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FINRA Advances CARDS Proposal, But With an Ear to Industry

WASHINGTON -- FINRA on Tuesday issued a long-awaited regulatory notice outlining the proposal for a controversial data-sharing system known as CARDS, asking for comments from the industry and other stakeholders on how to refine the proposal to better protect investors without unduly burdening brokerage firms with the new reporting requirements.

Of the various proposals currently under consideration at FINRA, few have garnered as much consternation within the industry as the CARDS program, though the issue remains a top priority within FINRA, Susan Axelrod, the group's executive vice president of regulatory operations, said Monday at the FSI's financial advisor conference.

"CARDS is something that I think we at FINRA are really passionate about," Axelrod says.

But Axelrod stresses that FINRA is committed to developing the proposal in close collaboration with industry, leaving room for modifications that could ease the compliance burden for industry and address other concerns. For instance, FINRA already withdrew a controversial provision that would have included personally identifiable information in the data transfers the regulator is proposing to collect.


In today's release, FINRA issued a second regulatory notice that builds on the group's earlier proposal.

FINRA will be collecting comments on the proposal through Dec. 1, and says that it would implement CARDS in phases to minimize the disruption for firms' operations. In the first stage, about 200 carrying or clearing companies would be tapped to submit periodic reports containing specific securities information from their books and records. Those transmissions would include data concerning specific transactions, holdings and information about account profiles, excluding customer names and other personally identifiable information.

The second phase, FINRA says, "would require fully-disclosed introducing firms to submit the specified account profile-related data elements either directly to FINRA or through a third party."

At present, FINRA has two firms that have been supplying it with pilot data in a preliminary CARDS trial, and six firms helping it develop its data specifications, Axelrod says. The concept proposal that FINRA released was met with about 140 unique sets of comments, and several hundred more from various stakeholders that were essentially copies of form letters. Axelrod anticipates a brisk response to the latest proposal.

Following the close of the current comment period, FINRA staffers will revisit the rules again before submitting them to the board and then the SEC for final approval, Axelrod says.


The FSI and other industry groups have warned that the CARDS system invites security and privacy risks by sharing sensitive data with a non-government regulator, while also expressing alarm about the cost to firms to comply with the data-sharing requirements.

Axelrod insists that FINRA is sensitive to the cost concerns, and says that the group's economic team has been looking closely at the cost-benefit calculus of the proposal. FINRA included an economic analysis of the impact on the roughly 200 firms that would be affected in the first phase of the proposal, and says that it is continuing to develop a similar study for the introducing firms that would be covered in stage two.

"It's really, really important that we continue to listen on the cost side," Axelrod says. "We think the benefits are huge. We just need to get a better handle on what the costs are."


Backers of the proposal say it will be a needed mechanism for generating a more complete flow of data that will give FINRA a clearer and more comprehensive picture of the industry operations. Currently, FINRA gathers much of its data about firm operations through its examinations, what Axelrod calls an "ad hoc" process.

The ability to collect "standardized data in a regular cadence from firms," Axelrod says, will "help us be a more proactive regulator" and better tailor efforts to address the riskiest firms and business practices.

Axelrod says that enforcement actions will currently undercover a history of malfeasance dating back three to five years. With CARDS, FINRA isn't quite anticipating being able to flag bad actors in "real time," Axelrod acknowledges, "but it will be a lot quicker."

"It will be so much better for the investing public," she says. "We really want to do a lot with CARDS. We're really optimistic that this is the future of regulation, and we think really being proactive in our field is better for the investor and better for the industry. And I'm sure that there's a lot of skepticism -- we can talk about all of that, but our head and hearts are in the right place."

Kenneth Corbin is a Financial Planning contributing writer in Washington.

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