Independent broker-dealers may be making some headway with the FInancial Industry Regulatory Authority in getting the regulator to modify its controversial Comprehensive Automated Risk Data System proposal.
 
The CARDS project would collect customer account and suitability information, and create a database for automated oversight and early identification of industry risks.
 
Among other issues, the Financial Services Institute and other industry interests have raised questions about how CARDS would collect and standardize suitability data, which would be paired with trade and position data.
 
A Finra official on Tuesday told attendees at FSI’s annual conference in San Antonio, Texas, that Finra will not be standardizing suitability data in CARDS.
 
“We’re willing to take those [suitability profiles] the way firms keep them today,” said Susan Axelrod, Finra executive vice president of regulation.
 
Suitability data from new-account forms varies among firms and lacks full context needed to  make suitability determinations, FSI said in a December comment letter.
 
“Firms are really afraid that Finra will use [CARDS] to second guess” broker-dealers’ own compliance departments, said Robin Traxler, FSI vice president of regulatory affairs, at the conference.

Finra has said CARDS would not be used for individual suitability determinations.
 
Security concerns have been the biggest issue with CARDS ever since Finra floated the idea in a December 2013 concept release.
 
Finra later promised that no personally identifiable information like Social Security numbers would be collected.
 
Industry observers think Finra’s chief executive Rick Ketchum is determined to overcome opposition and see CARDS come to fruition.
 
“We think it’s critical to investor protection,” Axelrod said. “We think enhanced data and analytics is the way to do it” by heading off fraud before investor money is lost.
 
Finra points to the mutual-fund breakpoint investigation from a decade ago as an example of a problem uncovered by analyzing big data from clearing firms.
 
Nevertheless, the industry has a lot of concerns with CARDS.
 
Independent firms’ main point of contention now with CARDS is how Finra plans to capture trades and holdings done directly with mutual funds and insurers.
 
Without a view into this direct business, Finra won’t have the comprehensive database it needs, FSI officials said.
 
Finra’s first formal CARDS proposal, released for comment in September, said direct business could be added at a later date after first implementing CARDS data from clearing firms and self-clearing B-Ds.
 
The FSI thinks a two-part implementation could force firms to redo their CARDS reporting systems, so it wants direct business included in the initial rollout.
 
But exactly how that would work is not yet clear.
 
There’s no central location where that [data is] all kept,” said David Bellaire, FSI general counsel.
 
The Depository Trust and Clearing Corp. “has some but not all” of it, he said. Furthermore, “you’d have to clean it, normalize it so you’re comparing apples to apples, [and] synch all the timing up so you’re not looking at data that’s out of date.”
 
For many firms, reporting direct business will be difficult, said Roger Ochs, chief executive of H.D. Vest.
 
The Dallas-based firm, which caters to tax preparers, collects data on direct business, “but it’s really hard and really expensive,” he said.
 
FSI has a meeting scheduled with Finra next month to further discuss how direct business might be captured, among other issues.
 
Meanwhile, Finra is now working through the CARDS comment letters from late last year, Axelrod said. She gave no timetable for when Finra might have an updated proposal.
 
“Data security is a major focus” for Finra in updating its CARDS proposal, Traxler said. “They will want to get around that [issue] before they put out the next regulatory notice or actual rule proposal.”
 
Separately, FSI officials have their eyes on a number of other regulatory developments this year.
 
A big one is the emergence of state-run retirement plans that could compete for business with advisors.
 
Several proposed state bills “specifically cut out advisors from the process,” Traxler said.
 
On Capitol Hill, look for a Republican Congress to “pick off [Dodd-Frank] piece by piece,” said Robert Lewis, FSI’s head lobbyist. That’s an action the White House is expected to oppose.
 
But legislation on cyber security has bipartisan support. A cyber security law will likely address data breaches, privacy issues and notification to clients of breaches, Lewis said.
 
States and Finra are focused on cyber threats as well.
 
Axelrod said Finra is finishing a report on cyber-security findings from a sweep of 19 firms. Issues Finra found included the lack of insurance to cover data breaches and inadequate resources committed to cyber-security, she said.