The brokerage industry is hoping to head off a Financial Industry Regulatory Authority proposal floated late last year that would have the regulator capture and retain a huge amount of client account data for compliance purposes.
Meanwhile, individual investors are complaining that the Finra plan looks like something cooked up by the National Security Administration.
Industry sources say that Finra’s Comprehensive Automated Risk Data System, or “CARDS,” has become one of their top regulatory concerns. They worry about how Finra would use such a massive amount of client account data, how it would be secured, the costs of implementing the system, and why it is even needed.

As outlined by Finra in a December regulatory notice, the CARDS system would download customer trade data from clearing firms and analyze it to identify churning, pump-and-dump schemes, excessive markups and mutual fund switching. The data would also be used for exams of broker-dealers.

CARDS is just a concept at this point, not a formal rule proposal. Nevertheless, it  has the industry worried.

Initially, Finra asked for comment on the plan by February 21, but has now extended the comment period to March 21 after hearing concerns about the complexity of the proposal and its implications.

 “With the breadth and scope of information that the CARDS concept release covers, we thought it prudent to give the industry and other commenters additional time,” said Finra spokesman George Smaragdis in an e-mail.

Data security is the biggest issue.

“In a world where retailers like Target and Nieman Marcus have had [security] challenges, it makes us concerned,” said David Bellaire, general counsel at the Financial Services Institute.

CARDS was a major issue of discussion at the FSI board meeting in January.

“The CARDS concept would result in lot of sensitive information about individual customer holdings and [transactions] being kept at one place -- Finra,” said Ira Hammerman, general counsel at the Securities Industry and Financial Markets Association.

“That raises both privacy and data [security] concerns,” Hammerman said. “These issues really are top of mind with our members’ customers, the mom and pop investors.”

Clients are “concerned about what the government watches now in their day-to-day lives,” said Amy Webber, president of Cambridge Investment Research. They may feel even more skeptical of a private organization like Finra having their account data, she said.

Investors have raised those very concerns in comment letters to Finra.

“With the ongoing revelations about NSA surveillance and the associated public outcry, is this an appropriate time for the securities industry to inform the investing public that we are now going to be reporting ALL of their account, transactional and asset holding information, into a large regulatory database?” wrote investor Don Brock in a letter to Finra.

Even though Finra would be responsible for security, in the event of a breach, “a customer is going to view his or her brokerage firms responsible,” Hammerman said.

Privacy issues would extend beyond Finra, Hammerman added. If another regulator or a private litigant wanted CARDS data, it’s unclear if Finra would provide it, he said.

“What’s the problem [Finra is] trying to solve” with CARDS? Hammerman asked. “What don’t they have access to today in order to do the job?”

If Finra needs access to more client data, Sifma thinks a better approach would be to use the Consolidated Audit Trail system, another massive project now under development.

The CAT was approved by the SEC in 2012 following the “flash crash” of 2011 to give regulators a more complete picture of trading activity. It will incorporate customer I.D. and account information along with trading data.
If Finra needs more than that, “it would be a lot easier and more efficient to add that one field of data onto the CAT rule,” Hammerman said.
Finra has been working with firms in trying to figure out how CARDS might be best implemented.

“We continue to stress that we are happy to meet with firms that have feedback for us on the concept and have been doing so for several months,” Smaragdis said.

Hammerman gives Finra credit for floating CARDS as a concept. “In that sense, they’re telling everyone they haven’t fully baked the idea,” he said.