Ketchum tells lawmakers CARDS is on hold, not dead

Finra chief says regulator reviewing whether massive data collection proposal carries data security risk, gets earful from Republicans on House Financial Services subcommittee

May 1, 2015 @ 1:46 pm

By Mark Schoeff Jr.

Finra chairman and chief executive Richard Ketchum told lawmakers on Friday that its controversial massive data-collection program is on hold while the regulator studies whether it would make brokerage information vulnerable to hackers. The CEO, however, did not suggest the proposal is dead.

The proposal received strong resistance from the financial services industry, which has expressed concerns about the implementation costs and the security of the information that would be compiled. At a House hearing on Friday, Republican lawmakers also attacked the initiative.

Mr. Ketchum said that the Financial Industry Regulatory Authority Inc. is reviewing whether the so-called Comprehensive Automated Risk Data System poses data-security risks.

“We are stepping back, having a number of conversations,” he said at a hearing of the House Financial Services subcommittee on capital markets. “We don't plan to move forward with CARDS” until concerns are addressed.

He did not provide a timeline for Finra's next steps on the proposal, which was released last September after being introduced as a concept release in December 2013. He said Finra would have to decide whether to build a new data-collection system or rely on existing systems.


“It will take a considerable amount of time,” Mr. Ketchum said.

The mechanism would collect reams of brokerage account information on a monthly basis and analyze it for sales trends and other activity that could harm investors. Finra has said that CARDS would make it a more data fluent and nimble regulator.

After the hearing, Mr. Ketchum did not throw in the towel on CARDS.

“I do believe that Finra having an early warning system that addresses instances of serious fraud and serious sale practice violations and abuses of investors is an important step for us to continue to improve on – and that I expect us to do,” Mr. Ketchum told reporters.

Republican lawmakers criticized the proposal, echoing industry concerns.

“I remain far from convinced that this costly, intrusive and burdensome proposal is needed,” said Rep. Scott Garrett, R-N.J. and chairman of the subcommittee. “Its costs will far outweigh any potential benefits and further squeezing our smaller broker-dealers who are already facing increased regulatory compliance costs.”

Proponents of CARDS remain optimistic about the proposal's future.

"CARDS in some form will ultimately be adopted," said Barbara Roper, director of investor protection at the Consumer Federation of America. "You simply cannot abandon the notion that you're going to use big data in some form to better police the markets."

Opponents of the measure, meanwhile, praised Finra for its pull back.

“We commend Finra for recognizing the industry's concerns with respect to the sensitivities involving client information, the burden of building yet another reporting system, and the abundance of data already received,” Ira Hammerman, executive vice president and general counsel of the Securities Industry and Financial Markets Association, said in a statement.

Republicans at the hearing criticized Finra for not giving enough deference to the industry that it regulates and too much to the Securities and Exchange Commission, which oversees its operations.

“Finra is neither a true self-regulator nor is it a government regulator, but it acts more like a deputy of the SEC,” Mr. Garrett said.


Mr. Ketchum countered that Finra does listen to its industry members but makes its own decisions about regulation and enforcement. He noted that a majority of its board are public rather than industry representatives. The organization regulates approximately 4,000 brokerage firms and about 637,000 registered representatives.

“The balance is correct today,” Mr. Ketchum said. “What Finra provides is an independent organization that is informed by the industry. I don't think we're anything like a deputy SEC.”

A Democrat on the subcommittee defended Finra.

“Finra plays a central role in protecting investors in our securities markets,” said Rep. Carolyn Maloney, D-N.Y. and ranking member of the subcommittee.

Mr. Ketchum also took heat from Republicans for supporting an SEC effort to write a rule that would raise investment-advice standards for brokers by requiring them to act in the best interest of their clients. Currently, investment advisers meet that bar. Brokers are held to a standard that requires them to sell products that are suitable for their clients.

Rep. Robert Hurt, R-Va., said that brokers are regulated enough as it is.

“Why would we risk the possibility of higher costs, fewer choices by imposing a higher standard that's not necessary?” he asked Mr. Ketchum.

Mr. Ketchum said that the SEC is in the best position to develop a uniform fiduciary standard. He questioned a fiduciary rule that has been proposed by the Department of Labor for brokers who work with retirement accounts.

“The right way to move forward is for the commission to look at the possibility of a balanced fiduciary standard across all products,” Mr. Ketchum said. “I regret the possibility of having different standards with regard to the Labor Department proposal.”

Finra is considering writing a comment letter about the DOL rule, Mr. Ketchum said.


Do you agree with Finra's decision to put CARDS on hold?

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