Finra seeks new monitoring system for customer accounts

Says it would more quickly identify potential red flags signaling misconduct

Dec 23, 2013 @ 12:32 pm

By Mark Schoeff Jr.

finra, customer accounts, surveillance, monitor
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Finra is proposing an automated data collection system that will allow it to gather information from brokerage firm customer accounts that could more quickly and efficiently identify harmful sales practices.

On Monday, the Financial Industry Regulatory Authority Inc. released a request for comment on a proposal called the Comprehensive Automated Risk Data System. Under the program, Finra would compile account activity information that firms currently maintain in their books and records.

“The information collected through CARDS will allow Finra to run analytics that identify potential 'red flags' of sales practice misconduct and help us identify potential business conduct problems with firms, branches and registered representatives,” Susan Axelrod, Finra executive vice president of regulatory operations, said in a statement.

The system will help the broker-dealer regulator ferret out “churning, excessive commissions, pump and dump schemes, markups [and] mutual fund switching,” among other sales violations, according to a regulatory notice.

Brokerage firms would have to provide the account information to their clearing firms — from which Finra would then obtain it. Finra would seek account types and categories, customer investment profiles, purchase and sales transactions, additions and withdrawals, margin and balances and a description of securities, among other data.

The information collected in the initial phase of the program is similar to what Finra currently culls on a firm-by-firm basis during examinations. Retrieving it through the new system prior to exams would help Finra identify investor risks earlier, according to a Finra statement.

The initiative could be a boon to Finra but it likely will draw initial resistance from financial firms, according to Amy Lynch, president of FrontLine Compliance.

“It's going to be a huge burden, especially on the clearing firms, initially, to implement the technology,” Ms. Lynch said, adding that industry-wide costs will be at least in the millions of dollars. On an individual-firm basis, she said it was hard to estimate.

The system “would have to be scalable somehow,” Ms. Lynch said. “Think of all the firms that don't have the resources to implement the new required technology.”

Finra released the request for comment in part to get industry feedback for a cost-benefit analysis of an information-collection system. The regulatory notice didn't contain cost estimates, but Finra said the program would ease regulatory hassles by making the examination process more efficient.

“CARDS is intended to reduce burdens on firms by eliminating intermittent information requests from Finra for the information CARDS covers,” according to the notice.

Finra also noted that clearing firms would incur costs related to building and maintaining the technology to provide account information to the regulator, while brokerages would see costs related to providing additional information to clearing companies.

A Finra official was not available for comment.

The system would require clearing firms and brokerages to add another level of coordination.

"There could be heated discussions as to who is responsible for which end of the data,” Ms. Lynch said.

Finra would collect the information on a daily or weekly basis from clearing firms and perform data analysis to get a better handle on customer contacts at individual firms as well as industry trends.

In a test of the concept using information from an individual firm and two clearing firms, Finra said it was able to pinpoint potential investor harm.

“For example, the analytics showed Finra that a firm was selling a new, high-risk product — a business in which the firm was not historically engaged and its financial reporting did not disclose,” the regulatory notice stated.

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