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FINRA's Account Data Collection System Under Scrutiny

By George C. Miller, Esq. of Shustak Reynolds & Partners, P.C. posted on Wednesday, November 12, 2014.

In recent years, everyone—from businesses, to government agencies and individuals—has turned to technology to simplify life and streamline the way things are done. Or at least that is the idea behind the Financial Industry Regulatory Authority’s (FINRA) proposed Rule 4540’s “Comprehensive Automated Risk Data System” (CARDS), a massive technology-based initiative that would require brokerage firms to upload detailed account information and trade data to FINRA for computerized, rule-based analysis.  FINRA believes the initiative will allow it to more closely supervise brokerage firms, monitor trading activity and detect wrongful or suspicious activity more quickly and less expensively than traditional review methods.  Regulators also claim the routine collection of trade data will lessen the burden on firms during FINRA examinations and inquiries.

The data uploaded to FINRA would include securities purchases and sales; investment objectives; risk tolerances; account transactions, deposit and withdrawal histories; account holding details, including specific securities; and other highly detailed, sensitive information for all accounts as maintained pursuant to each firm’s books and records policy.  The proposed rule gives FINRA discretion to review these categories annually and, as is likely to occur, to broaden the categories of data collected.  While customer names and other personally identifiable information would not be collected, investors and firms have expressed concern that their private account information could be disclosed in the event of a data breach, as has often been the case this year (Target, Home Depot and now the Post Office have reported large data breaches in the past several months alone).

Securities industry insiders also have criticized the proposal, citing the significant costs of complying with the new rule as firms will be required to roll out new staff, hardware, software and security measures.  In response to those concerns, FINRA has proposed a phased rollout for CARDS, starting first with requiring carrying or clearing firms (e.g., firms that carry accounts and clear transactions) to produce a “limited” set of information.  Phase two would require all member-firms, including smaller broker-dealers who do not custodialize funds or clear trades, to report the required information to FINRA or another authorized third party (e.g., the clearing firm with whom they transact securities business).  The proposed rule is expected to be enacted in 2015, though FINRA is accepting comments through December 1, 2014.

Shustak Reynolds & Partners, P.C.’s New York, San Francisco, Irvine and San Diego FINRA attorneys have extensive experience in representing individuals, brokerage firms and RIA firms in a variety of securities-industry matters, including SEC and FINRA regulatory investigations and enforcement proceedings.  Contact us today for a confidential analysis of your situation.

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