FINRA recently proposed a rule to implement the Comprehensive Automated Risk Data System (CARDS), a proposal to formalize and regularize its efforts to gather and use “big data” as part of its exam program. In the face of push-back from some parts of the broker-dealer industry, FINRA is not backing down, and as part of its justification for CARDS, it has cited its usefulness in addressing possible unsuitable sales by firms of complex products that present higher risks to customers.
A little background: according to recent FINRA Regulatory Notice 14-37, CARDS would allow FINRA to collect on a standardized, automated and regular basis, account information, as well as account activity and security identification information that a firm maintains as part of its books and records. This use of technology would enable FINRA to identify and quickly respond to high-risk areas and suspicious activities that it might not identify through its current surveillance and examination programs. In its initial phase, FINRA’s proposed rule would require clearing firms to periodically submit in an automated, standardized format, specific information that is part of the firms’ books and records relating to their securities accounts and the securities accounts for which they clear. In the second phase, fully disclosed introducing firms would be required to submit specified account profile-related data elements either directly to FINRA or through a third party. Amidst initial objections when FINRA first floated the proposal, FINRA cut back on the proposal by agreeing to exclude the collection of personally identifiable information for customers, including account names, account addresses and Social Security numbers.
At the recent SIFMA Complex Products Forum, Susan Axelrod, Executive Vice President, Regulatory Operations, drew the connection between CARDS and structured products. She explained that having data in a standard format will allow FINRA to track product mix across firms and in branches of each firm help monitor, on an ongoing basis, potential unsuitable sales, where firms consistently sell products that present higher risk to customers compared to their risk tolerance profiles. CARDS would also enable FINRA to quickly identify trends and product concentrations that are harmful to investors and as examples of such products she cited to certain complex products that she had discussed in her speech, such as steepeners, range accrual notes, and alt funds. Ms. Axelrod stated that CARDS would avoid the need to respond to concerns about sales of a certain type of product with a sweep request to narrow down the firms that might be of concern, because FINRA would already have the data in-house to identify those firms. As she stated, “That means we could immediately zero in on the firms that are actively selling suspect products to retail investors and may have large, concentrated positions.” The touted result would be a more focused and less arduous exam process that would lead to greater speed in protecting investors.
FINRA requested comments on the proposed rule by December 1, 2014, and it remains to be seen whether industry pressures will lead to a further contraction of the proposal.