Finra is considering a controversial, new system that would allow it to run analytics on broker-dealer customer accounts to identify sales and business misconduct "red flags."

Finra is soliciting comments on a proposal for a Comprehensive Automated Risk Data System (CARDS) that would allow it to download customer trade data from clearing firms and run analytics to identify churning, excessive commissions, pump and dump schemes, markups and mutual fund switching. CARDS data would also be used for exams of broker-dealers.

Finra’s plan to grab client data from clearing firms for oversight purposes might be controversial in some quarters, which is perhaps why the regulator put the proposal out for comment two days before Christmas.

About the timing of the proposal, “I can’t think of a worse time to propose gathering big data,” said Victor Shier, owner of Broker Dealer Services LLC, a compliance consultant.
 
Finra's announcement Monday said that it would analyze CARDS data before examining firms on site in hopes of identifying risks earlier and shifting work away from the on-site exam process. "The information collected through CARDS will allow Finra to run analytics that identify potential 'red flags' of sales practice misconduct and help us identify potential business conduct problems with firms, branches and registered representatives," said Susan Axelrod, Finra's executive vice president of regulatory operations.

Finra envisions that once CARDS is implemented, clearing firms (on behalf of introducing firms) and self-clearing firms would submit in an automated, standardized format, and on a regular basis, specific information relating to their customers' accounts and the customer accounts of each member firm for which they clear.

Finra’s notice says the automated reporting should eliminate some of the one-off reporting that B-Ds now have to do. It would also allow Finra to compare firms and understand industry-wide patterns and trends, the notice says.
 
“More information is good if it helps the regulator to act and target regulatory problems,” said Marc Menchel of Menchel Consulting LLC, and a former Finra official.  “But information can also be overwhelming. … Analytics by themselves do not improve judgments.”
 
Finra said clearing firms have in their systems some but not all the information that would be required by CARDS, so broker-dealers would have to work with clearing firms to supply missing data.
 
The self-regulator says it ran a successful trial of the program earlier this year with 300 introducing firms.
 
Finra is accepting comments on the CARDs proposal through February 21. The comment period "provides ample time for interested parties to comment on the proposal," said Finra spokesman George Smaragdis.

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