Broker-Dealers

FSI warns of ‘false positives’ under CARDS

IBD organization expresses suitability concerns with regulator's proposed data-collection system and predicts cost of $250,000 to $1 million — with ongoing maintenance above that.

An organization representing independent broker-dealers doesn’t want Finra to include analysis of the suitability of investments in its proposed CARDS data-collection system and warned that the system would impose significant costs on its members.
In a comment letter on Dec. 1, the Financial Services Institute said the Financial Industry Regulatory Authority Inc. should collect only birth year, net worth and investment-time-horizon data. Other categories, such as investment objectives and risk tolerance, should be left out because of the difficulty of providing the information in a standard format.
“FSI believes the costs in inputting, storing and transmitting the suitability data Finra currently contemplates collecting through CARDS might outweigh the benefits Finra envisions,” David Bellaire, FSI executive vice president and general counsel, wrote in the comment letter. “FSI member firms are concerned that an analysis of suitability data by Finra will result in numerous ‘false positives’ requiring Finra and FSI member firms to expend significant resources to review and respond to these determinations.”
The letter included FSI estimates from its 100 member firms that CARDS implementation would cost between $250,000 and $1 million, while maintenance and inquiry responses would require $100,000 to $800,000 on an ongoing basis.
Monday was the deadline for comment letters about Finra’s Comprehensive Automated Risk Data System. First floated as a concept release in December 2013, Finra released an implementation proposal in September.
Finra has made CARDS a priority; the system would allow it to collect reams of customer-account data from clearing firms and brokerages each month. Finra said CARDS would give it the ability to detect dangerous industry trends and potentially harmful sales practices more quickly than it can now in firm-by-firm examinations.
In other recommendations, FSI asked Finra to require that firms submit “direct business data” in addition to brokerage data. The former involves transactions that are conducted outside a custodian’s platform.
FSI also said Finra should consider expanding its consolidated audit trail system rather than implementing CARDS separately, clarify liability in the event of a CARDS data breach and allow firms much more time to implement CARDS after the Securities and Exchange Commission approves the proposal.
The FSI letter is one of many Finra is likely to receive Monday about CARDS. Finra has already tried to assuage industry worries by modifying the proposal to prohibit the collection of information that can identify individual customers. It also has promised to conduct an extensive cost-benefit analysis.
Benjamin Edwards, director of the Investor Advocacy Clinic at the Michigan State University College of Law, told Finra to stick to its guns on CARDS.
“Much of the current opposition falls within a long history of financial intermediaries’ overstating the costs and risks of proposed measures to delay reforms,” Mr. Edwards wrote in a Dec. 1 comment letter.