FSI opposes Finra proposal for automated account information collection

CARDS would pose risks and challenges to its members, broker-dealer group contends

Mar 20, 2014 @ 1:56 pm

By Mark Schoeff Jr.

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The organization representing independent broker-dealers has come out against a Finra proposal to ramp up its collection of account information.

In a comment letter submitted Thursday, the Financial Services Institute Inc. wrote that the broker-dealer regulator's proposed Comprehensive Automated Risk Data System would pose substantial costs and management challenges to its members and would put sensitive investor information at risk.

The Financial Industry Regulatory Authority Inc. put out a CARDS concept release in December. The system would allow Finra to gather from clearing firms reams of account information about investments, transactions and investor profiles.

Individual brokerage firms would have to submit their information to clearing firms.

Finra said that frequent collection of data in aggregate would help it identify sales practice misconduct more efficiently and effectively than it is able to do on a firm-by-firm basis.

Although FSI lauded Finra's attempt to improve market oversight, it contended that the proposal is unworkable.

“As proposed, CARDS presents significant challenges due to its ambitious scope and massive scale,” wrote David Bellaire, FSI executive vice president and general counsel.

“These challenges include data standardization, data complexity, data translation, system infrastructure and the incredible financial costs required to develop, implement and maintain CARDS,” he wrote. “We are concerned the development and implementation of CARDS is simply not feasible while preserving widespread investor access to the services of independent broker-dealers and financial advisers.”

Finra is showing no signs of backing down on the project.

“We remain very committed to the CARDS initiative,” Carlo di Florio, Finra executive vice president for risk and strategy, said at an Investment Company Institute conference in Orlando, Fla., this week.

But Finra has already tweaked the proposal.

After widespread alarm about the potential for data breaches, Finra on March 4 said that it wouldn't require the submission of personally identifiable information, such as a client's name, address or tax identification number.

Despite that change, data remain vulnerable during the process of collecting and transmitting it to clearing firms, according to the FSI.

“While Finra may not have the [personally identifiable information], the data security concerns with consolidated financial data still remain but have shifted from Finra to the clearing firms,” Mr. Bellaire wrote.

Another problem is that data collected directly from investment product providers wouldn't be included in CARDS and adding it later to the CARDS review would be a costly undertaking for FSI firms, according to the group.

FSI also warned that CARDS would require developing a common data standard for all of the information that flows in different formats from investment product companies.

“The enormous costs of creating this process will likely be passed on to firms and advisers,” Mr. Bellaire wrote. “If Finra begins to require new standardized CARDS data fields, the costs will be significant for firms and advisers to change their systems, repaper their accounts and enter the new information in their systems.”

So far, Finra has received 57 comment letters. The deadline for submission is Friday.

Not all the missives have been negative. The Consumer Federation of America is supportive.

The initiative would strengthen Finra's ability to assess business conduct patterns across the financial industry, according to Barbara Roper, the CFA's director of investor protection. “To the degree that analysis allows Finra to identify troubling developments and problematic practices and shut them down before significant harm occurs, the benefits to investors would be self-evident,” she wrote in a March 11 letter.

In Orlando, Mr. di Florio said that CARDS would bolster Finra's risk analytics so that it could more easily spot anomalies, such as an elderly client with a conservative profile holding risky investments.

“Rather than go in and do a lot of random sampling across a host of accounts, let's just target those accounts, those branches, those brokers, those transactions” that pose concerns, he said.

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