Finra expected to adopt CARDS despite vocal industry resistance

Opponents like SIFMA and FSI remain wary of the potential costs, customer data security, but Finra asserts that CARDS will help investors

Nov 16, 2014 @ 12:01 am

By Mark Schoeff Jr.

Despite strong industry resistance, Finra is expected to adopt a controversial proposal to implement an automated tracking system to detect abusive broker conduct.

“They're going to go through with it,” said Linda Riefberg, a partner at Cozen O'Connor and a former chief counsel for Finra enforcement. “They don't have to have firms' approval. Finra, and presumably the [Securities and Exchange Commission], believes this is a way to strengthen their investor protection.”

The Financial Industry Regulatory Authority Inc., the self-funded broker-dealer regulator, sees its Comprehensive Automated Risk Data System, or CARDS, as a way to use technology to make itself a more effective and nimble regulator.

Opponents, including the Securities Industry and Financial Markets Association and the Financial Services Institute, are wary of the potential costs involved in implementing and maintaining the system and worry about exposing customer data.

At its annual conference last week in New York, SIFMA said in no uncertain terms it opposes the system. SIFMA president and chief executive Kenneth Bentsen Jr. said in addition to the price tag and potential customer privacy breaches, CARDS, which would collect reams of brokerage account information monthly, duplicates supervision and surveillance activities companies already have in place.

“We don't think Finra has yet answered the questions that really need to be answered,” Mr. Bentsen said. “Turning over account-level data on a regular basis to one quasi-government entity is just something that the public doesn't like doing and our members think their clients don't like.”

“Both sides of the issue are digging their heels in,” said Daniel Nathan, a partner at Morrison & Foerster.

The standoff is likely to play out further as comment letters regarding Finra's proposal to implement CARDS flow in by the Dec. 1 deadline. Finra introduced the proposal in late September; the initiative was initially floated as a concept release in December 2013.

At each step along the way, the opposition has been vocal — and Finra has consistently called it a top priority. A CARDS rule ultimately will have to be approved by the SEC.

Finra's enthusiasm is likely to prevail, said Evan Rosser, a senior consultant at Oyster Consulting, which advises financial services companies.

“Finra feels as if this is an important part of their regulatory duties,” said Mr. Rosser, a former vice president and director of enforcement at Finra and its predecessor, the National Association of Securities Dealers. “It would take an enormous amount of pressure to make them back off of this entirely.”

In an appearance at the SIFMA conference, Finra chairman and chief executive Richard Ketchum asserted that CARDS would help Finra detect much more quickly and efficiently investment-product sales abuses and other trends that could hurt investors. Currently, Finra must ferret out dangers in firm-by-firm examinations.

“Our early warning systems are limited,” Mr. Ketchum said. “We're getting to problems where investors are harmed too late.”

He also underscored that Finra has already revised the CARDS proposal to ensure that the system will not collect information that can identify individual investors.

It's not clear that Finra has wiggle room on the CARDS proposal beyond strengthening privacy protections.

“I'm not sure there's much more they can do to cut it down,” said Mr. Nathan, a former Finra vice president and director of regional enforcement. “Their point of view is that they've already made significant concessions in cutting out personally identifiable information.”

Typically, Finra reviews industry complaints and dilutes proposals, said Peter Chepucavage, general counsel at Plexus Consulting.

A recent example was an initiative to require brokers to reveal recruiting bonuses to their clients when they switch firms. The proposal has been walked back to an “educational communication” that will outline questions clients should ask their brokers about compensation.

But with CARDS, Finra might not have as much leeway.

“If they get less information, it's not going to be worth much compared to the costs,” Mr. Chepucavage said.

Tweaks might be possible in what kind of data is gathered and how it is formatted. Finra also could give firms a long lead time to comply with CARDS.

“Any modification in the program will be how it's implemented operationally,” Ms. Riefberg said.

Now is the time for firms to try to get Finra's attention and influence CARDS because the regulator is listening, she said.

“They will bend over backwards because these are the firms that make up their membership,” Ms. Riefberg said.

Finra firms are overreacting to CARDS, she said. The information Finra is seeking and the problems it is trying to detect are not new.

“I don't think CARDS is as negative or scary a program as firms are making it out to be,” Ms. Riefberg said.

It's ominous enough, though, to get the attention of Congress. Rep. Scott Garett, R-N.J., chairman of the House Financial Services Subcommittee on Capital Markets, who has told Finra to rethink the program.

“This might go to some players other than Finra and the industry when it's all said and done,” Mr. Rosser said.


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