Finra gets first-hand push-back on controversial data collection proposal

At regulator's annual conference, concerns are raised but some attendees see the silver lining

May 19, 2014 @ 6:30 pm

By Mark Schoeff Jr.

As Finra moves toward establishing a massive data collection system that it says will help identify market activities that pose a threat to investors, resistance from the financial industry was apparent among participants at the regulator's annual conference Monday.

At the opening of the session in Washington, Finra chairman and chief executive Richard Ketchum said that the organization has revised its controversial proposal for a Comprehensive Automated Risk Data System, making it easier for the Financial Industry Regulatory Authority Inc.'s nearly 4,300 member firms to submit customer and product information.

In response to worries outlined in hundreds of comment letters about the CARDS concept release, the broker-dealer self-regulator announced earlier this year that it would not collect personally identifiable customer information. Finra is hoping to make a formal CARDS rule proposal this summer or fall.

But the tweaks are not easing the fears of some brokerage firms.

Paul Tolley, senior vice president and chief compliance officer at Commonwealth, continues to have qualms about Finra's compiling reams of information from brokerage accounts, even if individual investors can't be identified.

“I get concerned with such a huge database, collecting all this information that I believe, if breached, could still be used to manipulate markets,” Mr. Tolley said during a panel at the Finra conference.

In the initial proposal, Finra would have required its member firms to submit information through a clearing firm. That idea drew criticism because there's no uniform way for brokerages to present data about customers and trades. In addition, about half of Finra firms don't use a clearing house.

In his speech on Monday, Mr. Ketchum said that brokers without clearing firms would be able to submit data through a service bureau or directly to Finra.

After hearing of the change, Mr. Tolley was still leery. He said that Finra would be inundated with information, which would lead to unfounded suspicions about some firms.

“All that data coming in, I believe, has got to result in false flags,” Mr. Tolley said. “Now, I might get nickeled and dimed on all sorts of these little inquiries.”

Susan Axelrod, Finra executive vice president of regulatory operations, said that Finra would not use the CARDS information to press firms on whether individual or a handful of recommendations were suitable. Rather, it would be used to spot broad investor threats.

“We're committed to using the data to look across the industry, to look at trends, to look at products, to be able to be laser-focused on a single branch office or a single [registered] representative,” Ms. Axelrod said during the Monday afternoon panel. “It's key to investor protection for the future.”

Robert Muh, chief executive of Sutter Securities Inc., wants Finra to go slowly. He suggested a pilot program in which firms that didn't sell certain targeted products, hadn't been hit with Finra fines and didn't have brokers under heightened supervision would be exempt from CARDS requirements.

“This is so major, I would urge that Finra walk, not run, into this,” Mr. Muh said on a Finra conference panel.

But there were also positive comments. Hardeep Walia, chief executive of Motif Investing Inc., said that CARDS would move regulation into the big data age.

“The power of CARDS is that it's almost the next generation of regulation, which is the use of technology versus rule writing versus doing these random audits,” Mr. Walia said during a panel.

Michelle Oroschakoff, managing director and chief risk officer at LPL Financial Inc., also took an optimistic view.

“If it's done right, it's going to be terrific,” Ms. Oroschakoff said during a panel. “It's going to be better for investor protection and better for the markets.”

Ms. Axelrod assured the approximately 1,000 attendees at the conference that Finra would continue to listen to brokerage firm concerns about CARDS.

“There will be a lot more dialogue to come,” Ms. Axelrod said.


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