FINRA Proposes Automated Oversight

FINRA outlines the proposed review system, called the Comprehensive Automated Risk Data System (CARDS), in Regulatory Notice 13-42. 

As proposed, the system will reform FINRA members’ account reporting requirements to allow regulators to automatically collect and analyze member account information, as well as account activity and security identification information that a firm maintains as part of its books and records.

FINRA hopes the program, once enacted, will increase its ability to protect the investing public by utilizing automated analytics on brokerage data to identify potentially problematic sales activity. Under the proposed arrangement, FINRA plans to analyze CARDS data before examining firms on site, thereby 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," says Susan Axelrod, FINRA's executive vice president of regulatory operations.

FINRA's Regulatory Notice 13-42 discusses the CARDS concept without submitting specific rule language. The idea is to solicit comments on how to best design and fund the CARDS system.

As currently envisioned by FINRA, the CARDS program would compel clearing firms (on behalf of introducing firms) and self-clearing firms to submit specific information relating to their customers’ accounts and the customer accounts of each member firm for which they conduct clearing activity. This information would be automatically collected, standardized and sent to FINRA on a regular basis.

Introducing firms would be required to provide their clearing firms with specified pieces of account and customer information. This would allow clearing firms to provide the information to FINRA in conjunction with other information the clearing firms provide.

According to its regulatory note, FINRA plans to use the information to run analytics that identify potential sales practice misconduct, such as churning, excessive commissions, pump and dump schemes, excessive markups and mutual fund switching, among others.

The information selected for submission to FINRA during the initial phase of CARDS would generally represent the same types of information FINRA already collects on a firm-by-firm basis during the examination process. 

Based on experience with two major clearing firms with which FINRA tested the feasibility of an automated data acquisition program, FINRA believes that the vast majority of the information that CARDS would collect is already stored in an automated format at clearing and self-clearing firms and service bureaus.

As a result, FINRA envisions implementing CARDS through a phased approach over a reasonable period of time and is seeking comment regarding the structure of a phased approach.

More on the CARDS program proposal and how to submit comments to FINRA is available here.

FINRA is an independent regulator for securities firms doing business in the United States.