The Impact FINRA’s CARDS Plan Will Have on the Financial Industry

The Impact FINRA’s CARDS Plan Will Have on the Financial Industry

The largest independent regulator of securities firms in the U.S., the Financial Industry Regulatory Authority (FINRA) purports to protect investors by making sure brokerage firms play by the rules.

For most of its history, FINRA has relied on investor complaints of possible misconduct and examinations of broker-dealers to keep tabs on the securities industry. But with the release of the Comprehensive Automated Risk Data System (CARDS) Version 2.0, the regulator is taking a controversial step by fundamentally examining of data to predict problems before they are reported.

What is it?

A nussiance to some, an afterthought to most, some have questioned whether FINRA has ever had the authority to be a true regulator in the securities industry because it relies on after-the-fact reviews to do its job.

In other words, it cleans up messes after the fact and has limited power to prevent them from happening in the future. An ambitious system designed to collect massive amounts of information on the brokerage industry and its millions of customer accounts, FINRA claims that CARDS is expected to change all that.

How it Works

According to the regulatory notice, CARDS will help FINRA collect automated data about securities transactions and customer account demographics on a monthly basis. This information will help the self-regulatory organization allegedly expeditiously identify suspicious trading patterns and activity by brokers, branch offices, firms, and individual representatives. The data collected through CARDS would even allow FINRA to compare trading activity with customer data, which would help them identify possible suitability issues.

For the regulator, this new system would allow them to run analytics early and often, which should make it possible to spot potential red flags with regard to sales and trader misconduct issues perpetrated by branches, firms, and representatives. By examining the information collected by CARDS beforehand, FINRA would move away from their on-site exam process that deals with misconduct long after it has occurred. Because it will identify risk much earlier on, FINRA claims that CARDS should result in a substantial reduction in broker fraud and misconduct in the securities industry.

The Opposition

As you might expect, the major players in the securities industry aren’t thrilled about CARDS. Most of the initial opposition has focused on privacy and data security issues. FINRA has responded to those worries by assuring brokerages that account names, Social Security numbers, addresses, and other personally identifying information will be encrypted before transmission and upon receipt. The risk of hackers intercepting such sensitive data would therefore be quite low. Then there is the big brother Orwell 1984 issue. Although it is a self-regulatory agency, it is only one level removed from the United States Securities and Exchange Commission (“SEC”). There is nothing to stop FINR from sharing information with an arm of the federal government.

A Game Changer?

According to FINRA, rather than sitting back and letting information come to them, CARDS will collect the important data regulators need to sniff out fraud and misconduct before investors are adversely affected.  Cynics in the industry believe that this is just another regulatory hurdle they have to handle in running their business. The system should also improve the efficiency and effectiveness of their oversight by reducing costs and increasing productivity at the same time. Now, according to FINRA, instead of conducting costly, expensive on-site examinations, FINRA can identify and analyze patterns of trading abuse automatically. Veterans of the securities industry doubt this will remove anything and will just add a layer of regulation on top of other layers.

At the end of the day, the Comprehensive Automated Risk Data System was designed to enhance investor protection, but it is unclear whether it can do just that. With access to more information and the ability to analyze data quickly and effectively, CARDS could do exactly that, or it could be an unprecedented overreach for limited additional protection.


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