Broker-dealers appear to have succeeded, at least for now, in beating back FINRA's proposal to capture extensive amounts of data through electronic means.
For over a year, FINRA has been pushing its Comprehensive Automated Risk Data System (CARDS), which would require clearing firms (on behalf of introducing firms) and self-clearing firms to regularly submit to FINRA, in an automated, standardized format, specific information about their customers' accounts and the customer accounts of each member firm for which they clear. FINRA claims that CARDS would enhance FINRA's access to data and analytics, "help it evolve [its] risk-based surveillance and examination programs regarding sales activities" and enable it to "operate as an early warning system to more effectively identify potential fraudulent activity and customer sales practice abuse to guide examinations," according to testimony last week by Richard Ketchum, FINRA Chairman and CEO, before the House Subcommittee on Capital Markets and Government Sponsored Enterprises Committee on Financial Services. "Accordingly," Ketchum testified, "we believe that a data-driven analysis could increase our ability to identify investor protection issues sooner and to respond quickly to stem investor harm."
In the face of extensive comments and criticism from the industry, including the Securities Industry and Financial Markets Association (SIFMA) and smaller broker-dealers, Ketchum announced before the Congressional Subcommittee that "we will not move ahead with the present form of the proposal and will not move forward with an amended version until we conclude that the concerns raised in the comments have been addressed."
Industry comments have focused on the potential threat to individual privacy posed by transferring too much data electronically. Ketchum reported that FINRA has already watered down its proposal by agreeing not to collect personally identifiable data. However, he acknowledged that FINRA shared the concerns raised about the ability of bad actors to obtain information from its system that could be used to identify individuals. Ketchum testified that FINRA is evaluating the ability to accomplish some of its same investor protection goals by relying upon data generated by the SEC's Consolidated Audit Trail when it is implemented; the overlap between the two proposed systems is one basis for the industry's objections.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
© Morrison & Foerster LLP. All rights reserved
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.