FINRA Seeks Input on Proposed Customer Account Monitoring System

FINRA recently issued a Regulatory Notice soliciting comment regarding a proposal called Comprehensive Automated Risk Data System (CARDS). Under the CARDS program, Finra would compile account activity information that firms currently maintain in their books and records, such as account types and categories, customer investment profiles, purchase and sales transactions, additions and withdrawals, margin and balances and a description of securities, among other data. Brokerage firms would provide the customer information to clearing firms, who would then provide it to FINRA in an automated, standardized format, and on a regular basis.

“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, in a statement released by FINRA.

CARDS, which would be implemented in phases, is intended to identify “churning, excessive commissions, pump and dump schemes, markups [and] mutual fund switching,” among other sales violations, according to a regulatory notice.

The information collected in the initial phase of the CARDS program is similar to that obtained by FINRA during a firm-by-firm examination. “CARDS is intended to increase the effectiveness of the examination process by enabling FINRA to identify risks to efficiently target firm surveillance and examination programs,” according to the regulatory notice.

FINRA cited a test of the concept using information from an individual firm and two clearing firms, in which “the analytics showed FINRA that a firm was selling a new, high-risk product — a business in which the firm was not historically engaged and its financial reporting did not disclose,” the regulatory notice stated.

Implementing the new system, however, would be costly. “It’s going to be a huge burden, especially on the clearing firms, initially, to implement the technology,” said Amy Lynch, president of FrontLine Compliance, as reported by Investment News.

Although FINRA’s regulatory notices contains no cost estimates, it stated that “CARDS is intended to reduce burdens on firms by eliminating intermittent information requests from Finra for the information CARDS covers.”

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