Finra's CARDS plan is likely to be a game changer

Released for public comment Sept. 30, CARDS Version 2.0 is an ambitious effort by the Financial Industry Regulatory Authority Inc. to develop mega-data on the brokerage industry and its millions of customer accounts for enforcement purposes. While the regulated don't generally share the regulator's enthusiasm for the Comprehensive Automated Risk Data System, it is likely to be implemented. When it is, CARDS promises to be a game changer in a number of ways, including some that may impact the fiduciary debate. CARDS will allow Finra to collect on a monthly basis standardized, automated data about customer account demographics and securities transactions under broker-dealer books and records, allowing the self-regulatory organization to quickly identify patterns of aberrant trading activity by an individual representative, a branch office, a firm, or even at the industry level. Customer data would include suitability factors such as an individual's investment objectives, risk tolerance, net worth, age and investment time horizon. Initial industry pushback has centered on privacy and data security concerns. However, Finra has confirmed that no personally identifiable information — such as account name, address or Social Security number — will be collected and all data will be encrypted in transmission and upon receipt.

IDENTIFYING PATTERNS

While CARDS is primarily intended to put technology to the best use to identify patterns of trading abuses, the system also will serve as an important data resource for regulators to improve the efficiency and effectiveness of their oversight and to calibrate the costs and benefits of regulatory initiatives. These outcomes have already been observed in a Finra pilot program called Risk Discovery and Analytics Tool (RDAT). RDAT involved the collection and analysis of data from a limited number of firms in a manner consistent with what would take place through CARDS. In the most recent release of the CARDS proposal, Finra was able to cite concrete examples from experience with RDAT to substantiate expected benefits of the CARDS platform. Specifically, the pilot “helped Finra ... uncover issues such as suspicious trading activity, excessive commissions, concentration of high-risk products in customer accounts and inadequate sales practice supervisory procedures.” The Finra staff also found that RDAT “allowed it to save days to weeks usually committed to standardizing and conforming data for analysis during an examination.” While costs of regulatory initiatives are relatively easy to compute, calculating benefits is notoriously difficult. The ability CARDS provides to collect and analyze data proactively should give regulators a more complete picture of both sides of the equation when they conduct cost-benefit analyses to justify regulatory initiatives. Interestingly enough, on the same day that Finra released CARDS 2.0, SEC Commissioner Michael Piwowar, in a speech before the National Association of Plan Advisors, questioned whether a uniform fiduciary standard for securities brokers and investment advisers would enhance investor protection. He stated that a more thorough cost-benefit analysis is needed before the Securities and Exchange Commission can decide whether to proceed with rule making. On that day, the SEC's newly appointed chief economist, Mark Flannery, speaking at the Data Transparency Coalition's fall policy conference, touted the value of structured data to meet both investor and regulator objectives. He emphasized the growing importance of data analysis to the SEC staff in conducting economic analyses of proposed rules. And in mid-October, the SEC announced that its “innovative use of data and analytical tools” contributed to a record year of enforcement actions, leading to $4.16 billion in disgorgement and penalties. Might CARDS 2.0 be the opening the SEC has been looking for to help turn around some of its enforcement woes? There is clearly a hunger for data at the embattled agency to improve oversight and decision making at a time when funding is tight and the opportunity to leverage technology looks so appetizing. In the new era of Big Data and analytics, the current version of CARDS is billed as the modern solution for increased investor protection, reduced costs of regulation and the elimination of duplicative regulatory systems and procedures. It's not hard to imagine how CARDS could become a very big deal for the future of financial regulation. Blaine F. Aikin is president and chief executive of fi360 Inc.