As FINRA moves ahead with a controversial new data-reporting rule, the industry regulator is pledging to proceed cautiously and in close consultation with the industry it oversees, a senior official said.
Daniel Sibears, executive vice president of FINRA's member regulation programs, told an SEC committee this week that as his team reviews the so-called CARDS proposal, the industry regulator will be sensitive to the concerns some firms and trade groups have expressed, particularly those concerning privacy and security.
"This is a project that has already been out there for over a year, and there is a tremendous amount of dialogue that will continue to take place before we get to the next step of even getting close to implementation," Sibears says.
Through that process, he explains, FINRA is reaching out to individual firms, industry trade organizations and investor advocacy groups to fine-tune the CARDS proposal. At the moment, FINRA is sorting through hundreds of letters it received in response to its most recent call for comments on the proposal; feedback that Sibears says will be integral to the development of the final rule.
"We are in fact in a listening mode, because since there has been so much comment regarding CARDS ... we really want to understand what the key issues are from the commentators," he says.
The CARDS proposal -- in longhand, Continuous Automated Risk Data System -- would require brokers to submit to FINRA information from their books and records in a standardized format on an automated, ongoing basis. Through that system, FINRA hopes to better pinpoint risky areas in the market and more effectively target its limited resources to address potential consumer harms.
"The objective is a simple one, which is really to just enhance investor protection that FINRA delivers by additional and more sophisticated data and analytic capabilities," Sibears says.
The CARDS proposal is one of the most prominent examples of FINRA's efforts to introduce new data-driven technologies as it looks to become a more effective and efficient regulator.
NEW FINRA DIVISION
Earlier this week, FINRA announced the hiring of an SEC official to head up a new division focused on marshalling the organization's data analytics capabilities to better police the industry. As head of FINRA's new Office of Advanced Data Analytics, Erozan Kurtas will head up a team that will coordinate with other divisions of the organization and "focus on improving how FINRA analyzes and uses the data it currently gathers from firms," the group says in a statement.
"We are convinced that to be an effective modern regulator, we have to be able to do a better job with data and analytics to protect investors," Sibears adds.
"The approach today by regulators -- at least securities regulators -- is to approach regulation basically [one] exam at a time, and when there's an issue that's widespread we engage in things that have been called thematic exams or sweeps, where we take a shot at identifying the firms that we think are most likely involved in certain kinds of conduct," he says. That process, familiar to many firms that fall under the purview of either FINRA or the SEC, is a drawn-out fact-finding exercise that involves the collection and analysis of troves of documents.
In contrast, the vision of CARDS, and indeed the new data analytics division, would allow FINRA examiners to identify trouble spots in the industry with far greater speed and precision than they are currently able.
"To be able to run analytics against data in a very rapid way to get specific outcomes will help us identify very quickly patterns, trends and concentrations that are occurring across the entire industry that we regulate," Sibears says.
CARDS PROPOSAL CONTROVERSY
Reaction to the CARDS proposal has been mixed. FINRA first floated the idea as a concept release before moving on to issue a proposed rule, but throughout that process groups such as SIFMA have warned about the costs and compliance burdens the reporting system could entail, as well as the concern that the organization could be overwhelmed by the influx of data, with the perverse effect that it could become a less effective regulator as it chases down false positives.
While investor advocates have welcomed the data reporting requirements as a useful mechanism to strengthen oversight of the industry, many stakeholders have raised concerns about the security of the information collected, as well as the attendant privacy considerations. FINRA addressed those fears in part by excluding personally identifiable information from the data flows that it would collect, though some observers have raised questions about the ability of hackers to piece together the identity of individual investors using just a few, seemingly innocuous data points.
Sibears acknowledges that those concerns linger, though he offers the assurance that the CARDS program will carry "the most cutting edge, state-of the art, domestic, international standards for protection of data."
"One of those relates to access to the data," he says. "We do not envision turning over the database to all of our examiners and surveillance people and investigators."
Robin Traxler, vice president of regulatory affairs at FSI, also warns of FINRA's proposal to exclude data relating to direct business from the first phase of the CARDS rollout. Those cases, where the client holds an account directly with the provider of the investment vehicle, but relies on an advisor or broker to conduct the analysis of the suitability of the product, account for 90% of clients' holdings at some FSI members, she says. Excluding that data, Traxler warns, would overlook a major segment of the investment market, undermining the efficacy of the program from the outset.
"One of the concerns we had was that, given the size of the direct market, CARDS would only be collecting a small amount of the relevant transaction and client data, and therefore be unable to properly identify risks," Traxler says. "We were also concerned that by excluding this data, FINRA would be overwhelmed by having to chase down a significant amount of false positives, wasting time and resources that need to be spent protecting investors."
JUST THE BEGINNING
Sibears, stressing that the CARDS proposal is still very much a work in progress, says that the organization will re-evaluate the treatment of direct business data, along with other areas of concern that industry members and other stakeholders have raised.
Once FINRA finalizes its proposal, the CARDS rules would pass to the SEC for review before they could take effect. Already, a subcommittee at the commission's Investor Advisory Committee has been keeping an eye on the process. Barbara Roper, director of consumer protection at the Consumer Federation of America, chairs the SEC's Investor as Purchaser Subcommittee, and says that the panel is still in the very preliminary stages of its review of the CARDS proposal.
"We're at the very start of what I can assure you will be a careful, deliberative process in terms of possibly arriving at a recommendation from this subcommittee," Roper says.
- Battle Lines Drawn in FINRA's CARDS Proposal
- FINRA Advances CARDS Proposal, But With an Ear to Industry
- FSI Warns on DoL Fiduciary, FINRA CARDS Rules
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