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FINRA and CARDS

Finding opportunity in a new compliance regime

The securities industry is reacting with a mixture of caution and indignation to the Comprehensive Automated Risk Data System (CARDS). This transaction reporting system, proposed by the Financial Industry Regulatory Authority, Inc. (FINRA), could go into effect in early 2015. Policies, data standardization, and information platforms themselves may have to change or be created as part of making the rule work. But at the same time, CARDS may also present hidden opportunities.

What is CARDS?

On September 30, 2014, FINRA released the second iteration of the CARDS Rule Proposal, a new data reporting requirement that stands to affect 4,300 securities firms that are FINRA members, and requested industry feedback. As of this writing, CARDS would require those firms to collect, store, and report information at the transaction level from approximately 110 million retail brokerage accounts.

FINRA’s rationale for proposing CARDS is to “protect the investing public” by analyzing data from actual transactions to identify “red flags” in sales practices and business conduct. CARDS would also provide FINRA the opportunity to move its surveillance process to a more real-time and continuous basis. FINRA believes that the automated nature of the process would lower regulatory costs for its members, and that this program would allow firms to better monitor and manage their own compliance, as FINRA plans to make its analyses of this data available to member firms. 

The data opportunity

The burden of CARDS on affected firms would be the need to collect and standardize large quantities of transaction data. The proposed changes that would assist FINRA in its oversight efforts, however, could also benefit the firms themselves—because for many of them, CARDS would produce broader, “cleaner,” more cohesive data than their existing fragmented systems ever have before. The same information a firm reports to FINRA could generate new value in-house, when analytics is leveraged to discern trends and patterns that were once deemed invisible.

The compliance task

CARDS presents itself as a technology challenge, and the firms that excel in adapting to this coming change would be the ones that have already begun to address it on those terms. However, for the moment, CARDS is also a regulatory and legal uncertainty. Following the FINRA process that will take the proposed rule over the final few steps to implementation is critical for anyone who would have to live under the resulting requirements.

The challenges of CARDS implementation would be broad and they would include, but not be limited to:

  • Data standardization
  • Creation of cohesive systems to transmit authentic data within introducing and clearing brokers
  • The cost of new infrastructure and staff

The CARDS timeline

Since its initial release as a proposed rule, CARDS has changed in both form and timing. Plans for a pilot rollout in early 2015 have been postponed. The most recent comment period for the rule proposal closed on December 1, 2014, and FINRA often revises rule proposals based on the comments received. FINRA’s estimated timeline, once a final proposed rule has been submitted to the SEC for approval, anticipates that Phase 1 would be implemented nine months post SEC approval and Phase 2 would be implemented 15 months post SEC approval. 

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Firms that want to seize this opportunity shouldn’t wait until implementation is well underway before they look beyond the compliance checklist. Instead, they should build the advantages into their CARDS strategies, right alongside the burdens. Read our full report to learn more. 

Learn more about the FINRA CARDS proposal
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