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Regulation and Compliance > Federal Regulation > FINRA

FINRA trade-surveillance system will be curbed

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(Bloomberg) — The Financial Industry Regulatory Authority, Wall Street’s self-regulator, is changing the design of a trading-surveillance system that has drawn opposition from brokers, Chief Executive Officer Rick Ketchum said in a speech.

Smaller brokers that don’t use clearing firms will have more flexibility to send trade and commission data to Finra directly or to use a contractor, Ketchum said today at the authority’s annual conference in Washington. Trade information about products not held by clearing brokers, such as variable annuities and direct mutual funds, won’t have to be submitted in the early stages of the project, he said.

Finra advised brokers in December that the system, known as Cards, would help it automate its analysis of suspicious activity by brokers, including overcharging customers or selling them unsuitable investments. The brokerage data would lessen Finra’s reliance on in-person exams that can miss some regulatory violations.

“We are aggressively engaged in meeting with firms to understand the costs and benefits of Cards,” Ketchum said today. “These meetings have already led to changes from our original concept that will help balance the impact on market participants while maintaining the benefits.”

The Securities Industry and Financial Markets Association has rebelled against Finra’s original concept for the system, saying it would raise privacy and data-security risks for investors and brokers, and could involve large compliance costs. Finra is designing the proposal as it undertakes an effort to subject its rules to an analysis of costs and benefits.

Complaint Response

The regulator is responding to complaints about cost by permitting some variability in data reporting and introducing requirements in stages, Ketchum said.

Finra will incorporate the changes into a regulatory proposal that will be issued as soon as “this summer,” Ketchum said. The proposal would have to be approved by the U.S. Securities and Exchange Commission before it becomes effective.

In response to complaints about hackers targeting the Cards system, Finra said in March that it would not require brokers to submit information that could identify an individual account owner.

“With the technologies that are now available to us, we can do things to transform our exam program in ways that haven’t been available to us before,” he said.

Finra oversees almost 4,300 brokerage firms and in 2012 examined more than 1,800 firms for compliance with its rules governing sales to customers, broker qualifications, and the financial condition of member firms. Finra also monitors trading on exchanges operated by NYSE Euronext, Nasdaq Group OMX Inc. and Bats Global Markets Inc.

‘Big Data’

The Cards system is part of a move by regulators toward using “big data” to supervise market risks, said Hardeep Walia, CEO of Motif Investing Inc., an online broker based in Rancho Cordova, California, that offers pre-built portfolios to investors.

“It’s a lot of cost in transitioning the existing system,” Walia told the conference. “It’s one of those things where we are betting on the long term. It’s a very visionary move.”

Some brokers say the system could result in more examinations because Finra would be able to routinely question whether products they sell fit their customers’ objectives, said Paul Tolley, chief compliance officer at Commonwealth Financial Network.

“This is all predicated on the idea there will be a reduction in sweeps, a reduction in inquiries,” said Tolley, whose firm is based in Waltham, Mass. and employs 1,700 financial advisers. “I’m not convinced.”


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