined
in section 6-1201 are subject to chapter 12, article 2 of this title and must produce and
retain records sufficient to fulfill the requirements established by those provisions.
C. Any records provided to the department pursuant to this chapter are
subject to the provisions of section 6-129.
D. The department must notify a person what reporting duties, if any, apply
to a person before that person enters the regulatory sandbox.
E. If an innovation fails before the end of the test period, the person
performing testing must notify the department and report on actions taken to ensure
consumers have not been harmed as a result of the innovations failure.

6-1809. Enforcement and Superintendent Powers


A. At any time, the Department may inspect records, documents, data, or any
other relevant material regarding a tested financial product or service that either is
currently in the regulatory sandbox or was at any time within the prior ten years.
B. The enforcement provisions of sections 6-123 and 6-132 apply to any
violation of this chapter.