The Financial Industry Regulatory Authority released Tuesday a regulatory notice on its controversial Comprehensive Automated Risk Data System (CARDS) and also plans to move ahead with further changes to BrokerCheck, particularly requiring background checks on brokers.
FINRA’s Regulatory Notice 14-37 requests comments on CARDS, which would be a rule-based program that would allow FINRA to collect — on a standardized, automated and regular basis — account information, as well as account activity and security identification information, from firms.
The rule proposal released Tuesday would be implemented in phases, FINRA says, with the first phase requiring that carrying or clearing firms (approximately 200 firms) 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. The second phase of CARDS would require fully disclosed introducing firms to submit specified account profile-related data either directly to FINRA or through a third party.
The CARDS rule proposal would exclude the collection of personally identifiable information (PII) for customers, including account name, account address and Social Security number.
Susan Axelrod, executive vice president of regulatory operations at FINRA, said during her Monday comments at the Financial Services Institute’s second annual Advisor Summit in Washington that FINRA’s regulatory notice on CARDS will include a 60-day comment period and that FINRA “will go back to its board for feedback” and consider further revisions before sending the plan to the Securities and Exchange Commission for approval.
FINRA received more than 800 comments on its first CARDS proposal, and Axelrod said the self-regulator “expects to hear from a lot of firms” regarding the second iteration of its CARDS plan. If the CARDS rule “gets passed,” she said, “we will build in significant implementation periods.”
FINRA, Axelrod said during her question-and-answer session with FSI President and CEO Dale Brown, is “committed” to CARDS.
CARDS will help FINRA to be “more proactive” in detecting troubling “trends in more of a real-time basis,” Axelrod said.
Ira Hammerman, executive vice president and general counsel for the Securities Industry and Financial Markets Association, said in a Tuesday statement that “as SIFMA noted in its two previous comment letters, CARDS raises a number of important concerns, including investor privacy, data security, duplication of regulatory data collection with the pending CAT system and other cost-benefit concerns, that remain outstanding and must be fully vetted with all interested parties.”
As to further changes to BrokerCheck, Brown questioned Axelrod about FINRA’s plan to include brokers’ test scores as well as require broader broker background checks, stating that FSI members have raised concerns about whether that information is revealed in the “proper context,” and if it is actually “meaningful” to investors.
“We are continuing to evaluate the information presented on BrokerCheck,” Axelrod responded, adding that FINRA is circulating a questionnaire to “investor groups to gauge what’s important to them.”
As to background checks, Axelrod said that FINRA is “moving forward” on its proposal and will seek amendments to FINRA’s supervision rule.
Regarding including test scores in BrokerCheck, Axelrod conceded that’s a “sensitive topic,” and noted that FINRA’s chief economist is now examining whether there is a correlation between failing test scores and disciplinary records. However, Axelrod stressed that the self-regulator is not “rushing” to include test scores on BrokerCheck.
“Folks in the room should understand that we are looking at this [issue] very carefully,” she said.