The Comprehensive Automated Risk Data System (CARDS) would allow FINRA, the largest independent regulator for all securities firms doing business in the United States, to collect information in a standardized format across all firms on a regular basis. CARDS was first floated as a concept release in December 2013, and an implementation proposal was released in September 2014. FINRA has made CARDS a priority. The system would allow it to collect reams of customer-account data from clearing firms and brokerages each month. FINRA claims that CARDS would give it the ability to detect dangerous industry trends and potentially harmful sales practices more quickly than it can now in firm-by-firm examinations.
FINRA has received 67 comment letters regarding its massive CARDS system, most of them opposed to the idea. Two organizations strongly opposed to CARDS are the Financial Services Institute (FSI) and the Securities Industry & Financial Markets Association (SIFMA).
SIFMA urged FINRA to withdraw the CARDS proposal, asserting that it would substantially increase regulatory costs for financial firms while potentially exposing sensitive customer information to cyberattacks. SIFMA’s comment letter can be downloaded here.
FSI does not want FINRA to include analysis of the suitability of investments in its proposed CARDS data-collection system and warned that the system would impose significant costs on its members. FSI said in a comment letter on December 1 that FINRA should collect only birth year, net worth and investment-time-horizon data and that other categories, such as investment objectives and risk tolerance, should be left out because of the difficulty of providing the information in a standard format. It is FSI’s belief that the costs in inputting, storing and transmitting the suitability data FINRA currently contemplates collecting through CARDS might outweigh the benefits FINRA envisions. There is concern that an analysis of suitability data by FINRA will result in numerous “false positives” requiring FINRA and FSI member firms to expend significant resources to review and respond to these determinations. The letter included FSI estimates from its 100 member firms that CARDS implementation would cost between $250,000 and $1 million, while maintenance and inquiry responses would require $100,000 to $800,000 on an ongoing basis. FSI’s comment letter can be read here.
FINRA has already tried to assuage industry worries by modifying the proposal to prohibit the collection of information that can identify individual customers. It also has promised to conduct an extensive cost-benefit analysis. Richard Ketchum, FINRA’s Chairman and Chief Executive Officer, believes the industry is missing the point about CARDS, but he has acknowledged that FINRA must demonstrate how its controversial data-collection system will benefit investors in order to quell mounting criticism of the proposal.
The Law Office of Michael A. Nagy, LLC will continue to monitor the CARDS proposal and its implementation. If you have questions about the CARDS proposal and what it means for your business, contact The Law Office of Michael A. Nagy, LLC.