Finra pushes ahead with controversial data collection program

Industry groups organize to have a stronger voice in shaping the CARDS rule going forward.

Finra proposed a rule Tuesday for a controversial customer-data-collection initiative, marking another step in what remains a long journey toward a final rule.
The proposal would implement the Comprehensive Automated Risk Data System, or CARDS, which was originally unveiled as a concept release in December. The rule introduced Tuesday would establish the system in phases, the first of which would require about 200 clearing firms to submit customer-account information to the Financial Industry Regulatory Authority Inc., the industry-funded broker-dealer regulator, regarding securities accounts it clears for brokers. The information would include transactions, holdings and account profile data.
The second phase would require about 1,850 brokerages to submit account information either directly to Finra or through a third party that would include investors’ time horizons, objectives, risk tolerance and net worth, but would exclude personally identifiable information, according to the regulatory notice. Both groups would have to submit the information on a monthly basis.
All data transmitted to Finra would be encrypted, the regulator said in the notice.
As part of the proposal, Finra conducted an economic analysis of the first phase of implementation involving a limited number of clearing and self-clearing firms. It estimated that the cost of developing a technological infrastructure to fulfill the CARDS data mandate range from $390,000 to $8.33 million, while maintenance would cost anywhere from $76,000 to $2.44 million annually. The cost to Finra for developing and implementing CARDS would be $8 million to $12 million over three years.
Finra is continuing to conduct a cost-benefit analysis related to the second phase of implementation.
The regulator said the system would allow it to better detect investment-product sales abuses by aggregating reams of account data. A benefit for firms is that the regular data submissions would be more efficient than the piecemeal data-gathering Finra does when examining firms.
The proposal released Tuesday includes a public comment period that ends Dec. 1.
And comments are sure to flow in.
Industry push-back against the initial concept release was strong, with many critics asserting that compiling and submitting the data would create burdensome regulatory costs for small firms.
The Financial Services Institute, which represents independent broker-dealers and financial advisers, announced the formation of a task force to work on a response to CARDS. The panel will be led by LPL Financial President Robert Moore.
The task force is meeting with the goal of being “constructive” rather than obstructive, Mr. Moore said.
“There is no position of trying to explicitly stop it,” Mr. Moore said. “There is an explicit intention to form a task force with the mission of engaging constructively and collaboratively in this process. This is a very important proposal for investors, for financial advisers, for brokers.”
It is “too early to tell” whether Finra has addressed industry concerns in the second CARDS iteration, Mr. Moore said.
The Securities Industry and Financial Markets Association, a trade group of securities firms, also is taking a cautious approach.
“CARDS raises a number of important concerns, including investor privacy, data security, duplication of regulatory data collection … and other cost-benefit concerns, that remain outstanding and must be fully vetted with all interested parties,” Ira Hammerman, SIFMA executive vice president and general counsel, said in a statement.
Susan Axelrod, Finra executive vice president for regulatory operations, told an audience at the Financial Services Institute Financial Advisor Summit in Washington that Finra is listening to industry feedback and trying to determine what the costs would be for small firms. She cited a change that already has been made to exclude personally identifiable information from data gathering.
Ms. Axelrod also explained that CARDS will continue down a long road before it becomes reality. Finra will continue to hone the proposal after the comment period, and the final rule will include plenty of time for firms to adjust to the requirements.
“CARDS is something I think we at Finra are really passionate about,” Ms. Axelrod said in an interview. “I think CARDS will help us be a more proactive regulator, which is absolutely better for the investing public.”