Finra assessing costs for second phase of CARDS affecting broker-dealers

Finra chief economist Jonathan Sokobin had a coming out of sorts last week in the organization’s proposal to implement its massive customer data collection proposal.
Near the end of that regulatory notice, five pages are devoted to an interim assessment of the benefits of the system and how much it could cost member firms. It was a regulatory-impact study of the highest-profile proposal since Mr. Sokobin joined Finra in May 2013 to establish a formal economic analysis unit.
Prior to his arrival, Finra had paid attention to costs and benefits, but not in the detail it does now.
“It’s something Finra takes seriously,” Mr. Sokobin said. “We’ve stepped up our game.”
How well Finra, the industry-funded broker-dealer regulator, plays that game will be demonstrated in the next step of the Comprehensive Automated Risk Data System. Last week’s regulatory notice, the second iteration of the CARDS proposal, contained an interim cost-benefit analysis that only focuses on the first phase of implementation involving clearing firms.
The second phase of implementation would encompass broker-dealers. That’s where critics worry that the costs of CARDS — in terms of spending on technology infrastructure, maintenance and security — will outweigh the benefits for smaller broker-dealers.
The intense focus on costs puts the spotlight on Mr. Sokobin. He said his office is “providing a structured conversation” around the sources of costs and benefits, especially as they apply to smaller operations.
“We’ve tried to create a framework that allows flexibility for small firms to right-size their approach in order to make the rule as cost-effective as possible,” Mr. Sokobin said. “But we need to better understand the costs. We’re going to bring a group of small firms together to work through with them what the costs may be.”
The CARDS proposal is only one of 46 rules Mr. Sokobin and his staff of four are reviewing. He plans to add two more staff members in the coming months. He relishes the challenge of figuring out how complex Finra rules could impact the equally complex broker-dealer sector.
“This is really a fun job,” said Mr. Sokobin, a former deputy chief economist at the Securities and Exchange Commission and former director of its then-Office of Risk Assessment. “It’s a great opportunity to have an impact on how regulation is understood and how it is developed.”
One Finra member says it is too early to tell how much influence Mr. Sokobin will have on the rule-making process once Finra makes a decision to pursue a new regulation.
“I don’t see the economic side being able to say, ‘Let’s scrap this rule or start over because the cost is too high,’” said Carrie Wisniewski, president of Bridge Capital Associates. “But time will tell. It’s kind of a wait-and-see situation.”
A former colleague of Mr. Sokobin’s said Finra’s cost-benefit analysis, as well as similar efforts at other financial regulators, falls short because it cannot completely determine regulatory impact on small firms, capital formation and market competition.
“Important questions still aren’t fully addressed in these economic analyses,” said Emre Carr, a principal at the consulting firm BRG and a former SEC senior economist. “I’m not extremely optimistic that we’re close to data analysis changing Finra’s agenda. I’m happy to see we’re on that road, but we’re not close to the end of the road.”
Part of Mr. Sokobin’s job involves looking back at the road Finra has traveled. His office is instrumental in the organization’s review of existing rules regarding gifts and brokers’ public communication.
“We’re taking a very holistic approach to determine whether our rules can be made more efficient and more effective,” Mr. Sokobin said.